<PAGE> 1
As filed with the Securities and Exchange Commission on February 27, 1997
1933 Act File No. 33-37972
1940 Act File No. 811-5262
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 13
AND
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 14
MFS SERIES TRUST VIII
(Exact Name of Registrant as Specified in Charter)
500 Boylston, Street, Boston, Massachusetts 02116
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: 617-954-5000
Stephen E. Cavan, Massachusetts Financial Services Company,
500 Boylston Street, Boston, Massachusetts 02116
(Name and Address of Agent for Service)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
It is proposed that this filing will become effective (check appropriate box)
/ / immediately upon filing pursuant to paragraph (b)
/X/ on February 28, 1997 pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(i)
/ / on [date] pursuant to paragraph (a)(i)
/ / 75 days after filing pursuant to paragraph (a)(ii)
/ / on [date] pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
/ / this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
Pursuant to Rule 24f-2, the Registrant has registered an indefinite number of
its Shares of Beneficial Interest (without par value), under the Securities Act
of 1933. The Registrant filed a notice with respect to its fiscal year ended
October 31, 1996 on December 23, 1996.
<PAGE> 2
MFS SERIES TRUST VIII
MFS(R) STRATEGIC INCOME FUND
MFS(R) WORLD GROWTH FUND
CROSS REFERENCE SHEET
(Pursuant to Rule 404 showing location in Prospectus and/or Statement of
Additional Information of the responses to the Items in Parts A and B of Form
N-1A)
<TABLE>
<CAPTION>
ITEM NUMBER STATEMENT OF ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C>
1 (a), (b) Front Cover Page *
2 (a) Expense Summary *
(b), (c) * *
3 (a) Condensed Financial Information *
(b) * *
(c) Information Concerning Shares of the *
the Fund - Performance Information
(d) Condensed Financial Information *
4 (a) Front Cover Page; the Fund; Investment *
Objective and Policies
(b), (c) Investment Objective and Policies *
5 (a) The Fund; Management of the Fund - *
Investment Adviser
(b) Front Cover Page; Management of the *
Fund - Investment Adviser; Back
Cover Page
(c) Management of the Fund - Investment *
Adviser
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
ITEM NUMBER STATEMENT OF ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C>
(d) Management of the Fund - Investment *
Adviser - Back Cover Page
(e) Management of the Fund - Back *
Cover Page
(f) Expense Summary *
(g) Information Concerning Shares of the *
Fund - Purchases
5A (a), (b), (c) ** **
6 (a) Information Concerning Shares of the *
Fund - Description of Shares, Voting
Rights and Liabilities; Information
Concerning Shares of the Fund -
Redemptions and Repurchases;
Information Concerning Shares of
the Fund - Purchases; Information
Concerning Shares of the Fund -
Exchanges
(b), (c), (d) * *
(e) Shareholder Services *
(f) Information Concerning Shares of the *
Fund - Distributions; Shareholder
Services - Distribution Options
(g) Information Concerning Shares of the *
Fund - Tax Status; Information
Concerning Shares of the Fund -
Distributions
(h) * *
7 (a) Front Cover Page; Management of the *
Fund - Distributor; Back Cover
Page
(b) Information Concerning Shares of the *
Fund - Purchases; Net Asset Value
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
ITEM NUMBER STATEMENT OF ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C>
(c) Information Concerning Shares of the *
Fund - Purchases; Information
Concerning Shares of the Fund -
Exchanges; Shareholder Services
(d) Front Cover Page; Information *
Concerning Shares of the Fund -
Purchases; Shareholder Services
(e) Information Concerning Shares of the *
Fund - Distribution Plans;
Information Concerning Shares of
the Fund - Purchases; Expense
Summary
(f) Information Concerning Shares of the *
Fund - Distribution Plan
8 (a) Information Concerning Shares of the *
Fund - Redemptions and Repurchases;
Information Concerning Shares of the
Fund - Purchases; Shareholder Services
(b), (c), (d) Information Concerning Shares of the *
Fund - Redemptions and Repurchases
9 * *
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
ITEM NUMBER STATEMENT OF ADDITIONAL
FORM N-1A, PART B PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C>
10 (a), (b) * Front Cover Page
11 * Front Cover Page
12 * Definitions
13 (a), (b), (c) * Investment Objective,
Policies and Restrictions
(d) * *
14 (a), (b) * Management of the Fund -
Trustees and Officers
(c) * Management of the Fund -
Trustees and Officers;
Appendix A
15 (a) * *
(b), (c) * Management of the Fund -
Trustees and Officers
16 (a) Management of the Fund - Management of the Fund -
Investment Adviser Investment Adviser;
Management of the Fund -
Trustees and Officers
(b) Management of the Fund - Management of the Fund -
Investment Adviser Investment Adviser
(c) * *
(d) * Management of the Fund -
Investment Adviser
(e) * Portfolio Transactions and
Brokerage Commissions
(f) Information Concerning Shares of Distribution Plan
the Fund - Distribution Plan
(g) * *
</TABLE>
<PAGE> 6
<TABLE>
<CAPTION>
ITEM NUMBER STATEMENT OF ADDITIONAL
FORM N-1A, PART B PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C>
(h) * Management of the Fund -
Custodian; Independent
Auditors and Financial
Statements; Back Cover
Page
(i) * Management of the Fund -
Shareholder Servicing Agent
17 (a), (b), (c) * Portfolio Transactions and
(d), (e) Brokerage Commissions
18 (a) Information Concerning Shares of Description of Shares, Voting
the Fund - Description of Rights and Liabilities
Shares, Voting Rights and
Liabilities
(b) * *
19 (a) Information Concerning Shares of Shareholder Services
the Fund - Purchases
(b) Information Concerning Shares of Determination of Net Asset
the Fund - Net Asset Value; Value and Performance -
Information Concerning Shares of Net Asset Value
the Fund - Purchases
(c) * *
20 * Tax Status
21 (a), (b) * Management of the Fund -
Distributor; Distribution
Plan
(c) * *
22 (a) * *
(b) * Determination of Net Asset
Value and Performance
23 * Independent Auditors and
Financial Statements
</TABLE>
- --------------------------
* Not Applicable
** Contained in Annual Report
<PAGE> 7
MFS STRATEGIC INCOME FUND
SUPPLEMENT TO THE MARCH 1, 1997 PROSPECTUS AND STATEMENT OF ADDITIONAL
INFORMATION
THE FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE FUND'S
PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION ("SAI"), DATED MARCH 1, 1997,
AND CONTAINS A DESCRIPTION OF CLASS I SHARES.
CLASS I SHARES ARE AVAILABLE FOR PURCHASE ONLY BY CERTAIN INVESTORS AS
DESCRIBED UNDER THE CAPTION "ELIGIBLE PURCHASERS" BELOW.
EXPENSE SUMMARY
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES: CLASS I
-------
<S> <C>
Maximum Initial Sales Charge Imposed on Purchases of Fund
Shares (as a percentage of offering price) None
Maximum Contingent Deferred Sales Charge (as a percentage
of original purchase price or redemption proceeds, as applicable) None
ANNUAL OPERATING EXPENSES OF THE FUND (AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees (after expense reduction)(1) 0.40%
Rule 12b-1 Fees None
Other Expenses (after expense limitation)(2)(3)(4) 0.00%
Total Operating Expenses (after expense reduction)(4) 0.40%
</TABLE>
(1) Absent the voluntary waiver of management fees described under
"Management of the Fund" in the Prospectus, Management Fees would be
1.12%.
(2) "Other Expenses" is based on Class A expenses incurred during the
fiscal year ended October 31, 1996.
(3) The Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with
its custodian and dividend disbursing agent, and may enter into other
such arrangements and directed brokerage arrangements (which would also
have the effect of reducing the Fund's expenses). Any such fee
reductions are not reflected under "Other Expenses."
(4) The Adviser has agreed to bear the Fund's expenses, such that "Other
Expenses" do not exceed 0.00% per annum of the Fund's average daily net
assets during the current fiscal year. Otherwise, "Other Expenses"
would be 0.57% per annum, and, taking into account this expense
limitation and the management fee waiver, "Total Operating Expenses"
would be 1.69% per annum for Class I shares.
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a $1,000
investment in Class I shares of the Fund, assuming (a) a 5% annual return and
(b) redemption at the end of each of the time periods indicated:
<TABLE>
<CAPTION>
PERIOD CLASS I
------ -------
<S> <C>
1 year.......................... $ 4
3 years......................... 13
</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. A more complete description of the Fund's
management fee is set forth under the caption "Management of the Fund" in the
Prospectus.
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
ELIGIBLE PURCHASERS
Class I shares are available for purchase only by the following purchasers
("Eligible Purchasers"):
(i) certain retirement plans established for the benefit of employees of
Massachusetts Financial Services Company ("MFS"), the Fund's investment
adviser, and employees of MFS' affiliates;
- 1 -
<PAGE> 8
(ii) any fund distributed by MFS Fund Distributors, Inc. ("MFD"), the Fund's
distributor, if the fund seeks to achieve its investment objective by
investing primarily in shares of the Fund and other funds distributed
by MFD;
(iii) any retirement plan which (a) purchases shares directly through MFD
(rather than through a third party broker or dealer or other financial
intermediary); (b) has, at the time of purchase of Class I shares,
aggregate assets of at least $100 million; and (c) invests at least $10
million in Class I shares of the Fund either alone or in combination
with investments in Class I shares of other MFS funds distributed by
MFD (additional investments may be made in any amount); provided that
MFD may accept purchases from smaller plans or in smaller amounts if it
believes, in its sole discretion, that the plan's aggregate assets will
equal or exceed $100 million, or that the plan will make additional
investments which will cause its total investment to equal or exceed
$10 million, within a reasonable period of time; and
(iv) bank trust departments which initially invest, on behalf of their trust
clients, at least $100,000 in Class I shares of the Fund (additional
investments may be made in any amount); provided that MFD may accept
smaller initial purchases if it believes, in its sole discretion, that
the bank trust department will make additional investments, on behalf
of its trust clients, which will cause its total investment to equal or
exceed $100,000 within a reasonable period of time.
In no event will the Fund, MFS, MFD or any of their affiliates pay any sales
commissions or compensation to any third party in connection with the sale of
Class I shares; the payment of any such sales commission or compensation would,
under the Fund's policies, disqualify the purchaser as an eligible investor of
Class I shares.
SHARE CLASSES OFFERED BY THE FUND
Four classes of shares of the Fund currently are offered for sale, Class A
shares, Class B shares, Class C shares and Class I shares. Class I shares are
available for purchase only by Eligible Purchasers, as defined above, and are
described in this Supplement. Class A shares, Class B shares and Class C shares
are described in the Fund's Prospectus and are available for purchase by the
general public.
Class A shares are offered at net asset value plus an initial sales charge up
to a maximum of 4.75% of the offering price (or a contingent deferred sales
charge (a "CDSC") upon redemption of 1.00% during the first year in the case of
purchases of $1 million or more and certain purchases by retirement plans), and
are subject to an annual distribution fee and service fee up to a maximum of
0.35% per annum. Class B shares are offered at net asset value without an
initial sales charge but are subject to a CDSC upon redemption (declining from
4.00% during the first year to 0% after six years) and an annual distribution
fee and service fee up to a maximum of 1.00% per annum; Class B shares convert
to Class A shares approximately eight years after purchase. Class C shares are
offered at net asset value without an initial sales charge but are subject to a
CDSC upon redemption of 1.00% during the first year and an annual distribution
fee and service fee up to a maximum of 1.00% per annum. Class I shares are
offered at net asset value without an initial sales charge or CDSC and are not
subject to a distribution or service fee. Class C and Class I shares do not
convert to any other class of shares of the Fund.
OTHER INFORMATION
Eligible Purchasers may purchase Class I shares only directly through MFD.
Eligible Purchasers may exchange Class I shares of the Fund for Class I shares
of any other MFS Fund available for purchase by such Eligible Purchasers at
their net asset value (if available for sale), and may exchange Class I shares
of the Fund for shares of the MFS Money Market Fund (if available for sale), and
may redeem Class I shares of the Fund at net asset value. Distributions paid by
the Fund with respect to Class I shares generally will be greater than those
paid with respect to Class A shares, Class B shares and Class C shares because
expenses attributable to Class A shares, Class B shares and Class C shares
generally will be higher.
Subject to termination or revision at the sole discretion of MFS, MFS has
agreed to bear the Fund's expenses such that the Fund's "Other Expenses," which
are defined to include all Fund expenses except for management fees, Rule 12b-1
fees and class specific expenses, do not exceed 0.00% per annum of its average
daily net assets (the "Maximum Percentage"). The obligation of MFS to bear these
expenses terminates on the last day of the Fund's fiscal year in which the
Fund's "Other Expenses" are less than or equal to the Maximum Percentage.
THE DATE OF THIS SUPPLEMENT IS MARCH 1, 1997
- 2 -
<PAGE> 9
PROSPECTUS
March 1, 1997
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 ....................................... 4
4. Investment Objective and Policies ..................................... 7
5. Management of the Fund ................................................ 18
6. Information Concerning Shares of the Fund ............................. 20
Purchases ......................................................... 20
Exchanges ......................................................... 24
Redemptions and Repurchases ....................................... 25
Distribution Plan ................................................. 28
Distributions ..................................................... 30
Tax Status ........................................................ 30
Net Asset Value ................................................... 31
Description of Shares, Voting Rights and Liabilities .............. 31
Performance Information ........................................... 31
Expenses .......................................................... 32
7. Shareholder Services .................................................. 32
APPENDIX A ............................................................ A-1
APPENDIX B ............................................................ B-1
APPENDIX C ............................................................ C-1
APPENDIX D ............................................................ D-1
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
MFS 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 100% OF ITS NET ASSETS IN LOWER RATED BONDS, COMMONLY
KNOWN AS "JUNK BONDS," THAT ENTAIL GREATER RISKS, INCLUDING DEFAULT RISKS, THAN
THOSE FOUND IN HIGHER RATED SECURITIES. THESE BONDS MAY BE ISSUED BY DOMESTIC
AND FOREIGN CORPORATE ISSUERS, AS WELL AS BY FOREIGN GOVERNMENTS AND THEIR
POLITICAL SUBDIVISIONS. INVESTORS SHOULD CAREFULLY CONSIDER THESE RISKS BEFORE
INVESTING. SEE "INVESTMENT OBJECTIVE AND POLICIES -- EMERGING MARKET SECURITIES
- -- BRADY BONDS -- CORPORATE DEBT SECURITIES -- RISK FACTORS."
The Fund's investment adviser and distributor are Massachusetts Financial
Services Company ("MFS" or the "Adviser") and MFS Fund Distributors Inc.,
("MFD"), respectively, both of which are located at 500 Boylston Street, Boston,
Massachusetts 02116.
INVESTMENT PRODUCTS ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY,
AND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY FINANCIAL
INSTITUTION. SHARES OF MUTUAL FUNDS ARE SUBJECT TO INVESTMENT RISK, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED, AND WILL FLUCTUATE IN VALUE. YOU
MAY RECEIVE MORE OR LESS THAN YOU PAID WHEN YOU REDEEM YOUR SHARES.
<PAGE> 10
This Prospectus sets forth concisely the information concerning the Fund that a
prospective investor ought to know before investing. The Fund has filed with the
Securities and Exchange Commission (the "SEC") a Statement of Additional
Information, dated March 1, 1997, as amended or supplemented from time to time
(the "SAI"), which contains more detailed information about the Fund. The SAI is
incorporated into this Prospectus by reference. See page 34 for a further
description of the information set forth in the SAI. A copy of the SAI may be
obtained without charge by contacting the Shareholder Servicing Agent (see back
cover for address and phone number). The SEC maintains an Internet World Wide
Web site that contains the SAI, materials that are incorporated by reference
into this Prospectus and the SAI, and other information regarding the Fund. This
Prospectus is available on the Adviser's Internet World Wide Web site at
http://www.mfs.com.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE> 11
<TABLE>
1. EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES:
<CAPTION>
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% None None
Maximum Contingent Deferred Sales Charge (as a percentage of
original purchase price or redemption proceeds, as
applicable) .............................................. See Below(1) 4.00% 1.00%
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE DAILY
NET ASSETS):
Management Fees (after expense reduction)(2) ............... 0.40% 0.40% 0.40%
Rule 12b-1 Fees ............................................ 0.35%(3) 1.00%(4) 1.00%(4)
Other Expenses (after expense limitation)(5)(6) ............ 0.00% 0.00% 0.00%
---- ---- ----
Total Operating Expenses (after expense limitation)(5) ..... 0.75% 1.40% 1.40%
<FN>
- ------------
(1) Purchases of $1 million or more and certain purchases by retirement plans
are not subject to an initial sales charge; however, a contingent deferred
sales charge ("CDSC") of 1% will be imposed on such purchases in the event
of certain redemption transactions within 12 months following such
purchases. See "Information Concerning Shares of the Fund -- Purchases."
(2) Absent the voluntary waiver of management fees described under "Management
of the Fund," "Management Fees" would be 1.12%.
(3) The Fund has adopted a distribution plan for its shares in accordance with
Rule 12b-1 under the Investment Company Act of 1940, as amended (the "1940
Act") (the "Distribution Plan"), which provides that it will pay
distribution/service fees aggregating up to (but not necessarily all of)
0.35% per annum of average daily net assets attributable to the Class A
shares. The 0.25% per annum service fee is reduced to 0.15% per annum for
shares purchased prior to May 14, 1991. Distribution expenses paid under
the Plan, together with the initial sales charge, may cause long-term
shareholders to pay more than the maximum sales charge that would have been
permissible if imposed entirely as an initial sales charge. See
"Information Concerning Shares of the Fund -- Distribution Plan" below.
(4) The Fund's Distribution Plan provides that it will pay distribution/service
fees aggregating up to (but not necessarily all of) 1.00% per annum of the
average daily net assets attributable to the Class B shares and Class C
shares, respectively. Distribution expenses paid under the Plan with
respect to Class B or Class C shares, together with any CDSC, may cause
long-term shareholders to pay more than the maximum sales charge that would
have been permissible if imposed entirely as an initial sales charge. See
"Information Concerning Shares of the Fund -- Distribution Plan" below.
(5) The Adviser has agreed to bear the Fund's expenses, such that "Other
Expenses" do not exceed 0.00% per annum of the Fund's average daily net
assets during the current fiscal year. Otherwise, "Other Expenses" would be
0.57% per annum, and, taking into account this expense limitation and the
management fee waiver, "Total Operating Expenses" would be 2.04%, 2.69% and
2.69% for Class A, B and C shares, respectively.
(6) The Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its
custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the
effect of reducing the Fund's expenses). Any such fee reductions are not
reflected under "Other Expenses."
</TABLE>
<PAGE> 12
EXAMPLE OF EXPENSES
<TABLE>
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(3)
- ------ ------- ----------------- -----------
<S> <C> <C> <C> <C> <C>
(1) (1)
1 year ......................... $ 55 $ 54 $ 14 $ 24 $ 14
3 years ........................ 70 74 44 44 44
5 years ........................ 87 97 77 77 77
10 years ........................ 136 150(2) 150(2) 168 168
<FN>
- ------------
(1) Assumes no redemption.
(2) Class B shares convert to Class A shares approximately eight years after
purchase; therefore, years nine and ten reflect Class A expenses.
(3) Purchases subsequent to April 1, 1996 which are redeemed within 12 months of
purchase are subject to a 1% CDSC.
</TABLE>
The purpose of the expense table above is to assist investors in
understanding the various costs and expenses that a shareholder of the Fund will
bear directly or indirectly. More complete descriptions of the following Fund
expenses are set forth in the following sections: (i) varying sales charges on
share purchases -- "Purchases"; (ii) varying CDSCs -- "Purchases"; (iii)
management fees -- "Management of the Fund -- Investment Adviser"; and (iv) Rule
12b-1 (i.e., distribution plan) fees -- "Distribution Plan."
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS
THAN THOSE SHOWN.
2. THE FUND
The Fund is a non-diversified series of the Trust, an open-end management
investment company which was organized as a business trust under the laws of The
Commonwealth of Massachusetts on July 31, 1987. The Trust presently consists of
two series of shares, each of which represents a portfolio with separate
investment objectives and 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 for sale to the general
public. Class A shares are offered at net asset value plus an initial sales
charge up to a maximum of 4.75% of the offering price (or a CDSC upon redemption
of 1.00% during the first year in the case of purchases of $1 million or more
and certain purchases by retirement plans) and subject to an annual distribution
fee and a service fee up to a maximum of 0.35% per annum. Class B shares are
offered at net asset value without an initial sales charge but are subject to a
CDSC upon redemption (declining from 4.00% during the first year to 0% after six
years) and an annual distribution fee and a service fee up to a maximum of 1.00%
per annum. Class B shares will convert to Class A shares approximately eight
years after purchase. Class C shares are offered at net asset value without an
initial sales charge or a CDSC but are subject to a CDSC upon redemption of
1.00% during the first year and an annual distribution fee and service fee up to
a maximum of 1.00% per annum. Class C shares do not convert to any other class
of shares of the Fund. In addition, the Fund offers an additional class of
shares, Class I shares, exclusively to certain institutional investors. Class I
shares are made available by means of a separate Prospectus Supplement provided
to institutional investors eligible to purchase Class I shares and are offered
at net asset value without an initial sales charge or CDSC upon redemption and
without an annual distribution and service fee.
The Trust's Board of Trustees provides broad supervision over the affairs of the
Fund. MFS is the Fund's investment adviser. The Adviser is responsible for the
management of the Fund's assets and the officers of the Trust are responsible
for the Fund's operations. The Adviser manages the portfolio from day to day in
accordance with the Fund's investment objective and policies. A majority of the
Trustees are not affiliated with the Adviser. The Fund also offers to buy back
(redeem) its shares from its shareholders at any time at net asset value less
any applicable CDSC.
<PAGE> 13
3. CONDENSED FINANCIAL INFORMATION
The following information has been audited for at least the latest five fiscal
years of the Fund and should be read in conjunction with financial statements
included in the Fund's Annual Report to shareholders which are incorporated by
reference into the SAI in reliance upon the report of the Fund's independent
auditors, given upon their authority as experts in accounting and auditing. The
Fund's independent auditors are Ernst & Young LLP. Prior to May 6, 1991, the
Fund's predecessor operated as a closed-end management investment company (see
"The Fund") above).
<TABLE>
FINANCIAL HIGHLIGHTS
CLASS A, CLASS B AND CLASS C SHARES
<CAPTION>
YEAR ENDED OCTOBER 31,
---------------------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
CLASS A
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value - beginning of period .......................... $ 8.07 $ 7.57 $ 8.34 $ 8.00 $ 8.12
------- ------- ------- ------- -------
Income from investment operations# -
Net investment income(S) ..................................... $ 0.62 $ 0.60 $ 0.48 $ 0.52 $ 0.63
Net realized and unrealized gain (loss) on investments and
foreign currency transactions ................................ 0.18 0.48 (0.74) 0.42 0.08
------- ------- ------- ------- -------
Total from investment operations ......................... $ 0.80 $ 1.08 $ (0.26) $ 0.94 $ 0.71
------- ------- ------- ------- -------
Less distributions declared to shareholders -
From net investment income ................................... $ (0.60) $ (0.58) -- $ (0.24) $ (0.56)
From net realized gain on investments and foreign currency
transactions ............................................... (0.08) -- -- (0.32) --
In excess of net investment income and foreign currency
transactions ............................................... -- -- (0.06) -- --
In excess of net realized gain on investments and foreign
currency transactions ...................................... -- -- (0.04) -- --
From paid-in capital ......................................... -- -- (0.41) (0.04) (0.27)
------- ------- ------- ------- -------
Total distributions declared to shareholders ............. $ (0.68) $ (0.58) $ (0.51) $ (0.60) $ (0.83)
------- ------- ------- ------- -------
Net asset value - end of period ................................ $ 8.19 $ 8.07 $ 7.57 $ 8.34 $ 8.00
======= ======= ======= ======= =======
Total return(+) ................................................ 10.42% 15.00% (3.15)% 12.36% 9.02%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA(S):
Expenses## ................................................... 1.13% 1.54% 1.71% 1.98% 2.02%
Net investment income ........................................ 7.63% 7.86% 6.11% 5.92% 7.47%
PORTFOLIO TURNOVER ............................................. 287% 249% 153% 275% 423%
NET ASSETS AT END OF PERIOD (000 OMITTED) ...................... $49,432 $41,688 $44,032 $60,120 $77,487
# Per share data for periods subsequent to October 31, 1993 is based on
average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
(+) Total returns for Class A shares do not include the applicable sales
charge. If the charge had been included, the results would have been lower.
(S) The 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 ratios would have been:
Net investment income ...................................... $ 0.54 $ 0.53 $ 0.44 $ 0.49 $ 0.61
RATIOS (TO AVERAGE NET ASSETS):
Expenses## ............................................... 2.06% 2.47% 2.21% 2.14% 2.21%
Net investment income .................................... 6.70% 6.89% 5.62% 5.76% 7.55%
</TABLE>
<PAGE> 14
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------------------------------------------------------
1991 1990 1989 1988 1987*
------ ------ ------ ------ -------
CLASS A
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value - beginning of period ....................... $ 7.56 $ 8.93 $ 9.60 $ 9.21 $ 9.35
------ ------- ------- ------- -------
Income from investment operations -
Net investment income(S) .................................. $ 0.73 $ 0.86 $ 0.94 $ 0.93 $0.0025
Net realized and unrealized gain (loss) on investments and
foreign currency transactions ........................... 0.95 (1.03) (0.38) 0.56 (0.1425)
------- ------- ------- ------- -------
Total from investment operations ...................... $ 1.68 $ (0.17) $ 0.56 $ 1.49 $ (0.14)
------- ------- ------- ------- -------
Less distributions declared to shareholders -
From net investment income ................................ $ (0.73) $ (0.82) (1.18) $ (0.69) $ --
From net realized gain on investments and foreign currency
transactions ............................................ -- -- -- (0.41) --
In excess of net realized gain on investments and foreign
currency transactions ...................................
From paid-in capital ...................................... (0.39) (0.38) (0.05) -- --
------- ------- ------- ------- -------
Total distributions declared to shareholders .......... $ (1.12) $ (1.20) $ (1.23) $ (1.10) --
------- ------- ------- ------- -------
Net asset value - end of period ............................. $ 8.12 $ 7.56 $ 8.93 $ 9.60 $ 9.21
======= ======= ======= ======= =======
Total return(+) ............................................. 23.78% (1.62)% (5.85)% 16.60% (1.50)%++
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA(S):
Expenses .................................................. 1.87% 1.47% 1.82% 1.75% 0.57%+
Net investment income ..................................... 9.26% 10.42% 10.05% 9.74% 4.88%+
PORTFOLIO TURNOVER .......................................... 671% 400% 157% 270% --
NET ASSETS AT END OF PERIOD (000 OMITTED) ................... $76,312 $74,555 $87,978 $93,819 $78,479
* For the period from the commencement of investment operations, October 29, 1987 to October 31, 1987.
+ Annualized.
++ Not Annualized.
(+) Total returns for Class A shares do not include the applicable sales charge.
If the charge had been included, the results would have been lower.
(S) The 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 ratios would have been:
Net investment income ................................... $ 0.71 $ 0.83 -- -- --
RATIOS (TO AVERAGE NET ASSETS):
Expenses## ............................................ 2.16% 1.81% -- -- --
Net investment income ................................. 8.97% 10.08% -- -- --
</TABLE>
<PAGE> 15
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------------------------------------------------------------
1996 1995 1994 1993** 1996 1995 1994***
------ ------ ------ ------ ------ ------ ------
CLASS B CLASS C
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH
PERIOD):
Net asset value - beginning of period ............... $ 8.03 $ 7.53 $ 8.33 $ 8.28 $ 8.00 $ 7.53 $ 7.53
------- ------ ------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) .......................... $ 0.56 $ 0.55 $ 0.45 $ 0.04 $ 0.57 $ 0.54 $ 0.12
Net realized and unrealized gain (loss) on
investments and foreign currency transactions ... 0.18 0.48 (0.78) 0.05 0.18 0.48 (0.03)
------- ------ ------ ------ ------ ------ ------
Total from investment operations .............. $ 0.74 $ 1.03 (0.33) $ 0.09 $ 0.75 $ 1.02 $ 0.09
------- ------ ------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income ........................ $ (0.55) $(0.53) -- $(0.03) $(0.55) $(0.55) --
From net realized gain on investments and foreign
currency transactions ........................... (0.08) -- -- (0.01) (0.08) -- --
In excess of net investment income and foreign
currency transactions ........................... -- -- (0.05) -- -- -- --
In excess of net realized gain on investments and
foreign currency transactions ................... -- -- (0.03) -- -- -- --
From paid-in capital .............................. -- -- (0.39) -- -- -- (0.09)
------- ------ ------ ------ ------ ------ ------
Total distributions declared to shareholders .. $ (0.63) $(0.53) $(0.47) $(0.04) $(0.63) $(0.55) $(0.09)
------- ------ ------ ------ ------ ------ ------
Net asset value - end of period ..................... $ 8.14 $ 8.03 $ 7.53 $ 8.33 $ 8.12 $ 8.00 $ 7.53
======= ====== ====== ====== ====== ====== ======
Total return ........................................ 9.68% 14.23% (3.97)% 1.15%++ 9.80% 14.17% 1.23%++
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA(S):
Expenses## ........................................ 1.80% 2.27% 2.43% 3.03%+ 1.71% 2.20% 2.16%+
Net investment income ............................. 7.02% 7.15% 5.97% 5.22%+ 7.12% 7.23% 8.99%+
PORTFOLIO TURNOVER .................................. 287% 249% 153% 275% 287% 249% 153%
NET ASSETS AT END OF PERIOD (000 OMITTED) ........... $25,361 $8,365 $5,350 $ 265 $5,478 $1,060 $ 13
** For the period from the commencement of offering of Class B shares,
September 7, 1993 to October 31, 1993.
*** For the period from the commencement of offering of Class C shares,
September 1, 1994 to October 31, 1994.
+ Annualized.
++ Not annualized.
# Per share data for periods subsequent to October 31, 1993 is based on
average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
(S) 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 ratios would have been:
Net investment income ........................... $ 0.49 $ 0.48 $ 0.41 $ -- $ 0.51 $ 0.46 $ 0.11
RATIOS (TO AVERAGE NET ASSETS):
Expenses## .................................... 2.73% 3.20% 2.92% -- 2.64% 3.13% 2.65%+
Net investment income ......................... 6.09% 6.18% 5.48% -- 6.19% 6.26% 8.50%+
</TABLE>
<PAGE> 16
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 and
convertible securities to be fixed income securities. With respect to 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 common stocks and depository
receipts for common stocks. 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
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 fixed-income 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 B.
Some U.S. Government Securities do not generally involve the credit risks
associated with other types of interest bearing securities, although, as a
result, the yields available from U.S. Government Securities are generally lower
than the yields available from corporate interest bearing securities. Like other
interest bearing securities, however, the values of U.S. Government Securities
change as interest rates fluctuate.
<PAGE> 17
FOREIGN SECURITIES: The Fund may invest up to 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 Securities. The Fund may also invest in fixed income and
equity securities of non-U.S. issuers and securities of domestic issuers
denominated in a foreign currency. Such securities may include corporate debt
securities, established company equity securities, emerging growth equity
securities, bank obligations and bank equity securities (described below) in
which the Fund may invest in accordance with its investment objective. For the
risk considerations involved, see "Risks of Investment in Foreign Securities."
The percentage of the Fund's assets invested in securities issued abroad and
denominated in foreign currencies will vary depending on the relative yield of
such securities, the relative appreciation potential of such securities, the
state of the economies of the countries in which the investments are made and
such countries' financial markets, and the relationship of such countries'
currencies to the U.S. dollar. Currency is judged on the basis of fundamental
economic criteria (e.g., relative inflation levels and trends, growth rate
forecasts, balance of payments status, and economic policies) as well as
technical and political data. In addition to the foregoing, interest rates are
evaluated on the basis of differentials or anomalies that may exist between
different countries. To the extent the Fund invests in foreign securities, under
normal conditions the Fund's portfolio of foreign securities will include those
of a number of foreign countries. The Fund may hold foreign currency for hedging
purposes to protect against declines in the U.S. dollar value of foreign
securities held by the Fund and against increases in the U.S. dollar value of
the foreign securities which the Fund might purchase. The Fund may also hold
foreign currency in anticipation of purchasing foreign securities. The Fund will
not invest 25% or more of the value of its assets in the securities of any one
foreign government. See "Risk Factors -- Risks of Investment in Foreign
Securities".
EMERGING MARKET SECURITIES: Consistent with the Fund's objective and policies,
the Fund may invest in securities of issuers whose principal activities are
located in emerging market countries. Emerging market countries include any
country determined by the Adviser to have an emerging market economy, taking
into account a number of factors, including whether the country has a low-to
middle-income economy according to the International Bank for Reconstruction and
Development, the country's foreign currency debt rating, its political and
economic stability and the development of its financial and capital markets. The
Adviser determines whether an issuer's principal activities are located in an
emerging market country by considering such factors as its country of
organization, the principal trading market for its securities and the source of
its revenues and assets. The issuer's principal activities generally are deemed
to be located in a particular country if: (a) the security is issued or
guaranteed by the government of that country or any of its agencies, authorities
or instrumentalities; (b) the issuer is organized under the laws of, and
maintains a principal office in, that country; (c) the issuer has its principal
securities trading market in that country; (d) the issuer derives 50% or more of
its total revenues from goods sold or services performed in that country; or (e)
the issuer has 50% or more of its assets in that country. See "Risk Factors --
Risks of Investment in Emerging Market Securities".
BRADY BONDS: The Fund may invest in Brady Bonds, which are securities created
through the exchange of existing commercial bank loans to public and private
entities in certain emerging markets for new bonds in connection with debt
restructurings under a debt restructuring plan introduced by former U.S.
Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan debt
restructurings have been implemented to date in Argentina, Brazil, Bulgaria,
Costa Rica, Dominican Republic, Ecuador, Jordan, Mexico, Nigeria, Panama, the
Philippines, Poland, Uruguay and Venezuela. Brady Bonds have been issued only
recently, and for that reason do not have a long payment history. Brady Bonds
may be collateralized or uncollateralized, are issued in various currencies (but
primarily the U.S. dollar) and are actively traded in over-the-counter secondary
markets. U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed
rate bonds or floating-rate bonds, are generally collateralized in full as to
principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds. Brady Bonds are often viewed as having three or four valuation
components: the collateralized repayment of principal at final maturity; the
collateralized interest payments; the uncollateralized interest payments; and
any uncollateralized repayment of principal at maturity (these uncollateralized
amounts constituting the "residual risk"). In light of the residual risk of
Brady Bonds and the history of defaults of countries
<PAGE> 18
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 SAI 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;
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 Services ("S&P"), Duff & Phelps Credit Rating Co. ("Duff &
Phelps") or Fitch Investors Service, Inc. ("Fitch")) (and comparable unrated
securities) (commonly known as "junk bonds"). Up to 100% of the Fund's net
assets may be invested in such lower rated debt securities. For a description of
these and other rating categories, see Appendix C. See "Risk Factors -- Risks of
Investment in Lower Rated Bonds." For a chart indicating the composition of the
bond portion of the Fund's portfolio for the fiscal year ended October 31, 1996,
with the debt securities separated into rating categories, see Appendix D 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 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 to become more widely
recognized as growth companies. See "Risk Factors -- Risks of Investment in
Emerging 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.
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.
<PAGE> 19
RESTRICTED SECURITIES: The Fund may also purchase securities that are not
registered under the Securities Act of 1933 (the "1933 Act") ("restricted
securities"), including those that can be offered and sold to "qualified
institutional buyers" under Rule 144A under the 1933 Act ("Rule 144A
securities"). A determination is made, based upon a continuing review of the
trading markets for a specific Rule 144A security, whether such security is
liquid and thus not subject to the Fund's limitations on investing not more than
15% of its net assets in illiquid investments. The Board of Trustees has adopted
guidelines and delegated to MFS the daily function of determining and monitoring
the liquidity of Rule 144A securities. The Board, however, retains oversight,
focusing on factors, such as valuation, liquidity and availability of
information. Investing in Rule 144A securities could have the effect of
decreasing the level of liquidity in a Fund to the extent that qualified
institutional buyers become for a time uninterested in purchasing Rule 144A
securities held in the Fund's portfolio. Subject to the Fund's 15% limitation on
investments in illiquid investments, the Fund may also invest in restricted
securities that may not be sold under Rule 144A, which presents certain risks.
As a result, the Fund might not be able to sell these securities when the
Adviser wishes to do so, or might have to sell them at less than fair value. In
addition, market quotations are less readily available. Therefore, judgment may
at times play a greater role in valuing these securities than in the case of
unrestricted securities.
CORPORATE ASSET-BACKED SECURITIES: The Fund may invest in corporate asset-
backed securities. These securities, issued by trusts and special purpose
corporations, are backed by a pool of assets, such as credit card or automobile
loan receivables, representing the obligations of a number of different parties.
Corporate asset-backed securities present certain risks. For instance, in the
case of credit card receivables, these securities may not have the benefit of
any security interest in the related collateral. See the SAI for further
information on these securities.
SECURITIES PURCHASED AT A DISCOUNT: When and if available, fixed income
securities may be purchased at a discount from face value. However, the Fund
does not intend to hold such securities to maturity for the purpose of achieving
potential capital gains, unless current yields on these securities remain
attractive.
ZERO COUPON BONDS, DEFERRED INTEREST BONDS AND PIK BONDS: Debt securities in
which the Fund may invest also include zero coupon bonds, deferred interest
bonds and bonds on which the interest is payable in kind ("PIK bonds"). Zero
coupon and deferred interest bonds are debt obligations which are issued or
purchased at a significant discount from face value. The discount approximates
the total amount of interest the bonds will accrue and compound over the period
until maturity or the first interest payment date at a rate of interest
reflecting the market rate of the security at the time of issuance. While zero
coupon bonds do not require the periodic payment of interest, deferred interest
bonds provide for a period of delay before the regular payment of interest
begins. PIK bonds are debt obligations which provide that the issuer thereof
may, at its option, pay interest on such bonds in cash or in the form of
additional debt obligations. Such investments benefit the issuer by mitigating
its need for cash to meet debt service, but also require a higher rate of return
to attract investors who are willing to defer receipt of such cash. Such
investments may experience greater volatility in market value due to changes in
interest rates and other factors than debt obligations which make regular
payments of interest. The Fund will accrue income on such investments for tax
and accounting purposes, as required, which is distributable to shareholders and
which, because no cash is received at the time of accrual, may require the
liquidation of other portfolio securities under disadvantageous circumstances to
satisfy the Fund's distribution obligations.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES: The
Fund may invest a portion of its assets in collateralized mortgage obligations
or "CMOs," which are debt obligations collateralized by mortgage loans or
mortgage pass-through 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.
<PAGE> 20
CMOs (which include multiclass pass-through securities) may be issued by
agencies or instrumentalities of the U.S. Government or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose
subsidiaries of the foregoing. Payments of principal of and interest on the
Mortgage Assets, and any reinvestment income thereon, provide the funds to pay
debt service on the CMOs or make scheduled distributions on the multiclass
pass-through securities. In a CMO, a series of bonds or certificates is usually
issued in multiple classes with different maturities. Each class of CMOs, often
referred to as a "tranche", is issued at a specific fixed or floating coupon
rate and has a stated maturity or final distribution date. Principal prepayments
on the Mortgage Assets may cause the CMOs to be retired substantially earlier
than their stated maturities or final distribution dates, resulting in a loss of
all or part of the premium if any has been paid.
The Fund may also invest in parallel pay CMOs and Planned Amortization Class
CMOs ("PAC Bonds"). Parallel pay CMOs are structured to provide payments of
principal on each payment date to more than one class. PAC Bonds generally
require payments of a specified amount of principal on each payment date. PAC
Bonds are always parallel pay CMOs with the required principal payment on such
securities having the highest priority after interest has been paid to all
classes. For a further description of CMOs, parallel pay CMOs and PAC Bonds and
the risks related to transactions therein, see the SAI.
STRIPPED MORTGAGE-BACKED SECURITIES: The Fund may also invest a portion of its
assets in stripped mortgage-backed securities ("SMBS"), which are derivative
multiclass mortgage securities usually structured with two classes that receive
different proportions of interest and principal distributions from an underlying
pool of mortgage assets. For a further description of SMBS and the risks related
to transactions therein, see the SAI.
OTHER INVESTMENTS: When the Adviser believes that investing for defensive
purposes is appropriate, such as during periods of unusual market conditions, or
when relative yields are deemed attractive, part or all of the Fund's assets may
be temporarily invested in cash (including foreign currency) or cash equivalent
short-term obligations including, but not limited to, certificates of deposit,
commercial paper, short-term notes, obligations issued or guaranteed by the U.S.
Government or any of its agencies or instrumentalities and repurchase
agreements.
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements in order to
earn income on available cash or as a temporary defensive measure. Under a
repurchase agreement, the Fund acquires securities subject to the seller's
agreement to repurchase at a specified time and price. If the seller becomes
subject to a proceeding under the bankruptcy laws or its assets are otherwise
subject to a stay order, the Fund's right to liquidate the securities may be
restricted (during which time the value of the securities could decline). As
discussed in the SAI, the Fund has adopted certain procedures intended to
minimize any risk.
LOAN PARTICIPATIONS AND OTHER DIRECT INDEBTEDNESS: The Fund may invest a portion
of its assets in "loan participations and other direct indebtedness." By
purchasing a loan participation, the Fund acquires some or all of the interest
of a bank or other lending institution in a loan to a corporate borrower. Many
such loans are secured, and most impose restrictive covenants which must be met
by the borrower. These loans are made generally to finance internal growth,
mergers, acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans may be in default at the time of purchase. The Fund may
also purchase trade or other claims against companies, which generally represent
money owed by the company to a supplier of goods and services. These claims may
also be purchased at a time when the company is in default. Certain of the loan
participations acquired by the Fund may involve revolving credit facilities or
other standby financing commitments which obligate the Fund to pay additional
cash on a certain date or on demand.
The highly leveraged nature of many such loans may make such loans especially
vulnerable to adverse changes in economic or market conditions. Loan
participations and other direct investments may not be in the form of securities
or may be subject to restrictions on transfer, and only limited opportunities
may exist to resell such instruments. As a result, the Fund may be unable to
sell such investments at an opportune time or may have to resell them at less
than fair market value. For a further discussion of loan
<PAGE> 21
participations and the risks related to transactions therein, see the SAI.
INDEXED SECURITIES: The Fund may invest in indexed securities whose value is
linked to foreign currencies, interest rates, commodities, indices, or other
financial indicators. Most indexed securities are short to intermediate term
fixed-income securities whose values at maturity (i.e., principal value) or
interest rates rise or fall according to the change in one or more specified
underlying instruments. Indexed securities may be positively or negatively
indexed (i.e., their principal value or interest rates may increase or decrease
if the underlying instrument appreciates), and may have return characteristics
similar to direct investments in the underlying instrument or to one or more
options on the underlying instrument. Indexed securities may be more volatile
than the underlying instrument itself.
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 SAI. In
addition, such options present risks of loss even if the yield on one of the
underlying securities remains constant, if the spread moves in a direction or to
an extent which was not anticipated.
In certain instances, the Fund may enter into options on Treasury Securities
which may be referred to as "reset" options or "adjustable strike" options.
These options provide for periodic adjustment of the strike price and may also
provide for the periodic adjustment of the premium during the term of the
option.
The Fund may purchase and sell options that are traded on U.S. and foreign
exchanges, and Options traded over-the-counter with broker-dealers who deal in
these Options. The ability to terminate over-the-counter Options is more limited
than with exchange-traded Options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. The Fund
will treat assets used to cover over-the-counter Options as illiquid unless the
dealer is a primary dealer in U.S. Government securities and has given the Fund
the unconditional right to close such Options at a formula price, in which event
only an amount of the cover determined with reference to the formula will be
considered illiquid. The Fund may also write over-the-counter options with
non-primary dealers, including foreign dealers, and will treat the assets used
to cover these options as illiquid.
In addition, the Fund may purchase warrants on fixed income securities. A
warrant on a fixed income security is a long-dated call option conveying to the
holder of the warrant the right, but not the obligation, to purchase a fixed
income security of a specific description from the issuer on a certain date or
dates (the exercise date) at a fixed exercise price.
OPTIONS ON STOCK INDICES: The Fund may write (sell) covered call and put options
and purchase call and put options on domestic and foreign stock indices. The
Fund may write such options for the purpose of increasing its current income
and/or to protect its portfolio against declines in the value of securities it
owns or increases in the value of securities to be acquired.
<PAGE> 22
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
securities and other obligations underlying Futures Contracts held by the Fund
not exceed 50% of the market value of the total assets of the Fund.
<PAGE> 23
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.
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
<PAGE> 24
counterparty's creditworthiness deteriorates. The Fund may also suffer losses if
it is unable to terminate outstanding swap agreements or reduce its exposure
through offsetting transactions.
Swaps, caps, floors and collars are highly specialized activities which involve
certain risks. See the SAI on the risks involved in these activities.
LENDING OF PORTFOLIO SECURITIES: The Fund may seek to increase its income by
lending portfolio securities 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 in
cash, U.S. Government Securities or an irrevocable letter of credit maintained
on a current basis at an amount at least equal to the market value of the
securities loaned. 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
records these transactions as sale and purchase transactions, rather than as
borrowing transactions. The Fund will only enter into covered rolls. A "covered
roll" is a specific type of dollar roll for which there is an offsetting cash
position or a cash equivalent security position which matures on or before the
forward settlement date of the dollar roll transaction.
"WHEN-ISSUED" OR FORWARD DELIVERY SECURITIES: Securities may be purchased on a
"when-issued" or on a "forward delivery" basis, which means that the obligations
will be delivered to the Fund at a future date usually beyond customary
settlement time. The commitment to purchase a security for which payment will be
made on a future date may be deemed a separate security. Although the Fund is
not limited to the amount of securities for which it may have commitments to
purchase on such basis, it is expected that under normal circumstances, the Fund
will not commit more than 30% of its assets to such purchases. The Fund does not
pay for the securities until received or start earning interest on them until
the contractual settlement date. 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. For the fiscal year ended
October 31, 1996, the Fund had a portfolio turnover rate in excess of 100%.
Transaction costs incurred by the Fund and the realized capital gains and losses
of the Fund may be greater than that of a fund with a lesser portfolio turnover
rate.
The primary consideration in placing portfolio security transactions 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 SAI.
<PAGE> 25
RISK FACTORS
EFFECT OF INTEREST RATE CHANGES: The value of shares of the Fund will vary as
the aggregate value of the Fund's portfolio securities increases or decreases.
The net asset value of the Fund may change as the general levels of interest
rates fluctuate. When interest rates decline, the value of a portfolio of fixed
income securities can be expected to rise. Conversely, when interest rates rise,
the value of a portfolio of fixed income securities can be expected to decline.
Moreover, the value of the lower-rated fixed income securities that the Fund
purchases will fluctuate more than the value of higher-rated fixed income
securities. These lower-rated fixed income securities generally tend to reflect
short-term corporate and market developments to a greater extent than
higher-rated securities, which react primarily to fluctuations in the general
level of interest rates. See "Risks of Investment in Lower Rated Bonds" below
for additional discussion of the risks of investing in such securities.
Although changes in the value of the Fund's portfolio securities subsequent to
their acquisition are reflected in the net asset value of shares of the Fund,
such changes will not affect the income received by the Fund from such
securities. The dividends paid by the Fund will increase or decrease in relation
to the income received by the Fund from its investments, which will in any case
be reduced by the Fund's expenses before being distributed to the Fund's
shareholders.
If the Adviser's expectations of changes in interest rates or its evaluation of
the normal yield relationship between two securities proves to be incorrect, the
Fund's income, net asset value and potential capital gain may be decreased or
its potential capital loss may be increased. The Adviser's reallocation of Fund
assets in response to actual and anticipated market and economic changes may
result in the Fund not achieving anticipated benefits, or experiencing losses,
should the Adviser's reallocation decision be incorrect.
RISKS OF INVESTMENT IN LOWER RATED BONDS: No minimum rating standard is required
for a purchase of corporate debt securities by the Fund and up to 100% of the
Fund's net assets may be invested in convertible and non- convertible
fixed-income securities. These securities are considered speculative and, while
generally providing greater income than investments in higher rated securities,
will involve greater risk of principal and income (including the possibility of
default or bankruptcy of the issuers of such securities) and may involve greater
volatility of price (especially during periods of economic uncertainty or
change) than securities in the higher rating categories and, because yields vary
over time, no specific level of income can ever be assured. These lower rated,
high yielding fixed income securities generally tend to be affected by economic
changes (and the outlook for economic growth), short-term corporate and industry
developments and the market's perception of their credit quality (especially
during times of adverse publicity) to a greater extent than higher rated
securities, which react primarily to fluctuations in the general level of
interest rates (although these lower rated securities are also affected by
changes in interest rates. In the past, economic downturns or an increase in
interest rates have, under certain circumstances, caused a higher incidence of
default by the issuers of these securities and may do so in the future,
especially in the case of highly leveraged issuers. During certain periods, the
higher yields on the Fund's lower rated, high yielding fixed income securities
are paid primarily because of the increased risk of loss of principal and
income, arising from such factors as the heightened possibility of default or
bankruptcy of the issuers of such securities. Due to the fixed income payments
of these securities, the Fund may continue to earn the same level of interest
income while its net asset value declines due to portfolio losses, which could
result in an increase in the Fund's yield despite the actual loss of principal.
The prices for these securities may be affected by legislative and regulatory
developments. The market for these lower rated fixed income securities may be
less liquid than the market for investment grade fixed income securities.
Furthermore, the liquidity of these lower rated securities may be affected by
the market's perception of their credit quality. Therefore, the Adviser's
judgment may at times play a greater role in valuing these securities than in
the case of investment grade fixed income securities, and it also may be more
difficult during times of certain adverse market conditions to sell these lower
rated securities to meet redemption requests or to respond to changes in the
market.
While the Adviser may refer to ratings issued by established credit rating
<PAGE> 26
agencies, it is not the Fund's policy to rely exclusively on ratings issued by
these rating agencies, but rather to supplement such ratings with the Adviser's
own independent and ongoing review of credit quality. The Fund's achievement of
its investment objective may be more dependent on the Adviser's own credit
analysis than in the case of an investment company primarily investing in higher
quality fixed income securities.
The Fund may also invest in fixed income securities rated Baa by Moody's or BBB
by S&P, Fitch or Duff & Phelps and comparable unrated securities. These
securities, while normally exhibiting adequate protection parameters, may have
speculative characteristics and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than in the case of higher grade fixed income securities.
RISKS OF INVESTMENT IN EMERGING GROWTH COMPANIES: Investing in emerging growth
companies involves greater risk than is customarily associated with investing in
more established companies. Emerging growth companies often have limited product
lines, markets or financial resources, and they may be dependent on one-person
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.
RISKS OF INVESTMENT IN OPTIONS, FUTURES CONTRACTS, OPTIONS ON FUTURES CONTRACTS
AND OPTIONS ON FOREIGN CURRENCY: Although the Fund will enter into transactions
in options, Futures Contracts, Options on Futures Contracts and Options on
Foreign Currencies for hedging purposes, such transactions nevertheless involve
certain risks. For example, a lack of correlation between the instrument
underlying an option or Futures Contract and the assets being hedged, or
unexpected adverse price movements, could render the Fund's hedging strategy
unsuccessful and could result in losses. The Fund also may enter into
transactions in such instruments for other than hedging purposes, to the extent
permitted by applicable law, which involves greater risk. In particular, such
transactions may result in losses for the Fund which are not offset by gains on
other portfolio positions, thereby reducing gross income. In addition, foreign
currency markets may be extremely volatile from time to time. There also can be
no assurance that a liquid secondary market will exist for any contract
purchased or sold, and the Fund may be required to maintain a position until
exercise or expiration, which could result in losses. In addition, the Fund may
be required or may elect to receive delivery of the foreign currencies
underlying Forward Contracts or Options on Foreign Currencies, which may involve
certain risks. In such instances, the Fund may hold the foreign currency when,
in the judgment of the Adviser, it would be beneficial to convert such currency
into U.S. dollars at a later date, based on anticipated changes in the relevant
exchange rate. The SAI contains a description of the nature and trading
mechanics of Options, Futures Contracts, Options on Futures Contracts, Forward
Contracts and Options on Foreign Currencies, and includes a discussion of the
risks related to transactions therein.
Transactions in Forward Contracts may be entered into only in the
over-the-counter market. Futures Contracts and Options on Futures Contracts may
be entered into on U.S. exchanges regulated by the Commodity Futures Trading
Commission and on foreign exchanges. In addition, the securities underlying
options and Futures Contracts traded by the Fund will include U.S. Government
Securities as well as foreign securities. Because longer-term U.S. Government
Securities are favorable vehicles for an option writing program, from time to
time up to 100% of the Fund's portfolio may consist of such securities. Such
securities are among the most volatile U.S. Government Securities.
RISKS OF INVESTMENT IN FOREIGN SECURITIES: Investors should recognize that
transactions involving foreign equity or debt securities or foreign currencies,
and transactions entered into in foreign countries, involve considerations and
risks not typically associated with investing in U.S. markets. These include
changes in currency rates, exchange control regulations, governmental
administration or economic or monetary policy (in the U.S. or 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
<PAGE> 27
markets may also be less liquid, more volatile and less subject to government
supervision than in the United States. Investments in foreign countries could be
affected by other factors including expropriation, confiscatory taxation and
potential difficulties in enforcing contractual obligations and could be subject
to extended settlement periods. While the holding of foreign currencies will
permit the Fund to take advantage of favorable movements in the applicable
exchange rate, it also exposes the Fund to risk of loss if such rates move in a
direction adverse to the Fund's position. Such losses could also adversely
affect the Fund's hedging strategies. See "Investment Objective, Policies and
Restrictions" in the SAI for further discussion of the holding of foreign
currency, as well as the associated risks.
RISKS OF INVESTMENT IN EMERGING MARKET SECURITIES: The risks of investing in
foreign securities may be intensified in the case of investments in emerging
markets. Securities of many issuers in emerging markets may be less liquid and
more volatile than securities of comparable domestic issuers. Emerging markets
also have different clearance and settlement procedures, and in certain markets
there have been times when settlements have been unable to keep pace with the
volume of securities transactions, making it difficult to conduct such
transactions. Delays in settlement could result in temporary periods when a
portion of the assets of the Fund is uninvested and no return is earned thereon.
The inability of the Fund to make intended security purchases due to settlement
problems could cause the Fund to miss attractive investment opportunities.
Inability to dispose of portfolio securities due to settlement problems could
result in losses to the Fund due to subsequent declines in values of the
portfolio securities, a decrease in the level of liquidity in the Fund's
portfolio or, if the Fund has entered into a contract to sell the security, in
possible liability to the purchaser. Certain markets may require payment for
securities before delivery, and in such markets the Fund bears the risk that the
securities will not be delivered and that the Fund's payments will not be
returned. Securities prices in emerging markets can be significantly more
volatile than in the more developed nations of the world, reflecting the greater
uncertainties of investing in less established markets and economies. In
particular, countries with emerging markets may have relatively unstable
governments, present the risk of nationalization of businesses, restrictions on
foreign ownership, or prohibitions of repatriation of assets, and may have less
protection of property rights than more developed countries. The economies of
countries with emerging markets may be predominantly based on only a few
industries, may be highly vulnerable to changes in local or global trade
conditions, and may suffer from extreme and volatile debt burdens or inflation
rates. Local securities markets may trade a small number of securities and may
be unable to respond effectively to increases in trading volume, potentially
prompt liquidation of substantial holdings difficult or impossible at times.
Securities of issuers located in countries with emerging markets may have
limited marketability and may be subject to more abrupt or erratic movements.
Certain emerging markets may require governmental approval for the repatriation
of investment income, capital or the proceeds of sales of securities by foreign
investors. In addition, if a deterioration occurs in an emerging market's
balance of payments or for other reasons, a country could impose temporary
restrictions on foreign capital remittances. The Fund could be adversely
affected by delays in, or a refusal to grant, any required governmental approval
for repatriation of capital, as well as by the application to the Fund of any
restrictions on investments.
Investment in certain foreign emerging market debt obligations may be restricted
or controlled to varying degrees. These restrictions or controls may at times
preclude investment in certain foreign emerging market debt obligations and
increase the expenses of the Fund.
NON-DIVERSIFIED STATUS: The Fund has registered as a "non-diversified"
investment company. As a result, the Fund is limited as to the percentage of its
assets which may be invested in the securities of any one issuer only by its own
investment restrictions and the diversification requirements imposed by the
Internal Revenue Code of 1986, as amended (the "Code"). U.S. Government
Securities are not subject to any investment limitation. Since the Fund may
invest a relatively high percentage of its assets in a limited number of
issuers, the Fund may be more susceptible to any single economic, political or
regulatory occurrence and to the financial conditions of the issuers in which it
invests. For these reasons, an investment in shares of the Fund should not be
considered to constitute a complete investment program and may not be
appropriate for investors who cannot assume the greater risk of capital
depreciation inherent in seeking higher income and significant capital
appreciation.
<PAGE> 28
--------------------
The investment objective and policies described above are not fundamental and
may be changed without shareholder approval, as may the Fund's investment
objective. A change in the Fund's investment objective may result in the Fund
having an investment objective different from the objective which the
shareholder considered appropriate at the time of investment in the Fund.
The SAI includes a discussion of investment policies and a listing of specific
investment restrictions which govern the Fund's investment policies. The
specific investment restrictions listed in the SAI may be changed without
shareholder approval unless indicated otherwise. See "Investment Objective,
Policies and Restrictions" in the SAI.
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"). Under the
Advisory Agreement, the Adviser provides the Fund with overall investment
advisory services. 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 has
been employed as a portfolio manager by the Adviser since 1985 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 0.50% 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. The
Adviser has voluntarily reduced its right to receive the fee set forth in the
Advisory Agreement to a maximum of 0.40% 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.
For the Fund's fiscal year ended October 31, 1996, MFS received a management fee
of $465,666. If MFS had not reduced its management fee, MFS would have received
a management fee of $768,788 (of which $341,027 would have been based on average
daily net assets and $427,761 on gross income), which would have been equivalent
on an annual basis to 1.12% 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, and seven variable accounts, each of which is a
registered investment company established by Sun Life Assurance Company of
Canada (U.S.) ("Sun Life of Canada (U.S.)") in connection with the sale of
various fixed/variable annuity contracts. MFS and its wholly-owned subsidiary,
MFS Institutional Advisors, Inc., also provide investment advice to substantial
private clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the United States, Massachusetts Investors
Trust. Net assets under the management of the MFS organization were
approximately $54 billion on behalf of approximately 2.3 million investor
accounts as of January 31, 1997. As of such date, the MFS organization managed
approximately $20.1 billion of assets invested in fixed income funds and fixed
income portfolios, approximately $6.1 billion of assets in U.S. Government
Securities, and approximately $30.3 billion of assets in equity securities. MFS
is a subsidiary of Sun Life of Canada (U.S.), which in turn is a wholly owned
subsidiary of Sun Life Assurance Company of Canada ("Sun Life"). The Directors
of MFS are A. Keith Brodkin, Jeffrey L. Shames, Arnold D. Scott, John D. McNeil
and Donald A. Stewart. 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 Stewart are the Chairman and President, respectively, of Sun
Life. Sun Life, a mutual life insurance company, is one of the largest
international life insurance companies and has been operating in the United
<PAGE> 29
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 also the Chairman,
President and a Trustee of the Trust. John D. Laupheimer, Jr., Leslie J.
Nanberg, Jeffrey L. Shames, 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.
MFS has established a strategic alliance with Foreign & Colonial Management Ltd.
("Foreign & Colonial"). Foreign & Colonial is a subsidiary of two of the world's
oldest financial services institutions, the London-based Foreign & Colonial
Investment Trust PLC, which pioneered the idea of investment management in 1868,
and HYPO-BANK (Bayerische Hypotheken-und Wechsel-Bank AG), the oldest publicly
listed bank in Germany, founded in 1835. As part of this alliance, the portfolio
managers and investment analysts of MFS and Foreign & Colonial share their views
on a variety of investment related issues, such as the economy, securities
markets, portfolio securities and their issuers, investment recommendations,
strategies and techniques, risk analysis, trading strategies and other portfolio
management matters. MFS has access to the extensive international equity
investment expertise of Foreign & Colonial, and Foreign & Colonial has access to
the extensive U.S. equity investment expertise of MFS. MFS and Foreign &
Colonial each have investment personnel working in each other's offices in
Boston and London, respectively.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for portfolios of other clients of MFS or clients of
Foreign & Colonial. Some simultaneous transactions are inevitable when several
clients receive investment advice from MFS and Foreign & Colonial, particularly
when the same security is suitable for more than one client. While in some cases
this arrangement could have a detrimental effect on the price or availability of
the security as far as the Fund is concerned, in other cases, however, it may
produce increased investment opportunities for the Fund.
ADMINISTRATOR -- MFS provides the Fund with certain administrative services
pursuant to a Master Administrative Services Agreement dated March 1, 1997.
Under this Agreement, MFS provides the Fund with certain financial, legal,
compliance, shareholder communications and other administrative services. As a
partial reimbursement for the cost of providing these services, the Fund pays
MFS an administrative fee up to 0.015% per annum of the Fund's average daily net
assets, provided that the administrative fee is not assessed on Fund assets that
exceed $3 billion.
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
Class A, B and C shares of the Fund may be purchased at the public offering
price through any dealer and other financial institutions ("dealers") having a
selling agreement with MFD. Dealers may also charge their customers fees
relating to investments in the Fund.
This Prospectus offers Class A, B and C shares to the general public which bear
sales charges and distribution fees in different forms and amounts, as described
below:
CLASS A SHARES: Class A shares are generally offered at net asset value plus an
initial sales charge, but in certain cases are offered at net asset value
without an initial sales charge but subject to a CDSC.
PURCHASES SUBJECT TO INITIAL SALES CHARGE. Class A shares are offered at
net asset value plus an initial sales charge as follows:
<PAGE> 30
<TABLE>
<CAPTION>
SALES CHARGE* AS
PERCENTAGE OF:
-------------------------------- DEALER ALLOWANCE
NET AMOUNT AS A PERCENTAGE
AMOUNT OF PURCHASE OFFERING PRICE INVESTED OF OFFERING PRICE
- ------------------ -------------- -------- -----------------
<S> <C> <C> <C>
Less than $100,000 ......................................................... 4.75% 4.99% 4.00%
$100,000 but less than $250,000 ............................................ 4.00 4.17 3.20
$250,000 but less than $500,000 ............................................ 2.95 3.04 2.25
$500,000 but less than $1,000,000 .......................................... 2.20 2.25 1.70
$1,000,000 or more ......................................................... None** None** See Below**
<FN>
- ----------
*Because of rounding in the calculation of offering price, actual sales charges
may be more or less than those calculated using the percentages above.
**A CDSC will apply to such purchases, as discussed below.
</TABLE>
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price, as shown in the above table. In the case of
the maximum sales charge, the dealer retains 4% and MFD retains approximately
3/4 of 1% of the public offering price. The sales charge may vary depending on
the number of shares of the Fund as well as certain other MFS Funds owned or
being purchased, the existence of an agreement to purchase additional shares
during a 13-month period (or 36-month period for purchases of $1 million or
more) or other special purchase programs. A description of the Right of
Accumulation, Letter of Intent and Group Purchase privileges by which the sales
charge may be reduced is set forth in the SAI.
PURCHASES SUBJECT TO A CDSC (but not subject to an initial sales charge). In
the following four circumstances, Class A shares are offered at net asset value
without an initial sales charge but subject to a CDSC equal to 1% of the lesser
of the value of the shares redeemed (exclusive of reinvested dividend and
capital gain distributions) or the total cost of such shares, in the event of a
share redemption within 12 months following the purchase:
(i) on investments of $1 million or more in Class A shares;
(ii) on investments in Class A shares by certain retirement plans subject
to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), if, prior to July 1, 1996: (a) the Plan had established an
account with the Shareholder Servicing Agent and (b) the sponsoring
organization had demonstrated to the satisfaction of MFD that either
(i) the employer had at least 25 employees or (ii) the aggregate
purchases by the retirement plan of Class A shares of the MFS Funds
would be in an amount of at least $250,000 within a reasonable period
of time, as determined by MFD in its sole discretion;
(iii) on investments in Class A shares by certain retirement plans subject
to ERISA, if: (a) the retirement plan and/or sponsoring organization
subscribes to the MFS FUNDamental 401(k) Program or any similar
recordkeeping system made available by the Shareholder Servicing Agent
(the "MFS Participant Recordkeeping System"); (b) the plan establishes
an account with the Shareholder Servicing Agent on or after July 1,
1996; and (c) the aggregate purchases by the retirement plan of Class
A shares of the MFS Funds will be in an aggregate amount of at least
$500,000 within a reasonable period of time, as determined by MFD in
its sole discretion; and
(iv) on investments in Class A shares by certain retirement plans subject
to ERISA, if: (a) the plan establishes an account with the
Shareholder Servicing Agent on or after July 1, 1996 and (b) the plan
has, at the time of purchase, a market value of $500,000 or more
invested in shares of any class or classes of the MFS Funds. THE
RETIREMENT PLAN WILL QUALIFY UNDER THIS CATEGORY ONLY IF THE PLAN OR
ITS SPONSORING ORGANIZATION INFORMS THE SHAREHOLDER SERVICING AGENT
PRIOR TO THE PURCHASES THAT THE PLAN HAS A MARKET VALUE OF $500,000
OR MORE INVESTED IN SHARES OF ANY CLASS OR CLASSES OF THE MFS FUNDS.
THE SHAREHOLDER SERVICING AGENT HAS NO OBLIGATION INDEPENDENTLY TO
DETERMINE WHETHER SUCH A PLAN QUALIFIES UNDER THIS CATEGORY.
In the case of all such purchases, MFD will pay commissions to dealers on new
investments in Class A shares made through such dealers as follows:
<PAGE> 31
COMMISSION PAID BY MFD TO DEALERS CUMULATIVE PURCHASE AMOUNT
--------------------------------- --------------------------
1.00% On the first $2,000,000, plus
0.80% Over $2,000,000 to $3,000,000, plus
0.50% Over $3,000,000 to $50,000,000, plus
0.25% Over $50,000,000
For purposes of determining the level of commissions to be paid to dealers with
respect to a shareholder's new investment in Class A shares made on or after
April 1, 1996, purchases for each shareholder account (and certain other
accounts for which the shareholder is a record or beneficial holder) will be
aggregated over a 12-month period (commencing from the date of the first such
purchase).
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
WAIVERS OF INITIAL SALES CHARGE AND CDSC. In certain circumstances, the
initial sales charge imposed upon purchases of Class A shares and the CDSC
imposed upon redemptions of Class A shares is waived. These circumstances are
described in Appendix A to this Prospectus. In addition to these circumstances,
the CDSC imposed upon the redemption of Class A shares is waived with respect to
shares held by certain retirement plans qualified under Section 401(a) or 403(b)
of the Internal Revenue Code of 1986, as amended (the "Code"), and subject to
ERISA, where:
(i) the retirement plan and/or sponsoring organization does not subscribe
to the MFS Participant Recordkeeping System; and
(ii) the retirement plan and/or sponsoring organization demonstrates to the
satisfaction of, and certifies to the Shareholder Servicing Agent that
the retirement plan has, at the time of certification or will have
pursuant to a purchase order placed with the certification, a market
value of $500,000 or more invested in shares of any class or classes of
the MFS Funds and aggregate assets of at least $10 million;
provided, however, that the CDSC will not be waived (i.e., it will be imposed)
in the event that there is a change in law or regulations which results in a
material adverse change to the tax advantaged nature of the plan, or in the
event that the plan and/or sponsoring organization: (i) becomes insolvent or
bankrupt; (ii) is terminated or partially terminated under ERISA or is
liquidated or dissolved; or (iii) is acquired by, merged into, or consolidated
with, any other entity.
CLASS B SHARES: Class B shares are offered at net asset value without an initial
sales charge but subject to a CDSC upon redemption as follows:
YEAR OF CONTINGENT
REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
-------------- --------------
First ......................................................... 4%
Second ........................................................ 4%
Third ......................................................... 3%
Fourth ........................................................ 3%
Fifth ......................................................... 2%
Sixth ......................................................... 1%
Seventh and following ......................................... 0%
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividends or capital gain distributions.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
Except as described below, MFD will pay commissions to dealers of 3.75% of the
purchase price of Class B shares purchased through dealers. MFD will also
advance to dealers the first year service fee payable under the Fund's
Distribution Plan (see "Distribution Plan" below) at a rate equal to 0.25% of
<PAGE> 32
the purchase price of such shares. Therefore, the total amount paid to a dealer
upon the sale of Class B shares is 4% of the purchase price of the shares
(commission rate of 3.75% plus a service fee equal to 0.25% of the purchase
price).
Class B shares purchased by a retirement plan whose sponsoring organization
subscribes to the MFS Participant Recordkeeping System and which has established
its account with the Shareholder Servicing Agent on or after July 1, 1996, will
be subject to the CDSC described above, only under limited circumstances, as
explained below under "Waivers of CDSC." With respect to such purchases, MFD
pays an amount to dealers equal to 3.00% of the amount purchased through such
dealers (rather than the 4.00% payment described above), which is comprised of a
commission of 2.75% plus the advancement of the first year service fee equal to
0.25% of the purchase price payable under the Distribution Plan. As discussed
above, such retirement plans are eligible to purchase Class A shares of the Fund
at net asset value without an initial sales charge but subject to a 1% CDSC if
the plan has, at the time of purchase, a market value of $500,000 or more
invested in shares of any class or classes of the MFS Funds. IN THIS EVENT, THE
PLAN OR ITS SPONSORING ORGANIZATION SHOULD INFORM THE SHAREHOLDER SERVICING
AGENT THAT THE PLAN IS ELIGIBLE TO PURCHASE CLASS A SHARES UNDER THIS CATEGORY;
THE SHAREHOLDER SERVICING AGENT HAS NO OBLIGATION INDEPENDENTLY TO DETERMINE
WHETHER SUCH A PLAN QUALIFIES UNDER THIS CATEGORY FOR THE PURCHASE OF CLASS A
SHARES.
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon redemption
of Class B shares is waived. These circumstances are described in Appendix A to
this Prospectus. In addition to these circumstances, the CDSC imposed upon the
redemption of Class B shares is waived with respect to shares held by a
retirement plan whose sponsoring organization subscribes to the MFS Participant
Recordkeeping System and which has established an account with the Shareholder
Servicing Agent on or after July 1, 1996; provided, however, that the CDSC will
not be waived (i.e., it will be imposed) in the event that there is a change in
law or regulations which results in a material adverse change to the tax
advantaged nature of the plan, or in the event that the plan and/or sponsoring
organization: (i) becomes insolvent or bankrupt; (ii) is terminated or partially
terminated under ERISA or is liquidated or dissolved; or (iii) is acquired by,
merged into, or consolidated with, any other entity.
CONVERSION OF CLASS B SHARES. Class B shares of the Fund that remain
outstanding for approximately eight years will convert to Class A shares of the
Fund. Shares purchased through the reinvestment of distributions paid in respect
of Class B shares will be treated as Class B shares for purposes of the payment
of the distribution and service fees under the Fund's Distribution Plan. See
"Distribution Plan" below. However, for purposes of conversion to Class A
shares, all shares in a shareholder's account that were purchased through the
reinvestment of dividends and distributions paid in respect of Class B shares
(and which have not converted to Class A shares as provided in the following
sentence) will be held in a separate sub-account. Each time any Class B shares
in the shareholder's account (other than those in the sub-account) convert to
Class A shares, a portion of the Class B shares then in the sub-account will
also convert to Class A shares. The portion will be determined by the ratio that
the shareholder's Class B shares not acquired through reinvestment of dividends
and distributions that are converting to Class A shares bear to the
shareholder's total Class B shares not acquired through reinvestment. The
conversion of Class B shares to Class A shares is subject to the continuing
availability of a ruling from the Internal Revenue Service or an opinion of
counsel that such conversion will not constitute a taxable event for federal tax
purposes. There can be no assurance that such ruling or opinion will be
available, and the conversion of Class B shares to Class A shares will not occur
if such ruling or opinion is not available. In such event, Class B shares would
continue to be subject to higher expenses than Class A shares for an indefinite
period.
CLASS C SHARES: Class C shares are offered at net asset value without an initial
sales charge but are subject to a CDSC upon redemption of 1.00% during the first
year. Class C shares do not convert to any other class of shares of the Fund.
The maximum investment in Class C shares that may be made is up to $1,000,000
per transaction.
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividend and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividend or capital gain distributions.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" below
<PAGE> 33
for further discussion of the CDSC.
MFD will pay dealers 1.00% of the purchase price of Class C shares purchased
through dealers and, as compensation therefor, MFD will retain the 1.00% per
annum distribution and service fee paid under the Fund's Distribution Plan to
MFD for the first year after purchase (see "Distribution Plan" below).
Class C shares are not currently available for purchase by any retirement plan
qualified under Sections 401(a) or 403(b) of the Internal Revenue Code of 1986,
as amended, if the retirement plan and/or the sponsoring organization subscribe
to the MFS FUNDamental 401(k) Plan or another similar recordkeeping program made
available by the Shareholder Servicing Agent.
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon redemption of
Class C shares is waived. These circumstances are described in Appendix A to
this Prospectus.
GENERAL: The following information applies to purchases of all classes of the
Fund's shares.
MINIMUM INVESTMENT. Except as described below, the minimum initial
investment is $1,000 per account and the minimum additional investment is $50
per account. Accounts being established for monthly automatic investments and
under payroll savings programs and tax-deferred retirement programs (other than
IRAs) involving the submission of investments by means of group remittal
statements are subject to a $50 minimum on initial and additional investments
per account. The minimum initial investment for IRAs is $250 per account and the
minimum additional investment is $50 per account. Accounts being established for
participation in the Automatic Exchange Plan are subject to a $50 minimum on
initial and additional investments per account. There are also other limited
exceptions to these minimums for certain tax-deferred retirement programs. Any
minimums may be changed at any time at the discretion of MFD. The Fund reserves
the right to cease offering its shares at any time.
SUBSEQUENT INVESTMENT BY TELEPHONE: Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-free
at (800) 225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this telephone
purchase privilege must so elect on their Account Application and designate
thereon a bank and account number from which purchases will be made. If a
telephone purchase request is received by the Shareholder Servicing Agent on any
business day prior to the close of regular trading on the Exchange (generally,
4:00 p.m., Eastern time), the purchase will occur at the closing net asset value
of the shares purchased on that day. The Shareholder Servicing Agent may be
liable for any losses resulting from unauthorized telephone transactions if it
does not follow reasonable procedures designed to verify the identity of the
caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
RIGHT TO REJECT PURCHASE ORDERS/MARKET TIMING. Purchases and exchanges
should be made for investment purposes only. The Fund and MFD each reserves the
right to reject or restrict any specific purchase or exchange request. In the
event that the Fund or MFD rejects an exchange request, neither the redemption
nor the purchase side of the exchange will be processed.
The Fund is not designed for professional market timing organizations or other
entities using programmed or frequent exchanges. The Fund defines a "market
timer" as an individual, or organization acting on behalf of one or more
individudals, if (i) the individual or organization makes three or more exchange
requests out of the Fund per calendar year and (ii) any one of such exchange
requests represents shares equal in value to 1/2 of 1% or more of the Fund's net
assets at the time of the request. Accounts under common ownership or control,
including accounts administered by market timers, will be aggregated for
purposes of this definition.
As noted above, the Fund and MFD each reserves the right to reject or restrict
any specific purchase and exchange request and, in addition, may impose specific
limitations with respect to market timers, including delaying for up
<PAGE> 34
to seven days the purchase side of an exchange request by market timers or
specifically rejecting or otherwise restricting purchase or exchange requests by
market timers. Other funds in the MFS Family of Funds may have different and/or
more or less restrictive policies with respect to market timers than the Fund.
These policies are disclosed in the prospectuses of these other MFS Funds.
DEALER CONCESSIONS. Dealers may receive different compensation with respect
to sales of Class A, Class B and Class C shares. In addition, from time to time,
MFD may pay dealers 100% of the applicable sales charge on sales of Class A
shares of certain specified MFS Funds sold by such dealer during a specified
sales period. In addition, MFD or its affiliates may, from time to time, pay
dealers an additional commission equal to 0.50% of the net asset value of all of
the Class B and/or Class C shares of certain specified MFS Funds sold by such
dealer during a specified sales period. In addition, from time to time, MFD, at
its expense, may provide additional commissions, compensation or promotional
incentives ("concessions") to dealers which sell shares of the Fund. Such
concessions provided by MFD may include financial assistance to dealers in
connection with preapproved conferences or seminars, sales or training programs
for invited registered representatives, payment for travel expenses, including
lodging, incurred by registered representatives for such seminars or training
programs, seminars for the public, advertising and sales campaigns regarding one
or more MFS Funds, and/or other dealer-sponsored events. From time to time, MFD
may make expense reimbursements for special training of a dealer's registered
representatives in group meetings or to help pay the expenses of sales contests.
Other concessions may be offered to the extent not prohibited by state laws or
any self-regulatory agency, such as the NASD.
SPECIAL INVESTMENT PROGRAMS. For shareholders who elect to participate in
certain investment programs (e.g., the Automatic Investment Plan) or other
shareholder services, MFD or its affiliates may either (i) give a gift of
nominal value, such as a hand-held calculator, or (ii) make a nominal charitable
contribution on their behalf.
RESTRICTIONS ON ACTIVITIES OF NATIONAL BANKS. The Glass-Steagall Act
prohibits national banks from engaging in the business of underwriting, selling
or distributing securities. Although the scope of the prohibition has not been
clearly defined, MFD believes that such Act should not preclude banks from
entering into agency agreements with MFD. If, however, a bank were prohibited
from so acting, the Trustees would consider what actions, if any, would be
necessary to continue to provide efficient and effective shareholder services in
respect of Shareholders who invested in the Fund through a national bank. It is
not expected that shareholders would suffer any adverse financial consequence as
a result of these occurrences. In addition, state securities laws on this issue
may differ from the interpretation of federal law expressed herein and banks and
financial institutions may be required to register as broker-dealers pursuant to
state law.
------------------------
A shareholder whose shares are held in the name of, or controlled by, a dealer
might not receive many of the privileges and services from the Fund (such as
Right of Accumulation, Letter of Intent and certain recordkeeping services) that
the Fund ordinarily provides.
EXCHANGES
Subject to the requirements set forth below, some or all of the shares in an
account with the Fund for which payment has been received by the Fund (i.e., an
established account) may be exchanged for shares of the same class of any of the
other MFS Funds at net asset value (if available for sale). Shares of one class
may not be exchanged for shares of any other class.
EXCHANGES AMONG MFS FUNDS (EXCLUDING MFS MONEY MARKET FUNDS): No initial sales
charges or CDSC will be imposed in connection with an exchange from shares of an
MFS Fund to shares of any other MFS Fund, except with respect to exchanges from
an MFS money market fund to another MFS Fund which is not an MFS money market
fund (discussed below). With respect to an exchange involving shares subject to
a CDSC, the CDSC will be unaffected by the exchange and the holding period for
purposes of calculating the CDSC will carry over to the acquired shares.
<PAGE> 35
EXCHANGES FROM AN MFS MONEY MARKET FUND: Special rules apply with respect to the
imposition of an initial sales charge or a CDSC for exchanges from an MFS money
market fund to another MFS Fund which is not an MFS money market fund. These
rules are described under the caption "Exchanges" in the Prospectuses of those
MFS money market funds.
EXCHANGES INVOLVING THE MFS FIXED FUND: Class A shares of any MFS Fund held by
certain qualified retirement plans may be exchanged for units of participation
of the MFS Fixed Fund (a bank collective investment fund) (the "Units"), and
Units may be exchanged for Class A shares of any MFS Fund. With respect to
exchanges between Class A shares subject to a CDSC and Units, the CDSC will
carry over to the acquired shares or Units and will be deducted from the
redemption proceeds when such shares or Units are subsequently redeemed,
assuming the CDSC is then payable (the period during which the Class A shares
and the Units were held will be aggregated for purposes of calculating the
applicable CDSC). In the event that a shareholder initially purchases Units and
then exchanges into Class A shares subject to an initial sales charge of an MFS
Fund, the initial sales charge shall be due upon such exchange, but will not be
imposed with respect to any subsequent exchanges between such Class A shares and
Units with respect to shares on which the initial sales charge has already been
paid. In the event that a shareholder initially purchases Units and then
exchanges into Class A shares subject to a CDSC of an MFS Fund, the CDSC period
will commence upon such exchange, and the applicability of the CDSC with respect
to subsequent exchanges shall be governed by the rules set forth above in this
paragraph.
GENERAL: A shareholder should read the prospectuses of the other MFS Funds and
consider the differences in objectives, policies and restrictions before making
any exchange. Exchanges will be made only after instructions in writing or by
telephone (an "Exchange Request") are received for an established account by the
Shareholder Servicing Agent in proper form (i.e., if in writing -- signed by the
record owner(s) exactly as the shares are registered; if by telephone -- proper
account identification is given by the dealer or shareholder of record) and each
exchange must involve either shares having an aggregate value of at least $1,000
($50 in the case of retirement plan participants whose sponsoring organizations
subscribe to the MFS FUNDamental 401(k) Plan or another similar 401(k)
recordkeeping system made available by the Shareholder Servicing Agent) or all
the shares in the account. If an Exchange Request is received by the Shareholder
Servicing Agent on any business day prior to the close of regular trading on the
New York Stock Exchange (generally, 4:00 p.m., Eastern time) (the "Exchange"),
the exchange will occur on that day if all the requirements set forth above have
been complied with at that time and subject to the Fund's right to reject
purchase orders. No more than five exchanges may be made in any one Exchange
Request by telephone. Additional information concerning this exchange privilege
and prospectuses for any of the other MFS Funds may be obtained from dealers or
the Shareholder Servicing Agent. For federal and (generally) state income tax
purposes, an exchange is treated as a sale of the shares exchanged and,
therefore, an exchange could result in a gain or loss to the shareholder making
the exchange. Exchanges by telephone are automatically available to most
non-retirement plan accounts and certain retirement plan accounts. For further
information regarding exchanges by telephone, see "Redemptions by Telephone."
The exchange privilege (or any aspect of it) may be changed or discontinued and
is subject to certain limitations, including certain restrictions on purchases
by market timers.
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the value of his account on any
date on which the Fund is open for business by redeeming shares at their net
asset value (a redemption) or by selling such shares to the Fund through a
dealer (a repurchase). Certain redemptions and repurchases are, however, subject
to a CDSC. See "Contingent Deferred Sales Charge" below. Because the net asset
value of shares of the account fluctuates, redemptions or repurchases, which are
taxable transactions, are likely to result in gains or losses to the
shareholder. When a shareholder withdraws an amount from his account, the
shareholder is deemed to have tendered for redemption a sufficient number of
full and fractional shares in his account to cover the amount withdrawn. The
proceeds of a redemption or repurchase will normally be available within seven
days, except for shares purchased or received in exchange for shares purchased
by check (including certified checks or cashier's checks). Payment of redemption
proceeds may be delayed for up to 15 days from the purchase date in an effort to
assure that such check has
<PAGE> 36
cleared. See "Tax Status" below.
REDEMPTION BY MAIL: Each shareholder may redeem all or any portion of the shares
in his account by mailing or delivering to the Shareholder Servicing Agent (see
back cover for address) a stock power with a written request for redemption or
letter of instruction, together with his share certificates (if any were
issued), all in "good order" for transfer. "Good order" generally means that the
stock power, written request for redemption, letter of instruction or
certificate must be endorsed by the record owner(s) exactly as the shares are
registered and the signature(s) must be guaranteed in the manner set forth below
under the caption "Signature Guarantee." In addition, in some cases "good order"
will require the furnishing of additional documents. The Shareholder Servicing
Agent may make certain de minimis exceptions to the above requirements for
redemption. Within seven days after receipt of a redemption request in "good
order" by the Shareholder Servicing Agent, the Fund will make payment in cash of
the net asset value of the shares next determined after such redemption request
was received, reduced by the amount of any applicable CDSC described above and
the amount of any income tax required to be withheld, except during any period
in which the right of redemption is suspended or date of payment is postponed
because the Exchange is closed or trading on such Exchange is restricted or to
the extent otherwise permitted by the 1940 Act if an emergency exists.
REDEMPTION BY TELEPHONE: Each shareholder may redeem an amount from his account
by telephoning the Shareholder Servicing Agent toll-free at (800) 225-2606.
Shareholders wishing to avail themselves of this telephone redemption privilege
must so elect on their Account Application, designate thereon a bank and account
number to receive the proceeds of such redemption, and sign the Account
Application Form with the signature(s) guaranteed in the manner set forth below
under the caption "Signature Guarantee." The proceeds of such a redemption,
reduced by the amount of any applicable CDSC and the amount of any income tax
required to be withheld, are mailed by check to the designated account, without
charge, if the redemption proceeds do not exceed $1,000, and are wired in
federal funds to the designated account if the redemption proceeds exceed
$1,000. If a telephone redemption request is received by the Shareholder
Servicing Agent by the close of regular trading on the Exchange on any business
day, shares will be redeemed at the closing net asset value of the Fund on that
day. Subject to the conditions described in this section, proceeds of a
redemption are normally mailed or wired on the next business day following the
date of receipt of the order for redemption. The Shareholder Servicing Agent
will not be responsible for any losses resulting from unauthorized telephone
transactions if it follows reasonable procedures designed to verify the identity
of the caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
REPURCHASE THROUGH A DEALER: If a shareholder desires to sell his shares through
his dealer (a repurchase), the shareholder can place a repurchase order with his
dealer, who may charge the shareholder a fee. IF THE DEALER RECEIVES THE
SHAREHOLDER'S ORDER PRIOR TO THE CLOSE OF REGULAR TRADING ON THE EXCHANGE AND
COMMUNICATES IT TO MFD BEFORE THE CLOSE OF BUSINESS ON THE SAME DAY, THE
SHAREHOLDER WILL RECEIVE THE NET ASSET VALUE CALCULATED ON THAT DAY, REDUCED BY
THE AMOUNT OF ANY APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME TAX REQUIRED TO
BE WITHHELD.
REDEMPTION BY CHECK: Only Class A 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 or 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" below, and must
return any Class A or Class C 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) or record exactly as the account is
<PAGE> 37
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 AND CLASS C SHARES BY CHECK (INCLUDING CERTIFIED CHECKS OR
CASHIER'S CHECKS) MAY WRITE CHECKS AGAINST THOSE SHAE ONLY AFTER THEY HAVE BEEN
ON THE FUND'S BOOKS FOR 15 DAYS. WHEN SUCH A CHECK IS PRESENTED TO THE BANK FOR
PAYMENT, A SUFFICIENT NUMBER OF FULL AND FRACTIONAL SHARES WILL BE REDEEMED TO
COVER THE AMOUNT OF THE CHECK, ANY APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME
TAX REQUIRED TO BE WITHHELD. IF THE AMOUNT OF THE CHECK, PLUS ANY APPLICABLE
CDSC AND THE AMOUNT OF ANY INCOME TAX REQUIRED TO BE WITHHELD IS GREATER THAN
THE VALUE OF CLASS A 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 FLUCTUATIONS IN ACCOUNT VALUE,
SHAREHOLDERS ARE ADVISED AGAINST REDEEMING ALL OR MOST OF THEIR ACCOUNT BY
CHECK. CHECKS SHOULD NOT BE USED TO CLOSE A FUND ACCOUNT BECAUSE WHEN THE CHECK
IS WRITTEN, THE SHAREHOLDER WILL NOT KNOW THE EXACT TOTAL VALUE OF THE ACCOUNT
ON THE DAY THE CHECK CLEARS. There is presently no charge to the shareholder for
the maintenance of this special account or for the clearance of any checks, but
the Fund and the Bank reserve the right to impose such charges or to modify or
terminate the redemption by check privilege at any time.
CONTINGENT DEFERRED SALES CHARGE: Investments in Class A, Class B and Class C
shares ("Direct Purchases") will be subject to a CDSC for a period of (i) with
respect to Class A and Class C shares, 12 months (however, the CDSC on Class A
shares is only imposed with respect to purchases of $1 million or more of Class
A shares or purchases by certain retirement plans of Class A shares) or (ii)
with respect to Class B shares, six years. Purchases of Class A shares made
during a calendar month, regardless of when during the month the investment
occurred, will age one month on the last day of the month and each subsequent
month. Class C shares and Class B shares purchased on or after January 1, 1993
will be aggregated on a calendar month basis -- all transactions made during a
calendar month, regardless of when during the month they have occurred, will age
one year at the close of business on the last day of such month in the following
calendar year and each subsequent year. For Class B shares of the Fund purchased
prior to January 1, 1993, transactions will be aggregated on a calendar year
basis -- all transactions made during a calendar year, regardless of when during
the year they have occurred, will age one year at the close of business on
December 31 of that year and each subsequent year. Prior to April 1, 1996, Class
C shares of the MFS Funds were not subject to a CDSC upon redemption. In no
event will Class C shares of the MFS Funds purchased prior to this date be
subject to a CDSC. For the purpose of calculating the CDSC upon redemption of
shares acquired in an exchange on or after April 1, 1996, the purchase of shares
acquired in one or more exchanges is deemed to have occurred at the time of the
original purchase of the exchanged shares (if such original purchase occurred
prior to April 1, 1996, then no CDSC would be imposed upon such a redemption).
At the time of a redemption, the amount by which the value of a shareholder's
account for a particular class of shares represented by Direct Purchases exceeds
the sum of the six calendar year aggregations (12 months in the case of
purchases of Class C shares and of purchases of $1 million or more of Class A
shares or purchases by certain retirement plans of Class A shares) of Direct
Purchases may be redeemed without charge ("Free Amount"). Moreover, no CDSC is
ever assessed on additional shares acquired through the automatic reinvestment
of dividends or capital gain distributions ("Reinvested Shares"). Therefore, at
the time of redemption of a particular class, (i) any Free Amount is not subject
to the CDSC and (ii) the amount of the redemption equal to the then-current
value of Reinvested Shares is not subject to the CDSC, but (iii) any amount of
the redemption in excess of the aggregate of the then-current value of
Reinvested Shares and the Free Amount is subject to a CDSC. The CDSC will first
be applied against the amount of Direct Purchases which will result in any such
charge being imposed at the lowest possible rate. The CDSC to be imposed upon
redemptions of shares will be calculated as set forth in "Purchases" above.
The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except as described in Appendix A hereto.
GENERAL: The following information applies to redemptions and repurchases of
all classes of the Fund's shares.
SIGNATURE GUARANTEE. In order to protect shareholders against fraud, the
<PAGE> 38
Fund requires, in certain instances as indicated above, that the shareholder's
signature be guaranteed. In these cases the shareholder's signature must be
guaranteed by an eligible bank, broker, dealer, credit union, national
securities exchange, registered securities association, clearing agency or
savings association. Signature guarantees shall be accepted in accordance with
policies established by the Shareholder Servicing Agent.
REINSTATEMENT PRIVILEGE. Shareholders of the Fund who have redeemed their
shares have a one-time right to reinvest the redemption proceeds in the same
class of shares of any of the MFS Funds (if shares of such Fund are available
for sale) at net asset value (with a credit for any CDSC paid) within 90 days of
the redemption pursuant to the Reinstatement Privilege. If the shares credited
for any CDSC paid are then redeemed within six years of the initial purchase in
the case of Class B shares or within 12 months of the initial purchase for Class
C shares and certain Class A share purchases, a CDSC will be imposed upon
redemption. Such purchases under the Reinstatement Privilege are subject to all
limitations in the SAI regarding this privilege.
IN-KIND DISTRIBUTIONS. The Trust agrees to redeem shares of the Fund solely
in cash up to the lesser of $250,000 or 1% of the net asset value of the Fund
during any 90-day period for any one shareholder. The Fund has reserved the
right to pay other redemptions either totally or partially, by a distribution
in-kind of securities (instead of cash) from the Fund's portfolio. The
securities distributed in such a distribution would be valued at the same amount
as that assigned to them in calculating the net asset value for the shares being
sold. If a shareholder received a distribution in-kind, the shareholder could
incur brokerage or transaction charges when converting the securities to cash.
INVOLUNTARY REDEMPTIONS/SMALL ACCOUNTS. Due to the relatively high cost of
maintaining small accounts, the Fund reserves the right to redeem shares in any
account for their then-current value if at any time the total investment in such
account drops below $500 because of redemptions, except in the case of accounts
being established for monthly automatic investments and certain payroll savings
programs, Automatic Exchange Plan accounts and tax-deferred retirement plans,
for which there is a lower minimum investment requirement. See "Purchases --
General -- Minimum Investment." Shareholders will be notified that the value of
their account is less than the minimum investment requirement and allowed 60
days to make an additional investment before the redemption is processed.
DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class A, Class B and Class C
shares pursuant to Section 12(b) of the 1940 Act and Rule 12b-1 thereunder (the
"Distribution Plan"), after having concluded that there is a reasonable
likelihood that the Plan would benefit the Fund and its shareholders.
In certain circumstances, the fees described below may not be imposed or are
being waived. These circumstances, if any, are described below under the heading
"Current Level of Distribution and Service Fees."
FEATURES COMMON TO EACH CLASS OF SHARES: There are features of the Distribution
Plan that are common to each class of shares, as described below.
SERVICE FEES. The Distribution Plan provides that the Fund may pay MFD a
service fee of up to 0.25% of the average daily net assets attributable to the
class of shares to which the Distribution Plan relates (i.e., Class A, Class B
or Class C shares, as appropriate) (the "Designated Class") annually in order
that MFD may pay expenses on behalf of the Fund relating to the servicing of
shares of the Designated Class. The service fee is used by MFD to compensate
dealers which enter into a sales agreement with MFD in consideration for all
personal services and/or account maintenance services rendered by the dealer
with respect to shares of the Designated Class owned by investors for whom such
dealer is the dealer or holder of record. MFD may from time to time reduce the
amount of the service fees paid for shares sold prior to a certain date. Service
fees may be reduced for a dealer that is the holder or dealer of record for an
investor who owns shares of the Fund having an aggregate net asset value at or
above a certain dollar level. Dealers may from time to time be required to meet
certain criteria in order to receive service fees. MFD or its affiliates are
entitled to retain all service fees payable under the Distribution Plan for
which there is no dealer of record or for which
<PAGE> 39
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by MFD or its affiliates
to shareholder accounts.
DISTRIBUTION FEES. The Distribution Plan provides that the Fund may pay MFD
a distribution fee based on the average daily net assets attributable to the
Designated Class as partial consideration for distribution services performed
and expenses incurred in the performance of MFD's obligations under its
distribution agreement with the Fund. See "Management of the Fund --
Distributor" in the SAI. The amount of the distribution fee paid by the Fund
with respect to each class differs under the Distribution Plan, as does the use
by MFD of such distribution fees. Such amounts and uses are described below in
the discussion of the provisions of the Distribution Plan relating to each class
of shares. While the amount of compensation received by MFD in the form of
distribution fees during any year may be more or less than the expense incurred
by MFD under its distribution agreement with the Fund, the Fund is not liable to
MFD for any losses MFD may incur in performing services under its distribution
agreement with the Fund.
OTHER COMMON FEATURES. Fees payable under the Distribution Plan are charged
to, and therefore reduce, income allocated to shares of the Designated Class.
The provisions of the Distribution Plan relating to operating policies as well
as initial approval, renewal, amendment and termination are substantially
identical as they relate to each class of shares covered by the Distribution
Plan.
FEATURES UNIQUE TO EACH CLASS OF SHARES: There are certain features that are
unique to each class of shares, as described below.
CLASS A SHARES. Class A shares are generally offered with an initial sales
charge, a substantial portion of which is paid to or retained by the dealer
making the sale (and the remainder of which is paid to MFD). See "Purchases --
Class A Shares" above. In addition to the initial sales charge, the dealer also
generally receives the ongoing 0.25% per annum service fee, as discussed above.
The distribution fee paid to MFD under the Distribution Plan is equal, on an
annual basis, to 0.10% of the Fund's average daily net assets attributable to
Class A shares. As noted above, MFD may use the distribution fee to cover
distribution-related expenses incurred by it under its distribution agreement
with the Fund, including commissions to dealers and payments to wholesalers
employed by MFD (e.g., MFD pays commission to dealers with respect to purchases
of $1 million or more and purchases by certain retirement plans of Class A
shares which are sold at net asset value but which are subject to a 1% CDSC for
one year after purchase). See "Purchases -- Class A Shares" above. In addition,
to the extent that the aggregate service and distribution fees paid under the
Distribution Plan do not exceed 0.35% per annum of the average daily net assets
of the Fund attributable to Class A shares, the Fund is permitted to pay such
distribution-related expenses or other distribution- related expenses.
CLASS B SHARES. Class B shares are offered at net asset value without an
initial sales charge but subject to a CDSC. See "Purchases -- Class B Shares"
above. MFD will advance to dealers the first year service fee described above at
a rate equal to 0.25% of the purchase price of such shares and, as compensation
therefore, MFD may retain the service fee paid by the Fund with respect to such
shares for the first year after purchase. Dealers will become eligible to
receive the ongoing 0.25% per annum service fee with respect to such shares
commencing in the thirteenth month following purchase.
Under the Distribution Plan, the Fund pays MFD a distribution fee equal, on an
annual basis, to 0.75% of the Fund's average daily net assets attributable to
Class B shares. As noted above, this distribution fee may be used by MFD to
cover its distribution-related expenses under its distribution agreement with
the Fund (including the 3.75% commission it pays to dealers upon purchase of
Class B shares, as described under "Purchases -- Class B Shares" above).
CLASS C SHARES. Class C shares are offered at net asset value without an
initial sales charge but subject to a CDSC. See "Purchases -- Class C shares"
above. MFD will pay a commission to dealers of 1.00% of the purchase price of
Class C shares purchased through dealers at the time of purchase. In
compensation for this 1.00% commission paid by MFD to dealers, MFD will retain
the 1.00% per annum Class C distribution and service fees paid by the Fund with
respect to such shares for the first year after purchase, and dealers
<PAGE> 40
will become eligible to receive from MFD the ongoing 1.00% per annum
distribution and service fees paid by the Fund to MFD with respect to such
shares commencing in the thirteenth month following purchase.
This ongoing 1.00% fee is comprised of the 0.25% per annum service fee paid to
MFD under the Distribution Plan (which MFD in turn pays to dealers), as
discussed above, and a distribution fee paid to MFD (which MFD also in turn pays
to dealers) under the Distribution Plan equal, on an annual basis, to 0.75% of
the Fund's average daily net assets attributable to Class C shares.
CURRENT LEVEL OF DISTRIBUTION AND SERVICE FEES: The Fund's Class A, Class B and
Class C distribution and service fees for its current fiscal year are 0.35%,
1.00% and 1.00% per annum, respectively. The 0.25% per annum Class A service fee
is reduced to 0.15% per annum for shares purchased prior to May 14, 1991.
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. Because the Fund
intends to distribute all of its net investment income and net realized capital
gains to its shareholders in accordance with the timing requirements imposed by
the Code, it is not expected that the Fund will be required to pay any entity
level federal income or excise taxes, although the Fund's foreign- source income
may be subject to foreign withholding taxes.
Shareholders of the Fund normally will have to pay federal income taxes, (and
any state or local taxes), on the dividends and capital gain distributions they
receive from the Fund, whether paid in cash or additional shares. A portion of
the dividends received from the Fund (but none of the Fund's capital gain
distributions) may qualify for the dividends received deduction for
corporations. Shortly after the end of each calendar year, each shareholder will
receive a statement setting forth the federal income tax status of all dividends
and distributions for that year, including the portion taxable as ordinary
income, the portion taxable as long-term capital gain, the portion, if any,
representing a return of capital (which is free of current taxes but results in
a basis reduction) and the amount, if any, of federal income tax withheld.
Fund distributions will reduce the Fund's net asset value per share.
Shareholders who buy shares shortly before the Fund makes a distribution may
thus pay the full price for the shares and then effectively receive a portion of
the purchase price back as a taxable distribution.
The Fund intends to withhold U.S. federal income tax at the rate of 30% on
dividends and other payments that are subject to such withholding and that are
<PAGE> 41
made to persons who are neither citizens nor residents of the U.S., regardless
of whether a lower rate may be permitted under an applicable treaty. The Fund is
also required in certain circumstances to apply backup withholding at the rate
of 31% on taxable dividends and redemption proceeds paid to any shareholder
(including a shareholder who is neither a citizen nor a resident of the U.S.)
who does not furnish to the Fund certain information and certifications or who
is otherwise subject to backup withholding. Backup withholding will not,
however, be applied to payments that have been subject to 30% withholding.
Prospective shareholders should read the Account Application for information
regarding backup withholding of federal income tax and should consult their own
tax advisers as to the tax consequences of an investment in the Fund.
NET ASSET VALUE
The net asset value per share of each class of the Fund is determined each day
during which the Exchange is open for trading. This determination is made once
each day as of the close of regular trading on the Exchange by deducting the
amount of the liabilities attributable to the class from the value of the assets
attributable to the class and dividing the difference by the number of shares of
the class outstanding. Assets in the Fund's portfolio are valued on the basis of
their market values or otherwise at their fair values, as described in the SAI.
All investments and assets are expressed in U.S. dollars based upon current
currency exchange rates. The net asset value per share of each class of shares
is effective for orders received by the dealer prior to its calculation and
received by MFD prior to the close of that business day.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund, one of two series of the Trust, has three classes of shares which it
offers to the general public, entitled Class A, Class B and Class C Shares of
Beneficial Interest (without par value). The Fund also has a class of shares
which it offers exclusively to institutional investors, entitled Class I shares.
The Fund has reserved the right to create and issue additional classes and
series of shares, in which case each class of shares of a series would
participate equally in the earnings, dividends and assets attributable to that
class of that particular series. Shareholders are entitled to one vote for each
share held and shares of each series would be entitled to vote separately to
approve investment advisory agreements or changes in investment restrictions,
but shares of all series would vote together in the election or selection of
Trustees and accountants. Additionally, each class of shares of a series will
vote separately on any material increases in the fees under the Distribution
Plan or on any other matter that affects solely that class of shares, but will
otherwise vote together with all other classes of shares of the series on all
other matters. The Fund does not intend to hold annual shareholder meetings. The
Trust's Declaration of Trust provides that a Trustee may be removed from office
in certain instances (see "Description of Shares, Voting Rights and Liabilities"
in the SAI).
Each share of a class of the Fund represents an equal proportionate interest in
the Fund with each other class share, subject to the liabilities of the
particular class. Shares have no pre-emptive or conversion rights (except as set
forth in "Purchases -- Conversion of Class B shares"). Shares are fully paid and
non-assessable. Should the Fund be liquidated, shareholders of each class are
entitled to share pro rata in the net assets attributable to that class
available for distribution to shareholders. Shares will remain on deposit with
the Shareholder Servicing Agent and certificates will not be issued except in
connection with pledges and assignments and in certain other limited
circumstances.
The Fund is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the risk of a shareholder incurring financial loss on account of
shareholder liability would be limited to circumstances in which both inadequate
insurance existed (e.g., fidelity bonding and errors and omissions insurance)
and the Fund itself was unable to meet its obligations.
PERFORMANCE INFORMATION
From time to time, the Fund will provide yield, current distribution rate and
total rate of return quotations for each class of shares and may also quote fund
rankings in the relevant fund category from various sources, such as the
<PAGE> 42
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 and Class C shares assumes no CDSC is paid. The current
distribution rate for each class is generally based upon the total amount of
dividends per share paid by the Fund to shareholders of that class during the
past twelve months and is computed by dividing the amount of such dividends by
the maximum public offering price of that class at the end of such period.
Current distribution rate calculations for Class B and Class C shares assume no
CDSC is paid. The current distribution rate differs from the yield calculation
because it may include distributions to shareholders from sources other than
dividends and interest, such as premium income from option writing, short-term
capital gains, and return of invested capital, and is calculated over a
different period of time. Total rate of return quotations will reflect the
average annual percentage change over stated periods in the value of an
investment in a class of the Fund made at the maximum public offering price of
the shares of that class with all distributions reinvested and which will give
effect to the imposition of any applicable CDSC assessed upon redemptions of the
Fund's Class B and Class C shares. Such total rate of return quotations may be
accompanied by quotations which do not reflect the reduction in value of the
initial investment due to the sales charge or the deduction of a CDSC, and which
will thus be higher. The Fund offers multiple classes of shares which were
initially offered for sale to the public on different dates. The calculation of
total rate of return for a class of shares which initially was offered for sale
to the public subsequent to another class of shares of the Fund is based both on
(i) the performance of the Fund's newer class from the date it initially was
offered for sale to the public and (ii) the performance of the Fund's oldest
class from the date it initially was offered for sale to the public up to the
date that the newer class initially was offered for sale to the public. See the
SAI for further information on the calculation of total rate of return for share
classes initially offered for sale to the public on different dates.
All performance quotations are based on historical performance and are not
intended to indicate future performance. Yield reflects only net portfolio
income as of a stated time and current distribution rate reflects only the rate
of distributions paid by the fund over a stated period of time, while total rate
of return reflects all components of investment return over a stated period of
time. The Fund's quotations may from time to time be used in advertisements,
shareholder reports or other communications to shareholders. For a discussion of
the manner in which the Fund will calculate its yield, current distribution rate
and total rate of return, see the SAI. For further information about the Fund's
performance for the fiscal year end October 31, 1996, 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.
EXPENSES
The Trust pays the compensation of the Trustees who are not officers of MFS and
all expenses of the Fund (other than those assumed by MFS) including but not
limited to: governmental fees; interest charges; taxes; membership dues in the
Investment Company Institute allocable to the Fund, fees and expenses of
independent auditors, of legal counsel, and of any transfer agent, registrar or
dividend disbursing agent of the Fund; expenses of repurchasing and redeeming
shares and servicing shareholder accounts; expenses of preparing, printing and
mailing prospectuses, periodic reports, notices and proxy statements to
shareholders and to governmental officers and commissions; brokerage and other
expenses connected with the execution, recording and settlement of portfolio
security transactions, insurance premiums; fees and expenses of State Street
Bank and Trust Company, the Trust's Custodian, for all services to the Fund,
including safekeeping of funds and securities and maintaining required books and
accounts; expenses of calculating the net asset value of shares of the Fund; and
expenses of shareholder meetings. Expenses relating to the issuance,
registration and qualification of shares of the Fund and the preparation,
printing and mailing of prospectuses are borne by the Fund except that the
Distribution Agreement with MFD requires MFD to pay for prospectuses that are to
be used for sales purposes. Expenses of the Trust which are not attributable to
a specific series of the Trust are allocated among the series in a manner
believed by management of the Trust to be fair
<PAGE> 43
and equitable.
Subject to termination or revision at the sole discretion of MFS, MFS has agreed
to bear the Fund's expenses such that the Fund's "Other Expenses," which are
defined to include all Fund expenses except for management fees, Rule 12b-1 fees
and class specific expenses, do not exceed 0.00% per annum of its average daily
net assets (the "Maximum Percentage"). The obligation of MFS to bear these
expenses terminates on the last day of the Fund's fiscal year in which the
Fund's "Other Expenses" are less than or equal to the Maximum Percentage.
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
distributions from short-term capital gains on a monthly basis, and to the
extent such gains are distributed monthly, they shall be paid in cash; any
remaining short-term capital gains not so distributed shall be reinvested in
additional shares. Reinvestments (net of any tax withholding) will be made in
additional full and fractional shares of the same class of shares at the net
asset value in effect at the close of business on the record date. Dividends and
capital gain distributions in amounts less than $10 will automatically be
reinvested in additional shares of the Fund. If a shareholder has elected to
receive dividends and/or capital gain distributions in cash, and the postal or
other delivery service is unable to deliver checks to the shareholder's address
of record, or the shareholder does not respond to mailings from the Shareholder
Servicing Agent with regard to uncashed distribution checks, such shareholder's
distribution option will automatically be converted to having all dividends and
other distributions reinvested in additional shares. Any request to change a
distribution option must be received by the Shareholder Servicing Agent by the
record date for a dividend or distribution in order to be effective for that
dividend or distribution. No interest will accrue on amounts represented by
uncashed distribution or redemption checks.
INVESTMENT AND WITHDRAWAL PROGRAMS -- For the convenience of shareholders, the
Fund makes available the following programs designed to enable shareholders to
add to their investment in an account with the Fund or withdraw from it with a
minimum of paper work. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or the Fund:
LETTER OF INTENT: If a shareholder (other than a group purchaser as defined
in the SAI) anticipates purchasing $100,000 or more of Class A shares of the
Fund alone or in combination with shares of any class of other MFS Funds or the
MFS Fixed Fund (a bank collective investment fund) within a 13-month period (or
36-month period in the case of purchases of $1 million or more), the shareholder
may obtain Class A shares of the Fund at the same reduced sales charge as though
the total quantity were invested in one lump sum, subject to escrow agreements
and the appointment of an attorney for redemptions from the escrow amount if the
intended purchases are not
<PAGE> 44
completed, by completing the Letter of Intent section of the Account
Application.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on the purchase of Class A shares when that shareholder's new
investment, together with the current offering price value of all the holdings
of Class A, B and C shares of that shareholder in the MFS Funds or the MFS Fixed
Fund (a bank collective investment fund) reaches a discount level.
DISTRIBUTION INVESTMENT PROGRAM: Shares of a particular class of the Fund
may be sold at net asset value (and without any applicable CDSC) through the
automatic reinvestment of dividend and capital gain distributions from the same
class of another MFS Fund. Furthermore, distributions made by the Fund may be
automatically invested at net asset value (and without any applicable CDSC) in
shares of the same class of another MFS Fund, if shares of such Fund are
available for sale.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder
Servicing Agent to send to him (or anyone he designates) regular periodic
payments based upon the value of his account. Each payment under a Systematic
Withdrawal Plan (a "SWP") must be at least $100, except in certain limited
circumstances. The aggregate withdrawals of Class B and Class C shares in any
year pursuant to a SWP will not be subject to a CDSC and are generally limited
to 10% of the value of the account at the time of the establishment of the SWP.
The CDSC will not be waived in the case of SWP redemptions of Class A shares
which are subject to a CDSC.
DOLLAR COST AVERAGING PROGRAMS --
AUTOMATIC INVESTMENT PLAN: Cash investments of $50 or more may be made
through a shareholder's checking account on any day of the month. If the
shareholder does not specify a date, the investment will automatically occur on
the first business day of the month. Required forms are available from the
Shareholder Servicing Agent or investment dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may participate in the Automatic Exchange Plan, a dollar
cost averaging program. The Automatic Exchange Plan provides for automatic
monthly or quarterly exchanges of funds from the shareholder's account in an MFS
Fund for investment in the same class of shares of other MFS Funds selected by
the shareholder if such fund is available for sale. Under the Automatic Exchange
Plan, exchanges of at least $50 each may be made to up to six different funds. A
shareholder should consider the objectives and policies of a fund and review its
prospectus before electing to exchange money into such fund through the
Automatic Exchange Plan. No transaction fee is imposed in connection with
exchange transactions under the Automatic Exchange Plan. However, exchanges of
shares of MFS Money Market Fund, MFS Government Money Market Fund or Class A
shares of MFS Cash Reserve Fund will be subject to any applicable sales charge.
For federal and (generally) state income tax purposes, an exchange is treated as
a sale of the shares exchanged and, therefore, could result in a capital gain or
loss to the shareholder making the exchange. See the SAI for further information
concerning the Automatic Exchange Plan. Investors should consult their tax
advisers for information regarding the potential capital gain and loss
consequences of transactions under the Automatic Exchange Plan.
Because a dollar cost averaging program involves periodic purchases of shares
regardless of fluctuating share offering prices, a shareholder should consider
his financial ability to continue his purchases through periods of low price
levels. Maintaining an investment program concurrently with a withdrawal program
would be disadvantageous because of the sales charges included in share
purchases in the case of Class A shares, and because of the assessment of the
CDSC for share redemption (if applicable) in the case of Class B shares.
TAX-DEFERRED RETIREMENT PLANS -- Except as noted under "Purchases -- Class C
shares," shares of the Fund may be purchased by all types of tax-deferred
retirement plans, including IRAs, SEP-IRA plans, 401(k) plans, 403(b) plans
and other corporate pension and profit-sharing plans. Investors should consult
with their tax advisers before establishing any of the tax-deferred retirement
plans described above.
--------------------
<PAGE> 45
The Fund's SAI, dated March 1, 1997, as amended or supplemented from time to
time, contains more detailed information about the Fund, including, but not
limited to, information related to (i) the Fund's investment objective, policies
and restrictions, including the purchase and sale of options, Futures Contracts,
Options on Futures Contracts, Forward Contracts and Options on Foreign
Currencies; (ii) the Trustees, officers and investment adviser; (iii) portfolio
trading; (iv) the shares, including rights and liabilities of shareholders; (v)
tax status of dividends and distributions; (vi) the Distribution Plan; and (vii)
various services and privileges provided by the Fund for the benefit of its
shareholders, including additional information with respect to the exchange
privilege.
<PAGE> 46
APPENDIX A
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable sales
charges are waived (Section I), the initial sales charge and the contingent
deferred sales charge ("CDSC") for Class A shares are waived (Section II), and
the CDSC for Class B and Class C shares is waived (Section III).
I. WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on
purchases of Class A shares and the CDSC imposed on certain redemptions of
Class A shares and on redemptions of Class B and Class C shares, as
applicable, is waived:
1. DIVIDEND REINVESTMENT
* Shares acquired through dividend or capital gain reinvestment; and
* Shares acquired by automatic reinvestment of distributions of
dividends and capital gains of any fund in the MFS Family of Funds
("MFS Funds") pursuant to the Distribution Investment Program.
2. CERTAIN ACQUISITIONS/LIQUIDATIONS
* Shares acquired on account of the acquisition or liquidation of
assets of other investment companies or personal holding companies.
3. AFFILIATES OF AN MFS FUND/CERTAIN DEALERS. Shares acquired by:
* Officers, eligible directors, employees (including retired employees)
and agents of Massachusetts Financial Services Company ("MFS"), Sun
Life Assurance Company of Canada ("Sun Life") or any of their
subsidiary companies;
* Trustees and retired trustees of any investment company for which MFS
Fund Distributors, Inc. ("MFD") serves as distributor;
* Employees, directors, partners, officers and trustees of any sub-
adviser to any MFS Fund;
* Employees or registered representatives of dealers and other
financial institution ("dealers") which have a sales agreement with
MFD;
* Certain family members of any such individual and their spouses
identified above and certain trusts, pension, profit-sharing or other
retirement plans for the sole benefit of such persons, provided the
shares are not resold except to an MFS Fund; and
* Institutional Clients of MFS or MFS Institutional Advisors, Inc.
("MFSI")
4. INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
* Shares redeemed at an MFS Fund's direction due to the small size of a
shareholder's account. See "Redemptions and Repurchases -- General --
Involuntary Redemptions/ Small Accounts" in the Prospectus.
5. RETIREMENT PLANS (CDSC WAIVER ONLY). Shares redeemed on account of
distributions made under the following circumstances:
<PAGE> 47
INDIVIDUAL RETIREMENT ACCOUNTS ("IRA'S")
* Death or disability of the IRA owner.
SECTION 401(A) PLANS ("401(A) PLANS") AND SECTION 403(B) EMPLOYER
SPONSORED PLANS ("ESP PLANS")
* Death, disability or retirement of 401 (a) or ESP Plan participant;
* Loan from 401(a) or ESP Plan (repayment of loans, however, will
constitute new sales for purposes of assessing sales charges);
* Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1 (d)(2), as amended from time to time);
* Termination of employment of 401(a) or ESP Plan participant
(excluding, however, a partial or other termination of the Plan);
* Tax-free return of excess 401(a) or ESP Plan contributions;
* To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the 401(a) or ESP Plan (e.g.,
participant account fees), provided that the Plan sponsor subscribes
to the MFS FUNDamental 401 (k) Plan or another similar recordkeeping
system made available by the Shareholder Servicing Agent; and
* Distributions from a 401(a) or ESP Plan that has invested its assets
in one or more of the MFS Funds for more than 10 years from the later
to occur of: (i) January 1, 1993 or (ii) the date such 401(a) or ESP
Plan first invests its assets in one or more of the MFS Funds. The
sales charges will be waived in the case of a redemption of all of
the 401(a) or ESP Plan's shares in all MFS Funds (i.e., all the
assets of the 401(a) or ESP Plan invested in the MFS Funds are
withdrawn), unless immediately prior to the redemption, the aggregate
amount invested by the 401(a) or ESP Plan in shares of the MFS Funds
(excluding the reinvestment of distributions) during the prior four
years equals 50% or more of the total value of the 401(a) or ESP
Plan's assets in the MFS Funds, in which case the sales charges will
not be waived.
SECTION 403(B) SALARY REDUCTION ONLY PLANS ("SRO PLANS")
* Death or disability of SRO Plan participant.
6. CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY). Shares
transferred:
* To an IRA rollover account where any sales charges with respect to
the shares being reregistered would have been waived had they been
redeemed; and
* From a single account maintained for a 401(a) Plan to multiple
accounts maintained by the Shareholder Servicing Agent on behalf of
individual participants of such Plan, provided that the Plan sponsor
subscribes to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping system made available by the Shareholder Servicing
Agent.
II. WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A
shares and the CDSC imposed on certain redemptions of Class A shares are
waived:
1. INVESTMENT OF REDEMPTION PROCEEDS FROM UNAFFILIATED MUTUAL FUNDS
* Shares acquired through the investment of redemption proceeds from
another open-end management investment company not distributed or
managed by MFD or its affiliates if: (i) the investment is made
through a dealer and appropriate documentation is submitted to MFD;
(ii) the redeemed shares were subject to an initial sales charge or
deferred sales charge (whether or not actually imposed); (iii) the
<PAGE> 48
redemption occurred no more than 90 days prior to the purchase of
Class A shares; and (iv) the MFS Fund, MFD or its affiliates have not
agreed with such company or its affiliates, formally or informally,
to waive sales charges on Class A shares or provide any other
incentive with respect to such redemption and sale.
2. WRAP ACCOUNT INVESTMENTS
* Shares acquired by investments through certain dealers which have
entered into an agreement with MFD which includes a requirement that
such shares be sold for the sole benefit of clients participating in
a "wrap" account or a similar program under which such clients pay a
fee to such dealer.
3. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
* Shares acquired by insurance company separate accounts.
4. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
* Shares acquired by retirement plans whose third party administrators,
or dealers have entered into an administrative services agreement
with MFD or one of its affiliates to perform certain administrative
services, subject to certain operational and minimum size
requirements specified from time to time by MFD or one or more of its
affiliates.
REINVESTMENT OF DISTRIBUTIONS FROM QUALIFIED RETIREMENT PLANS
* Shares acquired through the automatic reinvestment in Class A shares
of Class A or Class B distributions which constitute required
withdrawals from qualified retirement plans.
Shares redeemed on account of distributions made under the following
circumstances:
IRA'S
* Distributions made on or after the IRA owner has attained the age of
59 1/2 years old; and
* Tax-free returns of excess IRA contributions.
401(A) PLANS
* Distributions made on or after the 401 (a) Plan participant has
attained the age of 59 1/2 years old; and
* Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a Plan.
ESP PLANS AND SRO PLANS
* Distributions made on or after the ESP or SRO Plan participant has
attained the age of 59 1/2 years old.
III. WAIVERS OF CLASS B AND CLASS C SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B and Class C shares
is waived:
1. SYSTEMATIC WITHDRAWAL PLAN
* Systematic Withdrawal Plan redemptions with respect to up to 10% per
year of the account value at the time of establishment.
<PAGE> 49
2. DEATH OF OWNER
* Shares redeemed on account of the death of the account owner if the
shares are held solely in the deceased individual's name or in a
living trust for the benefit of the deceased individual.
3. DISABILITY OF OWNER
* Shares redeemed on account of the disability of the account owner if
shares are held either solely or jointly in the disabled individual's
name or in a living trust for the benefit of the disabled individual
(in which case a disability certification form is required to be
submitted to the Shareholder Servicing Agent.).
4. RETIREMENT PLANS. Shares redeemed on account of distributions made
under the following circumstances:
IRA'S, 401(A) PLANS, ESP PLANS AND SRO PLANS
* Distributions made on or after the IRA owner or the 401(a), ESP or SRO
Plan participant, as applicable, has attained the age of 70 1/2 years
old, but only with respect to the minimum distribution under
applicable Internal Revenue Code ("Code") rules.
SALARY REDUCTION SIMPLIFIED EMPLOYEE PENSION PLANS ("SAR-SEP PLANS")
* Distributions made on or after the SAR-SEP Plan participant has
attained the age of 70 1/2 years old, but only with respect to the
minimum distribution under applicable Code rules;
* Death or disability of a SAR-SEP Plan participant.
<PAGE> 50
APPENDIX B
DESCRIPTION OF OBLIGATIONS ISSUED OR GUARANTEED BY
U.S. GOVERNMENT AGENCIES, AUTHORITIES OR INSTRUMENTALITIES
Federal Farm Credit Banks Consolidated Systemwide Notes and Bonds -- are bonds
issued and guaranteed by a cooperatively owned nationwide system of banks and
associations supervised by the Farm Credit Administration.
Maritime Administration Bonds -- are bonds issued by the Department of
Transportation of the U.S. Government.
FHA Debentures -- are debentures issued by the Federal Housing Administration of
the U.S. Government.
GNMA Certificates -- are mortgage-backed securities which represent partial
ownership interests in a pool of mortgage loans issued by lenders such as
mortgage bankers, commercial banks and savings and loan associations. Each
mortgage loan included in the pool is also insured or guaranteed by the
Federal Housing Administration or the Veterans Administration or the Farmers
Home Administration.
The Fund will purchase GNMA Certificates of the "modified pass-through"
type, which entitle the holder to receive its proportionate share of all
interest and principal payments owed on the mortgage pool, net of fees paid to
the issuer and GNMA. Payment of principal of and interest on GNMA Certificates
of the "modified pass-through" type is guaranteed by GNMA.
FHLMC Bonds -- are bonds issued and guaranteed by the Federal Home Loan Mortgage
Corporation and are not guaranteed by the U.S. Government.
FNMA Bonds -- are bonds issued and guaranteed by the Federal National Mortgage
Association and are not guaranteed by the U.S. Government.
Federal Home Loan Bank Notes and Bonds -- are notes and bonds issued by the
Federal Home Loan Bank System.
SLMA Debentures -- are debentures backed by the Student Loan Marketing
Association and are not guaranteed by the U.S. Government.
The list of securities set forth above does not purport to be an exhaustive
compilation of all debt obligations issued or guaranteed by U.S. Government
agencies, authorities or instrumentalities. The Fund reserves the right to
invest in debt obligations issued or guaranteed by U.S. Government agencies,
authorities or instrumentalities in addition to those listed above.
<PAGE> 51
APPENDIX C
DESCRIPTION OF BOND RATINGS
The ratings of Moody's S&P, Fitch and Duff & Phelps represent their opinions as
to the quality of various bonds. IT SHOULD BE EMPHASIZED, HOWEVER, THAT RATINGS
ARE NOT ABSOLUTE STANDARDS OF QUALITY. CONSEQUENTLY, BONDS WITH THE SAME
MATURITY, COUPON AND RATING MAY HAVE DIFFERENT YIELDS WHILE BONDS OF THE SAME
MATURITY AND COUPON WITH DIFFERENT RATINGS MAY HAVE THE SAME YIELD.
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
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.
<PAGE> 52
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
STANDARD & POOR'S RATINGS SERVICES
AAA: 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
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.
<PAGE> 53
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
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
<PAGE> 54
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.
DUFF & PHELPS CREDIT RATING CO.
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 "D-1+".
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions 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.
PLUS (+) OR MINUS (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within a rating category. Plus and
minus signs, however, are not used in the "AAA" category.
NR: Indicates that Duff & Phelps does not rate the specific issue.
DUFF & PHELPS SHORT-TERM RATINGS
D-1+: Highest certainty of timely payment. Short-term liquidity, including
internal operation factors and/or access to alternative sources of funds, is
outstanding and safety is just below risk-free U.S. Treasury short-term
obligations.
D-1: Very high certainty of timely payment. Liquidity factors are excellent and
supported by good fundamental protection factors. Risk factors are minor.
D-1-: High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
D-2: Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
D-3: Satisfactory liquidity and other protection factors qualify issues as to
investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
<PAGE> 55
D-4: Speculative investment characteristics. Liquidity is not sufficient to
insure against disruption in debt service. Operating factors and market access
may be subject to a high degree of variation.
D-5: Issuer failed to meet scheduled principal and/or interest payments.
<PAGE> 56
APPENDIX D
PORTFOLIO COMPOSITION CHART
FOR FISCAL YEAR ENDED OCTOBER 31, 1996
<TABLE>
The table below shows the percentages of the Fund's assets at October 31, 1996
invested in bonds assigned to the various rating categories by S&P, Moody's
(provided only for bonds not rated by S&P), Fitch (provided only for bonds not
rated by S&P or Moody's) and Duff & Phelps (provided only for bonds not rated by
S&P, Moody's or Fitch) and in unrated bonds determined by MFS to be of
comparable quality. For split rated bonds, the higher of S&P or Moody's rating
is used. When neither an S&P or Moody's rating is available, secondary sources
are selected in the following order: Fitch and Duff & Phelps.
<CAPTION>
UNRATED
SECURITIES OF
COMPILED COMPARABLE
RATING RATINGS QUALITY TOTAL
- ------ ------- ------- -----
<S> <C> <C> <C>
AAA/Aaa ............... 8.28% 8.28%
AA/Aa ................. 2.44% 2.44%
A/A ................... 1.25% 1.25%
BBB/Baa ............... 3.26% 3.26%
BB/Ba ................. 33.39% 0.61% 34.00%
B/B ................... 33.25% 0.61% 33.86%
CCC/Caa ............... 1.98% 0.01% 1.99%
CC/Ca ................. 0.07% 0.07%
C/C ...................
Default ...............
Total ................. 83.92% 1.23% 85.15%
</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> 57
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
[LOGO] M F S(SM)
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
MFS(R) STRATEGIC INCOME FUND
500 Boylston Street
Boston, MA 02116
MSI-1-3/97/85M 34/234/334
[LOGO] M F S(SM)
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
MFS(R) STRATEGIC INCOME FUND
Prospectus
March 1, 1997
<PAGE> 58
MFS(R) STRATEGIC
INCOME FUND STATEMENT OF
ADDITIONAL INFORMATION
(A member of the MFS Family of Funds(R)) March 1, 1997
- --------------------------------------------------------------------------------
Page
1. Definitions ........................................................ 2
2. Investment Objective, Policies and Restrictions .................... 2
3. Management of the Fund ............................................. 13
Trustees ........................................................ 13
Officers ........................................................ 14
Trustee Compensation Table ...................................... 14
Investment Adviser .............................................. 15
Custodian ....................................................... 15
Shareholder Servicing Agent ..................................... 15
Distributor ..................................................... 16
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 Plan .................................................. 21
8. Determination of Net Asset Value and Performance ................... 22
9. Description of Shares, Voting Rights and Liabilities ............... 25
10. Independent Auditors and Financial Statements ...................... 25
APPENDIX A -- Performance Information .............................. A-1
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, as amended or supplemented from time
to time (the "SAI"), sets forth information which may be of interest to
investors but which is not necessarily included in the Fund's Prospectus dated
March 1, 1997. This SAI should be read in conjunction with the Prospectus, a
copy of which may be obtained without charge by contacting the Shareholder
Servicing Agent (see back cover for address and phone number).
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE
INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
<PAGE> 59
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 of the Fund,
dated March 1, 1997, as amended
or supplemented from time to
time.
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% 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: The Fund may invest in American Depositary
Receipts ("ADRs") are certificates issued by a U.S. depository (usually a bank)
and represent a specified quantity of shares of an underlying non-U.S. stock on
deposit with a custodian bank as collateral. ADRs may be sponsored or
unsponsored. A sponsored ADR is issued by a depository which has an exclusive
relationship with the issuer of the underlying security. An unsponsored ADR may
be issued by any number of U.S. depositories. Under the terms of most
<PAGE> 60
sponsored arrangements, depositories agree to distribute notices of shareholder
meetings and voting instructions, and to provide shareholder communications and
other information to the ADR holders at the request of the issuer of the
deposited securities. The depository of an unsponsored ADR, on the other hand,
is under no obligation to distribute shareholder communications received from
the issuer of the deposited securities or to pass through voting rights to ADR
holders in respect of the deposited securities. The Fund may invest in either
type of ADR. Although the U.S. investor holds a substitute receipt of ownership
rather than direct stock certificates, the use of the depository receipts in the
United States can reduce costs and delays as well as potential currency exchange
and other difficulties. The Fund may purchase securities in local markets and
direct delivery of these ordinary shares to the local depository of an ADR agent
bank in the foreign country. Simultaneously, the ADR agents create a certificate
which settles at the Fund's custodian in five days. The Fund may also execute
trades on the U.S. markets using existing ADRs. A foreign issuer of the security
underlying an ADR is generally not subject to the same reporting requirements in
the United States as a domestic issuer. Accordingly the information available to
a U.S. investor will be limited to the information the foreign issuer is
required to disclose in its own country and the market value of an ADR may not
reflect undisclosed material information concerning the issuer of the underlying
security. ADRs may also be subject to exchange rate risks if the underlying
foreign securities are denominated in foreign currency.
NON-DOLLAR FIXED INCOME SECURITIES: The Fund will purchase non-dollar fixed
income securities denominated in the currency of countries where the interest
rate environment as well as the general economic climate are believed by the
Adviser to provide an opportunity for declining interest rates and currency
appreciation. If interest rates decline, such non-dollar fixed income securities
will appreciate in value. If the currency also appreciates against the dollar,
the total investment in such non-dollar fixed income securities would be
enhanced further. (For example, if United Kingdom bonds yield 14% during a year
when interest rates decline causing the bonds to appreciate by 5% and the pound
rises 3% versus the dollar, then the annual total return of such bonds would be
22%. This example is illustrative only.) Conversely, a rise in interest rates or
decline in currency exchange rates would adversely affect the Fund's return.
Investments in non-dollar fixed income securities are evaluated primarily on the
strength of a particular currency against the dollar and on the interest rate
climate of that country. Currency is judged on the basis of fundamental economic
criteria (e.g., relative inflation levels and trends, growth rate forecasts,
balance of payments status, and economic policies) as well as technical and
political data. In addition to the foregoing, interest rates are evaluated on
the basis of differentials or anomalies that may exist between different
countries.
CORPORATE ASSET-BACKED SECURITIES: The Fund may invest in corporate asset-
backed securities. These securities, issued by trusts and special purpose
corporations, are backed by a pool of assets, such as credit card and automobile
loan receivables, representing the obligations of a number of different parties.
Corporate asset-backed securities present certain risks. For instance, in the
case of credit card receivables, these securities may not have the benefit of
any security interest in the related 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
<PAGE> 61
categories: (i) liquidity protection; and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
resulting from ultimate default ensures payment through insurance policies or
letters of credit obtained by the issuer or sponsor from third parties. The Fund
will not pay any additional or separate fees for credit support. The degree of
credit support provided for each issue is generally based on historical
information respecting the level of credit risk associated with the underlying
assets. Delinquency or loss in excess of that anticipated or failure of the
credit support could adversely affect the return on an investment in such a
security.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES: The
Fund may invest a portion of its assets in collateralized mortgage obligations
or "CMOs," which are debt obligations collateralized by mortgage loans or
mortgage pass-through securities. Typically, CMOs are collateralized by
certificates issued by the Government National Mortgage Association, the Federal
National Mortgage Association or the Federal Home Loan Mortgage Corporation, but
may also be collateralized by whole loans or private mortgage pass-through
securities (such collateral collectively hereinafter referred to "Mortgage
Assets"). The Fund may also invest a portion of its assets in multiclass
pass-through securities which are interests in a trust composed of Mortgage
Assets. The Fund may invest in CMOs and multiclass pass-through securities which
are issued by the U.S. Government, its agencies, authorities or
instrumentalities or private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose subsidiaries of the foregoing. Unless the
context indicates otherwise, all references herein to CMOs include multiclass
pass-through securities. Payments of principal of and interest on the Mortgage
Assets, and any reinvestment income thereon, provide the funds to pay debt
service on the CMOs or make scheduled distributions on the multiclass
pass-through securities.
In a common CMO structure, a series of bonds or certificates is usually issued
in multiple classes with different maturities. Each class of CMOs, often
referred to as a "tranche", is issued at a specific fixed or floating coupon
rate and has a stated maturity or final distribution date. Principal prepayments
on the Mortgage Assets may cause the CMOs to be retired substantially earlier
than their stated maturities or final distribution dates resulting in a loss of
all or part of the premium if any has been paid. Interest is paid or accrues on
all classes of the CMOs on a monthly, quarterly or semiannual basis. The
principal of and interest on the Mortgage Assets may be allocated among the
several classes of a series of a CMO in innumerable ways. In a common structure,
payments of principal, including any principal prepayments, on the Mortgage
Assets are applied to the classes of the series of a CMO in the order of their
respective stated maturities or final distribution dates, so that no payment of
principal will be made on any class of CMOs until all other classes having an
earlier stated maturity or final distribution date have been paid in full.
The Fund may also invest in parallel pay CMOs and Planned Amortization Class
CMOs ("PAC Bonds"). Parallel pay CMOs are structured to provide payments of
principal on each payment date to more than one class. These simultaneous
payments are taken into account in calculating the stated maturity date or final
distribution date of each class, which, as with other CMO structures, must be
retired by its stated maturity date or final distribution date but may be
retired earlier. PAC Bonds generally require payments of a specified amount of
principal on each payment date. PAC Bonds are always parallel pay CMOs with the
required principal payment on such securities having the highest priority after
interest has been paid to all classes.
STRIPPED MORTGAGE-BACKED SECURITIES: The Fund may invest a portion of its assets
in stripped mortgage-backed securities ("SMBS") which are derivative multiclass
mortgage securities issued by agencies of or instrumentalities of the U.S.
Government, or by private originators of, or investors in mortgage loans,
including savings and loan institutions, mortgage banks, commercial banks and
investment banks.
SMBS are usually structured with two classes that receive different proportions
of the interest and principal distributions from a pool of mortgage assets. A
common type of SMBS will have one class receiving some of the interest and most
of the principal from the Mortgage Assets, while the
<PAGE> 62
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
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
<PAGE> 63
company at a time when the Fund might not otherwise decide to do so (including
at a time when the company's financial condition makes it unlikely that such
amounts will be repaid). To the extent that the Fund is committed to advance
additional funds, it will at all times hold and maintain in a segregated account
cash or other high grade debt obligations in an amount sufficient to meet such
commitments.
The Fund's ability to receive payments of principal, interest and other amounts
due in connection with these investments will depend primarily on the financial
condition of the borrower. In selecting the loan participations and other direct
investments which the Fund will purchase, the Adviser will rely upon its (and
not that of the original lending institution's) own credit analysis of the
borrower. As the Fund may be required to rely upon another lending institution
to collect and pass on to the Fund amounts payable with respect to the loan and
to enforce the Fund's rights under the loan, an insolvency, bankruptcy or
reorganization of the lending institution may delay or prevent the Fund from
receiving such amounts. In such cases, the Fund will evaluate as well the
creditworthiness of the lending institution and will treat both the borrower and
the lending institution as an "issuer" of the loan participation for purposes of
certain investment restrictions pertaining to the diversification of the Fund's
portfolio investments. The highly leveraged nature of many such loans may make
such loans especially vulnerable to adverse changes in economic or market
conditions. Investments in such loans may involve additional risks to the Fund.
For example, if a loan is foreclosed, the Fund could become part owner of any
collateral, and would bear the costs and liabilities associated with owning and
disposing of the collateral. In addition, it is conceivable that under emerging
legal theories of lender liability, the Fund could be held liable as a
co-lender. It is unclear whether loans and other forms of direct indebtedness
offer securities law protections against fraud and misrepresentation. In the
absence of definitive regulatory guidance, the Fund relies on the Adviser's
research in an attempt to avoid situations where fraud or misrepresentation
could adversely affect the Fund. In addition, loan participations and other
direct investments may not be in the form of securities or may be subject to
restrictions on transfer, and only limited opportunities may exist to resell
such instruments. As a result, the Fund may be unable to sell such investments
at an opportune time or may have to resell them at less than fair market value.
To the extent that the Adviser determines that any such investments are
illiquid, the Fund will include them in the investment limitations described
below.
OPTIONS ON SECURITIES: The Fund may write (sell) covered call and put options on
securities ("Options") and purchase call 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 liquid assets, in a segregated
account with its custodian. A put option written by the Fund is "covered" if the
Fund maintains liquid assets 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 liquid assets 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
<PAGE> 64
exercise.
The Fund may write Options for the purpose of increasing its return and for
hedging purposes. In particular, if the Fund writes an Option which expires
unexercised or is closed out by the Fund at a profit, the Fund retains the
premium paid for the Option less related transaction costs, which increases its
gross income and offsets in part the reduced value of the portfolio security in
connection with which the Option is written, or the increased cost of portfolio
securities to be acquired. In contrast, however, if the price of the security
underlying the Option moves adversely to the Fund's position, the Option may be
exercised and the Fund will then be required to purchase or sell the security at
a disadvantageous price, which might only partially be offset by the amount of
the premium.
The Fund may write Options in connection with buy-and-write transactions; that
is, the Fund may purchase a security and then write a call Option against that
security. The exercise price of the call Option the Fund determines to write
depends upon the expected price movement of the underlying security. The
exercise price of a call Option may be below ("in-the-money"), equal to ("at-
the-money") or above ("out-of-the-money") the current value of the underlying
security at the time the Option is written.
The writing of covered put Options is similar in terms of risk/return
characteristics to buy-and-write transactions. Put Options may be used by the
Fund in the same market environments in which call Options are used in
equivalent buy-and-write transactions.
In certain instances, the Fund may enter into Options on U.S. Treasury
securities which provide for periodic adjustment of the strike price and may
also provide for the periodic adjustment of the premium during the term of each
such Option. Like other types of Options, these transactions, which may be
referred to as "reset" Options or "adjustable strike Options," grant the
purchaser the right to purchase (in the case of a "call") or sell (in the case
of a "put"), a specified type and series of U.S. Treasury security at any time
up to a stated expiration date (or, in certain instances, on such date). In
contrast to other types of Options, however, the price at which the underlying
security may be purchased or sold under a "reset" Option is determined at
various intervals during the term of the Option, and such price fluctuates from
interval to interval based on changes in the market value of the underlying
security. As a result, the strike price of a "reset" Option, at the time of
exercise, may be less advantageous to the Fund than if the strike price had been
fixed at the initiation of the Option. In addition, the premium paid for the
purchase of the Option may be determined at the termination, rather than the
initiation, of the Option. If the premium is paid at termination, the Fund
assumes the risk that (i) the premium may be less than the premium which would
otherwise have been received at the initiation of the Option because of such
factors as the volatility in yield of the underlying U.S. Treasury security over
the term of the Option and adjustments made to the strike price of the Option,
and (ii) the Option purchaser may default on its obligation to pay the premium
at the termination of the Option.
The Fund may also write combinations of put and call Options on the same
security, a practice known as a "straddle." By writing a straddle, the Fund
undertakes a simultaneous obligation to sell or purchase the same security in
the event that one of the Options is exercised. If the price of the security
subsequently rises sufficiently above the exercise price to cover the amount of
the premium and transaction costs, the call will likely be exercised and the
Fund will be required to sell the underlying security at a below market price.
This loss may be offset, however, in whole or in part, by the premiums received
on the writing of the two Options. Conversely, if the price of the security
declines by a sufficient amount, the put will likely be exercised. The writing
of straddles will likely be effective, therefore, only where the price of a
security remains stable and neither the call nor the put is exercised. In an
instance where one of the Options is exercised, the loss on the purchase or sale
of the underlying security may exceed the amount of the premiums received.
By writing a call Option on a portfolio security, the Fund limits its
opportunity to profit from any increase in the market value of the underlying
security above the exercise price of the Option. By writing a put Option, the
Fund assumes the risk that it may be required to purchase the underlying
security for an exercise price above its then current market value, resulting in
a loss unless the security subsequently appreciates in value. The writing
<PAGE> 65
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 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
<PAGE> 66
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. Because these securities are traded
over-the-counter, the SEC has taken the position that yield curve options are
liquid and, therefore, cannot exceed the SEC illiquidity ceiling. See "Options
on Securities" above for a discussion of the policies the Adviser intends to
follow to limit the Fund's investment in these securities.
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
maintained by the Fund in liquid assets in a segregated account with its
custodian. The Fund may cover put Options on stock indices by maintaining liquid
assets 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 liquid assets 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.
<PAGE> 67
The purchase of call Options on stock indices may be used by the Fund to attempt
to reduce the risk of missing a broad market advance, or an advance in an
industry or market segment, at a time when the Fund holds uninvested cash or
short-term debt securities awaiting investment. When purchasing call Options for
this purpose, the Fund will also bear the risk of losing all or a portion of the
premium paid if the value of the index does not rise. The purchase of call
Options on stock indices when the Fund is substantially fully invested is a form
of leverage, up to the amount of the premium and related transaction costs, and
involves risks of loss and of increased volatility similar to those involved in
purchasing calls on securities the Fund owns.
FUTURES CONTRACTS: The Fund may enter into contracts for the purchase or sale
for future delivery of fixed income securities or contracts based on municipal
bond or other financial indices, including any index of U.S. or foreign
government securities as such instruments become available for trading ("Futures
Contracts"). A "sale" of a Futures Contract means a contractual obligation to
deliver the securities called for by the contract at a specified price in a
fixed delivery month or, in the case of a Futures Contract on an index of
securities, to make or receive a cash settlement. A "purchase" of a Futures
Contract means a contractual obligation to acquire the securities called for by
the contract at a specified price in a fixed delivery month or, in the case of a
Futures Contract on an index of securities, to make or receive a cash
settlement. U.S. Futures Contracts have been designed by exchanges which have
been designated as "contract markets" by the Commodity Futures Trading
Commission (the "CFTC"), and must be executed through a futures commission
merchant, or brokerage firm, which is a member of the relevant contract market.
Existing contract markets include the Chicago Board of Trade and the
International Monetary Market of the Chicago Mercantile Exchange. Futures
Contracts are traded on these markets, and, through their clearing corporations,
the exchanges guarantee performance of the contracts as between the clearing
members of the exchange. The Fund will enter into Futures Contracts which are
based on debt securities that are backed by the full faith and credit of the
U.S. Government, such as long-term U.S. Treasury Bonds, Treasury Notes, and
three-month U.S. Treasury Bills. The Fund may also enter into Futures Contracts
which are based on corporate securities, non-U.S.
Government bonds and Eurodollar deposits.
At the same time a Futures Contract is purchased or sold, the Fund must allocate
cash or securities as a deposit payment ("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
<PAGE> 68
in bonds with short maturities when interest rates are expected to increase or
by buying bonds with long maturities and selling bonds with short maturities
when interest rates are expected to decline. However, since the futures market
is more liquid than the cash market, the use of Futures Contracts as an
investment technique allows the Fund to maintain a defensive position without
having to sell its portfolio securities.
Similarly, when it is expected that interest rates may decline, Futures
Contracts may be purchased to hedge against anticipated purchases of long-term
bonds at higher prices. Since the fluctuations in the value of Futures Contracts
should be similar to that of long-term bonds, the Fund could take advantage of
the anticipated rise in the value of long-term bonds without actually buying
them until the market had stabilized. At that time, the Futures Contracts could
be liquidated and the Fund could buy long-term bonds on the cash market.
Purchases of Futures Contracts would be particularly appropriate when the cash
flow from the sale of new shares of the Fund could have the effect of diluting
dividend earnings. To the extent the Fund enters into Futures Contracts for this
purpose, the assets in the segregated asset account maintained to cover the
Fund's obligations with respect to such Futures Contracts will consist of liquid
assets from the portfolio of the Fund in an amount equal to the difference
between the fluctuating market value of such Futures Contracts and the aggregate
value of the initial and variation margin payments made by the Fund with respect
to such Futures Contracts, thereby assuring that the transactions are
unleveraged.
Also, the Fund may purchase or sell stock index Futures Contracts to attempt to
protect current or intended stock investments from broad fluctuations in stock
prices. For example, the Fund may sell stock index futures contracts in
anticipation of or during a market decline to attempt to offset the decrease in
market value of the Fund's securities portfolio that might otherwise result. If
such decline occurs, the loss in value of portfolio securities may be offset, in
whole or part, by gains on the futures position. When the Fund is not fully
invested in the securities market and anticipates a significant market advance,
it may purchase stock index futures contracts in order to gain rapid market
exposure that may, in part or entirely, offset increases in the cost of
securities that the Fund intends to purchase. As such purchases are made, the
corresponding positions in stock index futures contracts will be closed out. In
a substantial majority of these transactions, the Fund will purchase such
securities upon termination of the futures position, but under unusual market
conditions a long futures position may be terminated without a related purchase
of securities.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the natures of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close Futures Contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by the Adviser may still not
result in a successful transaction.
In addition, Futures Contracts entail risks. Although the Fund believes that use
of such contracts will benefit the Fund, if the Adviser's investment judgment
about the general direction of interest rates is incorrect, the Fund's overall
performance would be poorer than if it had not entered into any such contract.
For example, if the Fund has hedged against the possibility of an increase in
interest rates which would adversely affect the price of bonds held in its
portfolio and interest rates decrease instead, the Fund will lose part or all of
the benefit of the increased value of its bonds which it has hedged because it
will have offsetting losses in its futures positions. In addition, in such
situations, if the Fund has insufficient cash, it may have to sell bonds from
its portfolio to meet daily variation margin requirements. Such sales of bonds
may, but will not necessarily, be at increased prices which reflect the rising
market. The Fund may have to sell securities at a
<PAGE> 69
time when it may be disadvantageous to do so.
OPTIONS ON FUTURES CONTRACTS: The Fund may write and purchase options to buy or
sell Futures Contracts ("Options on Futures Contracts") for hedging purposes.
The Fund may also enter into transactions in Options on Futures Contracts for
non-hedging purposes to the extent permitted by applicable law. The purchase of
a call Option on a Futures Contract is similar in some respects to the purchase
of a call option on an individual security. Depending on the pricing of the
option compared to either the price of the Futures Contract upon which it is
based or the price of the underlying debt securities, it may or may not be less
risky than ownership of the Futures Contract or underlying debt securities. As
with the purchase of Futures Contracts, when the Fund is not fully invested it
may purchase a call Option on a Futures Contract to hedge against a market
advance due to declining interest rates.
The writing of a call Option on a Futures Contract constitutes a partial hedge
against declining prices of the security underlying the Futures Contract. If the
futures price at expiration of the option is below the exercise price, the Fund
will retain the full amount of the option premium, less related transaction
costs, which provides a partial hedge against any decline that may have occurred
in the Fund's portfolio holdings. The writing of a put Option on a Futures
Contract constitutes a partial hedge against increasing prices of the security
underlying the Futures Contract. If the futures price at expiration of the
option is higher than the exercise price, the Fund will retain the full amount
of the option premium, less related transaction costs, which provides a partial
hedge against any increase in the price of securities which the Fund intends to
purchase. If a put or call option the Fund has written is exercised, the Fund
will incur a loss which will be reduced by the amount of the premium it
receives. Depending on the degree of correlation between changes in the value of
its portfolio securities and changes in the value of its futures positions, the
Fund's losses from existing Options on Futures Contracts may to some extent be
reduced or increased by changes in the value of portfolio securities.
The Fund may purchase Options on Futures Contracts for hedging purposes as an
alternative to purchasing or selling the underlying Futures Contracts. For
example, where a decrease in the value of portfolio securities is anticipated as
a result of a projected market-wide decline, a rise in interest rates or a
decline in the dollar value of foreign currencies in which portfolio securities
are denominated, the Fund may, in lieu of selling Futures Contracts, purchase
put options thereon. In the event that such decrease in portfolio value occurs,
it may be offset, in whole or part, by a profit on the option. Conversely, where
it is projected that the value of securities to be acquired by the Fund will
increase prior to acquisition, due to a market advance, or a decline in interest
rates or a rise in the dollar value of foreign currencies in which securities to
be acquired are denominated, the Fund may purchase call Options on Futures
Contracts, rather than purchasing the underlying Futures Contracts. As in the
case of Options, the writing of Options on Futures Contracts may require the
Fund to forego all or a portion of the benefits of favorable movements in the
price of portfolio securities, and the purchase of Options on Futures Contracts
may require the Fund to forego all or a portion of such benefits up to the
amount of the premium paid and related transaction costs.
The amount of risk the Fund assumes when it purchases an Option on a Futures
Contract is the premium paid for the option plus related transaction costs. In
addition to the correlation risks discussed above, the purchase of an option
also entails the risk that changes in the value of the underlying Futures
Contract will not be fully reflected in the value of the option purchased.
The Fund's ability to engage in the options and futures strategies described
above will depend on the availability of liquid markets in such instruments. It
is impossible to predict the amount of trading interest that may exist in
various types of options or futures. Therefore, no assurance can be given that
the Fund will be able to utilize these instruments effectively for the purposes
set forth above. Furthermore, the Fund's ability to engage in options and
futures transactions may be limited by tax considerations.
The Fund may cover the writing of call Options on Futures Contracts (a) through
purchases of the underlying Futures Contract, (b) through ownership of the
instrument, or instruments included in the index, underlying the Futures
Contract, or (c) through the holding of a call on the same Futures Contract
<PAGE> 70
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 liquid assets 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,
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, liquid assets in an amount equal to the value of its
commitments under Forward Contracts. While these contracts are not presently
regulated by the CFTC, the CFTC may in the future assert authority to regulate
Forward Contracts. In such event, the Fund's ability to utilize Forward
Contracts in the manner set forth above may be restricted.
OPTIONS ON FOREIGN CURRENCIES: The Fund may purchase and write put and call
options on foreign currencies ("Options on Foreign Currencies") for the purpose
of protecting against declines in the dollar value of foreign portfolio
securities and against increases in the dollar cost of foreign securities to be
acquired. For example, a decline in the dollar value of a foreign currency in
which portfolio securities are denominated will reduce the dollar value of such
securities, even if their value in the foreign currency
<PAGE> 71
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
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 liquid assets 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 liquid assets 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
<PAGE> 72
traded through financial institutions acting as market-makers, although foreign
currency options are also traded on certain national securities exchanges, such
as the Philadelphia Stock Exchange and the Chicago Board Options Exchange,
subject to SEC regulation. Similarly, options on securities and on stock indices
may be traded over-the-counter. In an over-the-counter trading environment, many
of the protections afforded to exchange participants will not be available. For
example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of time.
Although the purchaser of an option cannot lose more than the amount of the
premium plus related transaction costs, this entire amount could be lost.
Moreover, the option writer and a trader of Forward Contracts could lose amounts
substantially in excess of their initial investments, due to the margin and
collateral requirements associated with such positions.
The Fund's ability effectively to hedge all or a portion of its portfolio
through transactions in options, Futures Contracts, and Forward Contracts will
depend on the degree to which price movements in the underlying instruments
correlate with price movements in the relevant portion of the Fund's portfolio.
If the values of fixed income portfolio securities being hedged do not move in
the same amount or direction as the instruments underlying options, Futures
Contracts or Forward Contracts traded, the Fund's hedging strategy may not be
successful and the Fund could sustain losses on its hedging strategy which would
not be offset by gains on its portfolio. It is also possible that there may be a
negative correlation between the instrument underlying an option, Futures
Contract or Forward Contract traded and the portfolio securities being hedged,
which could result in losses both on the hedging transaction and the portfolio
securities. In such instances, the Fund's overall return could be less than if
the hedging transaction had not been undertaken. In the case of futures and
options on fixed income securities, the portfolio securities which are being
hedged may not be the same type of obligation underlying such contract. As a
result, the correlation probably will not be exact. Consequently, the Fund bears
the risk that the price of the fixed income portfolio securities being hedged
will not move in the same amount or direction as the underlying index or
obligation. Where the Fund enters into Forward Contracts as a "cross hedge"
(i.e., the purchase or sale of a Forward Contract on one currency to hedge
against risk of loss arising from changes in value of a second currency), the
Fund incurs the risk of imperfect correlation between changes in the values of
the two currencies, which could result in losses.
The correlation between prices of fixed income securities and prices of options,
Futures Contracts or Forward Contracts may be distorted due to differences in
the nature of the markets, such as differences in margin requirements, the
liquidity of such markets and the participation of speculators in the option,
Futures Contract and Forward Contract markets. Due to the possibility of
distortion, a correct forecast of general interest rate trends by the Adviser
may still not result in a successful transaction. The trading of Options on
Futures Contracts also entails the risk that changes in the value of the
underlying Futures Contract will not be fully reflected in the value of the
option. The risk of imperfect correlation, however, generally tends to diminish
as the maturity or termination date of the option, Futures Contract or Forward
Contract approaches.
The trading of options, Futures Contracts and Forward Contracts also entails the
risk that, if the Adviser's judgment as to the general direction of interest or
exchange rates is incorrect, the Fund's overall performance may be poorer than
if it had not entered into any such contract. For example, if the Fund has
hedged against the possibility of an increase in interest rates, and rates
instead decline, the Fund will lose part or all of the benefit of the increased
value of the fixed income securities being hedged, and may be required to meet
ongoing daily variation margin payments.
It should be noted that the Fund may purchase and write Options, Futures
Contracts, Options on Futures Contracts and Forward Contracts not only for
hedging purposes, but also for non-hedging purposes to the extent permitted by
applicable law for the purpose of increasing its return. As a result, the Fund
will incur the risk that losses on such transactions will not be offset by
corresponding increases in the value of fixed income portfolio securities or
decreases in the cost of fixed income securities to be acquired.
POTENTIAL LACK OF A LIQUID SECONDARY MARKET -- Prior to exercise or expiration,
a position in an exchange-traded Option, Futures Contract, Option on a Futures
Contract or Option on a Foreign Currency can only be terminated
<PAGE> 73
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 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
<PAGE> 74
currencies. Under certain circumstances, such as where the Adviser believes that
the applicable exchange rate is unfavorable at the time the currencies are
received or the Adviser anticipates, for any other reason, that the exchange
rate will improve, the Fund may hold such currencies for an indefinite period of
time. While the holding of currencies will permit the Fund to take advantage of
favorable movements in the applicable exchange rate, such strategy also exposes
the Fund to risk of loss if exchange rates move in a direction adverse to the
Fund's position. Such losses could reduce any profits or increase any losses
sustained by the Fund from the sale or redemption of securities and could reduce
the dollar value of interest or dividend payments received.
RISKS OF INVESTMENTS IN EMERGING MARKETS: Investments in emerging markets
involve special risks. Securities of many issuers in emerging markets may be
less liquid and more volatile than securities of comparable domestic issuers.
These securities may be considered speculative and, while generally offering
higher income and the potential for capital appreciation, may present
significantly greater risk. Emerging markets may have different clearance and
settlement procedures, and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when a portion of the assets of the
Fund is uninvested and no return is earned thereon. The inability of the Fund to
make intended security purchases due to settlement problems could cause the Fund
to miss attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result in losses to the Fund due to
subsequent declines in values of the portfolio securities or, if the Fund has
entered into a contract to sell the security, possible liability to the
purchaser. Certain markets may require payment for securities before delivery.
Certain emerging markets may require governmental approval for the repatriation
of investment income, capital or the proceeds of sales of securities by foreign
investors. In addition, if a deterioration occurs in an emerging market's
balance of payments or for other reasons, a country could impose temporary
restrictions on foreign capital remittances. The Fund could be adversely
affected by delays in, or a refusal to grant, any required governmental approval
for repatriation of capital, as well as by the application to the Fund of any
restrictions on investments.
Investment in certain foreign emerging market debt obligations may be restricted
or controlled to varying degrees. These restrictions or controls may at times
preclude investment in certain foreign emerging market debt obligations and
increase the expenses of the Fund.
SWAPS AND RELATED TRANSACTIONS: The Fund may enter into interest rate swaps,
currency swaps and other types of available swap agreements, such as caps,
collars and floors.
Swap agreements may be individually negotiated and structured to include
exposure to a variety of different types of investments or market factors.
Depending on their structure, swap agreements may increase or decrease the
Fund's exposure to long or short-term interest rates (in the U.S. or abroad),
foreign currency values, mortgage securities, corporate borrowing rates, or
other factors such as securities prices or inflation rates. Swap agreements can
take many different forms and are known by a variety of names. The Fund is not
limited to any particular form or variety of swap agreement if MFS determines it
is consistent with the Fund's investment objective and policies.
The Fund will maintain cash or appropriate liquid assets 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 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
<PAGE> 75
collars is the change in the specific interest rate, currency or other factor
that determines the amount of payments to be made under the arrangement. If MFS
is incorrect in its forecasts of such factors, the investment performance of the
Fund would be less than what it would have been if these investment techniques
had not been used. If a swap agreement calls for payments by the Fund, the Fund
must be prepared to make such payments when due. In addition, if the
counterparty's creditworthiness declined, the value of the swap agreement would
be likely to decline, potentially resulting in losses. If the counterparty
defaults, the Fund's risk of loss consists of the net amount of payments that
the Fund is contractually entitled to receive. The Fund anticipates that it will
be able to eliminate or reduce its exposure under these arrangements by
assignment or other disposition or by entering into an offsetting agreement with
the same or another counterparty.
WHEN-ISSUED OR FORWARD DELIVERY SECURITIES: When the Fund commits to purchase a
security on a "when-issued" or "forward delivery" basis, it will set up
procedures consistent with the General Statement of Policy of the SEC concerning
such purchases. Since that policy currently recommends that an amount of the
Fund's assets equal to the amount of the purchase be held aside or segregated to
be used to pay for the commitment, the Fund will always have liquid assets
sufficient to cover any commitments or to limit any potential risk. However,
although the Fund does not intend to make such purchases for speculative
purposes and intends to adhere to the provisions of the SEC policy, purchases of
securities on such bases may involve more risk than other types of purchases.
For example, the Fund may have to sell assets which have been set aside in order
to meet redemptions. Also, if the Fund determines it necessary to sell the
"when-issued" or "forward delivery" securities before delivery, it may incur a
loss because of market fluctuations since the time the commitment to purchase
such securities was made.
INDEXED SECURITIES: The Fund may purchase securities whose prices are indexed to
the prices of other securities, securities indices, currencies, precious metals
or other commodities, or other financial indicators. Indexed securities
typically, but not always, are debt securities or deposits whose value at
maturity (i.e. principal value) or coupon rate is determined by reference to a
specific instrument or statistic. Gold-indexed securities, for example,
typically provide for a maturity value that depends on the price of gold,
resulting in a security whose price tends to rise and fall together with gold
prices. Currency-indexed securities typically are short-term to intermediate-
term debt securities whose maturity values or interest rates are determined by
reference to the values of one or more specified foreign currencies, and may
offer higher yields than U.S. dollar-denominated securities of equivalent
issuers. Currency-indexed securities may be positive or negatively indexed; that
is, their maturity value may increase when the specified currency value
increases, resulting in a security that performs similarly to a foreign-
denominated instrument, or their maturity value may decline when foreign
currencies increase, resulting in a security whose price characteristics are
similar to a put on the underlying currency. Currency-indexed securities may
also have prices that depend on the values of a number of different foreign
currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deterioriates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
government agencies.
LENDING OF FIXED INCOME SECURITIES: The Fund may seek to increase its income by
lending fixed income portfolio securities to entities deemed creditworthy by the
Adviser. Such loans would be required to be secured continuously by collateral
in cash, U.S. Government Securities or an irrevocable letter of credit
maintained on a current basis at an amount at least equal to the market value of
the securities loaned. The Fund would have the right to call a loan and obtain
the securities loaned at any time on customary industry settlement notice (which
will usually not exceed five days). During the existence of a loan, the Fund
would continue to receive the equivalent of the interest or dividends paid by
the issuer on the securities loaned and would also receive compensation based on
investment of cash collateral. The Fund would not, however, have the right to
vote any securities having voting rights during the
<PAGE> 76
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. The Fund records these transactions as sale and purchase transactions,
rather than as borrowing transactions. During the roll period, the Fund foregoes
principal and interest paid on the mortgage-backed securities. The Fund is
compensated for the lost interest by the difference between the current sales
price and the lower price for the futures purchase (often referred to as the
"drop") as well as by the interest earned on the cash proceeds of the initial
sale. The Fund may also be compensated by receipt of a commitment fee.
PORTFOLIO MANAGEMENT: Although the Fund does not intend to seek short-term
profits, securities in its portfolio will be sold whenever the Adviser
believes it is appropriate to do so without regard to the length of time the
particular asset may have been held, subject to tax requirements for the
Fund's qualification as a regulated investment company. A high turnover rate
involves greater expenses, including higher brokerage and transactions costs,
to the Fund. The Fund engages in portfolio trading if it believes a
transaction net of costs (including custodian charges) will help in achieving
its investment objective. See "Portfolio Transactions and Brokerage
Commissions" below.
------------------------
The policies stated above are not fundamental and may be changed without
shareholder approval, as may the Fund's investment objective.
INVESTMENT RESTRICTIONS. The Fund has adopted the following restrictions which
cannot be changed without the approval of the holders of a majority of the
Fund's shares (which, as used in this SAI, means the lesser of (i) more than 50%
of the outstanding shares of the Fund (or a class, as applicable) or (ii) 67% or
more of the outstanding shares of the Fund (or a class, as applicable) present
at a meeting at which holders of more than 50% of the outstanding shares of the
Fund (or a class, as applicable) are represented in person or by proxy):
The Fund may not:
(1) borrow 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
<PAGE> 77
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
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 (born 8/4/35)
Massachusetts Financial Services Company, Chairman
<PAGE> 78
RICHARD B. BAILEY* (born 9/14/26)
Private Investor; Massachusetts Financial Services Company, Former Chairman
(prior to September 30, 1991); Cambridge Bancorp, Director; Cambridge Trust
Company, Director
MARSHALL N. COHAN (born 11/14/26)
Private Investor
Address: 2524 Bedford Mews Drive, Wellington, Florida
LAWRENCE H. COHN, M.D. (born 3/11/37)
Brigham and Women's Hospital, Chief of Cardiac Surgery; Harvard Medical
School, Professor of Surgery
Address: 75 Francis Street, Boston, Massachusetts
THE HON. SIR J. DAVID GIBBONS, KBE (born 6/15/27)
Edmund Gibbons Limited, Chief Executive Officer; Bank of NT Butterfield & Son
Limited, Chairman.
Address: 21 Reid Street, Hamilton, Bermuda HM 12
ABBY M. O'NEILL (born 4/27/28)
Private Investor; Rockefeller Financial Services, Inc. (investment advisers),
Director
Address: 30 Rockefeller Plaza, Room 5600, New York, New York
WALTER E. ROBB, III (born 7/9/27)
Benchmark Advisors, Inc., (Financial Consultants) President and Treasurer;
Benchmark Consulting Group, Inc. (office services), President; Landmark
Funds (Mutual Fund), Trustee
Address: 110 Broad Street, Boston, Massachusetts
ARNOLD D. SCOTT* (born 12/16/42)
Massachusetts Financial Services Company, Senior Executive Vice President and
Secretary
JEFFREY L. SHAMES,* Trustee and Vice President (born 6/2/55)
Massachusetts Financial Services Company, President
J. DALE SHERRATT (born 9/23/38)
Insight Resources, Inc. (acquisition planning specialists), President
Address: One Liberty Square, Boston, Massachusetts
WARD SMITH (born 9/13/30)
NACCO Industries (holding company), Chairman (prior to June 1994); Sundstrand
Corporation (diversified mechanical manufacturer), Director
Address: 5875 Landerbrook Drive, Mayfield Heights, Ohio
OFFICERS
JOHN D. LAUPHEIMER, JR.,* Vice President (born 7/30/57)
Masssachusetts Financial Services Company, Vice President
LESLIE J. NANBERG,* Vice President (born 11/4/45)
Massachusetts Financial Services Company, Senior Vice President
JAMES T. SWANSON,* Vice President (born 6/12/49)
Massachusetts Financial Services Company, Senior Vice President
W. THOMAS LONDON,* Treasurer (born 3/1/44)
Massachusetts Financial Services Company, Senior Vice President
STEPHEN E. CAVAN,* Secretary and Clerk (born 11/6/53)
Massachusetts Financial Services Company, Senior Vice President, General
Counsel and Assistant Secretary
JAMES O. YOST,* Assistant Treasurer (born 6/12/60)
Massachusetts Financial Services Company, Vice President
JAMES R. BORDEWICK, JR.,* Assistant Secretary (born 3/6/59)
Massachusetts Financial Services Company, Senior Vice President and Associate
General Counsel
- ------------
*"Interested persons" (as defined in the 1940 Act) of the Adviser, whose address
is 500 Boylston Street, Boston, Massachusetts 02116.
<PAGE> 79
The Fund pays the compensation of non-interested Trustees and Mr. Bailey who
currently receive a fee of $1,250 per year plus $225 per meeting and $225 per
committee meeting attended, together with such Trustee's out-of-pocket
expenses. Each Trustee and officer holds comparable positions with certain
affiliates of MFS or with certain other funds of which MFS or a subsidiary is
the investment adviser or distributor. 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 five years of service, he would be entitled to
annual payments during his lifetime of up to 50% of such Trustee's average
annual compensation (based on the three years prior to his retirement) depending
on his length of service. A Trustee may also retire prior to age 75 and receive
reduced payments if he has completed at least five years of service. Under the
plan, a Trustee (or his beneficiaries) will also receive benefits for a period
of time in the event the Trustee is disabled or dies. These benefits will also
be based on the Trustee's average annual compensation and length of service.
There is no retirement plan provided by the Fund for Messrs. Brodkin, Scott and
Shames. The Fund will accrue compensation expenses each year to cover current
year's service and amortize past service cost.
Set forth below is certain information concerning the cash compensation paid to
the Trustees and benefits accrued and estimated benefits payable, under the
retirement plan.
<TABLE>
TRUSTEE COMPENSATION TABLE
<CAPTION>
RETIREMENT
BENEFIT TOTAL TRUSTEE
ACCRUED AS ESTIMATED FEES
PART OF CREDITED FROM FUND AND
TRUSTEE FEES FUND EXPENSE YEARS FUND COMPLEX
TRUSTEE FROM FUND(1) (1) OF SERVICE(2) (3)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Bailey ...... $3,050 $ 785 10 $247,168
A. Keith Brodkin ....... -0- -0- N/A -0-
Marshall N. Cohan ...... 4,175 1,666 14 149,258
Lawrence H. Cohn ....... 3,725 460 18 136,508
The Hon. Sir
J. David Gibbons ..... 3,725 1,286 13 136,508
Abby M. O'Neill ........ 3,275 583 10 123,758
Walter E. Robb, III .... 4,175 1,666 14 149,258
Arnold D. Scott ........ -0- -0- N/A -0-
Jeffrey L. Shames ...... -0- -0- N/A -0-
J. Dale Sherratt ....... 4,175 527 20 149,258
Ward Smith ............. 4,175 725 13 149,258
<FN>
(1) For fiscal year ended October 31, 1996.
(2) Based on normal retirement age of 75.
(3) For calendar year December 31, 1996. All Trustees receiving compensation
served as Trustees of 41 funds within the MFS fund complex (having aggregate
net assets at December 31, 1996, of approximately $14.9 billion) except Mr.
Bailey, who served as Trustee of 81 funds within the MFS fund complex
(having aggregate net assets at December 31, 1996, of approximately $38.5
billion).
</TABLE>
<TABLE>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
<CAPTION>
YEARS OF SERVICE
---------------------------------------------
AVERAGE TRUSTEE FEES 3 5 7 10 OR MORE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$2,745 $412 $ 686 $ 961 $1,373
3,115 467 779 1,090 1,557
3,484 523 871 1,219 1,742
3,854 578 963 1,349 1,927
</TABLE>
<PAGE> 80
<TABLE>
<S> <C> <C> <C> <C>
4,223 633 1,056 1,478 2,112
4,593 689 1,148 1,607 2,296
<FN>
(4) Other funds in the MFS fund complex provide similar retirement benefits to
the Trustees.
</TABLE>
As of January 31, 1997, all Trustees and officers as a group owned less than 1%
of the outstanding shares of the Fund.
As of January 31, 1997, Merrill, Lynch, Pierce, Fenner & Smith, Inc., 4800 Deer
Lake Drive, E., 3rd Floor, Jacksonville, FL 32246-6484 for the sole benefit of
its customers, was the record owner of approximately 5.65% of the outstanding
Class B shares of the Fund. As of January 31, 1997, Merrill, Lynch, Pierce,
Fenner & Smith, Inc., 4800 Deer Lake Drive E., 3rd Floor, Jacksonville, FL
32246-6484 for the sole benefit of its customers, was the record owner of 6.00%
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 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 in turn is a
wholly owned subsidiary of Sun Life Assurance Company of Canada ("Sun Life").
INVESTMENT ADVISORY AGREEMENT -- The Adviser manages the Fund pursuant to an
Investment Advisory Agreement, dated September 9, 1987 (the "Advisory
Agreement"). Under the Advisory Agreement, the Adviser provides the Fund with
overall investment advisory services. Subject to such policies as the Trustees
may determine, the Adviser makes investment decisions for the Fund. For these
services and facilities, the Adviser receives an annual management fee, computed
and paid monthly, in an amount equal to the sum of .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, 1996, MFS received a management fee
under the Advisory Agreement of $465,666. If MFS had not reduced its management
fee, MFS would have received a management fee of $768,788 (of which $341,027
would have been based on average daily net assets and $427,761 on gross income),
which would have been equivalent, on an annualized basis, to 1.12% of the Fund's
average daily net assets. For the Fund's fiscal year ended October 31, 1995, MFS
received a management fee under the Advisory Agreement of $364,207. If MFS had
not reduced its management fee, MFS would have received a management fee of
$563,213 (of which $242,748 was based on average daily net assets and $322,465
on gross income, before a voluntary reduction of $201,006), which would have
been equivalent on an annualized basis to 1.16% of the Fund's average daily net
assets. For the Fund's fiscal year ended October 31, 1994, MFS received
management fees under the Advisory Agreement of $297,813. If MFS had not 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) which would have been equivalent on an annual 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
<PAGE> 81
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 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 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, 1997 and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Fund's shares (as defined in "Investment Objective, Policies and Restrictions")
and, in either case, by a majority of the Trustees who are not parties to the
Advisory Agreement or interested persons of any such party. The Advisory
Agreement terminates automatically if it is assigned and may be terminated
without penalty by vote of a majority of the Fund's shares (as defined in
"Investment Objective, Policies and Restrictions"), or by either party on not
more than 60 days' nor less than 30 days' written notice. The Advisory Agreement
provides that if MFS ceases to serve as the Adviser to the Fund, the Fund will
change its name so as to delete the initials "MFS" and that MFS may render
services to others and may permit other fund clients to use the initials "MFS"
in their names. The Advisory Agreement also provides that neither the Adviser
nor its personnel shall be liable for any error of judgment or mistake of law or
for any loss arising out of any investment or for any act or omission in the
execution and management of the Fund, except for willful misfeasance, bad faith
or gross negligence in the performance of its or their duties or by reason of
reckless disregard of its or their obligations and duties under the Advisory
Agreement.
ADMINISTRATOR -- MFS provides the Fund with certain administrative services
pursuant to a Master Administrative Services Agreement dated March 1, 1997.
Under this Agreement, MFS provides the Fund with certain financial, legal,
compliance, shareholder communications and other administrative services. As a
partial reimbursement for the cost of providing these services, the Fund pays
MFS an administrative fee up to 0.015% per annum of the Fund's average daily net
assets, provided that the administrative fee is not assessed on Fund assets that
exceed $3 billion.
CUSTODIAN
State Street Bank and Trust Company (the "Custodian") is the custodian of the
Fund's assets. The Custodian's responsibilities include safekeeping and
controlling the Fund's cash and securities, handling the receipt and delivery of
securities, determining income and collecting interest and dividends on the
Fund's investments, maintaining books of original entry for portfolio and fund
accounting and other required books and accounts, and calculating the daily net
asset value of each class of shares of the Fund. The Custodian does not
determine the investment policies of the Fund or decide which securities the
Fund will buy or sell. The Fund may, however, invest in securities of the
Custodian and may deal with the Custodian as principal in securities
transactions. The Custodian also acts as the dividend disbursing agent of the
Fund. 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 calculated as a percentage of the average daily net
assets of the Fund at an effective annual rate of 0.13%. In addition, the
Shareholder Servicing Agent will be reimbursed by the Fund for certain expenses
incurred by the Shareholder Servicing Agent on behalf of the Fund. State Street
Bank and Trust Company, the dividend and distribution disbursing agent of the
Fund, has contracted with the Shareholder Servicing
<PAGE> 82
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 as amended and restated. 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 SAI).
Class A shares of the Fund may be sold at their net asset value to certain
persons and in certain instances, as described in the Prospectus. Such sales are
made without a sales charge to promote good will with employees and others with
whom MFS, MFD and/or the Fund have business relationships, and because the sales
effort, if any, involved in making such sales is negligible.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price of the Class A shares. Dealer allowances
expressed as a percentage of offering price for all offering prices are set
forth in the Prospectus (see "Purchases" in the Prospectus). The difference
between the total amount invested and the sum of (a) the net proceeds to the
Fund and (b) the dealer commission, is the commission paid to the distributor.
Because of rounding in the computation of offering price, the portion of the
sales charge paid to the distributor may vary and the total sales charge may be
more or less than the sales charge calculated using the sales charge expressed
as a percentage of the offering price or as a percentage of the net amount
invested as listed in the Prospectus. In the case of the maximum sales charge,
the dealer retains 4% and MFD retains approximately 3/4 of 1% of the public
offering price. MFD, on behalf of the Fund, pays a commission to dealers who
initiate and are responsible for purchases of $1 million or more as described in
the Prospectus.
CLASS B, CLASS C AND CLASS I SHARES: MFD acts as agent in selling Class B, Class
C and Class I shares of the Fund. The public offering price of Class B, Class C
and Class I shares is their net asset value next computed after the sale (see
"Purchases" in the Prospectus and the Prospectus Supplement pursuant to which
Class I shares are offered).
GENERAL: Neither MFD nor dealers are permitted to delay placing orders to
benefit themselves by a price change. On occasion, MFD may obtain brokers loans
from various banks, including the custodian banks for the MFS Funds, to
facilitate the settlement of sales of shares of the Fund to dealers. MFD may
benefit from its temporary holding of funds paid to it by investment dealers for
the purchase of Fund shares.
During the Fund's fiscal year ended October 31, 1996, MFD received sales charges
of $26,837 and dealers received sales charges of $151,358 (as their concession
on gross sales charges of $178,195) for selling Class A shares of the Fund. The
Fund received $9,230,573 representing the aggregate net asset value of such
shares. During the Fund's fiscal year ended October 31, 1995, MFD received sales
charges of $12,776 and dealers received sales charges of $60,939 (as their
concession on gross sales charges of $73,715) for selling Class A shares of the
Fund. The Fund received $3,332,860 representing the aggregate net asset value of
such shares. During the Fund's fiscal year ended October 31, 1994, MFD received
<PAGE> 83
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 $3,014,713 representing the aggregate net asset value of
such shares.
During the Fund's fiscal year ended October 31, 1996, the CDSC imposed on
redemption of Class A, B and C shares were $21, $28,744 and $397, respectively.
During the Fund's fiscal year ended October 31, 1995, the CDSC imposed on
redemption of Class A and Class B shares were $0 and $28,517, respectively.
During the period from September 7, 1993 through October 31, 1994, the CDSC
imposed on redemption of Class A and Class B shares were $0 and $7,154,
respectively.
The Distribution Agreement will remain in effect until August 1, 1997 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
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.
<PAGE> 84
Although commissions paid on every transaction will, in the judgment of the
Adviser, be reasonable in relation to the value of the brokerage services
provided, commissions exceeding those which another broker might charge may be
paid to broker-dealers who were selected to execute transactions on behalf of
the Fund and the Adviser's other clients in part for providing advice as to the
availability of securities or of purchasers or sellers of securities and
services in effecting securities transactions and performing functions
incidental thereto, such as clearance and settlement.
Broker-dealers may be willing to furnish statistical, research and other factual
information or services ("Research") to the Adviser for no consideration other
than brokerage or underwriting commissions. Securities may be bought or sold
from time to time through such broker-dealers on behalf of the Fund. The
Trustees (together with the Trustees of the other MFS Funds) have directed the
Adviser to allocate a total of $39,100 of commission business from the MFS Funds
to the Pershing Division of Donaldson, Lufkin and Jenrette as consideration for
the annual renewal of certain publications provided by Lipper Analytical
Securities Corporation (which provides information useful to the Trustees in
reviewing the relationship between the Fund and the Adviser).
The Adviser's investment management personnel attempt to evaluate the quality of
Research provided by brokers. The Adviser sometimes uses evaluations resulting
from this effort as a consideration in the selection of brokers to execute
portfolio transactions.
The management fee that the Fund pays to the Adviser will not be reduced as a
consequence of the Adviser's receipt of brokerage and research service. To the
extent the Fund's portfolio transactions are used to obtain brokerage and
research services, the brokerage commissions paid by the Fund will exceed those
that might otherwise be paid for such portfolio transactions, or for such
portfolio transactions and research, by an amount which cannot be presently
determined. Such services would be useful and of value to the Adviser in serving
both the Fund and other clients and, conversely, such services obtained by the
placement of brokerage business of other clients would be useful to the Adviser
in carrying out its obligations to the Fund. While such services are not
expected to reduce the expenses of the Adviser, the Adviser would, through use
of the services, avoid the additional expenses which would be incurred if it
should attempt to develop comparable information through its own staff.
For the Fund's fiscal years ended October 31, 1995 and 1996, no brokerage
commissions were paid. For the fiscal year ended October 31, 1994, total
brokerage commissions of $2,399 were paid on total transactions of $156,786,605.
During the Fund's fiscal year ended October 31, 1996, the Fund did not acquire
or sell securities issued by affiliates of regular broker-dealers of the Fund.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for that of one or more of the other clients of the Adviser
or any subsidiary of the Adviser. Investment decisions for the Fund and for such
other clients are made with a view to achieving their respective investment
objectives. It may develop that a particular security is bought or sold for only
one client even though it might be held by, or bought or sold for, other
clients. Likewise, a particular security may be bought for one or more clients
when one or more other clients are selling that same security. Some simultaneous
transactions are inevitable when several clients receive investment advice from
the same investment adviser, particularly when the same security is suitable for
the investment objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed by the Adviser to be
equitable to each. It is recognized that in some cases this system could have a
detrimental effect on the price or volume of the security as far as the Fund is
concerned. In other cases, however, the Fund believes that its ability to
participate in volume transactions will produce better executions for the Fund.
5. SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS -- The Fund makes available the following
programs designed to enable shareholders to add to their investment or withdraw
from it with a minimum of paper work. These are described below and,
<PAGE> 85
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 Class A, B and C
shares of that shareholder in the MFS Funds or MFS Fixed Fund (a bank collective
investment fund) reaches a discount level. For example, if a shareholder owns
shares with a current offering price value of $75,000 and purchases an
additional $25,000 of Class A shares of the Fund, the sales charge for the
$25,000 purchase would be at the rate of 4% (the rate applicable to single
transactions of $100,000). A shareholder must provide the Shareholder Servicing
Agent (or his investment dealer must provide MFD) with information to verify
that the quantity sales charge discount is applicable at the time the investment
is made.
SUBSEQUENT INVESTMENT BY TELEPHONE: Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-free
at (800) 225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this telephone
purchase privilege must so elect on their Account Application and designate
thereon a bank and account number from which purchases will be made.
<PAGE> 86
If a telephone purchase request is received by the Shareholder Servicing Agent
on any business day prior to the close of regular trading on the Exchange
(generally, 4:00 p.m., Eastern time), the purchase will occur at the closing net
asset value of the shares purchased on that day. The Shareholder Servicing Agent
may be liable for any losses resulting from unauthorized telephone transactions
if it does not follow reasonable procedures designed to verify the identity of
the caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
DISTRIBUTION INVESTMENT PROGRAM -- Distributions of dividends and capital
gains made by the Fund with respect to a particular class of shares may be
automatically invested in shares of the same class of one of the other MFS
Funds, if shares of the fund are available for sale. Such investments will be
subject to additional purchase minimums. Distributions will be invested at the
close of business on the payable date for the distribution. A shareholder
considering the Distribution Investment Program should obtain and read the
prospectus of the other fund and consider the differences in objectives and
policies before making any investment.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder
Servicing Agent to send him (or anyone he designates) regular periodic payments,
based upon the value of his account. Each payment under a Systematic Withdrawal
Plan ("SWP") must be at least $100, except certain limited circumstances. The
aggregate withdrawals of Class B shares in any year pursuant to a SWP generally
are limited to 10% of the value of the account at the time of establishment of
the SWP. SWP payments are drawn from the proceeds of share redemptions (which
would be a return of principal and, if reflecting a gain, would be taxable).
Redemptions of Class B and Class C shares will be made in the following order:
(i) any "Reinvested Shares"; (ii) to the extent necessary, any "Free Amount";
and (iii) to the extent necessary, the earliest "Direct Purchase" subject to the
lowest CDSC (as such terms are defined in "Contingent Deferred Sales Charge" in
the Prospectus). The CDSC will be waived in the case of redemptions of Class B
and Class C shares pursuant to a SWP, but will not be waived in the case of SWP
redemptions of Class A shares which are subject to a CDSC. To the extent that
redemptions for such periodic withdrawals exceed dividend income reinvested in
the account, such redemptions will reduce and may eventually exhaust the number
of shares in the shareholder's account. All dividend and capital gain
distributions for an account with a SWP will be received in full and fractional
shares of the Fund at the net asset value in effect at the close of business on
the record date for such distributions. To initiate this service, shares having
an aggregate value of at least $5,000 either must be held on deposit by, or
certificates for such shares must be deposited with, the Shareholder Servicing
Agent. Maintaining a withdrawal plan concurrently with an investment program
would be disadvantageous because of the sales charges included in share
purchases. The shareholder may deposit into the account additional shares of the
Fund, change the payee or change the dollar amount of each payment. The
Shareholder Servicing Agent may charge the account for services rendered and
expenses incurred beyond those normally assumed by the Fund with respect to the
liquidation of shares. No charge is currently assessed against the account, but
one could be instituted by the Shareholder Servicing Agent on 60 days' notice in
writing to the shareholder in the event that the Fund ceases to assume the cost
of these services. The Fund may terminate any SWP for an account if the value of
the account falls below $5,000 as a result of share redemptions (other than as a
result of a SWP) or an exchange of shares of the Fund for shares of another MFS
Fund. Any SWP may be terminated at any time by either the shareholder or the
Fund.
INVEST BY MAIL: Additional investments of $50 or more may be made at any
time by mailing a check payable to the Fund directly to the Shareholder
Servicing Agent. The shareholder's account number and the name of his investment
dealer must be included with each investment.
GROUP PURCHASES: A bona fide group and all its members may be treated as a
single purchaser and, under the Right of Accumulation (but not the Letter of
Intent) obtain quantity sales charge discounts on the purchase of Class A shares
if the group (1) gives its endorsement or authorization to the investment
program so it may be used by the investment dealer to facilitate solicitation of
the membership, thus effecting economies of sales effort; (2)
<PAGE> 87
has been in existence for at least six months and has a legitimate purpose other
than to purchase mutual fund shares at a discount; (3) is not a group of
individuals whose sole organizational nexus is as credit cardholders of a
company, policyholders of an insurance company, customers of a bank or
broker-dealer, clients of an investment adviser or other similar groups; and (4)
agrees to provide certification of membership of those members investing money
in the MFS Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may participate in the Automatic Exchange Plan. The
Automatic Exchange Plan provides for automatic exchanges of funds from the
shareholder's account in an MFS Fund for investment in the same class of shares
of other MFS Funds, if available for sale, selected by the shareholder. Under
the Automatic Exchange Plan, exchanges of at least $50 each may be made to up to
six different funds effective on the seventh day of each month or of every third
month, depending whether monthly or quarterly exchanges are elected by the
shareholder. If the seventh day of the month is not a business day, the
transaction will be processed on the next business day. Generally, the initial
exchange will occur after receipt and processing by the Shareholder Servicing
Agent of an application in good order. Transfers will continue to be made from a
shareholder's account, in any MFS Fund, as long as the balance of the account is
sufficient to complete the exchanges. Additional payments made to a
shareholder's account will extend the period that exchanges will continue to be
made under the Automatic Exchange Plan. However, if additional payments are
added to an account subject to the Automatic Exchange Plan shortly before an
exchange is scheduled, such funds may not be available for exchanges until the
following month; therefore, care should be used to avoid inadvertently
terminating the Automatic Exchange Plan through exhaustion of the account
balance.
No service fee for exchanges will be charged in connection with the Automatic
Exchange Plan. However, exchanges of shares of MFS Money Market Fund, MFS
Government Money Market Fund and Class A shares of MFS Cash Reserve Fund will be
subject to any applicable sales charge. Changes in amounts to be exchanged to
each fund, the funds to which exchanges are to be made and the timing of
exchanges (monthly or quarterly), or termination of a shareholder's
participation in the Automatic Exchange Plan will be made after instructions in
writing or by telephone (an "Exchange Change Request") are received by the
Shareholder Servicing Agent in proper form (i.e., if in writing -- signed by the
record owner(s) exactly as shares are registered; if by telephone -- proper
account identification is given by the dealer or shareholder of record). Each
Exchange Change Request (other than termination of participation in the program)
must involve at least $50. Generally, if an Exchange Change Request is received
by telephone or in writing before the close of business on the last business day
of a month, the Exchange Change Request will be effective for the following
month's transfer.
A shareholder's right to make additional investments in any of the MFS Funds, to
make exchanges of shares from one MFS Fund to another and to withdraw from an
MFS Fund, as well as a shareholder's other rights and privileges are not
affected by a shareholder's participation in the Automatic Exchange Plan.
The Automatic Exchange is part of the Exchange Privilege. For additional
information regarding the Automatic Exchange Plan, including the treatment of
any CDSC, see "Exchange Privilege" below.
REINSTATEMENT PRIVILEGE: Shareholders of the Fund and shareholders of the
other MFS Funds (except MFS Money Market Fund, MFS Government Money Market Fund
and holders of Class A shares of MFS Cash Reserve Fund in the case where shares
of such funds are acquired through direct purchase or reinvested dividends) who
have redeemed their shares have a one-time right to reinvest the redemption
proceeds in the same class of shares of any of the MFS Funds (if shares of the
fund are available for sale) at net asset value (without a sales charge) and, if
applicable, with credit for any CDSC paid. In the case of proceeds reinvested in
MFS Money Market Fund, MFS Government Money Market Fund and Class A shares of
MFS Cash Reserve Fund, the shareholder has the right to exchange the acquired
shares for shares of another MFS Fund at net asset value pursuant to the
exchange privilege described below. Such a reinvestment must be made within 90
days of the redemption and is limited to the amount of the redemption proceeds.
If the shares credited for any CDSC paid are then redeemed within six years of
the initial purchase in the case of
<PAGE> 88
Class B shares or 12 months of the initial purchase in the case of Class C
shares and certain Class A shares, a CDSC will be imposed upon redemption.
Although redemptions and repurchases of shares are taxable events, a
reinvestment within such 90-day period of time in the same fund may be
considered a "wash sale" and may result in the inability to recognize currently
all or a portion of a loss realized on the original redemption for federal
income tax purposes. Please see your tax advisor for further information.
EXCHANGE PRIVILEGE -- Subject to the requirements set forth below, some or all
of the shares of the same class in an account with the Fund for which payment
has been received by the Fund (i.e. an established account) may be exchanged for
shares of the same class of any of the other MFS Funds (if available for sale
and if the purchaser is eligible to purchase the class of shares) at net asset
value. Exchanges will be made only after instructions in writing or by telephone
(an "Exchange Request") are received for an established account by the
Shareholder Servicing Agent.
Each Exchange Request must be in proper form (i.e., if in writing - signed by
the record owner(s) exactly as the shares are registered; if by telephone proper
account identification is given by the dealer or shareholder of record), and
each exchange must involve either shares having an aggregate value of at least
$1,000 ($50 in the case of retirement plan participants whose sponsoring
organizations subscribe to the MFS FUNDamental 401(k) Plan or another similar
401(k) recordkeeping system made available by the Shareholder Servicing Agent)
or all the shares in the account. Each exchange involves the redemption of the
shares of the Fund to be exchanged and the purchase at net asset value (i.e.,
without a sales charge) of shares of the same class of the other MFS Fund. Any
gain or loss on the redemption of the shares exchanged is reportable on the
shareholder's federal income tax return, unless both the shares received and the
shares surrendered in the exchange are held in a tax-deferred retirement plan or
other tax-exempt account. No more than five exchanges may be made in any one
Exchange Request by telephone. If the Exchange Request is received by the
Shareholder Servicing Agent prior to the close of regular trading on the New
York Stock Exchange (the "Exchange"), the exchange usually will occur on that
day if all the requirements set forth above have been complied with at that
time. However, payment of the redemption proceeds by the Fund, and thus the
purchase of shares of the other MFS Fund, may be delayed for up to seven days if
the Fund determines that such a delay would be in the best interest of all its
shareholders. Investment dealers which have satisfied criteria established by
MFD may also communicate a shareholder's Exchange Request to MFD by facsimile
subject to the requirements set forth above.
No CDSC is imposed on exchanges among the MFS Funds, although liability for the
CDSC is carried forward to the exchanged shares. For purposes of calculating the
CDSC upon redemption of shares acquired in an exchange, the purchase of shares
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.
<PAGE> 89
The exchange privilege (or any aspect of it) may be changed or discontinued and
is subject to certain limitations (see "Purchases" in the Prospectus).
TAX-DEFERRED RETIREMENT PLANS -- Shares of the Fund may be purchased by all
types of tax-deferred retirement plans. MFD makes available through investment
dealers plans and/or custody agreements for the following:
Individual Retirement Accounts (IRAs) (for individuals and their non-
employed spouses who desire to make limited contributions to a tax-deferred
retirement program and, if eligible, to receive a federal income tax
deduction for amounts contributed);
Simplified Employee Pension (SEP-IRA) Plans;
Retirement Plans Qualified under Section 401(k) of the Internal Revenue Code
of 1986 (the "Code"), as amended;
403(b) Plans (deferred compensation arrangements for employees of public
school systems and certain non-profit organizations); and
Certain other qualified pension and profit-sharing plans.
The plan documents provided by MFD designate a trustee or custodian (unless
another trustee or custodian is designated by the individual or group
establishing the plan) and contain specific information about the plans. Each
plan provides that dividends and distributions will be reinvested automatically.
For further details with respect to any plan, including fees charged by the
trustee, custodian or MFD, tax consequences and redemption information, see the
specific documents for that plan. Plan documents other than those provided by
MFD may be used to establish any of the plans described above. Third party
administrative services, available for some corporate plans, may limit or delay
the processing of transactions.
Investors should consult with his tax adviser before establishing any of the
tax-deferred retirement plans described above.
6. TAX STATUS
The Fund has elected to be treated and intends to qualify each year as a
"regulated investment company" under Subchapter M of the Code, by meeting all
applicable requirements of Subchapter M, including requirements as to the nature
of the Fund's gross income, the amount of Fund distributions, and the
composition and holding period of the Fund's portfolio assets. Because the Fund
intends to distribute all of its net investment income and net realized capital
gains to shareholders in accordance with the timing requirements imposed by the
Code, it is not expected that the Fund will be required to pay any federal
income or excise taxes, although the Fund's foreign-source income may be subject
to foreign withholding taxes. If the Fund should fail to qualify as a "regulated
investment company" in any year, the Fund would incur a regular corporate
federal income tax upon its taxable income and Fund distributions would
generally be taxable as ordinary dividend income to the shareholders.
Shareholders of the Fund normally will have to pay federal income taxes, and any
state or local taxes, on the dividends and capital gain distributions they
receive from the Fund. Dividends from ordinary income (including certain foreign
currency gains) and any distributions from net short-term capital gains, are
taxable to shareholders as ordinary income for federal income tax purposes
whether paid in cash or reinvested in additional shares. A portion of the Fund's
ordinary income dividends is normally eligible for the dividends received
deduction for corporations if the recipient otherwise qualifies for that
deduction with respect to its holding of Fund shares. Availability of the
deduction for particular corporate shareholders is subject to certain
limitations, and deducted amounts may be subject to the alternative minimum tax
and may result in certain basis adjustments. Distributions from net capital
gains (i.e., the excess of net long-term capital gains over net short-term
capital losses), whether paid in cash or reinvested in additional shares, are
taxable to shareholders as long-term capital gains without regard to the length
of time the shareholders have held shares in the Fund. Any Fund dividend that is
declared in October, November or December of any calendar
<PAGE> 90
year, that is payable to shareholders of record in such a month and that is paid
the following January will be treated as if received by the shareholders on
December 31 of the year in which the dividend is declared. The Fund will notify
shareholders regarding the federal tax status of its distributions after the end
of each calendar year.
Any Fund distribution will have the effect of reducing the per share net asset
value of shares in the Fund by the amount of the distribution. Shareholders
purchasing shares shortly before the record date of any distribution may thus
pay the full price for the shares and then effectively receive a portion of the
purchase price back as a taxable distribution.
In general, any gain or loss realized upon a taxable disposition of shares of
the Fund by a shareholder that holds such shares as a capital asset will be
treated as a long-term capital gain or loss if the shares have been held for
more than twelve months and otherwise as a short-term capital gain or loss.
However, any loss realized upon a disposition of shares in the Fund held for six
months or less will be treated as a long-term capital loss to the extent of any
distributions of net capital gain made with respect to those shares. Any loss
realized upon a disposition of shares may also be disallowed under rules
relating to wash sales. Gain may be increased (or loss reduced) upon a
redemption of Class A shares of the Fund within 90 days after their purchase
followed by any purchase without payment of an additional sales charge
(including purchases by exchange or by reinvestment) of Class A shares of the
Fund or of another MFS Fund (or any other shares of an MFS Fund generally sold
subject to a sales charge).
The Fund's current dividend and accounting policies will affect the amount,
timing, and character of distributions to shareholders, and may, under certain
circumstances, make an economic return of capital taxable to shareholders. Any
investment in zero coupon securities, deferred interest bonds, payment-in- kind
bonds, certain stripped securities, and certain securities purchased at a market
discount will cause the Fund to recognize income prior to the receipt of cash
payments with respect to those securities. In order to distribute this income
and avoid a tax on the Fund, the Fund may be required to liquidate portfolio
securities that it might otherwise have continued to hold, potentially resulting
in additional taxable gain or loss to the Fund. An investment in residual
interests of a CMO that has elected to be treated as a real estate mortgage
investment conduit, or "REMIC", can create complex tax problems, especially if
the Fund has state or local governments or other tax-exempt organizations as
shareholders.
The Fund's transactions in options, Futures Contracts and Forward Contracts will
be subject to special tax rules that may affect the amount, timing and character
of Fund income and distributions to shareholders. For example, certain positions
held by the Fund on the last business day of each taxable year will be marked to
market (i.e., treated as if closed out) on that day, and any gain or loss
associated with the positions will be treated as 60% long-term and 40%
short-term capital gain or loss. Certain positions held by the Fund that
substantially diminish its risk of loss with respect to other positions in its
portfolio may constitute "straddles," and may be subject to special tax rules
that would cause deferral of Fund losses, adjustments in the holding periods of
Fund securities, and conversion of short-term into long-term capital losses.
Certain tax elections exist for straddles that may alter the effects of these
rules. The Fund will limit its activities in options, Futures Contracts, Forward
Contracts, and swaps and related transactions to the extent necessary to meet
the requirements of Subchapter M of the Code.
Special tax considerations apply with respect to foreign investments of the
Fund. Foreign exchange gains and losses realized by the Fund will generally be
treated as ordinary income and losses. The holding of foreign currencies for
nonhedging purposes and investment by the Fund in certain "passive foreign
investment companies" may be limited in order to avoid a tax on the Fund.
Investment income received by the Fund from foreign securities may be subject to
foreign income taxes withheld at the source; the Fund does not expect to be able
to pass through to shareholders foreign tax credits with respect to such foreign
taxes. The United States has entered into tax treaties with many foreign
countries that may entitle the Fund to a reduced rate of tax or an exemption
from tax on such income; the Fund intends to qualify for treaty reduced rates
where available. It is not possible, however, to determine the Fund's effective
rate of foreign tax in advance since the amounts of the Fund's assets to be
invested within various countries are not known.
<PAGE> 91
Dividends and certain other payments to persons who are not citizens or
residents of the United States or U.S. entities ("Non-U.S. Persons") are
generally subject to U.S. tax withholding at the rate of 30%. The Fund intends
to withhold U.S. federal income tax at the rate of 30% on taxable dividends and
other payments to Non-U.S. Persons that are subject to withholding, regardless
of whether a lower rate may be permitted under an applicable treaty. Any amounts
overwithheld may be recovered by such persons by filing a claim for refund with
the U.S. Internal Revenue Service within the time period appropriate to such
claims. Distributions received from the Fund by Non-U.S. Persons may also be
subject to tax under the laws of their own jurisdictions. The Fund is also
required in certain circumstances to apply backup withholding at the rate of 31%
on taxable dividends and redemption proceeds paid to any shareholder (including
a non-U.S. Person) who does not furnish to the Fund certain information and
certifications or who is otherwise subject to backup withholding. Backup
withholding will not, however, be applied to payments that have been subject to
30% withholding.
As long as it qualifies as a regulated investment company under the Code, the
Fund will not be required to pay Massachusetts income or excise taxes.
Distributions of the Fund that are derived from interest on obligations of the
U.S. Government and certain of its agencies and instrumentalities (but generally
not from capital gains realized upon the disposition of such obligations) may be
exempt from state and local taxes. The Fund intends to advise shareholders of
the extent, if any, to which its distributions consist of such interest.
Shareholders are urged to consult their tax advisers regarding the possible
exclusion of such portion of their dividends for state and local income tax
purposes as well as regarding the tax consequences of an investment in the Fund.
7. DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class A, Class B and Class C
shares (the "Distribution Plan") pursuant to Section 12(b) of the 1940 Act and
Rule 12b-1 thereunder (the "Rule") after having concluded that there is a
reasonable likelihood that the Distribution Plan would benefit the Fund and each
respective class of shareholders. The provisions of the Distribution Plan are
severable with respect to each class of shares offered by the Fund. The
Distribution Plan is designed to promote sales, thereby increasing the net
assets of the Fund. Such an increase may reduce the Fund's expense ratio to the
extent the Fund's fixed costs are spread over a larger net asset base. Also, an
increase in net assets may lessen the adverse effects that could result were the
Fund required to liquidate portfolio securities to meet redemptions. There is,
however, no assurance that the net assets of the Fund will increase or that the
other benefits referred to above will be realized.
The Distribution Plan is described in the Prospectus under the caption
"Distribution Plan," which is incorporated herein by reference. The following
information supplements this Prospectus discussion.
SERVICE FEES: With respect to Class A Shares, no service fees will be paid: (i)
to any dealer who is the holder or dealer of record for investors who own Class
A shares having an aggregate net asset value less than $750,000, or such other
amount as may be determined from time to time by MFD (MFD, however, may waive
this minimum amount requirement from time to time); or (ii) to any insurance
company which has entered into an agreement with the Fund and MFD that permits
such insurance company to purchase Class A shares from the Fund at their net
asset value in connection with annuity agreements issued in connection with the
insurance company's separate accounts. Dealers may from time to time be required
to meet certain other criteria in order to receive service fees.
With respect to Class B Shares, except in the case of the first year service
fee, no service fees will be paid to any securities dealer who is the holder or
dealer of record for investors who own Class B shares having an aggregate net
asset value of less than $750,000 or such other amount as may be determined by
MFD from time to time. MFD, however, may waive this minimum amount requirement
from time to time. Dealers may from time to time be required to meet certain
other criteria in order to receive service fees.
MFD or its affiliates shall be entitled to receive any service fee payable under
the Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by MFD or its affiliates
for shareholder accounts.
<PAGE> 92
DISTRIBUTION FEES: The purpose of distribution payments to MFD under the
Distribution Plans is to compensate MFD for its distribution services to the
Fund. MFD pays commissions to dealers as well as expenses of printing
prospectuses and reports used for sales purposes, expenses with respect to the
preparation and printing of sales literature and other distribution related
expenses, including, without limitation, the cost necessary to provide
distribution-related services, or personnel, travel, office expenses and
equipment.
<TABLE>
DISTRIBUTION AND SERVICE FEES PAID DURING THE FUND'S LAST FISCAL YEAR: During
the fiscal year ended October 31, 1996, the Fund paid the following Distribution
Plan expenses:
<CAPTION>
AMOUNT OF AMOUNT OF AMOUNT OF
DISTRIBUTION DISTRIBUTION DISTRIBUTION
AND SERVICE AND SERVICE AND SERVICE
FEES PAID FEES RETAINED FEES RECEIVED
CLASSES OF SHARES BY FUND BY MFD BY DEALERS
<S> <C> <C> <C>
Class A Shares $166,446 $ 68,798 $97,648
Class B Shares $168,585 $129,457 $39,128
Class C Shares $ 40,187 $ 82 $40,105
</TABLE>
GENERAL: The Distribution Plan will remain in effect until August 1, 1997, and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by vote of both the Trustees and a majority of the
Trustees who are not "interested persons" or financially interested parties of
such Plan ("Distribution Plan Qualified Trustees"). The Distribution Plan also
requires that the Fund and MFD each shall provide the Trustees, and the Trustees
shall review, at least quarterly, a written report of the amounts expended (and
purposes therefor) under such Plan. The Distribution Plan may be terminated at
any time by vote of a majority of the Distribution Plan Qualified Trustees or by
vote of the holders of a majority of the respective class of the Fund's shares
(as defined in "Investment Restrictions"). All agreements relating to the
Distributions Plan entered into between the Fund or MFD and other organizations
must be approved by the Board of Trustees, including a majority of the
Distribution Plan Qualified Trustees. Agreements under the Distribution Plan
must be in writing, will be terminated automatically if assigned, and may be
terminated at any time without payment of any penalty, by vote of a majority of
the Distribution Plan Qualified Trustees or by vote of the holders of a majority
of the respective class of the Fund's shares. The Distribution Plan may not be
amended to increase materially the amount of permitted distribution expenses
without the approval of a majority of the respective class of the Fund's shares
(as defined in "Investment Restrictions") or may not be materially amended in
any case without a vote of the Trustees and a majority of the Distribution Plan
Qualified Trustees. The selection and nomination of Distribution Plan Qualified
Trustees shall be committed to the discretion of the non-interested Trustees
then in office. No Trustee who is not an "interested person" has any financial
interest in the Distribution Plan or in any related agreement.
8. DETERMINATION OF NET ASSET VALUE AND PERFORMANCE
NET ASSET VALUE: The net asset value per share of each class of the Fund is
determined each day during which the Exchange is open for trading. (As of the
date of this SAI, the Exchange is open for trading every weekday except for the
following holidays (or the days on which they are observed): New Year's Day,
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
<PAGE> 93
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 in its
capacity as the Fund's distributor, or its agent, the shareholder servicing
agent, prior to the close of that business day.
PERFORMANCE INFORMATION
TOTAL RATE OF RETURN: The Fund will calculate its total rate of return for each
class of shares for certain periods by determining the average annual compounded
rates of return over those periods that would cause an investment of $1,000
(made with all distributions reinvested and reflecting the CDSC or the maximum
public offering price) to reach the value of that investment at the end of the
periods. The Fund may also calculate (i) a total rate of return, which is not
reduced by the CDSC (5% maximum for Class B shares purchased on and after
January 1, 1993, but before September 1, 1993 and 4% maximum for Class B shares
and 1% maximum for Class C shares purchased after April 1, 1996) and therefore
may result in a higher rate of return, (ii) a total rate of return assuming an
initial account value of $1,000, which will result in a higher rate of return
since the value of the initial account will not be reduced by the sales charge
(4.75% maximum for Class A shares) and/or (iii) total rates of return which
represent aggregate performance over a period or year-by-year performance, and
which may or may not reflect the effect of the maximum or other sales charge or
CDSC.
The Fund offers multiple classes of shares which were initially offered for sale
to the public on different dates. The calculation of total rate of return for a
class of shares which initially was offered for sale to the public subsequent to
another class of shares of the Fund is based both on (i) the performance of the
Fund's newer class from the date it initially was offered for sale to the public
and (ii) the performance of the Fund's oldest class from the date it initially
was offered for sale to the public up to the date that the newer class initially
was offered for sale to the public.
As discussed in the Prospectus, the sales charges, expenses and expense ratios,
and therefore the performance, of the Fund's classes of shares differ. In
calculating total rate of return for a newer class of shares in accordance with
certain formulas required by the SEC, the performance will be adjusted to take
into account the fact that the newer class is subject to a different
<PAGE> 94
sales charge than the oldest class (e.g., if the newer class is Class A shares,
the total rate of return quoted will reflect the deduction of the initial sales
charge applicable to Class A shares; if the newer class is Class B shares, the
total rate of return quoted will reflect the deduction of the CDSC applicable to
Class B shares). However, the performance will not be adjusted to take into
account the fact that the newer class of shares bears different class specific
expenses than the oldest shares (e.g., Rule 12b-1 fees). Therefore, the total
rate of return quoted for a newer class of shares will differ from the return
that would be quoted had the newer class of shares been outstanding for the
entire period over which the calculation is based (i.e., the total rate of
return quoted for the newer class will be higher than the return that would have
been quoted had the newer class of shares been outstanding for the entire period
over which the calculation is based if the class specific expenses for the newer
class are higher than the class specific expenses of the oldest class, and the
total rate of return quoted for the newer class will be lower than the return
that would be quoted had the newer class of shares been outstanding for this
entire period if the class specific expenses for the newer class are lower than
the class specific expenses of the oldest class).
Total rate of return quotations for each class are presented in Appendix A
attached hereto under the heading "Performance Quotations."
PERFORMANCE RESULTS: The performance results for Class A shares presented in
Appendix A attached hereto under the heading "Performance Results," assume an
initial investment of $10,000 in Class A shares, and cover the period from the
commencement of investment operations, October 29, 1987, to December 31, 1996.
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).
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 and Class C shares.
Yield quotations for each class of shares are presented in Appendix A attached
hereto under the heading "Performance Quotations."
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
<PAGE> 95
gains and return of invested capital, and is calculated over a different period
of time. The Fund's current distribution rate calculation for Class A shares
assumes a maximum sales charge of 4.75%. The Fund's current distribution rate
calculation for Class B and Class C shares assumes no CDSC is paid. Current
distribution rate quotations for each class of shares are presented in Appendix
A attached hereto.
GENERAL: From time to time the Fund may, as appropriate, quote Fund rankings or
reprint all or a portion of evaluations of fund performance and operations
appearing in various independent publications, including but not limited to the
following: Money, Fortune, U.S. News and World Report, Kiplinger's Personal
Finance, The Wall Street Journal, Barron's, Investors Business Daily, Newsweek,
Financial World, Financial Planning, Investment Advisor, USA Today, Pensions and
Investments, SmartMoney, Forbes, Global Finance, Registered Representative,
Institutional Investor, the Investment Company Institute, Johnson's Charts,
Morningstar, Lipper Analytical Services, Inc., CDA Wiesenberger, Shearson Lehman
and Salomon Bros. Indices, Ibbotson, Business Week, Lowry Associates, Media
General, Investment Company Data, The New York Times, Your Money, Strangers
Investment Advisor, Financial Planning on Wall Street, Standard and Poor's,
Individual Investor, The 100 Best Mutual Funds You Can Buy, by Gordon K.
Williamson, Consumer Price Index, and Sanford C. Bernstein & Co. Fund
performance may also be compared to the performance of other mutual funds
tracked by financial or business publications or periodicals. The Fund may also
quote evaluations mentioned in independent radio or television broadcasts and
use charts and graphs to illustrate the past performance of various indices such
as those mentioned above and illustrations using hypothetical rates of return to
illustrate the effects of compounding and tax-deferral. The Fund may advertise
examples of the effects of periodic investment plans, including the principle of
dollar cost averaging. In such a program, an investor invests a fixed dollar
amount in a fund at periodic intervals, thereby purchasing fewer shares when
prices are high and more shares when prices are low. While such a strategy does
not assure a profit or guard against a loss in a declining market, the
investor's average cost per share can be lower than if fixed numbers of shares
are purchased at the same intervals.
From time to time, the Fund may discuss or quote its current portfolio manager
as well as other investment personnel, including such persons' views on: the
economy; securities markets; portfolio securities and their issuers; investment
philosophies, strategies, techniques and criteria used in the selection of
securities to be purchased or sold for the Fund; the Fund's portfolio holdings;
the investment research and analysis process; the formulation and evaluation of
investment recommendations; and the assessment and evaluation of credit,
interest rate, market and economic risks and similar related matters.
From time to time the Fund may also discuss or quote the views of its
distributor, its investment adviser and other financial planning, legal, tax,
accounting, insurance, estate planning and other professionals, or from surveys,
regarding individual and family financial planning. Such views may include
information regarding: retirement planning; tax management strategies; estate
planning; general investment techniques (e.g., asset allocation and disciplined
saving and investing); business succession; ideas and information provided
through the MFS Heritage Planningsm program, an inter-generational financial
planning assistance program; issues with respect to insurance (e.g., disability
and life insurance and Medicare supplemental insurance); issues regarding
financial and health care management for elderly family members; and other
similar or related matters.
MFS FIRSTS: MFS has a long history of innovations.
-- 1924 -- Massachusetts Investors Trust is established as the first open-end
mutual fund in America.
-- 1924 -- Massachusetts Investors Trust is the first mutual fund to make
full public disclosure of its operations in shareholder reports.
-- 1932 -- One of the first internal research departments is established to
provide in-house analytical capability for an investment management firm.
-- 1933 -- Massachusetts Investors Trust is the first mutual fund to register
under the Securities Act of 1933.
<PAGE> 96
-- 1936 -- Massachusetts Investors Trust is the first mutual fund to allow
shareholders to take capital gain distributions either in additional
shares or in cash.
-- 1976 -- MFS(R) Municipal Bond Fund is among the first municipal bond funds
established.
-- 1979 -- Spectrum becomes the first combination fixed/variable annuity with
no initial sales charge.
-- 1981 -- MFS(R) World Governments Fund is established as America's first
globally diversified fixed-income mutual fund.
-- 1984 -- MFS(R) Municipal High Income Fund is the first open-end mutual
fund to seek high tax-free income from lower-rated municipal securities.
-- 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual fund to
target and shift investments among industry sectors for shareholders.
-- 1986 -- MFS(R) Municipal Income Trust is the first closed-end, high-yield
municipal bond fund traded on the New York Stock Exchange.
-- 1987 -- MFS(R) Multimarket Income Trust is the first closed-end,
multimarket high income fund listed on the New York Stock Exchange.
-- 1989 -- MFS(R) Regatta becomes America's first non-qualified market-
value-adjusted fixed/variable annuity.
-- 1990 -- MFS(R) World Total Return Fund is the first global balanced fund.
-- 1993 -- MFS(R) World Growth Fund is the first global emerging markerts
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 four classes of shares of each series of the Trust, Class A shares,
Class B shares, Class C shares and Class I shares. Each share of a class of the
Fund represents an equal proportionate interest in the assets of the Fund
allocable to that class. Upon liquidation of the Fund, shareholders of each
class of the Fund are entitled to share pro rata in the Fund's net assets
allocable to such class available for distribution to shareholders. The Fund
reserves the right to create and issue a number of series and additional classes
of shares, in which case the shares of each class of a series would participate
equally in the earnings, dividends and assets allocable to that class of the
particular series.
Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to meetings of shareholders.
Although Trustees are not elected annually by the shareholders, the Declaration
of Trust provides that a Trustee may be removed from office at a meeting of
shareholders by a vote of two-thirds of the outstanding shares of the Fund. A
meeting of shareholders will be called upon the request of shareholders of
record holding in the aggregate not less than 10% of the outstanding voting
securities of the Fund. No material amendment may be made to the Trust's
Declaration of Trust without the affirmative vote of a majority of the Fund's
outstanding shares (as defined in "Investment Restrictions"). The Fund may be
terminated (i) upon the merger or consolidation of the Fund with another
organization or upon the sale of all or substantially all of its
<PAGE> 97
assets, if approved by the vote of the holders of two-thirds of the Fund's
outstanding shares, except that if the Trustees recommend such merger,
consolidation or sale, the approval by vote of the holders of a majority of the
Fund's outstanding shares will be sufficient, or (ii) upon liquidation and
distribution of the assets of the Fund, if approved by the vote of the holders
of two-thirds of its outstanding shares of the Fund, or (iii) by the Trustees by
written notice to its shareholders. If not so terminated, the Fund will continue
indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Fund and provides for indemnification
and reimbursement of expenses out of Fund property for any shareholder held
personally liable for the obligations of the Fund. The Declaration of Trust also
provides that the Trust shall maintain appropriate insurance (for example,
fidelity bonding and errors and omissions insurance) for the protection of the
Fund and its shareholders and the Trustees, officers, employees and agents of
the Fund covering possible tort and other liabilities. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which both inadequate insurance existed and the Fund
itself was unable to meet its obligations.
The Declaration of Trust further provides that obligations of the Fund are not
binding upon the Trustees individually but only upon the property of the Fund
and that the Trustees will not be liable for any action or failure to act, but
nothing in the Declaration of Trust protects a Trustee against any liability to
which he would otherwise be subject by reason of his willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties involved in the
conduct of his office.
10. INDEPENDENT AUDITORS AND FINANCIAL
STATEMENTS
Ernst & Young LLP are the Fund's independent auditors, providing audit services,
tax services, and assistance and consultation with respect to the preparation of
filings with the SEC.
The Portfolio of Investments and Statement of Assets and Liabilities at October
31, 1996, the Statement of Operations for the year ended October 31, 1996, the
Statement of Changes in Net Assets for each of the two years in the period ended
October 31, 1996, the Notes to Financial Statements and the Report of
Independent Auditors, each of which is included in the Annual Report to
Shareholders of the Fund, are incorporated by reference into this SAI in
reliance upon the report of Ernst & Young LLP, independent auditors, given upon
their authority, as experts in accounting and auditing. A copy of the Annual
Report accompanies this SAI.
<PAGE> 98
APPENDIX A
PERFORMANCE INFORMATION
The performance results and quotations below should not be considered as
representative of the performance of the Fund in the future since the net asset
value and public offering price of shares of the Fund will vary. See
"Determination of Net Asset Value and Performance" in the SAI.
<TABLE>
<CAPTION>
MFS STRATEGIC INCOME FUND -- CLASS A
- --------------------------------------------------------------------------------------------------------------------
VALUE OF VALUE OF VALUE OF
INITIAL $10,000 CAP. GAIN REINVESTED TOTAL
DATE INVESTMENT DISTRIBUTIONS DIVIDENDS VALUE
------ ------- ------------- --------- -----
<C> <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
12/31/95 8,258 30 11,483 19,771
12/31/96 8,340 31 13,365 21,736
<FN>
- ------------
*From commencement of investment operations, October 29, 1987.
Explanatory Notes: The results in the table assume that income dividends and
capital gain distributions were invested in additional shares. The results
also assume that the initial investment in Class A shares was reduced by the
current maximum applicable sales charge. No adjustment has been made for
income taxes, if any, payable by shareholders.
</TABLE>
PERFORMANCE QUOTATIONS
All performance quotations are for the fiscal year ended October 31, 1996.
<TABLE>
<CAPTION>
ACTUAL
AVERAGE ANNUAL TOTAL RETURNS* 30-DAY 30-DAY
10 YEAR YIELD YIELD
OR (INCLUDING (WITHOUT CURRENT
LIFE OF ANY ANY DISTRIBUTION
1 YEAR 5 YEAR FUND WAIVERS) WAIVERS) RATE
------ ------ ------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Class A Shares with sales charge ........... 5.21% 7.49% 8.72%(1) 7.73% 6.03% 6.93%
Class A Shares without sales charge ........ 10.42% 8.54% 9.31%(1) N/A N/A N/A
Class B Shares with CDSC ................... 5.68% 7.74%(2) 9.03%(2) N/A N/A N/A
Class B Shares without CDSC ................ 9.68% 8.04%(2) 9.03%(2) 7.40% 5.62% 6.73%
Class C Shares with CDSC ................... 8.80% 8.16%(3) 9.10%(3) N/A N/A N/A
Class C Shares without CDSC ................ 9.80% 8.16%(3) 9.10%(3) 7.44% 5.66% 6.71%
<FN>
(1) From the initial public offering date of Class A shares on October 29, 1987.
(2) Class B share performance includes the performance of the Fund's Class A
shares for periods prior to the commencement of offering of Class B shares
on September 7, 1993. Sales charges, expenses and expense ratios, and
therefore performance, for Class A and Class B shares differ. Class B share
performance has been adjusted to reflect that Class B shares generally are
subject to CDSC (unless the performance quotation does not
</TABLE>
<PAGE> 99
give effect to the CDSC) whereas Class A shares generally are subject to an
initial sales charge. Class B share performance has not, however, been
adjusted to reflect differences in operating expenses (e.g., Rule 12b-1
fees), which generally are lower for Class A shares.
(3) Class C share performance includes the performance of the Fund's Class A
shares for periods prior to the commencement of offering of Class C shares
on September 1, 1994. Sales charges, expenses and expense ratios, and
therefore performance, for Class A and Class B shares differ. Class C shares
performance has been adjusted to reflect that Class C shares generally are
subject to a CDSC (unless the performance quotation does not give effect to
the CDSC) whereas Class A shares generally are subject to an initial sales
charge. Class C share performance has not, however, been adjusted to reflect
differences in operating expenses (e.g., Rule 12b-1 fees), which generally
are lower for Class A shares.
* Total rate of return figures would have been lower if fee waivers were not
in place.
<PAGE> 100
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
MSI-13-3/97/500 34/234/334
[MFS LOGO](SM)
INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND(SM)
<PAGE>
[Logo]
INVESTMENT MANAGEMENT
ANNUAL REPORT
FOR YEAR ENDED
OCTOBER 31, 1996
MFS(R) STRATEGIC INCOME FUND
[Graphic Omitted]
<PAGE>
TABLE OF CONTENTS
Letter from the Chairman ................................................... 1
A Discussion with the Portfolio Manager .................................... 3
Portfolio Manager's Profile ................................................ 5
Portfolio Concentration .................................................... 5
Fund Facts ................................................................. 6
Performance Summary ........................................................ 6
Portfolio of Investments ................................................... 9
Financial Statements .......................................................15
Notes to Financial Statements ..............................................22
Independent Auditors' Report .............................................. 32
Trustees and Officers ......................................................33
HIGHLIGHTS
* FOR THE YEAR ENDED OCTOBER 31, 1996, CLASS A SHARES OF THE FUND PROVIDED A
TOTAL RETURN AT NET ASSET VALUE OF 10.42%, CLASS B SHARES 9.68%, AND CLASS C
SHARES 9.80%.
* THE FUND'S PERFORMANCE WAS HELPED BY ITS ALLOCATION TO THE HIGHER-YIELDING
FIXED-INCOME MARKETS, INCLUDING CORPORATE AND EMERGING MARKETS, WHICH HAVE
BEEN THE BEST PERFORMERS IN THE FIXED-INCOME UNIVERSE.
* WE ARE SEEKING TO INCREASE THE FUND'S YIELD BY REDUCING ITS INTERNATIONAL
EXPOSURE TO MATURE COUNTRIES AND ITS POSITION IN THE U.S. GOVERNMENT
SECTOR, WHERE YIELD LEVELS IN GENERAL HAVE DROPPED, AND REPLACING THESE
SEGMENTS WITH MORE HIGH-YIELD U.S. CORPORATE BONDS, EMERGING MARKET DEBT,
AND SOME HIGHER-GRADE MORTGAGE-BACKED SECURITIES.
* THE FUND HAS A RELATIVELY HIGH WEIGHTING IN EMERGING MARKETS, WHICH WE
BELIEVE ARE CHEAP RELATIVE TO OTHER FIXED-INCOME MARKETS, AND WHERE OUR
LONG-TERM OUTLOOK FORESEES HIGHER GROWTH RATES COMPARED TO THOSE OF
DEVELOPED COUNTRIES. INVESTMENTS IN EMERGING MARKET SECURITIES MAY PROVIDE
SUPERIOR RETURNS BUT ALSO INVOLVE GREATER RISK.
<PAGE>
LETTER FROM THE CHAIRMAN
Dear Shareholders:
[Photo of A. Keith Brodkin]
As we enter the final months of 1996, the U.S. economy appears to have settled
into a pattern of moderate growth and inflation -- two factors that we think can
be important contributors to a favorable long-term investment climate. During
the first quarter of 1996, real (inflation-adjusted) economic growth was 2.3% on
an annualized basis, followed by a rate of 4.7% in the second quarter. However,
this unexpectedly high level was followed by a more moderate 2.2% pace during
the third quarter. Overall, real growth in gross domestic product has surpassed
our expectations this year, and we now expect that growth for all of 1996 could
exceed 2.5%. Although individual consumers appear to be carrying an excessive
debt load, the consumer sector itself, which represents two-thirds of the
economy, continues to support the automobile and housing markets. Consumer
spending has also been positively impacted by widespread job growth and, more
recently, rising wages. However, recent statistics appear to show a slowdown in
consumer spending. This is particularly true when considering overall retail
sales, which have been flat for several months. Furthermore, the economies of
Europe and Japan continue to be in the doldrums, weakening U.S. export markets
while subduing the capital spending plans of American corporations. Thus, while
economic growth should continue, we expect some slackening toward the end of the
year.
In the bond markets, persistent signs of economic weakness led to decreases in
short-term interest rates by the Federal Reserve Board in late 1995 and early
1996. Should signs of more rapid economic growth and, particularly, of higher
inflation resurface, we would expect the Fed to maintain its anti- inflationary
stance. In the beginning of the year, bond markets traded in a narrow range as
investors shifted between concern for the lack of a budget resolution in
Washington and hope that sluggish economic reports and low inflation might lead
to lower interest rates. Later, fixed-income markets began reacting to
conflicting signals regarding the economy's strength with more volatile trading
patterns marked by an upward bias in interest rates. Interest rates may move
even higher over the coming months, but we believe the current rise in bond
yields is reaching a point where fixed-income markets are equitably valued.
Finally, as you may notice, this report to shareholders incorporates a number
of changes which we hope you will find informative and useful. Following a
discussion with the Portfolio Manager, we have added new information on the
Fund's holdings, including charts illustrating the portfolio's concentration in
the types of investments that meet its criteria. Near the back of the report,
telephone numbers and addresses are listed if you would like to contact MFS.
We appreciate your support and welcome any questions or comments you may have.
Respectfully,
/s/ A. Keith Brodkin
------------------------------
A. Keith Brodkin
Chairman and President
November 12, 1996
<PAGE>
A DISCUSSION WITH THE PORTFOLIO MANAGER
[Photo of James T. Swanson]
In a mostly favorable global environment for financial assets, with inflation on
a downward trend in Europe, Asia, and North America and interest rates in most
countries declining or stable, Class A shares of the Fund provided a total
return of 10.42% for the year ended October 31, 1996, Class B shares 9.68%, and
Class C shares 9.80%. These returns assume the reinvestment of distributions but
exclude the effects of any sales charges.
Q. WHAT DO YOU SEE AS SOME OF THE REASONS FOR THIS PERFORMANCE, JIM?
A. The Fund's performance has been strong because of our allocation of assets
to the higher-yielding fixed-income markets, including corporate and emerging
markets, which have been the best performers in the fixed-income universe.
Also, our use of five or more asset classes has helped us reduce the
portfolio's volatility.
Q. COULD YOU DESCRIBE THE INVESTMENT ENVIRONMENT YOU FACED OVER THE PAST YEAR,
PARTICULARLY AS IT RELATES TO THE FUND?
A. As yields fell throughout the world on news of declining inflation, it became
difficult to keep the Fund's distribution level high. Even more difficult was
interpreting the news on the U.S. economy which, despite being largely positive,
has defied conventional thinking on business cycle patterns, wherein one would
have expected by now to have seen an upsurge in inflation, the biggest risk to
bonds and other financial assets.
Q. WHAT IS YOUR VIEW ON THE U.S. INTEREST RATE ENVIRONMENT, AND HAVE YOU MADE
ANY CHANGES IN THE FUND TO REFLECT THAT OUTLOOK?
A. We are concerned about interest rates in the United States, which we think
are vulnerable to upward pressure due to tight labor markets and rising wages.
Accordingly, we are keeping the Fund's U.S. government portion near its all-
time low (10% to 15% of assets) and our duration in the neutral to short
range.
Q. WHAT CAN YOU TELL US ABOUT ANY OTHER CHANGES IN THE FUND'S MANAGEMENT?
A. Our near-term plan is to reduce our international exposure to mature
countries (following a period of good gains from that sector) and our position
in the U.S. government sector because these markets are more at risk to faster
world growth and because their yield levels, in general, have dropped. We will
replace these segments with more high-yield U.S. corporate bonds, slightly more
emerging market debt, and a small portion of higher-grade mortgage-backed
securities.
Q. WHY ARE YOU DOING THIS?
A. Going forward, we see lower volatility in the fixed-income markets in general
as inflation rates and interest rates converge around the world. Given that
backdrop, we see the "spread markets," that is, the higher-yielding markets,
offering the better risk/reward potential because of our belief that their
higher coupon streams, reinvested, will produce higher returns than
lower-yielding markets that drift sideways. Of course, the key to successful
implementation of this strategy is thorough research, to help us avoid credit
mistakes.
Q. HOW ABOUT THE INTERNATIONAL BOND MARKET? WHAT PARTS OF THE WORLD LOOK MOST
FAVORABLE TO YOU NOW, AND HAVE YOU MADE ANY MOVES TOWARD THOSE AREAS?
A. International sovereigns have done well, particularly in Europe. Prices in
high-yielding countries such as Spain and Italy have risen as the European union
has begun to look more certain. However, much of the relative value from that
trade has already occurred, and we see better value in other markets. At the
same time, emerging markets still look exciting to us.
Q. WHAT AREAS OF THE WORLD ARE YOU AVOIDING OR UNDERWEIGHTING, AND WHY?
A. We are avoiding much of Asia because we feel yield spreads there suggest
high valuation levels.
Q. TELL US ABOUT THE EMERGING MARKETS. THE FUND HAS BEEN AT OR NEAR ITS
MAXIMUM WEIGHTING IN THESE MARKETS FOR SOME TIME, SO YOU MUST LIKE SOMETHING
ABOUT THEM. WHAT IS IT?
A. First, we believe these markets are cheap relative to other fixed-income
markets. Second, our long-term outlook foresees higher growth rates from these
countries than from the developed countries. Finally, the end of centrally
planned economies has rejuvenated many stagnant economies as their governments
have shown the political will to move to free-market economic systems. We
think all of these developments are creating a favorable environment for these
countries' bonds.
Respectfully,
/s/ James T. Swanson
-------------------------------
James T. Swanson
Portfolio Manager
<PAGE>
PORTFOLIO MANAGER'S PROFILE
JAMES SWANSON IS A SENIOR VICE PRESIDENT OF MASSACHUSETTS FINANCIAL SERVICES
(MFS). HE IS PORTFOLIO MANAGER OF MFS WORLD ASSET ALLOCATION FUND, MFS
STRATEGIC INCOME FUND, MERIDIAN CHARTER INCOME FUND, AND TWO CLOSED-END FUNDS
- MFS CHARTER INCOME TRUST AND MFS MULTIMARKET INCOME TRUST. MR. SWANSON
JOINED MFS IN 1985 AS A VICE PRESIDENT - INVESTMENTS AND WAS NAMED A SENIOR
VICE PRESIDENT IN 1989. HE WAS NAMED PORTFOLIO MANAGER OF MFS STRATEGIC
INCOME FUND IN 1991, OF MFS CHARTER INCOME TRUST AND MFS MULTIMARKET INCOME
TRUST IN 1992, AND OF MFS WORLD ASSET ALLOCATION FUND UPON ITS INCEPTION IN
JULY 1994. HE IS A GRADUATE OF COLGATE UNIVERSITY AND THE HARVARD UNIVERSITY
GRADUATE SCHOOL OF BUSINESS ADMINISTRATION.
PORTFOLIO CONCENTRATION AS OF OCTOBER 31, 1996
LARGEST SECTORS
Corporates 65.5%
Emerging Markets 23%
Foreign Governments 7.5%
U.S. Treasuries 3%
Cash 1%
TAX FORM SUMMARY
IN JANUARY 1997, SHAREHOLDERS WILL BE MAILED A TAX FORM SUMMARY
REPORTING THE FEDERAL TAX STATUS OF ALL DISTRIBUTIONS PAID DURING THE
CALENDAR YEAR 1996.
<PAGE>
FUND FACTS
STRATEGY: THE FUND'S INVESTMENT OBJECTIVE IS TO PROVIDE HIGH
CURRENT INCOME BY INVESTING IN FIXED-INCOME SECURITIES.
COMMENCEMENT OF
INVESTMENT OPERATIONS: OCTOBER 29, 1987
SIZE: $80.3 MILLION NET ASSETS AS OF OCTOBER 31, 1996
PERFORMANCE SUMMARY
The information below and on the following page illustrates the historical
performance of MFS Strategic Income Fund Class A shares in comparison to various
market indicators. Classs A share results reflect the deduction of the 4.75%
maximum sales charge; benchmark comparisons are unmanaged and do not reflect any
fees or expenses. You cannot invest in an index. All results reflect the
reinvestment of all dividends and capital gains.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the Period from November 1, 1987 to October 31, 1996)
MFS Strategic
Income Fund Consumer Price S&P 500 Lehman Brothers
Class A Index -- U.S. Composite Govt./Corp.
------------- -------------- --------- ---------------
11/87 9524.00 10000.0 10000.0 10000.0
10/89 11754.0 10893.0 14499.0 12406.0
10/91 14317.0 11917.0 17991.0 15099.0
10/93 17537.0 12637.0 22610.0 18962.0
10/95 19532.0 13331.0 29644.0 21005.0
10/96 21568.0 13732.0 36747.0 22137.0
<PAGE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
Life
1 Year 3 Years 5 Years of Fund#
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MFS Strategic Income Fund (Class A)
including 4.75% sales charge + 5.21% + 5.40% + 7.49% + 8.72%
- ------------------------------------------------------------------------------------------------------------------------------
MFS Strategic Income Fund (Class A) at net asset value +10.42% + 7.14% + 8.54% + 9.31%
- ------------------------------------------------------------------------------------------------------------------------------
MFS Strategic Income Fund (Class B) with CDSC + 5.68% + 5.49% + 7.74% + 9.03%
- ------------------------------------------------------------------------------------------------------------------------------
MFS Strategic Income Fund (Class B) without CDSC + 9.68% + 6.36% + 8.03% + 9.03%
- ------------------------------------------------------------------------------------------------------------------------------
MFS Strategic Income Fund (Class C) with CDSC + 8.80% + 6.52% + 8.16% + 9.10%
- ------------------------------------------------------------------------------------------------------------------------------
MFS Strategic Income Fund (Class C) without CDSC + 9.80% + 6.52% + 8.16% + 9.10%
- ------------------------------------------------------------------------------------------------------------------------------
Average flexible income fund** +12.45% + 6.05% + 9.69% + 8.82%
- ------------------------------------------------------------------------------------------------------------------------------
Lehman Brothers Government Corporate Bond Index+ + 5.37% + 5.30% + 7.95% + 8.47%
- ------------------------------------------------------------------------------------------------------------------------------
Salomon Brothers World Government Bond Index++ + 5.36% + 7.94% + 9.91% +10.04%
- ------------------------------------------------------------------------------------------------------------------------------
Salomon Brothers Composite High-Yield Bond Index## + 5.46% + 6.03% + 9.53% + 9.78%
- ------------------------------------------------------------------------------------------------------------------------------
Standard & Poor's 500 Composite Index*** +23.89% +17.57% +15.47% +14.60%
- ------------------------------------------------------------------------------------------------------------------------------
Consumer Price Index* + 3.01% + 2.81% + 2.88% + 3.68%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
#For the period from the commencement of investment operations, October 29,
1987 to October 31, 1996.
*The Consumer Price Index is a popular measure of change in prices.
**Source: Lipper Analytical Services.
+The Lehman Brothers Government Corporate Bond Index is an unmanaged,
market-value-weighted index of U.S. Treasury and government agency
securities, excluding mortgage-backed securities, and
investment-grade debt obligations of domestic corporations.
++The Salomon Brothers World Government Bond Index is an unmanaged,
market-value-weighted index of straight-issue bonds from the complete
universes of 14 government sectors with remaining maturities of at least one
year.
##The Salomon Brothers Composite High-Yield Bond Index is an unmanaged,
market-value- weighted index of public, non-convertible cash pay and
deferred-interest U.S. corporate bonds with a remaining maturity of at least
seven years and a credit rating between "CCC" and "BB+."
***The Standard and Poor's 500 Composite Index is a popular, unmanaged index of
common stock performance.
Class A SEC results include the maximum 4.75% sales charge. Class B SEC results
reflect the applicable contingent deferred sales charge (CDSC), which declines
over six years as follows: 4%, 4%, 3%, 3%, 2%, 1%, 0%. See the prospectus for
details. Class C shares have no initial sales charge but, along with Class B
shares, have higher annual fees and expenses than Class A shares. Class C share
purchases made on or after April 1, 1996 will be subject to a 1% CDSC if
redeemed within 12 months of purchase.
Class B and Class C share performance includes the performance of the Fund's
Class A shares for periods prior to the commencement of offering of Class B
shares on September 7, 1993 and of Class C shares on September 1, 1994. Sales
charges and operating expenses for Class A, Class B, and Class C shares differ.
The Class A share performance, which is included within the Class B and Class C
share SEC performance, has been adjusted to reflect the CDSC generally
applicable to Class B and Class C shares rather than the initial sales charge
generally applicable to Class A shares. Class B and Class C share performance
has not been adjusted, however, to reflect differences in operating expenses
(e.g., Rule 12b-1 fees), which generally are lower for Class A shares.
All results are historical and, therefore, are not an indication of future
results. The principal value and income return of an investment in a mutual fund
will vary with changes in market conditions, and shares, when redeemed, may be
worth more or less than their original cost.
<PAGE>
PORTFOLIO OF INVESTMENTS -- October 31, 1996
Bonds - 83.0%
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
Foreign - U.S. Dollar Denominated - 19.0%
Banco Nacional de Commerce, 7.25s, 2004 $3,500 $ 2,931,250
Empresas ICA Sociedad S.A., 11.875s, 2001 2,500 2,582,813
Federal Republic of Brazil, 6.688s, 2001 14 13,104
Federal Republic of Brazil, 4.5s, 2014 2,753 1,886,096
Grupo Elektra S.A., 12.75s, 2001 1,500 1,571,250
Hidroelectrica Alicura, 8.375s, 1999## 500 486,250
United Mexican States, 6.398s, 2019 6,000 4,927,500
United Mexican States, 6.453s, 2019 1,000 821,250
-------------
$ 15,219,513
- -----------------------------------------------------------------------------
U.S. Bonds - 56.4%
Airlines - 1.0%
K & F Industries, Inc., 11.875s, 2003 $ 250 $ 270,000
K & F Industries, Inc., 10.375s, 2004 500 515,000
-------------
$ 785,000
- -----------------------------------------------------------------------------
Automotive - 0.6%
Harvard Industries, Inc., 12s, 2004 $ 500 $ 460,000
- -----------------------------------------------------------------------------
Building - 1.2%
Building Materials Corp., 0s, 2004 $ 900 $ 740,250
Nortek, Inc., 9.875s, 2004 250 248,750
-------------
$ 989,000
- -----------------------------------------------------------------------------
Cellular Telephones - 0.6%
Rogers Cantel, Inc., 9.375s, 2008 $ 500 $ 502,500
- -----------------------------------------------------------------------------
Chemicals - 1.4%
NL Industries, Inc., 11.75s, 2003 $ 250 $ 257,813
UCC Investors Holdings, Inc., 0s, 2005 1,000 875,000
-------------
$ 1,132,813
- -----------------------------------------------------------------------------
Consumer Goods and Services - 2.2%
Food Brands America, Inc., 10.75s, 2006 $ 750 $ 780,000
Ithaca Industries, Inc., 11.125s, 2002+ 100 59,000
Revlon, Inc., 10.5s, 2003 200 208,000
Sealy Corp., 9.5s, 2003 500 497,500
Westpoint Stevens, Inc., 9.375s, 2005 250 252,500
-------------
$ 1,797,000
- -----------------------------------------------------------------------------
Containers - 3.8%
Calmar, Inc., 11.5s, 2005 $ 250 $ 255,937
Gaylord Container Corp., 11.5s, 2001 500 531,250
Ivex Packaging Corp., 12.5s, 2002 100 107,500
Owens-Illinois, Inc., 11s, 2003 1,000 1,098,750
Stone Container Corp., 10.75s, 2002 1,000 1,050,000
-------------
$ 3,043,437
- -----------------------------------------------------------------------------
Defense Electronics - 0.7%
Alliant Techsystem, Inc., 11.75s, 2003 $ 500 $ 545,000
- -----------------------------------------------------------------------------
Entertainment - 0.4%
Marvel Holdings, Inc., 0s, 1998 $ 500 $ 210,000
United Artist Theater Circuit, Inc.,
11.5s, 2002 100 106,000
-------------
$ 316,000
- -----------------------------------------------------------------------------
Financial Institutions - 1.2%
First Nationwide Corp., 10.625s, 2003## $ 600 $ 630,000
Penncorp Financial Group, Inc., 9.25s, 2003 330 344,850
-------------
$ 974,850
- -----------------------------------------------------------------------------
Food and Beverage Products - 0.6%
Specialty Foods Corp., 10.25s, 2001 $ 500 $ 460,000
- -----------------------------------------------------------------------------
Forest and Paper Products - 0.6%
Fort Howard Corp., 9.25s, 2001 $ 500 $ 515,000
- -----------------------------------------------------------------------------
Machinery - 0.6%
AGCO Corp., 8.5s, 2006 $ 500 $ 505,000
- -----------------------------------------------------------------------------
Medical and Health Technology and Services - 1.3%
Beverly Enterprises, 9s, 2006 $ 460 $ 453,100
Tenet Healthcare Corp., 10.125s, 2005 500 548,750
-------------
$ 1,001,850
- -----------------------------------------------------------------------------
Metals and Minerals - 1.7%
Haynes International, Inc., 11.625s, 2004 $1,000 $ 1,040,000
Kaiser Aluminum & Chemical Corp., 9.875s, 2002 300 297,000
-------------
$ 1,337,000
- -----------------------------------------------------------------------------
Oil Services - 1.0%
Falcon Drilling, Inc., 8.875s, 2003 $ 500 $ 487,500
Ferrell Gas LP, 10s, 2001 200 206,000
Tuboscope Vetco International, Inc.,
10.75s, 2003 100 106,000
-------------
$ 799,500
- -----------------------------------------------------------------------------
Oils - 0.7%
Gulf Canada, 9.25s, 2004 $ 500 $ 518,750
- -----------------------------------------------------------------------------
Restaurants and Lodging - 0.6%
Red Roof Inns, Inc., 9.625s, 2003 $ 500 $ 487,500
- -----------------------------------------------------------------------------
Special Products and Services - 4.6%
Central Transport Rental Finance
Corp., 9.5s, 2003 $ 143 $ 132,249
IMO Industries, Inc., 11.75s, 2006 500 515,000
Interlake Corp., 12.125s, 2002 500 512,500
Mark IV Industries, Inc., 8.75s, 2003 500 512,500
Polymer Group, Inc., 12.25s, 2002 333 362,970
Synthetic Industries, Inc., 12.75s, 2002 1,000 1,085,000
Thermadyne Holdings Corp., 10.75s, 2003 500 515,000
-------------
$ 3,635,219
- -----------------------------------------------------------------------------
Steel - 0.6%
Commonwealth of Aluminum Corp.,
10.75s, 2006## $ 500 $ 507,500
- -----------------------------------------------------------------------------
Stores - 1.1%
Limited, Inc., 7.5s, 2023 $1,000 $ 907,500
- -----------------------------------------------------------------------------
Student Loan Revenue - 0.6%
Talley Manufacturing & Technology,
Inc., 10.75s, 2003 $ 500 $ 517,500
- -----------------------------------------------------------------------------
Supermarkets - 2.6%
Dominick's Finer Foods Co., 10.875s, 2005 $ 500 $ 551,875
Pathmark Stores, Inc., 9.625s, 2003 500 488,750
Ralph's Grocery Co., 10.45s, 2004 500 505,000
Smiths Food & Drug, 11.25s, 2007 500 540,000
-------------
$ 2,085,625
- -----------------------------------------------------------------------------
Telecommunications - 12.1%
American Radio Systems Corp., 9s, 2006 $ 500 $ 477,500
Bell Cablemedia PLC, 0s, 2005 250 181,250
Brooks Fiber Properties, Inc., 0s, 2006 500 292,500
Cablevision Industries Corp., 9.25s, 2008 100 105,855
Comcast Corp., 9.375s, 2005 500 497,500
Continental Cablevision, Inc., 8.3s, 2006 500 530,000
Diamond Cable Communications, 0s, 2005 250 164,375
Echostar Satellite Broadcasting
Corp., 0s, 2004 1,000 705,000
Falcon Holdings Group, Inc., 11s, 2003* 216 196,996
Grand Union Co., 12s, 2004 750 757,500
Intermedia Capital Partners, 11.25s, 2006## 75 75,000
Jones Intercable, Inc., 10.5s, 2008 500 527,500
MFS Communications, Inc., 0s, 2006 1,000 707,500
Marcus Cable Operating Co., 0s, 2004 500 383,750
Mobilemedia Communications, Inc., 1s, 2003 275 132,000
Panamsat Capital Corp., 0s, 2003 500 460,000
Pronet, Inc., 11.875s, 2005 200 184,000
Rogers Cablesystems, Inc., 10.125s, 2012 500 495,000
Teleport Communications Group, 0s, 2007 500 320,000
Total Access Communication Public,
8.375s, 2006## 1,000 1,005,000
Turner Broadcasting Systems, Inc.,
8.375s, 2013 1,000 1,019,310
Western Wireless Corp., 10.5s, 2007## 500 501,250
-------------
$ 9,718,786
- -----------------------------------------------------------------------------
Transportation - 0.1%
Continental Airlines, Inc., 11.75s, 1995+ $ 500 $ 50
Moran Transportation Co., 11.75s, 2004 100 106,000
-------------
$ 106,050
- -----------------------------------------------------------------------------
U.S. Treasury Bond - 2.6%
U.S. Treasury Bonds, 13.375s, 2001 $1,600 $ 2,076,752
- -----------------------------------------------------------------------------
Utilities - Electric - 10.6%
First PV Funding Corp., 10.3s, 2014 $ 750 $ 795,937
First PV Funding Corp., 10.15s, 2016 343 365,295
Midland Cogeneration Funding Venture Corp.,
10.33s, 2002 1,261 1,333,369
Midland Funding Corp., "B", 13.25s, 2006 2,500 2,900,925
Niagara Mohawk Power Corp., 8.77s, 2018 990 943,262
Texas & New Mexico Power Co., 12.5s, 1999 2,000 2,189,600
-------------
$ 8,528,388
- -----------------------------------------------------------------------------
Utilities - Gas - 1.3%
Maxus Energy Corp., 11.25s, 2013 $1,000 $ 1,022,500
- -----------------------------------------------------------------------------
Total U.S. Bonds $ 60,495,533
- -----------------------------------------------------------------------------
Foreign Bonds - 7.6%
Canada - 0.8%
Government of Canada, 9.5s, 2010 CAD 700 $ 648,678
- -----------------------------------------------------------------------------
Germany - 4.5%
Federal Republic of Germany, 6.5s, 2005 DEM 2,643 $ 1,799,434
Federal Republic of Germany, 7.375s, 2005 2,525 1,817,235
-------------
$ 3,616,669
- -----------------------------------------------------------------------------
Italy - 0.8%
Republic of Italy, 8.313s, 2006 ITL 890,000 $ 637,130
- -----------------------------------------------------------------------------
Spain - 1.5%
Government of Spain, 8.3s, 1998 ESP 80,700 $ 649,575
Government of Spain, 8.4s, 2001 71,500 587,932
-------------
$ 1,237,507
- -----------------------------------------------------------------------------
Total Foreign Bonds $ 6,139,984
- -----------------------------------------------------------------------------
Total Bonds (Identified Cost, $66,045,625) $ 66,635,517
- -----------------------------------------------------------------------------
Common Stocks - 1.1%
- -----------------------------------------------------------------------------
Shares
- -----------------------------------------------------------------------------
Central Transport Rental Group* 69,925 $ 19,666
Gillett Holdings, Inc.*++ 22,594 858,572
- -----------------------------------------------------------------------------
Total Common Stocks (Identified Cost, $271,467) $ 878,238
- -----------------------------------------------------------------------------
Preferred Stocks - 6.4%
- -----------------------------------------------------------------------------
Cablevision Systems Corp. 5,356 $ 488,735
First Nationwide Bank 30,000 3,442,500
Long Island Lighting Co. 25,000 625,000
Renaissance Cosmetics, Inc.++ 500 505,000
Time Warner, Inc.*## 104 110,110
- -----------------------------------------------------------------------------
Total Preferred Stocks (Identified Cost, $5,223,750) $ 5,171,345
- -----------------------------------------------------------------------------
Convertible Preferred Stock
- -----------------------------------------------------------------------------
Issuer Shares Value
- -----------------------------------------------------------------------------
UDC Homes, Inc. 6 $ 5,121
- -----------------------------------------------------------------------------
Warrants
- -----------------------------------------------------------------------------
Warrants
- -----------------------------------------------------------------------------
American Media, Inc.* 27,000 $ 422
Atlantic Gulf Communities Corp.++ 100 538
ICO, Inc.* 62,500 40,625
- -----------------------------------------------------------------------------
Total Warrants (Identified Cost, $0) $ 41,585
- -----------------------------------------------------------------------------
Repurchase Agreement - 4.4%
- -----------------------------------------------------------------------------
Principal Amount
(000 Omitted)
- -----------------------------------------------------------------------------
Goldman Sachs, dated 10/31/96, due 11/01/96,
total to be received $3,687,917 (secured by
various U.S. Treasury and federal agency
obligations in a jointly traded account), at
Amortized Cost $ 3,494 $ 3,494,000
- -----------------------------------------------------------------------------
Short-Term Obligations - 4.2%
- -----------------------------------------------------------------------------
Argentina Treasury Bill, due 1/17/97 $ 1,000 $ 982,797
CSFB Russia Note, due 12/27/96++ 2,000 1,956
Pembangunan Perumahan, due 12/19/96 IDR 1,000,000 580
- -----------------------------------------------------------------------------
Total Short-Term Obligations (Identified Cost, $3,340,758) $ 3,360,860
- -----------------------------------------------------------------------------
Call Options Purchased - 0.1%
- -----------------------------------------------------------------------------
Principal Amount
of Contracts
Issuer/Expiration Month/Strike Price (000 Omitted)
- -----------------------------------------------------------------------------
German Marks/British Pounds/
November/2.2145 DEM/GBP 2,537 --
Japanese Government Bonds/
November/114.355 JPY 155,000 54,870
- -----------------------------------------------------------------------------
Total Call Options Purchased (Premiums Paid, $13,243) $ 54,870
- -----------------------------------------------------------------------------
Put Option Purchased - 0.1%
- -----------------------------------------------------------------------------
German Marks/British Pounds/
November/2.315
(Premiums Paid, $9,873) DEM/GBP 2,653 $ 116,241
- -----------------------------------------------------------------------------
Total Investments (Identified Cost, $78,398,716) $ 79,757,777
- -----------------------------------------------------------------------------
Call Option Written
- -----------------------------------------------------------------------------
German Marks/British Pounds/
November/2.2145
(Premiums Received, $9,873) DEM/GBP 2,537 --
- -----------------------------------------------------------------------------
Put Option Written
- -----------------------------------------------------------------------------
Japanese Government Bonds/
November/114.355
(Premiums Received, $12,885) JPY 155,000 $ (155)
- -----------------------------------------------------------------------------
Other Assets, Less Liabilities - 0.7% $ 514,172
- -----------------------------------------------------------------------------
Net Assets - 100.0% $ 80,271,794
- -----------------------------------------------------------------------------
*Non-income producing security.
+Non-income producing security - in default.
++Restricted security.
##SEC Rule 144A restriction.
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.
<TABLE>
<CAPTION>
<S> <C> <C>
BEF = Belgian Francs GBP = British Pounds JPY = Japanese Yen
CAD = Canadian Dollars HKD = Hong Kong Dollars NLG = Dutch Guilders
CHF = Swiss Francs IDR = Indonesian Rupah SEK = Swedish Kronor
DEM = German Marks IEP = Irish Punts THB = Thai Bahts
ESP = Spanish Pesetas ITL = Italian Lire
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- -----------------------------------------------------
October 31, 1996
- ------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $78,398,716) $79,757,777
Cash 86,020
Net receivable for forward foreign currency
exchange contracts sold 744,688
Receivable for Fund shares sold 283,037
Receivable for investments sold 215,211
Interest receivable 1,783,698
Other assets 233,376
-----------
Total assets $83,103,807
-----------
Liabilities:
Payable for Fund shares reacquired $ 212,290
Payable for investments purchased 1,672,701
Written options outstanding, at value (premiums
received, $22,758) 155
Net payable for forward foreign currency exchange
contracts purchased 914,665
Net payable for forward foreign currency exchange
contracts 3,350
Payable to affiliates -
Management fee 881
Shareholder servicing agent fee 628
Distribution fee 27,343
-----------
Total liabilities $ 2,832,013
-----------
Net assets $80,271,794
===========
Net assets consists of:
Paid-in capital $78,252,230
Unrealized appreciation on investments and
translation of assets and liabilities in
foreign currencies 1,205,519
Accumulated undistributed
net realized gain on
investments and foreign currency transactions 752,188
Accumulated undistributed net investment income 61,857
-----------
Total $80,271,794
===========
Shares of beneficial interest outstanding 9,826,372
===========
Class A shares:
Net asset value and redemption price per share
(net assets of $49,432,374 / 6,035,708
shares of beneficial interest outstanding) $8.19
=====
Offering price per share (100/95.25) $8.60
=====
Class B shares:
Net asset value and offering price per share
(net assets of $25,361,347 / 3,115,960
shares of beneficial interest outstanding) $8.14
=====
Class C shares:
Net asset value and offering price per share
(net assets of $5,478,073 / 674,704
shares of beneficial interest outstanding) $8.12
=====
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, Class
B, and Class C shares.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- ------------------------------------------------------------------------------
Year Ended October 31, 1996
- ------------------------------------------------------------------------------
Net investment income:
Interest income $6,014,777
----------
Expenses -
Management fee $ 768,788
Trustees' compensation 42,635
Shareholder servicing agent fee (Class A) 71,334
Shareholder servicing agent fee (Class B) 37,393
Shareholder servicing agent fee (Class C) 6,028
Distribution and service fee (Class A) 166,446
Distribution and service fee (Class B) 168,586
Distribution and service fee (Class C) 40,187
Custodian fee 65,789
Auditing fees 53,182
Printing 29,374
Postage 18,490
Legal fees 4,507
Miscellaneous 84,097
----------
Total expenses $1,556,836
Fees paid indirectly (25,807)
Reduction of expenses by investment adviser (643,680)
----------
Net expenses $ 887,349
----------
Net investment income $5,127,428
==========
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $1,019,500
Written option transactions 236,155
Foreign currency transactions (859,916)
Futures contracts 31,930
----------
Net realized gain on investments $ 427,669
----------
Change in unrealized appreciation -
Investments $ 734,533
Written options 6,778
Translation of assets and liabilities in foreign currencies 128,929
----------
Net unrealized gain on investments $ 870,240
----------
Net realized and unrealized gain on investments and
foreign currency $1,297,909
----------
Increase in net assets from operations $6,425,337
==========
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Changes in Net Assets
- ------------------------------------------------------------------------------
Year Ended October 31, 1996 1995
- ------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
Net investment income $ 5,127,428 $ 3,769,276
Net realized gain on investments and foreign
currency transactions 427,669 1,067,286
Net unrealized gain on investments and foreign
currency translation 870,240 1,875,133
------------ ------------
Increase in net assets from operations $ 6,425,337 $ 6,711,695
------------ ------------
Distributions declared to shareholders -
From net investment income (Class A) $ (3,527,319) $ (3,165,100)
From net investment income (Class B) (1,123,277) (442,955)
From net investment income (Class C) (266,632) (28,052)
From net realized gain on investments and
foreign currency transactions (Class A) (400,584) --
From net realized gain on investments and
foreign currency transactions (Class B) (87,623) --
From net realized gain on investments and
foreign currency transactions (Class C) (10,865) --
------------ ------------
Total distributions declared to
shareholders $ (5,416,300) $ (3,636,107)
------------ ------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 46,730,577 $ 10,564,774
Net asset value of shares issued to
shareholders in reinvestment
of distributions 2,632,478 1,251,060
Cost of shares reacquired (21,213,968) (13,172,718)
------------ ------------
Increase (decrease) in net assets from Fund
share transactions $ 28,149,087 $ (1,356,884)
------------ ------------
Total increase in net assets $ 29,158,124 $ 1,718,704
Net assets:
At beginning of year 51,113,670 49,394,966
------------ ------------
At end of year (including accumulated
undistributed net investment income of
$61,857 and $212,718, respectively) $ 80,271,794 $ 51,113,670
============ ============
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
- -----------------------------------------------------------------------------------------------------------
Year Ended October 31, 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------
Class A
- -----------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C>
Net asset value - beginning of period $ 8.07 $ 7.57 $ 8.34 $ 8.00
------ ------ ------ -------
Income from investment operations# -
Net investment income** $ 0.62 $ 0.60 $ 0.48 $ 0.52
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 0.18 0.48 (0.74) 0.42
------ ------ ------ -------
Total from investment operations $ 0.80 $ 1.08 $ (0.26) $ 0.94
====== ====== ======= =======
Less distributions declared to shareholders -
From net investment income $(0.60) $ (0.58) -- $ (0.24)
From net realized gain on investments
and foreign currency transactions (0.08) -- -- (0.32)
In excess of net investment income and
foreign currency transactions -- -- (0.06) --
In excess of net realized gain on investments
and foreign currency transactions -- -- (0.04) --
From paid-in capital -- -- (0.41) (0.04)
Total distributions declared to shareholders $(0.68) $ (0.58) $ (0.51) $ (0.60)
------ ------- ------- -------
Net asset value - end of period $ 8.19 $ 8.07 $ 7.57 $ 8.34
====== ====== ====== =======
Total return* 10.42% 15.00% (3.15)% 12.36%
Ratios (to average net assets)/Supplemental data**:
Expenses## 1.13% 1.54% 1.71% 1.98%
Net investment income 7.63% 7.86% 6.11% 5.92%
Portfolio turnover 287% 249% 153% 275%
Net assets at end of period (000 omitted) $49,432 $41,688 $44,032 $60,120
<FN>
#Per share data for periods subsequent to October 31, 1993 is based on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid indirectly.
*Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results would
have been lower.
**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 ratios would have been:
</FN>
<S> <C> <C> <C> <C>
Net investment income $ 0.54 $ 0.53 $ 0.44 $ 0.49
Ratios (to average net assets):
Expenses## 2.06% 2.47% 2.21% 2.14%
Net investment income 6.70% 6.89% 5.62% 5.76%
</TABLE>
See notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended October 31, 1992 1991 1990 1989 1988 1987*
- ----------------------------------------------------------------------------------------------------------------------------------
Class A
- ----------------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C> <C>
Net asset value - beginning of period $ 8.12 $ 7.56 $ 8.93 $ 9.60 $ 9.21 $ 9.35
------ ------ ------ ------- ------- -------
Income from investment operations -
Net investment income# $ 0.63 $ 0.73 $ 0.86 $ 0.94 $ 0.93 $0.0025
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions 0.08 0.95 (1.03) (0.38) 0.56 (0.1425)
------ ------ ------ ------- ------- -------
Total from investment operations $ 0.71 $ 1.68 $(0.17) $ 0.56 $ 1.49 $ (0.14)
====== ====== ====== ====== ======= =======
Less distributions declared to shareholders -
From net investment income $(0.56) $(0.73) $(0.82) $(1.18) $(0.69) $ --
From net realized gain on investments and
foreign currency transactions -- -- -- -- (0.41) --
From paid-in capital (0.27) (0.39) (0.38) (0.05) -- --
------ ------ ------ ------- ------- -------
Total distributions declared to
shareholders $(0.83) $(1.12) $(1.20) $(1.23) $(1.10) $ --
------ ------ ------ ------- ------- -------
Net asset value - end of period $ 8.00 $ 8.12 $ 7.56 $ 8.93 $ 9.60 $ 9.21
====== ====== ====== ====== ====== =======
Total return** 9.02% 23.78% (1.62)% 5.85% 16.60% (1.50)%++
Ratios (to average net assets)/Supplemental data#:
Expenses 2.02% 1.87% 1.47% 1.82% 1.75% 0.57%+
Net investment income 7.47% 9.26% 10.42% 10.05% 9.74% 4.88%+
Portfolio turnover 423% 671% 400% 157% 270% --
Net assets at end of period (000 omitted) $77,487 $76,312 $74,555 $87,978 $93,819 $78,479
<FN>
*For the period from the commencement of investment operations, October
29, 1987 to October 31, 1987.
+Annualized.
++Not annualized.
**Total returns for Class A shares do not include the applicable sales
charge. If the charge had been included, the results would have been lower.
#The 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 ratios would have been:
</FN>
Net investment income $ 0.61 $ 0.71 $ 0.83 -- -- --
Ratios (to average net assets):
Expenses 2.21% 2.16% 1.81% -- -- --
Net investment income 7.55% 8.97% 10.08% -- -- --
</TABLE>
See notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
- ----------------------------------------------------------------------------------------
Year Ended October 31, 1996 1995 1994 1993**
- ----------------------------------------------------------------------------------------
Class B
- ----------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C>
Net asset value - beginning of period $ 8.03 $ 7.53 $ 8.33 $ 8.28
------ ------ ------ ------
Income from investment operations# -
Net investment income* $ 0.56 $ 0.55 $ 0.45 $ 0.04
Net realized and unrealized gain
(loss) on investments and foreign
currency transactions 0.18 0.48 (0.78) 0.05
------ ------ ------ ------
Total from investment operations $ 0.74 $ 1.03 $(0.33) $ 0.09
------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.55) $ (0.53) -- $(0.03)
From net realized gain
on investments and foreign
currency transactions (0.08) -- -- (0.01)
In excess of net investment
income and foreign currency
transactions -- -- (0.05) --
In excess of net realized gain
on investments and foreign
currency transactions -- -- (0.03) --
From paid-in capital -- -- (0.39) --
Total distributions
declared to shareholders $(0.63) $(0.53) $(0.47) $(0.04)
------ ------ ------ ------
Net asset value - end of period $ 8.14 $ 8.03 $ 7.53 $ 8.33
====== ====== ====== ======
Total return 9.68% 14.23% (3.97)% 1.15%++
Ratios (to average net assets)/Supplemental data*:
Expenses## 1.80% 2.27% 2.43% 3.03%+
Net investment income 7.02% 7.15% 5.97% 5.22%+
Portfolio turnover 287% 249% 153% 275%
Net assets at end of period
(000 omitted) $25,361 $8,365 $5,350 $265
<FN>
**For the period from the commencement of offering of Class B shares,
September 7, 1993 to October 31, 1993.
+Annualized.
++Not annualized.
#Per share data for periods subsequent to October 31, 1993 is based on
average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses
are calculated without reduction for fees paid indirectly.
*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 ratios would have been:
</FN>
Net investment income $ 0.49 $ 0.48 $ 0.41 --
Ratios (to average net assets):
Expenses## 2.73% 3.20% 2.92% --
Net investment income 6.09% 6.18% 5.48% --
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -------------------------------------------------------------------------------
Year Ended October 31, 1996 1995 1994***
- -------------------------------------------------------------------------------
Class C
- -------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C>
Net asset value - beginning of period $ 8.00 $ 7.53 $ 7.53
------ ------ ------
Income from investment operations# -
Net investment income* $ 0.57 $ 0.54 $ 0.12
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions 0.18 0.48 (0.03)
------ ------ ------
Total from investment operations $ 0.75 $ 1.02 $ 0.09
------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.55) $ (0.55) $ --
From net realized gain on investments
and foreign currency transactions (0.08) -- --
From paid-in capital -- -- (0.09)
------ ------ ------
Total distributions declared
to shareholders $(0.63) $(0.55) $(0.09)
------ ------ ------
Net asset value - end of period $ 8.12 $ 8.00 $ 7.53
====== ====== ======
Total return 9.80% 14.17% 1.23%++
Ratios (to average net assets)/Supplemental data*:
Expenses## 1.71% 2.20% 2.16%+
Net investment income 7.12% 7.23% 8.99%+
Portfolio turnover 287% 249% 153%
Net assets at end of period (000 omitted) $5,478 $1,060 $13
<FN>
***For the period from the commencement of offering of Class C shares,
September 1, 1994 to October 31, 1994.
+Annualized.
++Not annualized.
#Per share data for periods subsequent to October 31, 1993 is based on
average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses
are calculated without reduction for fees paid indirectly.
*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 ratios would have been:
</FN>
Net investment income $ 0.51 $ 0.46 $ 0.11
Ratios (to average net assets):
Expenses## 2.64% 3.13% 2.65%+
Net investment income 6.19% 6.26% 8.50%+
</TABLE>
See notes to financial statements
<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.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Investments
in foreign securities are vulnerable to the effects of changes in the relative
values of the local currency and the U.S. dollar and to the effects of changes
in each country's legal, political and economic environment.
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. The
Fund, along with other affiliated entities of Massachusetts Financial Services
Company (MFS), may utilize a joint trading account for the purpose of entering
into one or more repurchase agreements.
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases and
sales of foreign investments, income and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates of
such transactions. Gains and losses attributable to foreign currency exchange
rates on sales of securities are recorded for financial statement purposes as
net realized gains and losses on investments. Gains and losses attributable to
foreign exchange rate movements on income and expenses are recorded for
financial statement purposes as foreign currency transaction gains and losses.
That portion of both realized and unrealized gains and losses on investments
that results from fluctuations in foreign currency exchange rates is not
separately disclosed.
Written Options - The Fund may write covered call or put options for which
premiums are received and are recorded as liabilities, and are subsequently
adjusted to the current value of the options written. Premiums received from
writing options which expire are treated as realized gains. Premiums received
from writing options which are exercised or are closed are offset against the
proceeds or amount paid on the transaction to determine the realized gain or
loss. If a put option is exercised, the premium reduces the cost basis of the
security purchased by the Fund. The Fund, as writer of an option, may have no
control over whether the underlying securities may be sold (call) or purchased
(put) and, as a result, bears the market risk of an unfavorable change in the
price of the securities underlying the written option. In general, written call
options may serve as a partial hedge against decreases in value in the
underlying securities to the extent of the premium received. Written options may
also be used as part of an income producing strategy reflecting the view of the
Fund's management on the direction of interest rates.
Forward Foreign Currency Exchange Contracts - The Fund may enter into forward
foreign currency exchange contracts for the purchase or sale of a specific
foreign currency at a fixed price on a future date. Risks may arise upon
entering into these contracts from the potential inability of counterparties to
meet the terms of their contracts and from unanticipated movements in the value
of a foreign currency relative to the U.S. dollar. The Fund will enter into
forward contracts for hedging purposes as well as for non-hedging purposes. For
hedging purposes, the Fund may enter into contracts to deliver or receive
foreign currency it will receive from or require for its normal investment
activities. The Fund may also use contracts in a manner intended to protect
foreign currency-denominated securities from declines in value due to
unfavorable exchange rate movements. For non-hedging purposes, the Fund may
enter into contracts with the intent of changing the relative exposure of the
Fund's portfolio of securities to different currencies to take advantage of
anticipated changes. The forward foreign currency exchange contracts are
adjusted by the daily exchange rate of the underlying currency and any gains or
losses are recorded for financial statement purposes as unrealized until the
contract settlement date.
Swap Agreements - The Fund may enter into swap agreements. A swap is an exchange
of cash payments between the Fund and another party which is based on a specific
financial index. Cash payments are exchanged at specified intervals and the
expected income or expense is recorded on the accrual basis. The value of the
swap is adjusted daily and the change in value is recorded as unrealized
appreciation or depreciation. Risks may arise upon entering into these
agreements from the potential inability of counterparties to meet the terms of
their contract and from unanticipated changes in the value of the financial
index on which the swap agreement is based. The Fund uses swaps for both hedging
and non-hedging purposes. For hedging purposes, the Fund may use swaps to reduce
its exposure to interest and foreign exchange rate fluctuations. For non-hedging
purposes, the Fund may use swaps to take a position on anticipated changes in
the underlying financial index.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
original issue discount are amortized or accreted for financial statement and
tax reporting purposes as required by federal income tax regulations. Dividend
income is recorded on the ex-dividend date for dividends received in cash.
Dividend 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 invests in high-yield securities rated below investment grade.
Investments in high-yield securities involve greater degrees of credit and
market risk than investments in higher-rated securities, and tend to be more
sensitive to economic conditions.
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 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.
Fees Paid Indirectly - The Fund's custodian bank calculates its fee based on the
Fund's average daily net assets. The fee is reduced according to a fee
arrangement, which provides for custody fees to be reduced based on a formula
developed to measure the value of cash deposited with the custodian by the Fund.
This amount is shown as a reduction of expenses on the Statement of Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided.
The Fund files a tax return annually using tax accounting methods required under
provisions of the Code which may differ from generally accepted accounting
principles, the basis on which these financial statements are prepared.
Accordingly, the amount of net investment income and net realized gain reported
on these financial statements may differ from that reported on the Fund's tax
return and, consequently, the character of distributions to shareholders
reported in the financial highlights may differ from that reported to
shareholders on Form 1099-DIV. Foreign taxes have been provided for on interest
and dividend income earned on foreign investments in accordance with the
applicable country's tax rates and to the extent unrecoverable are recorded as a
reduction of investment income. Distributions to shareholders are recorded on
the ex-dividend date.
The Fund distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a tax return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or accumulated net realized
gains.
During the year ended October 31, 1996, $361,061 was reclassified to accumulated
net realized gain on investments from accumulated undistributed net investment
income due to differences between book and tax accounting for mortgage-backed
securities and currency transactions. This change had no effect on the net
assets or net asset value per share. At October 31, 1996, accumulated
undistributed net investment income (realized gain on investments and foreign
currency transactions) under book accounting were different from tax accounting
due to temporary differences in accounting for currency transactions.
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. All
shareholders bear the common expenses of the Fund pro rata based on the average
daily net assets of each class, without distinction between share classes.
Dividends are declared separately for each class. No class has preferential
dividend rights; differences in per share dividend rates are generally due to
differences in separate class expenses.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an effective annual rate of
0.50% of average daily net assets and 7.14% of investment income. The investment
adviser did not impose a portion of its fee, which is reflected as a reduction
of expenses in the Statement of Operations.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive remuneration
for their services to the Fund from MFS. Certain officers and Trustees of the
Fund are officers or directors of MFS, MFS Fund Distributors, Inc. (MFD) and MFS
Service Center, Inc. (MFSC). The Fund has an unfunded defined benefit plan for
all of its independent Trustees and Mr. Bailey. Included in Trustees'
compensation is a net periodic pension expense of $12,160 for the year ended
October 31, 1996.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$26,836 for the year ended October 31, 1996, 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 MFD up to 0.35%
per annum of its average daily net assets attributable to Class A shares in
order that MFD may pay expenses on behalf of the Fund related to the
distribution and servicing of its shares. These expenses include a service fee
to each securities dealer that enters into a sales agreement with MFD of up to
0.25% per annum of the Fund's average daily net assets attributable to Class A
shares which are attributable to that securities dealer, a distribution fee to
MFD of up to 0.10% per annum of the Fund's average daily net assets attributable
to Class A shares, commissions to dealers and payments to MFD wholesalers for
sales at or above a certain dollar level, and other such distribution-related
expenses that are approved by the Fund. MFD retains the service fee for accounts
not attributable to a securities dealer which amounted to $21,242 for the year
ended October 31, 1996. Fees incurred under the distribution plan during the
year ended October 31, 1996 were 0.35% of average daily net assets attributable
to Class A shares on an annualized basis.
The Class B and Class C distribution plans provide that the Fund will pay MFD a
distribution fee of 0.75% per annum, and a service fee of up to 0.25% per annum,
of the Fund's average daily net assets attributable to Class B and Class C
shares. MFD will pay to securities dealers that enter into a sales agreement
with MFD all or a portion of the service fee attributable to Class B 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. MFD retains the service fee for accounts not attributable to a
securities dealer, which amounted to $3,080 and $82 for Class B and Class C
shares, respectively, for the year ended October 31, 1996. Fees incurred under
the distribution plans during the year ended October 31, 1996 were 1.00% of
average daily net assets attributable to Class B and Class C shares on an
annualized basis.
Purchases over $1 million of Class A shares and certain purchases into
retirement plans are subject to a contingent deferred sales charge in the event
of a shareholder redemption within 12 months following such purchase. A
contingent deferred sales charge is imposed on shareholder redemptions of Class
B shares in the event of a shareholder redemption within six years of purchase.
A contingent deferred sales charge is imposed on shareholder redemptions of
Class C shares in the event of a shareholder redemption within 12 months of
purchases made on or after April 1, 1996. MFD receives all contingent deferred
sales charges. Contingent deferred sales charges imposed during the year ended
October 31, 1996 were $21, $28,744, and $397 for Class A, Class B, and Class C
shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as a
percentage of the average daily net assets of each class of shares at an
effective annual rate of up to 0.15%, 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 $ 24,744,016 $ 26,041,452
============ ============
Investments (non-U.S. government securities) $134,794,279 $135,982,530
============ ============
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 $78,398,716
===========
Gross unrealized appreciation $ 2,113,684
Gross unrealized depreciation (754,623)
-----------
Net unrealized appreciation $ 1,359,061
===========
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
Class A Shares
Year Ended Year Ended
October 31, 1996 October 31, 1995
-------------------------- --------------------------
Shares Amount Shares Amount
- -----------------------------------------------------------------------------
Shares sold 2,056,255 $16,667,005 599,130 $ 4,692,705
Shares issued to
shareholders in
reinvestment of
distributions 200,640 1,607,490 127,484 978,866
Shares reacquired (1,387,485) (11,133,559) (1,380,515) (10,598,878)
----------- ------------ ----------- ------------
Net increase
(decrease) 869,410 $ 7,140,936 (653,901) $ (4,927,307)
======= =========== ======== ============
Class B Shares
Year Ended Year Ended
October 31, 1996 October 31, 1995
-------------------------- --------------------------
Shares Amount Shares Amount
- -----------------------------------------------------------------------------
Shares sold 2,785,248 $22,357,597 584,310 $ 4,523,648
Shares issued to
shareholders in
reinvestment of
distributions 98,830 787,774 33,442 256,014
Shares reacquired (809,863) (6,470,174) (286,518) (2,212,002)
----------- ------------ ----------- ------------
Net increase 2,074,215 $16,675,197 331,234 $ 2,567,660
========= =========== ======= ============
Class C Shares
Year Ended Year Ended
October 31, 1996 October 31, 1995
-------------------------- --------------------------
Shares Amount Shares Amount
- -----------------------------------------------------------------------------
Shares sold 962,710 $ 7,705,975 174,377 $ 1,348,421
Shares issued to
shareholders in
reinvestment of
distributions 29,851 237,214 2,067 16,180
Shares reacquired (450,415) (3,610,235) (45,641) (361,838)
----------- ------------ ----------- ------------
Net increase 542,146 $ 4,332,954 130,803 $ 1,002,763
======= =========== ======= ============
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $350 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Fund shares. Interest is charged to each
fund, based on its borrowings, at a rate equal to the bank's base rate. In
addition, a commitment fee, based on the average daily unused portion of the
line of credit, is allocated among the participating funds at the end of each
quarter. The commitment fee allocated to the Fund for the year ended October 31,
1996 was $754.
(7) Financial Instruments
The Fund trades financial instruments with off-balance sheet risk in the normal
course of its investing activities in order to manage exposure to market risks
such as interest rates and foreign currency exchange rates. These financial
instruments include written options, 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, 1996, is
as follows:
<TABLE>
<CAPTION>
Written Option Transactions
1996 Calls 1996 Puts
----------------------------- ------------------------------
Principal Amounts Principal Amounts
of Contracts of Contracts
(000 Omitted) Premiums (000 Omitted) Premiums
- -------------------------------------------------------------------------------------------
OUTSTANDING, BEGINNING OF PERIOD -
<S> <C> <C> <C> <C>
Australian Dollars 420 $ 5,108 409 $ 5,249
German Marks 1,154 3,095 1,492 5,450
German Marks/British Pounds 1,996 12,813 -- --
Italian Lire/German Marks 2,103,796 34,865 2,103,796 77,464
Japanese Yen 70,728 12,307 39,000 4,258
Options written -
Australian Dollars 949 5,462 318 1,945
Canadian Dollars 1,505 1,545 3,102 9,380
German Marks 12,085 70,800 2,213 6,074
German Marks/British Pounds 13,725 50,205 -- --
Italian Lire/German Marks 2,852,538 22,401 -- --
Japanese Yen 144,795 1,819 1,533,666 135,679
Japanese Yen/German Marks -- -- 456,269 16,266
New Zealand Dollars -- -- 2,443 3,632
Spanish Pesetas/German Marks -- -- 274,701 6,815
Options terminated in closing transactions -
Australian Dollars (1,369) (10,570) (318) (1,945)
German Marks (12,085) (70,800) (2,213) (6,074)
German Marks/British Pounds (9,477) (37,306) -- --
Italian Lire/German Marks (4,956,334) (57,266) (2,103,796) (77,464)
Japanese Yen (215,523) (14,126) (1,291,000) (119,534)
Japanese Yen/German Marks -- -- (456,269) (16,266)
New Zealand Dollars -- -- (2,443) (3,632)
Options expired -
Australian Dollars -- -- (409) (5,249)
Canadian Dollars (1,505) (1,545) (3,102) (9,380)
German Marks (1,154) (3,095) (1,492) (5,450)
German Marks/British Pounds (3,707) (15,839) -- --
Japanese Yen -- -- (126,666) (7,518)
Spanish Pesetas/German Marks -- -- (274,701) (6,815)
OUTSTANDING, END OF PERIOD 2,537 $ 9,873 155,000 $ 12,885
========= ========= ========= =========
OPTIONS OUTSTANDING, END OF PERIOD CONSIST OF -
German Marks/British Pounds 2,537 $ 9,873 -- $ --
Japanese Yen -- -- 155,000 12,885
--------- ------ --------- ------
2,537 $ 9,873 155,000 $ 12,885
========= ========= ========= =========
</TABLE>
At October 31, 1996, the Fund had sufficient cash and/or securities at least
equal to the value of the written options.
<PAGE>
<TABLE>
<CAPTION>
Forward Foreign Currency Exchange Contracts
NET UNREALIZED
CONTRACTS TO CONTRACTS APPRECIATION
SETTLEMENT DATE DELIVER/RECEIVE IN EXCHANGE FOR AT VALUE (DEPRECIATION)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales 2/24/97 BEF 40,257,881 $ 1,325,144 $ 1,296,827 $ 28,317
11/01/96 CAD 2,498,636 1,833,426 1,817,822 15,604
2/07/97 CHF 2,969,214 2,502,471 2,360,377 142,094
11/04/96 - 4/28/97 DEM 57,105,476 38,148,537 37,682,990 465,547
11/06/96 GBP 596,100 918,608 969,514 (50,906)
12/04/96 HKD 5,879,360 757,162 760,402 (3,240)
2/24/97 IEP 714,446 1,148,508 1,162,138 (13,630)
11/06/96 - 4/28/97 ITL 5,402,045,202 3,520,394 3,551,426 (31,032)
2/28/97 JPY 493,436,928 4,587,124 4,395,043 192,081
2/03/97 SEK 295,901 44,936 45,083 (147)
----------- ----------- ----------
$54,786,310 $54,041,622 $ 744,688
=========== =========== =========
Purchases 2/24/97 BEF 40,257,881 $ 1,329,863 $ 1,296,827 $ (33,036)
11/01/96 CAD 2,498,636 1,830,905 1,817,822 (13,083)
2/07/97 CHF 2,969,214 2,512,978 2,360,376 (152,602)
11/04/96 - 4/28/97 DEM 54,412,334 36,423,750 35,901,641 (522,109)
11/15/96 ESP 134,814,798 1,055,839 1,053,578 (2,261)
11/06/96 GBP 596,100 926,583 969,514 42,931
2/24/97 IEP 714,446 1,155,688 1,162,138 6,450
11/06/96 - 4/28/97 ITL 4,416,368,956 2,862,544 2,901,864 39,320
2/28/97 JPY 493,436,928 4,678,679 4,395,042 (283,637)
2/03/97 NLG 882,588 518,460 521,959 3,499
12/24/96 THB 13,000,000 506,773 506,636 (137)
---------- ---------- --------
$53,802,062 $52,887,397 $(914,665)
=========== =========== =========
</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 payable of $3,350 at October 31, 1996.
At October 31, 1996, 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 total assets in securities which
are subject to legal or contractual restrictions on resale. At October 31, 1996,
the Fund owned the following restricted securities (constituting 4.14% 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.
<TABLE>
<CAPTION>
Date of Shares/
Description Acquisition Par Amount Cost Value
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Atlantic Gulf Communities 9/21/89 - 9/25/95 100 $ -- $ 538
CSFB Russia Note, 0s, 1996 9/24/96 2,000,000 1,933,494 1,956,580
Gillett Holdings, Inc. 10/08/92 22,594 213,360 858,572
Renaissance Cosmetics, Inc. 8/22/96 500 507,500 505,000
----------
$3,320,690
==========
</TABLE>
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Trustees of MFS Series Trust VIII and Shareholders of MFS Strategic
Income Fund:
We have audited the accompanying statement of assets and liabilities of MFS
Strategic Income Fund, including the schedule of portfolio of investments, as of
October 31, 1996 and the related statement of operations for the year then ended
and the statement of changes in net assets and financial highlights for each of
the three years in the period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits. The financial highlights for each of
the six years in the period ended October 31, 1993, and for the period October
29, 1987 (commencement of investment operations) to October 31, 1987 for Class A
shares, and for the period September 7, 1993 (commencement of investment
operations) 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 audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1996, 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 audits provide 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 at October 31, 1996, the results of its operations for the
year then ended, and the changes in its net assets for each of the two years in
the period then ended and its financial highlights for each of the three years
in the period then ended, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
December 12, 1996
--------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
MFS(R) STRATEGIC INCOME FUND
<TABLE>
<CAPTION>
<S> <C>
TRUSTEES CUSTODIAN
A. Keith Brodkin* - Chairman and President State Street Bank and Trust Company
Richard B. Bailey* - Private Investor;
Former Chairman and Director (until 1991), AUDITOR
Massachusetts Financial Services Company; Ernst & Young LLP
Director, Cambridge Bancorp;
Director, Cambridge Trust Company INVESTOR INFORMATION
Marshall N. Cohan - Private Investor For MFS stock and bond market outlooks,
Lawrence H. Cohn, M.D. - Chief of Cardiac call toll free: 1-800-637-4458 anytime from
Surgery, Brigham and Women's Hospital; a touch-tone telephone.
Professor of Surgery, Harvard Medical School
The Hon. Sir J. David Gibbons, KBE - Chief For information on MFS mutual funds,
Executive Officer, Edmund Gibbons Ltd.; call your financial adviser or, for an
Chairman, Bank of N.T. Butterfield & Son Ltd. information kit, call toll free:
Abby M. O'Neill - Private Investor; 1-800-637-2929 any business day from
Director, Rockefeller Financial Services, Inc. 9 a.m. to 5 p.m. Eastern time (or leave
(investment advisers) a message anytime).
Walter E. Robb, III - President and Treasurer,
Benchmark Advisors, Inc. (corporate financial INVESTOR SERVICE
consultants); President, Benchmark Consulting MFS Service Center, Inc.
Group, Inc. (office services); Trustee, P.O. Box 2281
Landmark Funds (mutual funds) Boston, MA 02107-9906
Arnold D. Scott* - Senior Executive Vice
President, Director and Secretary, For general information, call toll free:
Massachusetts Financial Services Company 1-800-225-2606 any business day from
Jeffrey L. Shames* - President and Director, 8 a.m. to 8 p.m. Eastern time.
Massachusetts Financial Services Company
J. Dale Sherratt - President, Insight For service to speech- or hearing-impaired,
Resources, Inc. (acquisition planning call toll free: 1-800-637-6576 any business
specialists) day from 9 a.m. to 5 p.m. Eastern time.
Ward Smith - Former Chairman (until 1994), (To use this service, your phone must be equipped
NACCO Industries; Director, Sundstrand with a Telecommunications Device for the Deaf.)
Corporation
For share prices, account balances and
INVESTMENT ADVISER exchanges, call toll free: 1-800-MFS-TALK
Massachusetts Financial Services Company (1-800-637-8255) anytime from a touch-tone
500 Boylston Street telephone.
Boston, MA 02116-3741
WORLD WIDE WEB
DISTRIBUTOR www.mfs.com
MFS Fund Distributors, Inc.
500 Boylston Street TOP RATED SERVICE
Boston, MA 02116-3741 For the third year in a row,
[DALBAR MFS earned a #1 ranking in
PORTFOLIO MANAGER LOGO] DALBAR, Inc.'s Broker/Dealer
James T. Swanson* Survey, Main Office Operations
Service Quality category. The
TREASURER firm achieved a 3.48 overall score - on a
W. Thomas London* scale of 1 to 4 - in the 1996 survey. A total
of 110 firms responded, offering input on the
ASSISTANT TREASURER quality of service they received from 29
James O. Yost* mutual fund companies nationwide. The survey
contained questions about service quality in
SECRETARY 15 categories, including "knowledge of phone
Stephen E. Cavan* service contracts," "accuracy of transaction
processing," and "overall ease of doing
ASSISTANT SECRETARY business with the firm."
James R. Bordewick, Jr.*
*Affiliated with the Investment Adviser
</TABLE>
<PAGE>
MFS(R) STRATEGIC -------------
INCOME FUND [DALBAR BULK RATE
LOGO] U.S. POSTAGE
TOP-RATED SERVICE P A I D
PERMIT #55638
500 Boylston Street BOSTON, MA
Boston, MA 02116 -------------
[LOGO]
THE FIRST NAME IN MUTUAL FUNDS
MSI-2 12/96 15M 34/234/334
(C)1996 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116
<PAGE> 101
MFS WORLD GROWTH FUND
SUPPLEMENT TO THE MARCH 1, 1997 PROSPECTUS AND STATEMENT OF ADDITIONAL
INFORMATION
THE FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE FUND'S
PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION ("SAI"), DATED MARCH 1, 1997,
AND CONTAINS A DESCRIPTION OF CLASS I SHARES.
CLASS I SHARES ARE AVAILABLE FOR PURCHASE ONLY BY CERTAIN INVESTORS AS
DESCRIBED UNDER THE CAPTION "ELIGIBLE PURCHASERS" BELOW.
EXPENSE SUMMARY
<TABLE>
SHAREHOLDER TRANSACTION EXPENSES: CLASS I
-------
<S> <C>
Maximum Initial Sales Charge Imposed on Purchases of Fund
Shares (as a percentage of offering price) None
Maximum Contingent Deferred Sales Charge (as a percentage
of original purchase price or redemption proceeds, as applicable) None
ANNUAL OPERATING EXPENSES OF THE FUND (AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees 0.90%
Rule 12b-1 Fees None
Other Expenses(1)(2) 0.41%
Total Operating Expenses 1.31%
</TABLE>
(1) "Other Expenses" is based on Class A expenses incurred during the
fiscal year ended October 31, 1996.
(2) The Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with
its custodian and dividend disbursing agent, and may enter into other
such arrangements and directed brokerage arrangements (which would also
have the effect of reducing the Fund's expenses). Any such fee
reductions are not reflected under "Other Expenses."
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a $1,000
investment in Class I shares of the Fund, assuming (a) a 5% annual return and
(b) redemption at the end of each of the time periods indicated:
<TABLE>
<CAPTION>
PERIOD CLASS I
------ -------
<S> <C>
1 year.......................... $13
3 years......................... 12
</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. A more complete description of the Fund's
management fee is set forth under the caption "Management of the Fund" in the
Prospectus.
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
ELIGIBLE PURCHASERS
Class I shares are available for purchase only by the following purchasers
("Eligible Purchasers"):
(i) certain retirement plans established for the benefit of employees of
Massachusetts Financial Services Company ("MFS"), the Fund's investment
adviser, and employees of MFS' affiliates;
- 1 -
<PAGE> 102
(ii) any fund distributed by MFS Fund Distributors, Inc. ("MFD"), the Fund's
distributor, if the fund seeks to achieve its investment objective by
investing primarily in shares of the Fund and other funds distributed
by MFD;
(iii) any retirement plan which (a) purchases shares directly through MFD
(rather than through a third party broker or dealer or other financial
intermediary); (b) has, at the time of purchase of Class I shares,
aggregate assets of at least $100 million; and (c) invests at least $10
million in Class I shares of the Fund either alone or in combination
with investments in Class I shares of other MFS funds distributed by
MFD (additional investments may be made in any amount); provided that
MFD may accept purchases from smaller plans or in smaller amounts if it
believes, in its sole discretion, that the plan's aggregate assets will
equal or exceed $100 million, or that the plan will make additional
investments which will cause its total investment to equal or exceed
$10 million, within a reasonable period of time; and
(iv) bank trust departments which initially invest, on behalf of their trust
clients, at least $100,000 in Class I shares of the Fund (additional
investments may be made in any amount); provided that MFD may accept
smaller initial purchases if it believes, in its sole discretion, that
the bank trust department will make additional investments, on behalf
of its trust clients, which will cause its total investment to equal or
exceed $100,000 within a reasonable period of time.
In no event will the Fund, MFS, MFD or any of their affiliates pay any sales
commissions or compensation to any third party in connection with the sale of
Class I shares; the payment of any such sales commission or compensation would,
under the Fund's policies, disqualify the purchaser as an eligible investor of
Class I shares.
SHARE CLASSES OFFERED BY THE FUND
Four classes of shares of the Fund currently are offered for sale, Class A
shares, Class B shares, Class C shares and Class I shares. Class I shares are
available for purchase only by Eligible Purchasers, as defined above, and are
described in this Supplement. Class A shares, Class B shares and Class C shares
are described in the Fund's Prospectus and are available for purchase by the
general public.
Class A shares are offered at net asset value plus an initial sales charge up
to a maximum of 5.75% of the offering price (or a contingent deferred sales
charge (a "CDSC") upon redemption of 1.00% during the first year in the case of
purchases of $1 million or more and certain purchases by retirement plans), and
are subject to an annual distribution fee and service fee up to a maximum of
0.35% per annum. Class B shares are offered at net asset value without an
initial sales charge but are subject to a CDSC upon redemption (declining from
4.00% during the first year to 0% after six years) and an annual distribution
fee and service fee up to a maximum of 1.00% per annum; Class B shares convert
to Class A shares approximately eight years after purchase. Class C shares are
offered at net asset value without an initial sales charge but are subject to a
CDSC upon redemption of 1.00% during the first year and an annual distribution
fee and service fee up to a maximum of 1.00% per annum. Class I shares are
offered at net asset value without an initial sales charge or CDSC and are not
subject to a distribution or service fee. Class C and Class I shares do not
convert to any other class of shares of the Fund.
OTHER INFORMATION
Eligible Purchasers may purchase Class I shares only directly through MFD.
Eligible Purchasers may exchange Class I shares of the Fund for Class I shares
of any other MFS Fund available for purchase by such Eligible Purchasers at
their net asset value (if available for sale), and may exchange Class I shares
of the Fund for shares of the MFS Money Market Fund (if available for sale), and
may redeem Class I shares of the Fund at net asset value. Distributions paid by
the Fund with respect to Class I shares generally will be greater than those
paid with respect to Class A shares, Class B shares and Class C shares because
expenses attributable to Class A shares, Class B shares and Class C shares
generally will be higher.
THE DATE OF THIS SUPPLEMENT IS MARCH 1, 1997
- 2 -
<PAGE> 103
PROSPECTUS
March 1, 1997
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
================================================================================
Page
----
1. Expense Summary........................................................ 2
2. The Fund............................................................... 3
3. Condensed Financial Information........................................ 4
4. Investment Objective and Policies...................................... 6
5. Risk Factors........................................................... 10
6. Management of the Fund................................................. 13
7. Information Concerning Shares of the Fund.............................. 16
Purchases.......................................................... 16
Exchanges.......................................................... 21
Redemptions and Repurchases........................................ 22
Distribution Plan.................................................. 24
Distributions...................................................... 26
Tax Status......................................................... 26
Net Asset Value.................................................... 27
Description of Shares, Voting Rights and Liabilities............... 27
Performance Information............................................ 27
8. Shareholder Services................................................... 28
APPENDIX A................................................................ A-1
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
MFS 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 which manage a portion
of the Fund's assets, Foreign & Colonial Management Ltd. and its subsidiary,
Foreign & Colonial Emerging Markets Limited, both of which are located at
Exchange House, Primrose Street, London EC2A 2NY, United Kingdom.
INVESTMENT PRODUCTS ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY,
AND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY FINANCIAL
INSTITUTION. SHARES OF MUTUAL FUNDS ARE SUBJECT TO INVESTMENT RISK, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED, AND WILL FLUCTUATE IN VALUE. YOU
MAY RECEIVE MORE OR LESS THAN YOU PAID WHEN YOU REDEEM YOUR SHARES.
This Prospectus sets forth concisely the information concerning the 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, 1997, as amended or
supplemented from time to time (the "SAI"), which contains more detailed
information about the Trust and the Fund. The SAI is incorporated into this
Prospectus by reference. See page 30 for a further description of the
information set forth in the SAI. A copy of the SAI may be obtained without
charge by contacting the Shareholder Servicing Agent (see back cover for address
and phone number). The SEC maintains an Internet World Wide Web site that
contains the SAI, materials that are incorporated by reference into the
Prospectus and the SAI, and other information regarding the Fund. This
Prospectus is available on the Adviser's Internet World Wide Web site at
http://www.mfs.com.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE> 104
<TABLE>
1. EXPENSE SUMMARY
<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)....... 5.75% 0.00% 0.00%
Maximum Contingent Deferred Sales Charge (as a
percentage of original purchase price or redemption
proceeds, as applicable).............................. See Below (1) 4.00% 1.00%
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE DAILY
NET ASSETS):
Management Fees......................................... 0.90% 0.90% 0.90%
Rule 12b-1 Fees (after expense reduction)............... 0.25%(2) 1.00%(3) 1.00%(3)
Other Expenses(4)....................................... 0.41% 0.41% 0.41%
--------- ---- ----
Total Operating Expenses (after expense reduction)...... 1.56%(5) 2.31% 2.31%
- ---------------
<FN>
(1) Purchases of $1 million or more and certain purchases by retirement plans
are not subject to an initial sales charge; however, a contingent deferred
sales charge ("CDSC") of 1% will be imposed on such purchases in the event
of certain redemption transactions within 12 months following such
purchases. See "Information Concerning Shares of the Fund -- Purchases."
(2) The Fund has adopted a distribution plan for its shares in accordance with
Rule 12b-1 under the Investment Company Act of 1940, as amended (the "1940
Act") (the "Distribution Plan"), which provides that it will pay
distribution/service fees aggregating up to (but not necessarily all of)
0.35% per annum of the average daily net assets attributable to the Class A
shares. MFD is currently waiving the 0.10% distribution fee. This waiver may
be rescinded at any time without notice to shareholders. Distribution
expenses paid under the Plan, together with the initial sales charge, may
cause long-term shareholders to pay more than the maximum sales charge that
would have been permissible if imposed entirely as an initial sales charge.
See "Information Concerning Shares of the Fund -- Distribution Plan" below.
(3) The Fund's Distribution Plan provides that it will pay distribution/service
fees aggregating up to (but not necessarily all of) 1.00% per annum of the
average daily net assets attributable to Class B shares and Class C shares,
respectively. Distribution expenses paid under the Distribution Plan with
respect to Class B or Class C shares, together with any CDSC payable upon
redemption of Class B or Class C shares, may cause long-term shareholders to
pay more than the maximum sales charge that would have been permissible if
imposed entirely as an initial sales charge. See "Information Concerning
Shares of the Fund -- Distribution Plan" below.
(4) The Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its
custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the
effect of reducing the Fund's expenses). Any such fee reductions are not
reflected under "Other Expenses."
(5) Absent any expense reductions, "Total Operating Expenses," expressed as a
percentage of average daily net assets, would have been 1.66% for Class A
shares.
</TABLE>
2
<PAGE> 105
EXAMPLE OF EXPENSES
-------------------
<TABLE>
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(3)
------ ------- ------------- -------------
<S> <C> <C> <C> <C> <C>
(1) (1)
1 year....................... $ 72 $ 63 $ 23 $ 33 $ 23
3 years...................... 104 102 72 72 72
5 years...................... 138 144 124 124 124
(2) (2)
10 years...................... 232 246 246 265 265
- ---------------
<FN>
(1) Assumes no redemption.
(2) Class B shares convert to Class A shares approximately eight years after
purchase; therefore, years nine and ten reflect Class A expenses.
(3) Purchases subsequent to April 1, 1996 which are redeemed within 12 months of
purchase are subject to a 1% CDSC fee.
</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 Plan."
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
2. THE FUND
The Fund is a non-diversified series of the Trust, an open-end management
investment company which was organized as a business trust under the laws of The
Commonwealth of Massachusetts on July 31, 1987. The Trust presently consists of
two series, each of which represents a portfolio with separate investment
objectives and policies. Shares of the Fund are sold continuously to the public
and the Fund then uses the proceeds to buy securities for its portfolio. Three
classes of shares of the Fund currently are offered for sale to the general
public. Class A shares are offered at net asset value plus an initial sales
charge up to a maximum of 5.75% of the offering price (or a CDSC upon redemption
of 1.00% during the first year in the case of certain purchases of $1 million or
more and certain purchases by retirement plans) and subject to an annual
distribution fee and a service fee up to a maximum of 0.35% per annum. Class B
shares are offered at net asset value without an initial sales charge but
subject to a CDSC upon redemption (declining from 4.00% during the first year to
0% after six years) and an annual distribution fee and service fee up to a
maximum of 1.00% per annum. Class B shares will convert to Class A shares
approximately eight years after purchase. Class C shares are offered at net
asset value without an initial sales charge or a CDSC but are subject to a CDSC
upon redemption of 1.00% during the first year and an annual distribution fee
and service fee up to a maximum of 1.00% per annum. Class C shares do not
convert to any other class of shares of the Fund. In addition, the Fund offers
an additional class of shares, Class I shares, exclusively to certain
institutional investors. Class I shares are made available by means of a
separate Prospectus Supplement provided to institutional investors eligible to
purchase Class I shares and are offered at net asset value without an initial
sales charge or CDSC upon redemption and without an annual distribution and
service fee.
The Trust's Board of Trustees provides broad supervision over the affairs of the
Fund. 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
Fund also offers to buy back (redeem) its shares from its shareholders at any
time at net asset value, less any applicable CDSC.
3
<PAGE> 106
3. CONDENSED FINANCIAL INFORMATION
The following information has been audited for the period from the commencement
of investment operations, November 18, 1993 to October 31, 1996 and should be
read in conjunction with the financial statements included in the Fund's Annual
Report to Shareholders which are incorporated by reference into the SAI in
reliance upon the report of the Fund's independent auditors, given upon their
authority, as experts in accounting and auditing. The Fund's current independent
auditors are Deloitte & Touche LLP.
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Year Ended October 31 1996 1995 1994*
- -------------------------------------------------------------------------------------------------------------------------
Class A
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 18.16 $ 17.45 $ 15.00
-------- -------- ------
Income from investment operations# -
Net investment loss[Section] $ (0.07) $ -- $ (0.02)
Net realized and unrealized gain on investments and foreign currency transactions 2.73 0.93 2.47
-------- -------- ------
Total from investment operations $ 2.66 $ 0.93 $ 2.45
-------- -------- ------
Less distributions declared to shareholders -
From net investment income $ (0.01) $ -- $ --
From net realized gain on investments and foreign currency transactions (1.72) (0.22) --
-------- -------- ------
Total distributions declared to shareholders $ (1.73) $ (0.22) $ --
-------- -------- ------
Net asset value - end of period $ 19.09 $ 18.16 $ 17.45
-------- -------- ------
Total return[Double dagger] 15.73 % 5.47% 16.33 %++
Ratios (to average net assets)/Supplemental data{Section]:
Expenses## 1.58 % 1.63% 1.57 %+
Net investment income (loss) (0.35)% 0.02% (0.14)%+
Portfolio turnover 95 % 149% 100%
Average commission rate### $ 0.0130 $ -- $ --
Net assets at end of period (000 omitted) $172,106 $143,543 $131,503
- ------------
<FN>
* For the period from the commencement of offering of Class A shares,
November 18, 1993 to October 31, 1994.
+ Annualized.
++ Not annualized.
# Per share data is based on average shares outstanding.
[Double dagger] Total returns for Class A shares do not include the applicable sales
charge. If the sales charge had been included, the results would have
been lower.
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
### Average commission rate is calculated for funds with fiscal years beginning
on or after September 1, 1995.
[Section] The distributor did not impose a portion of its distribution fee for
the periods indicated. If this fee been incurred by the Fund, the net
investment loss per share and ratios would have been:
<CAPTION>
<S> <C> <C> <C>
Net investment loss $(0.09) $ -- $(0.04)
Ratios (to average net assets):
Expenses## 1.68 % 1.73 % 1.67 %+
Net investment loss (0.45)% (0.08)% (0.24)%+
</TABLE>
4
<PAGE> 107
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Year Ended October 31 1996 1995 1994*
- -------------------------------------------------------------------------------------------------------------------------
Class B
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 17.97 $ 17.32 $ 15.00
-------- -------- --------
Income from investment operations# -
Net investment loss $ (0.21) $ (0.14) $ (0.15)
Net realized and unrealized gain on investments and foreign currency transactions 2.70 0.92 2.47
-------- -------- --------
Total from investment operations $ 2.49 $ 0.78 $ 2.32
-------- -------- --------
Less distributions declared to shareholders from net realized gain on investments
and foreign currency transactions $ (1.59) $ (0.13) $ --
-------- -------- --------
Net asset value - end of period $ 18.87 $ 17.97 $ 17.32
-------- -------- --------
Total return 14.77% 4.61% 15.47 %++
Ratios (to average net assets)/Supplemental data:
Expenses## 2.39 % 2.45 % 2.39 %+
Net investment loss (1.16)% (0.80)% (0.95)%+
Portfolio turnover 95 % 149 % 100 %
Average commission rate### $ 0.0130 $ -- $ --
Net assets at end of period (000 omitted) $282,668 $247,437 $236,971
- ------------
<FN>
* For the period from the commencement of offering of Class B shares,
November 18, 1993 to October 31, 1994.
+ Annualized.
++ Not annualized.
# Per share data is based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
### Average commission rate is calculated for funds with fiscal years
beginning on or after September 1, 1995.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Year Ended October 31 1996 1995 1994**
- -------------------------------------------------------------------------------------------------------------------------
Class C
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 17.96 $ 17.34 $ 16.04
-------- ------- -------
Income from investment operations# -
Net investment loss $ (0.20) $ (0.13) $ (0.13)
Net realized and unrealized gain on investments and foreign currency transactions 2.70 0.92 1.43
-------- ------- -------
Total from investment operations $ 2.50 $ 0.79 $ 1.30
-------- ------- -------
Less distributions declared to shareholders from net realized gain on investments
and foreign currency transactions $ (1.61) $ (0.17) $ --
-------- ------- -------
Net asset value - end of period $ 18.85 $ 17.96 $ 17.34
-------- ------- -------
Total return 14.88% 4.68% 8.10 %++
Ratios (to average net assets)/Supplemental data:
Expenses## 2.32 % 2.38 % 2.31 %+
Net investment loss (1.10)% (0.72)% (0.83)%+
Portfolio turnover 95 % 149 % 100 %
Average commission rate### $0.0130 $ -- $ --
Net assets at end of period (000 omitted) $19,994 $13,349 $11,872
- -----------
<FN>
** For the period from the commencement of offering of Class C shares,
January 3, 1994 to October 31, 1994.
+ Annualized.
++ Not annualized.
# Per share data is based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
### Average commission rate is calculated for funds with fiscal years beginning
on or after September 1, 1995.
</TABLE>
5
<PAGE> 108
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 temporary
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 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
Consistent with the Fund's objective and policies, the Fund may invest in
securities of issuers whose principal activities are located in emerging market
countries. Emerging market countries include any country determined by the
Adviser to have an emerging market economy, taking into account a number of
factors, including whether the country has a low- to middle-income economy
according to the International Bank for Reconstruction and Development, the
country's foreign currency debt rating, its political and economic stability and
the development of its financial and capital markets. The Adviser determines
whether an issuer's principal activities are located in an emerging market
country by considering such factors as its country of organization, the
principal trading market for its securities and the source of its revenues and
assets. The issuer's principal activities generally are deemed to be located in
a particular country if: (a) the security is issued or guaranteed by the
government of that country or
6
<PAGE> 109
any of its agencies, authorities or instrumentalities; (b) the issuer is
organized under the laws of, and maintains a principal office in, that country;
(c) the issuer has its principal securities trading market in that country; (d)
the issuer derives 50% or more of its total revenues from goods sold or services
performed in that country; or (e) the issuer has 50% or more of its assets in
that country.
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 net assets in non-convertible fixed income securities rated Ba or lower
by Moody's Investors Service, Inc. ("Moody's") or BB or lower by Standard &
Poor's Ratings Services ("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 SAI 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 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
7
<PAGE> 110
otherwise subject to a stay order, the Fund's right to liquidate the securities
may be restricted (during which time the value of the securities could decline).
As discussed in the SAI, the Fund has adopted certain procedures intended to
minimize 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"). A determination is made based upon
a continuing review of the trading markets for a specific Rule 144A security,
whether such security is liquid and thus not subject to the Fund's limitations
on investing not more than 15% of its net assets in illiquid investments. The
Board of Trustees has adopted guidelines and delegated to the Adviser the daily
function of determining and monitoring liquidity of restricted securities. The
Board, however, retains oversight focusing on factors, such as valuation,
liquidity and availability of information. Investing in Rule 144A securities
could have the effect of decreasing the level of liquidity in the Fund to the
extent that qualified institutional buyers become for a time uninterested in
purchasing Rule 144A securities held in the Fund's portfolio. Subject to the
Fund's 15% limitation on investments in illiquid investments, the Fund may also
invest in restricted securities that may not be sold under Rule 144A, which
presents certain risks. As a result, the Fund might not be able to sell these
securities when the Adviser wishes to do so, or might have to sell them at less
than fair value. In addition, market quotations are less readily available.
Therefore, 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.
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.
8
<PAGE> 111
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 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 in cash, U.S.
Government securities or an
9
<PAGE> 112
irrevocable letter of credit 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 SAI.
INDEXED SECURITIES: The Fund may invest in indexed securities whose value is
linked to foreign currencies, precious metals, interest rates, commodities,
indices or other financial indicators. Most indexed securities are short to
intermediate term fixed-income securities whose values at maturity (i.e.,
principal value) or interest rates rise or fall according to the change in one
or more specified underlying instruments. Indexed securities may be positively
or negatively indexed (i.e., their principal value or interest rates may
increase or decrease if the underlying instrument appreciates), and may have
return characteristics similar to direct investments in the underlying
instrument or to one or more options on the underlying instrument. Indexed
securities may be more volatile than the underlying instrument itself.
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.
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 SAI.
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
10
<PAGE> 113
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.
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.
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 changes in exchange rates and more limited information about foreign
issuers.
EMERGING MARKET SECURITIES: The risks of investing in foreign securities may be
intensified in the case of investments in emerging markets. Securities of many
issuers in emerging markets may be less liquid and more volatile than securities
of comparable domestic issuers. Emerging markets also have different clearance
and settlement procedures, and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when a portion of the assets of the
Fund is uninvested and no return is earned thereon. The inability of the Fund to
make intended security purchases due to settlement problems could cause the Fund
to miss attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result in losses to the Fund due to
subsequent declines in value of the portfolio security, a decrease in the level
of liquidity in the Fund's portfolio, or, if the Fund has entered into a
contract to sell the security, in possible liability to the purchaser. Certain
markets may require payment for securities before delivery and in such markets,
the Fund bears the risk that the securities will not be delivered and that the
Fund's payments will not be returned. Securities prices in emerging markets can
be significantly more volatile than in the more developed nations of the world,
reflecting the greater uncertainties of investing in less established markets
and economies. In particular, countries with emerging markets may have
relatively unstable governments, present the risk of nationalization of
businesses, restrictions on foreign ownership, or prohibitions of repatriation
of assets, and may have less protection of property rights than more developed
countries. The economies of countries with emerging markets may be predominantly
based on only a few industries, may be highly vulnerable to changes in local or
global trade conditions, and may suffer from extreme and volatile debt burdens
or inflation rates. Local securities markets may trade a small number of
securities and may be unable to respond effectively to increases in trading
volume, potentially making prompt
11
<PAGE> 114
liquidation of substantial holdings difficult or impossible at times. Securities
of issuers located in countries with emerging markets may have limited
marketability and may be subject to more abrupt or erratic price movements.
Certain emerging markets may require governmental approval for the repatriation
of investment income, capital or the proceeds of sales of securities by foreign
investors. In addition, if a deterioration occurs in an emerging market's
balance of payments or for other reasons, a country could impose temporary
restrictions on foreign capital remittances. The Fund could be adversely
affected by delays in, or a refusal to grant, any required governmental approval
for repatriation of capital, as well as by the application to the Fund of any
restrictions on investments.
Investment in certain foreign emerging market debt obligations may be restricted
or controlled to varying degrees. These restrictions or controls may at times
preclude investment in certain foreign emerging market debt obligations and
increase the expenses of the Fund.
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 SAI 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 SAI
for more information on lower rated securities.
12
<PAGE> 115
CERTAIN 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 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 SAI 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 SAI includes a discussion of investment policies and a listing of specific
investment restrictions which govern the Fund's investment policies. The
specific investment restrictions listed in the SAI may be changed without
shareholder approval unless indicated otherwise. See "Investment Objective,
Policies and Restrictions" in the SAI.
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"). Under the
Advisory Agreement, the Adviser provides the Fund with overall investment
advisory services. The Fund's assets are allocated by the Adviser among:
domestic (i.e., U.S.) growth companies; foreign developed markets (e.g., Western
European countries) growth companies; and foreign emerging markets (e.g., South
American and Pacific Rim countries) growth companies. The Fund's assets
allocated to domestic growth companies are managed by John W. Ballen and David
Mannheim, Senior Vice Presidents of the Adviser, and Toni Y. Shimura, a Vice
President of the Adviser, each of whom is the Fund's portfolio managers. Mr.
Ballen has been employed as a portfolio manager by the Adviser since 1984 and
has been one of the Fund's portfolio managers since January 1, 1996. Mr.
Mannheim has been employed as a portfolio manager by the Adviser since 1988 and
has been one of the Fund's portfolio managers since inception. Ms. Shimura has
been employed as a portfolio manager by the Adviser since 1987 and has been one
of the Fund's portfolio managers since March 1, 1995. The Fund's assets
allocated to foreign developed markets growth companies are managed by a
committee of investment research analysts. This committee includes investment
analysts employed not only by the Adviser but also by MFS International (U.K.)
Limited, a wholly owned subsidiary of MFS, and investment analysts employed by
Foreign & Colonial Management Limited ("FCM") and Foreign & Colonial Emerging
Markets Limited ("FCEM"), the Fund's sub-advisors, with which MFS has entered
into a strategic alliance, as described below. This portion of the Fund's assets
are further allocated among countries and industries by the
13
<PAGE> 116
analysts acting together as a group. Individual analysts are then responsible
for selecting what they view as the securities best suited to meet the Fund's
investment objective within their assigned geographic and industry
responsibility.
The Fund's assets allocated to foreign emerging markets growth securities are
managed by Dr. Arnab Kumar Banerji and Jeffery Chowdhry. Dr. Banerji, Chief
Investment Officer of FCEM, has been employed by FCEM as a portfolio manager
since 1993. From 1989 to 1993, Dr. Banerji served as Joint Head of Emerging
Markets for Citibank Global Asset Management. Mr. Chowdhry, a Director of FCEM,
has been employed by FCEM as a portfolio manager since 1994. Prior to 1994, Mr.
Chowdhry was a Director of BZW Investment Management.
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, 1996, MFS received management fees under the Advisory
Agreement of $4,060,523.
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, and seven variable accounts, each of which is a registered
investment company established by Sun Life Assurance Company of Canada (U.S.)
("Sun Life of Canada (U.S.)") in connection with the sale of various
fixed/variable annuity contracts. MFS and its wholly-owned subsidiary, MFS
Institutional Advisors, Inc. provide investment advice to substantial private
clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the United States, Massachusetts Investors
Trust. Net assets under the management of the MFS organization were
approximately $54 billion on behalf of approximately 2.3 million investor
accounts as of January 31, 1997. As of such date, the MFS organization managed
approximately $20.1 billion of assets invested in fixed income funds and fixed
income portfolios, approximately $3.9 billion of assets in foreign securities,
and approximately $30.3 billion of assets in equity securities. MFS is a
subsidiary of Sun Life of Canada (U.S.), which in turn is a wholly owned
subsidiary of Sun Life Assurance Company of Canada ("Sun Life"). The Directors
of MFS are A. Keith Brodkin, Jeffrey L. Shames, Arnold D. Scott, John D. McNeil
and Donald A. Stewart. 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 Stewart are the Chairman and President, respectively, of Sun
Life. Sun Life, a mutual life insurance company, is one of the largest
international life insurance companies and has been operating in the United
States since 1895, establishing a headquarters office here in 1973. The
executive officers of MFS report to the Chairman of Sun Life.
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 Fund's Advisory Agreement permits the Adviser
from time to time to engage one or more sub-advisers to assist in the
performance of its services. The Adviser has engaged two sub-advisers for the
Fund: FCM and FCEM. As described above, the sub-advisers manage the Fund's
assets allocated to foreign emerging markets, and investment research analysts
employed by the sub-advisers are a part of the Committee which manages the
Fund's assets allocated to foreign developed markets growth companies.
FCM and FCEM are each companies incorporated under the laws of England and Wales
and are located at Exchange House, Primrose Street, London EC2A 2NY, United
Kingdom. FCM is a wholly owned subsidiary of Hypo Foreign & Colonial Management
(Holdings) Ltd. ("Hypo F&C"). Fifty percent of the outstanding voting securities
of Hypo F&C is owned by each of (i) Poutney Hill Holdings Limited, which is
wholly owned by five closed-end publicly listed investment trusts managed by
FCM, including Foreign & Colonial Investment Trust PLC, and (ii) Hypo (U.K.)
Holdings Ltd., which is a wholly owned subsidiary of HYPO-Bank
14
<PAGE> 117
(Bayerische Hypotheken-und Wechsel-Bank AG), the oldest publicly listed, and
fifth largest, commercial bank in Germany, founded in 1835. FCM has a history of
money management dating from 1868 and the establishment of the world's oldest
closed-end fund, Foreign & Colonial Investment Trust PLC. As of November 29,
1996, FCM managed approximately U.S. $43.6 billion of assets in securities. The
Adviser has entered into a sub-advisory agreement with FCM dated April 1, 1996.
For its services, the Adviser pays FCM a management fee, computed and paid
monthly, in an amount equal to 1.00% per annum of the average daily net asset
value of the Fund's assets managed by FCM. For the Fund's fiscal year ended
October 31, 1996, FCEM received management fees under the sub-advisory agreement
of $567,666.
FCEM is a wholly owned subsidiary of FCEM (HOLDINGS) Limited ("FCEM Holdings").
FCEM Holdings is a subsidiary of FCM, which owns 75.1% of the outstanding voting
securities of FCEM Holdings. Garantia Banking Limited, a wholly owned subsidiary
of Banco de Investmentos Garantia SA located at Rua Jorge Coelho, 16-13th Floor,
CEP 01451-020, Sao Paulo, Brazil, owns 14.9% of the outstanding voting
securities of FCEM Holdings, and Audley William Twiston Davies, the managing
Director of FCEM, owns 10% of the outstanding voting securities of FCEM
Holdings. FCEM manages emerging market investments for FCM and FCEM serves as
the investment adviser to public closed-end and open-end funds and segregated
accounts specializing in emerging markets. As of November 29, 1996, FCEM managed
approximately U.S. $4.3 billion of assets invested in emerging markets. FCM has
entered into a sub-advisory agreement with FCEM dated April 1, 1996. For its
service, FCM pays FCEM a management fee, computed and paid monthly, in an amount
equal to 1.00 per annum of the average daily net asset value of the Fund's
assets managed by FCM.
MFS and FCEM have entered into a strategic alliance pursuant to which they have
agreed to cooperate in distributing, advising and managing investment products
throughout the world. In this arrangement certain expenses and revenues relating
to their cooperative activities, including investment advisory fees received
from the Fund and certain expenses incurred by MFS, FCM and their affiliates
attributable to their services to the Fund, are shared. As part of this
alliance, the portfolio managers and investment analysts of MFS and FCM share
their views on a variety of investment related issues, such as the economy,
securities markets, portfolio securities and their issuers, investment
recommendations, strategies and techniques, risk analysis, trading strategies
and other portfolio management matters. MFS has access to the extensive
international equity investment expertise of FCM, and FCM has access to the
extensive U.S. equity investment expertise of MFS. MFS and FCM each have
investment personnel working in each other's offices in Boston and London,
respectively.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for portfolios of other clients of MFS or clients of FCM.
Some simultaneous transactions are inevitable when several clients receive
investment advice from MFS and FCM, particularly when the same securities are
suitable for more than one client. While in some cases this arrangement could
have a detrimental effect on the price or availability of the securities as far
as the Fund is concerned, in other cases it may produce increased investment
opportunities for the Fund.
ADMINISTRATOR -- MFS provides the Fund with certain administrative services
pursuant to a Master Administrative Services Agreement dated March 1, 1997.
Under this Agreement, MFS provides the Fund with certain financial, legal,
compliance, shareholder communications and other administrative services. As a
partial reimbursement for the cost of providing these services, the Fund pays
MFS an administrative fee up to 0.015% per annum of the Fund's average daily net
assets, provided that the administrative fee is not assessed on Fund assets that
exceed $3 billion.
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.
15
<PAGE> 118
7. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Class A, B and C shares of the Fund may be purchased at the public offering
price through any dealer and other financial institutions ("dealers") having a
selling agreement with MFD. Dealers may also charge their customers fees
relating to an investment in the Fund.
This Prospectus offers Class A, B, and C shares to the general public, which
bear sales charges and distribution fees in different forms and amounts, as
described below:
CLASS A SHARES: Class A shares are generally offered at net asset value plus an
initial sales charge, but in certain cases are offered at net asset value
without an initial sales charge but subject to a CDSC.
<TABLE>
PURCHASES SUBJECT TO INITIAL SALES CHARGE. Class A shares are offered at net
asset value plus an initial sales charge as follows:
<CAPTION>
- ----------------------------------------------------------------------------------------------------
SALES CHARGE* AS PERCENTAGE OF DEALER
------------------------------ ALLOWANCE AS A
OFFERING NET AMOUNT PERCENTAGE OF
AMOUNT OF PURCHASE PRICE INVESTED OFFERING PRICE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000........................ 5.75% 6.10% 5.00%
$50,000 but less than $100,000........... 4.75 4.99 4.00
$100,000 but less than $250,000.......... 4.00 4.17 3.20
$250,000 but less than $500,000.......... 2.95 3.04 2.25
$500,000 but less than $1,000,000........ 2.20 2.25 1.70
$1,000,000 or more....................... None** None** See Below**
- -------------------------------------------------------------------------------------------------------
<FN>
* Because of rounding in the calculation of offering price, actual sales
charges may be more or less than those calculated using the percentages
above.
** A CDSC will apply to such purchases, as discussed below.
</TABLE>
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price as shown in the above table. In the case of the
maximum sales charge, the dealer retains 5% and MFD retains approximately 3/4 of
1% of the public offering price. The sales charge may vary depending on the
number of shares of the Fund as well as certain other MFS Funds owned or being
purchased, the existence of an agreement to purchase additional shares during a
13-month period (or 36-month period for purchases of $1 million or more) or
other special purchase programs. A description of the Right of Accumulation,
Letter of Intent and Group Purchase privileges by which the sales charge may be
reduced is set forth in the SAI.
PURCHASES SUBJECT TO A CDSC (but not an initial sales charge). In the following
four circumstances, Class A shares of the Fund are offered at net asset value
without an initial sales charge but subject to a CDSC equal to 1% of the lesser
of the value of the shares redeemed (exclusive of reinvested dividend and
capital gain distributions) or the total cost of such shares, in the event of a
share redemption within 12 months following the purchase:
(i) on investments of $1 million or more in Class A shares;
(ii) on investments in Class A shares by certain retirement plans subject to
the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), prior to July 1, 1996: (a) the plan had established an
account with the Shareholder Servicing Agent and (b) the sponsoring
organization had demonstrated to the satisfaction of MFD that either
(i) the employer had at least 25 employees or (ii) the aggregate
purchases by the retirement plan of Class A shares of the MFS Funds
would be in an aggregate amount of at least $250,000 within a
reasonable period of time, as determined by MFD in its sole discretion;
(iii) on investments in Class A shares by certain retirement plans subject
to ERISA, if: (a) the retirement plan and/or sponsoring organization
subscribes to the MFS FUNDamental 401(k) Program or any similar
recordkeeping system
16
<PAGE> 119
made available by the Shareholder Servicing Agent (the "MFS
Participant Recordkeeping System"); (b) the plan establishes an
account with the Shareholder Servicing Agent on or after July 1, 1996;
and (c) the aggregate purchases by the retirement plan of Class A
shares of the MFS Funds will be in an aggregate amount of at least
$500,000 within a reasonable period of time, as determined by MFD in
its sole discretion; and
(iv) on investments in Class A shares by certain retirement plans subject to
ERISA, if: (a) the plan establishes an account with the Shareholder
Servicing Agent on or after July 1, 1996 and (b) the plan has, at the
time of purchase, a market value of $500,000 or more invested in shares
of any class or classes of the MFS Funds. THE RETIREMENT PLAN WILL
QUALIFY UNDER THIS CATEGORY ONLY IF THE PLAN OR ITS SPONSORING
ORGANIZATION INFORMS THE SHAREHOLDER SERVICING AGENT PRIOR TO THE
PURCHASE THAT THE PLAN HAS A MARKET VALUE OF $500,000 OR MORE INVESTED
IN SHARES OF ANY CLASS OR CLASSES OF THE MFS FUNDS. THE SHAREHOLDER
SERVICING AGENT HAS NO OBLIGATION INDEPENDENTLY TO DETERMINE WHETHER
SUCH A PLAN QUALIFIES UNDER THIS CATEGORY.
In the case of such purchases, MFD will pay commissions to dealers on new
investments in Class A shares made through such dealers, as follows:
<TABLE>
<CAPTION>
COMMISSION PAID
BY MFD
TO DEALERS CUMULATIVE PURCHASE AMOUNT
--------------- --------------------------
<S> <C>
1.00%.................. On the first $2,000,000, plus
0.80%.................. Over $2,000,000 to $3,000,000, plus
0.50%.................. Over $3,000,000 to $50,000,000, plus
0.25%.................. Over $50,000,000
</TABLE>
For purposes of determining the level of commissions to be paid to dealers with
respect to a shareholder's new investment in Class A shares made on or after
April 1, 1996, purchases for each shareholder account (and certain other
accounts for which the shareholder is a record or beneficial holder) will be
aggregated over a 12-month period (commencing from the date of the first such
purchase).
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
WAIVERS OF INITIAL SALES CHARGE AND CDSC. In certain circumstances, the initial
sales charge imposed upon purchases of Class A shares and the CDSC imposed upon
redemptions of Class A shares is waived. These circumstances are described in
Appendix A to this Prospectus. In addition to these circumstances, the CDSC
imposed upon the redemption of Class A shares is waived with respect to shares
held by certain retirement plans qualified under Section 401(a) or 403(b) of the
Internal Revenue Code of 1986, as amended (the "Code"), and subject to ERISA,
where:
(i) the retirement plan and/or sponsoring organization does not subscribe to
the MFS Participant Recordkeeping System; and
(ii) the retirement plan and/or sponsoring organization demonstrates to the
satisfaction of, and certifies to the Shareholder Servicing Agent that
the retirement plan has, at the time of certification or will have
pursuant to a purchase order placed with the certification, a market
value of $500,000 or more invested in shares of any class or classes of
the MFS Funds and aggregate assets of at least $10 million;
provided, however, that the CDSC will not be waived (i.e., it will be imposed)
in the event that there is a change in law or regulations which results in a
material adverse change to the tax advantaged nature of the plan, or in the
event that the plan and/or sponsoring organization: (i) becomes insolvent or
bankrupt; (ii) is terminated or partially terminated under ERISA or is
liquidated or dissolved; or (iii) is acquired by, merged into, or consolidated
with any other entity.
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<PAGE> 120
CLASS B SHARES: Class B shares are offered at net asset value without an initial
sales charge but subject to a CDSC upon redemption as follows:
<TABLE>
<CAPTION>
YEAR OF 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%
</TABLE>
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividends or capital gain distributions.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
Except as described below, MFD will pay commissions to dealers of 3.75% of the
purchase price of Class B shares purchased through dealers. MFD will also
advance to dealers the first year service fee payable under the Fund's
Distribution Plan (see "Distribution Plan" below) at a rate equal to 0.25% of
the purchase price of such shares. Therefore, the total amount paid to a dealer
upon the sale of Class B shares is 4% of the purchase price of the shares
(commission rate of 3.75% plus a service fee equal to 0.25% of the purchase
price).
Class B shares purchased by a retirement plan whose sponsoring organization
subscribes to the MFS Participant Recordkeeping System and which has established
its account with the Shareholder Servicing Agent on or after July 1, 1996, will
be subject to the CDSC described above, only under limited circumstances, as
explained below under "Waivers of CDSC." With respect to such purchases, MFD
pays an amount to dealers equal to 3.00% of the amount purchased through such
dealers (rather than the 4.00% payment described above), which is comprised of a
commission of 2.75% plus the advancement of the first year service fee equal to
0.25% of the purchase price payable under the Fund's Distribution Plan. As
discussed above, such retirement plans are eligible to purchase Class A shares
of the Fund at net asset value without an initial sales charge but subject to a
1% CDSC if the plan has, at the time of purchase, a market value of $500,000 or
more invested in shares of any class or classes of the MFS Funds. IN THIS EVENT,
THE PLAN OR ITS SPONSORING ORGANIZATION SHOULD INFORM THE SHAREHOLDER SERVICING
AGENT THAT THE PLAN IS ELIGIBLE TO PURCHASE CLASS A SHARES UNDER THIS CATEGORY;
THE SHAREHOLDER SERVICING AGENT HAS NO OBLIGATION INDEPENDENTLY TO DETERMINE
WHETHER SUCH A PLAN QUALIFIES UNDER THIS CATEGORY FOR THE PURCHASE OF CLASS A
SHARES.
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon redemption of
Class B shares is waived. These circumstances are described in Appendix A to
this Prospectus. In addition to these circumstances, the CDSC imposed upon the
redemption of Class B shares is waived with respect to shares held by a
retirement plan whose sponsoring organization subscribes to the MFS Participant
Recordkeeping System and which has established an account with the Shareholder
Servicing Agent on or after July 1, 1996; provided, however, that the CDSC will
not be waived (i.e., it will be imposed) in the event that there is a change in
law or regulations which results in a material adverse change to the tax
advantaged nature of the plan, or in the event that the plan and/or sponsoring
organization: (i) becomes insolvent or bankrupt; (ii) is terminated or partially
terminated under ERISA or is liquidated or dissolved; or (iii) is acquired by,
merged into, or consolidated with any other entity.
CONVERSION OF CLASS B SHARES. Class B shares of the Fund that remain outstanding
for approximately eight years will convert to Class A shares of the same Fund.
Shares purchased through the reinvestment of distributions paid in respect of
Class B shares will be treated as Class B shares for purposes of the payment of
the distribution and service fees under the Fund's Distribution
18
<PAGE> 121
Plan. See "Distribution Plan" below. However, for purposes of conversion to
Class A shares, all shares in a shareholder's account that were purchased
through the reinvestment of dividends and distributions paid in respect of Class
B shares (and which have not converted to Class A shares as provided in the
following sentence) will be held in a separate sub-account. Each time any Class
B shares in the shareholder's account (other than those in the sub-account)
convert to Class A shares, a portion of the Class B shares then in the
sub-account will also convert to Class A shares. The portion will be determined
by the ratio that the shareholder's Class B shares not acquired through
reinvestment of dividends and distributions that are converting to Class A
shares bear to the shareholder's total Class B shares not acquired through
reinvestment. The conversion of Class B shares to Class A shares is subject to
the continuing availability of a ruling from the Internal Revenue Service or an
opinion of counsel that such conversion will not constitute a taxable event for
federal tax purposes. There can be no assurance that such ruling or opinion will
be available, and the conversion of Class B shares to Class A shares will not
occur if such ruling or opinion is not available. In such event, Class B shares
would continue to be subject to higher expenses than Class A shares for an
indefinite period.
CLASS C SHARES: Class C shares are offered at net asset value without an initial
sales charge but are subject to a CDSC upon redemption of 1.00% during the first
year. Class C shares do not convert to any other class of shares of the Fund.
The maximum investment in Class C shares that may be made is up to $1,000,000
per transaction.
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividend and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividend or capital gain distributions.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" below for
further discussion of the CDSC.
MFD will pay dealers 1.00% of the purchase price of Class C shares purchased
through dealers and, as compensation therefor, MFD will retain the 1.00% per
annum distribution and service fee paid under the Fund's Distribution Plan to
MFD for the first year after purchase (see "Distribution Plan" below).
Class C shares are not currently available for purchase by any retirement plan
qualified under Sections 401(a) or 403(b) of the Internal Revenue Code of 1986,
as amended (the "Code"), if the retirement plan and/or the sponsoring
organization subscribe to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping program made available by the Shareholder Servicing Agent.
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon redemption of
Class C shares is waived. These circumstances are described in Appendix A to
this Prospectus.
GENERAL: The following information applies to purchases of all classes of the
Fund's shares.
MINIMUM INVESTMENT. Except as described below, the minimum initial investment is
$1,000 per account and the minimum additional investment is $50 per account.
Accounts being established for monthly automatic investments and under payroll
savings programs and tax-deferred retirement programs (other than IRA's)
involving the submission of investments by means of group remittal statements
are subject to a $50 minimum on initial and additional investments per account.
The minimum initial investment for IRAs is $250 per account and the minimum
additional investment is $50 per account. Accounts being established for
participation in the Automatic Exchange Plan are subject to a $50 minimum on
initial and additional investments per account. There are also other limited
exceptions to these minimums for certain tax-deferred retirement programs. Any
minimums may be changed at any time at the discretion of MFD. The Fund reserves
the right to cease offering its shares for sale at any time.
SUBSEQUENT INVESTMENT BY TELEPHONE: Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-free
at (800) 225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this telephone
purchase privilege must so elect on their Account Application and designate
thereon a bank and account number from which purchases will be made. If a
telephone purchase request is received by the Shareholder Servicing Agent on any
business day prior to the close of regular trading on the Exchange (generally,
4:00 p.m., Eastern time), the purchase will occur at the closing net asset value
of the shares purchased on
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that day. The Shareholder Servicing Agent may be liable for any losses resulting
from unauthorized telephone transactions if it does not follow reasonable
procedures designed to verify the identity of the caller. The Shareholder
Servicing Agent will request personal or other information from the caller, and
will normally also record calls. Shareholders should verify the accuracy of
confirmation statements immediately after their receipt.
RIGHT TO REJECT PURCHASE ORDERS/MARKET TIMING. Purchases and exchanges should be
made for investment purposes only. The Fund and MFD each reserve the right to
reject or restrict any specific purchase or exchange request. In the event that
the Fund or MFD rejects an exchange request, neither the redemption nor the
purchase side of the exchange will be processed.
The Fund is not designed for professional market timing organizations or other
entities using programmed or frequent exchanges. The Fund defines a "market
timer" as an individual, or organization acting on behalf of one or more
individuals, if (i) the individual or organization makes three or more exchange
requests out of the Fund per calendar year and (ii) any one of such exchange
requests represents shares equal in value to 1/2 of 1% or more of the Fund's net
assets at the time of the request. Accounts under common ownership or control,
including accounts administered by market timers, will be aggregated for
purposes of this definition.
As noted above, the Fund and MFD each reserve the right to reject or restrict
any specific purchase and exchange request and, in addition, may impose specific
limitations with respect to market timers, including delaying for up to seven
days the purchase side of an exchange request by market timers or specifically
rejecting or otherwise restricting purchase or exchange requests by market
timers. In the event that any individual or entity is determined either by the
Fund or MFD, in its sole discretion, to be a market timer with respect to any
calendar year, the Fund and/or MFD will reject all exchange requests into the
Fund during the remainder of that calendar year. Other funds in the MFS Funds
may have different and/or more or less restrictive policies with respect to
market timers than the Fund. These policies are disclosed in the Prospectuses of
these other MFS Funds.
DEALER CONCESSIONS. Dealers may receive different compensation with respect to
sales of Class A, Class B and Class C shares. In addition, from time to time,
MFD may pay dealers 100% of the applicable sales charge on sales of Class A
shares of certain specified MFS Funds sold by such dealer during a specified
sales period. In addition, MFD or its affiliates may, from time to time, pay
dealers an additional commission equal to 0.50% of the net asset value of all of
the Class B and/or Class C shares of certain specified MFS Funds sold by such
dealer during a specified sales period. In addition, from time to time, MFD, at
its expense, may provide additional commissions, compensation or promotional
incentives ("concessions") to dealers which sell shares of the Fund. Such
concessions provided by MFD may include financial assistance to dealers in
connection with preapproved conferences or seminars, sales or training programs
for invited registered representatives, payment for travel expenses, including
lodging, incurred by registered representatives for such seminars or training
programs, seminars for the public, advertising and sales campaigns regarding one
or more MFS Funds, and/or other dealer-sponsored events. From time to time, MFD
may make expense reimbursements for special training of a dealer's registered
representatives in group meetings or to help pay the expenses of sales contests.
Other concessions may be offered to the extent not prohibited by state laws or
any self-regulatory agency, such as the NASD.
SPECIAL INVESTMENT PROGRAMS. For shareholders who elect to participate in
certain investment programs (e.g., the Automatic Investment Plan) or other
shareholder services, MFD or its affiliates may either (i) give a gift of
nominal value, such as a hand-held calculator or (ii) make a nominal charitable
contribution on their behalf.
RESTRICTIONS ON ACTIVITIES OF NATIONAL BANKS. The Glass-Steagall Act prohibits
national banks from engaging in the business of underwriting, selling or
distributing securities. Although the scope of the prohibition has not been
clearly defined, MFD believes that such Act should not preclude banks from
entering into agency agreements with MFD. If, however, a bank were prohibited
from so acting, the Trustees would consider what actions, if any, would be
necessary to continue to provide efficient and effective shareholder services in
respect of shareholders who invested in the Fund through a national bank. It is
not expected that shareholders would suffer any adverse financial consequence as
a result of these occurrences. In addition, state securities laws on
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this issue may differ from the interpretation of federal law expressed herein
and banks and financial institutions may be required to register as
broker-dealers pursuant to state law.
------------------------
A shareholder whose shares are held in the name of, or controlled by, a dealer
might not receive many of the privileges and services from the Fund (such as
Right of Accumulation, Letter of Intent and certain recordkeeping services) that
the Fund ordinarily provides.
EXCHANGES
Subject to the requirements set forth below, some or all of the shares in an
account with the Fund for which payment has been received by the Fund (i.e., an
established account) may be exchanged for shares of the same class of any of the
other MFS Funds at net asset value (if available for sale). Shares of one class
may not be exchanged for shares of any other class.
EXCHANGES AMONG MFS FUNDS (EXCLUDING EXCHANGES FROM MFS MONEY MARKET FUNDS): No
initial sales charges or CDSC will be imposed in connection with an exchange
from shares of an MFS Fund to shares of any other MFS Fund, except with respect
to exchanges from an MFS money market fund to another MFS Fund which is not an
MFS money market fund (discussed below). With respect to an exchange involving
shares subject to a CDSC, the CDSC will be unaffected by the exchange and the
holding period for purposes of calculating the CDSC will carry over to the
acquired shares.
EXCHANGES FROM AN MFS MONEY MARKET FUND: Special rules apply with respect to the
imposition of an initial sales charge or a CDSC for exchanges from an MFS money
market fund to another MFS Fund which is not an MFS money market fund. These
rules are described under the caption "Exchanges" in the Prospectuses of those
MFS money market funds.
EXCHANGES INVOLVING THE MFS FIXED FUND: Class A shares of any MFS Fund held by
certain qualified retirement plans may be exchanged for units of participation
of the MFS Fixed Fund (a bank collective investment fund) (the "Units"), and
Units may be exchanged for Class A shares of any MFS Fund. With respect to
exchanges between Class A shares subject to a CDSC and Units, the CDSC will
carry over to the acquired shares or Units and will be deducted from the
redemption proceeds when such shares or Units are subsequently redeemed,
assuming the CDSC is then payable (the period during which the Class A shares
and the Units were held will be aggregated for purposes of calculating the
applicable CDSC). In the event that a shareholder initially purchases Units and
then exchanges into Class A shares subject to an initial sales charge of an MFS
Fund, the initial sales charge shall be due upon such exchange, but will not be
imposed with respect to any subsequent exchanges between such Class A shares and
Units with respect to shares on which the initial sales charge has already been
paid. In the event that a shareholder initially purchases Units and then
exchanges into Class A shares subject to a CDSC of an MFS Fund, the CDSC period
will commence upon such exchange, and the applicability of the CDSC with respect
to subsequent exchanges shall be governed by the rules set forth above in this
paragraph.
GENERAL: A shareholder should read the prospectuses of the other MFS Funds into
which an exchange is made and consider the differences in objectives, policies
and restrictions before making any exchange. Exchanges will be made only after
instructions in writing or by telephone (an "Exchange Request") are received for
an established account by the Shareholder Servicing Agent in proper form (i.e.,
if in writing -- signed by the record owner(s) exactly as the shares are
registered; if by telephone -- proper account identification is given by the
dealer or shareholder of record) and each exchange must involve either shares
having an aggregate value of at least $1,000 ($50 in case of retirement plan
participants whose sponsoring organizations subscribe to the MFS FUNDamental
401(k) Plan or another similar 401(k) recordkeeping system made available by the
Shareholder Servicing Agent) or all the shares in the account. If an Exchange
Request is received by the Shareholder Servicing Agent on any business day prior
to the close of regular trading on the Exchange (generally, 4:00 p.m., Eastern
time), the exchange will occur on that day if all the requirements set forth
above have been complied with at that time and subject to the right to reject
purchase orders. No more than five exchanges may be made in any one Exchange
Request by telephone. Additional information concerning this exchange privilege
and prospectuses for any of the other MFS Funds may be obtained from dealers or
the Shareholder Servicing
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Agent. For federal and (generally) state income tax purposes, an exchange is
treated as a sale of the shares exchanged and, therefore, an exchange could
result in a gain or loss to the shareholder making the exchange. Exchanges by
telephone are automatically available to most non-retirement plan accounts and
certain retirement plan accounts. For further information regarding exchanges by
telephone, see "Redemptions by Telephone." The exchange privilege (or any aspect
of it) may be changed or discontinued and is subject to certain limitations,
including certain restrictions on purchases by market timers.
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the value of his account on any
date on which the Fund is open for business by redeeming shares at their net
asset value (a redemption) or by selling such shares to the Fund through a
dealer (a repurchase). Certain redemptions and repurchases are, however, subject
to a CDSC. See "Contingent Deferred Sales Charge" below. Because the net asset
value of shares of the account fluctuates, redemptions or repurchases, which are
taxable transactions, are likely to result in gains or losses to the
shareholder. When a shareholder withdraws an amount from his account, the
shareholder is deemed to have tendered for redemption a sufficient number of
full and fractional shares in his account to cover the amount withdrawn. The
proceeds of a redemption or repurchase will normally be available within seven
days, except for shares purchased or received in exchange for shares purchased
by check (including certified checks or cashier's checks). Payment of redemption
proceeds may be delayed for up to 15 days from the purchase date in an effort to
assure that such check has cleared.
REDEMPTION BY MAIL: Each shareholder may redeem all or any portion of the shares
in his account by mailing or delivering to the Shareholder Servicing Agent (see
back cover for address) a stock power with a written request for redemption or
letter of instruction, together with his share certificates (if any were
issued), all in "good order" for transfer. "Good order" generally means that the
stock power, written request for redemption, letter of instruction or
certificate must be endorsed by the record owner(s) exactly as the shares are
registered and the signature(s) must be guaranteed in the manner set forth below
under the caption "Signature Guarantee." In addition, in some cases "good order"
will require the furnishing of additional documents. The Shareholder Servicing
Agent may make certain de minimis exceptions to the above requirements for
redemption. Within seven days after receipt of a redemption request in "good
order" by the Shareholder Servicing Agent, the Fund will make payment in cash of
the net asset value of the shares next determined after such redemption request
was received, reduced by the amount of any applicable CDSC described above and
the amount of any income tax required to be withheld, except during any period
in which the right of redemption is suspended or date of payment is postponed
because the Exchange is closed or trading on such Exchange is restricted or to
the extent otherwise permitted by the 1940 Act if an emergency exists. See "Tax
Status" below.
REDEMPTION BY TELEPHONE: Each shareholder may redeem an amount from his account
by telephoning the Shareholder Servicing Agent toll-free at (800) 225-2606.
Shareholders wishing to avail themselves of this telephone redemption privilege
must so elect on their Account Application, designate thereon a bank and account
number to receive the proceeds of such redemption, and sign the Account
Application Form with the signature(s) guaranteed in the manner set forth below
under the caption "Signature Guarantee." The proceeds of such a redemption,
reduced by the amount of any applicable CDSC and the amount of any income tax
required to be withheld, are mailed by check to the designated account, without
charge, if the redemption proceeds do not exceed $1,000, and are wired in
federal funds to the designated account if the redemption proceeds exceed
$1,000. If a telephone redemption request is received by the Shareholder
Servicing Agent by the close of regular trading on the Exchange on any business
day, shares will be redeemed at the closing net asset value of the Fund on that
day. Subject to the conditions described in this section, proceeds of a
redemption are normally mailed or wired on the next business day following the
date of receipt of the order for redemption. The Shareholder Servicing Agent may
be liable for any losses resulting from unauthorized telephone transactions if
it does not follow reasonable procedures designed to verify the identity of the
caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
REPURCHASE THROUGH A DEALER: If a shareholder desires to sell his shares through
his dealer (a repurchase), the shareholder can place a repurchase order with his
dealer, who may charge the shareholder a fee. IF THE DEALER RECEIVES THE
SHAREHOLDER'S ORDER
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PRIOR TO THE CLOSE OF REGULAR TRADING ON THE EXCHANGE AND COMMUNICATES IT TO MFD
BEFORE THE CLOSE OF BUSINESS ON THE SAME DAY, THE SHAREHOLDER WILL RECEIVE THE
NET ASSET VALUE CALCULATED ON THAT DAY, REDUCED BY THE AMOUNT OF ANY APPLICABLE
CDSC AND THE AMOUNT OF ANY INCOME TAX REQUIRED TO BE WITHHELD.
CONTINGENT DEFERRED SALES CHARGE: Investments in Class A, Class B or Class C
shares ("Direct Purchases") will be subject to a CDSC for a period of (i) with
respect to Class A and Class C shares, 12 months (however, the CDSC on Class A
shares is only imposed with respect to purchases of $1 million or more of Class
A shares or purchases by certain retirement plans of Class A shares) or (ii)
with respect to Class B shares, six years. Purchases of Class A shares made
during a calendar month, regardless of when during the month the investment
occurred, will age one month on the last day of the month and each subsequent
month. Class C shares and Class B shares purchased on or after January 1, 1993
will be aggregated on a calendar month basis -- all transactions made during a
calendar month, regardless of when during the month they have occurred, will age
one year at the close of business on the last day of such month in the following
calendar year and each subsequent year. For Class B shares of the Fund purchased
prior to January 1, 1993, transactions will be aggregated on a calendar year
basis -- all transactions made during a calendar year, regardless of when during
the year they have occurred, will age one year at the close of business on
December 31 of that year and each subsequent year. Prior to April 1, 1996, Class
C shares of the MFS Funds were not subject to a CDSC upon redemption. In no
event will Class C shares of the MFS Funds purchased prior to this date be
subject to a CDSC. For the purpose of calculating the CDSC upon redemption of
shares acquired in an exchange on or after April 1, 1996, the purchase of shares
acquired in one or more exchanges is deemed to have occurred at the time of the
original purchase of the exchanged shares (if such original purchase occurred
prior to April 1, 1996, then no CDSC would be imposed upon such a redemption).
At the time of a redemption, the amount by which the value of a shareholder's
account for a particular class of shares represented by Direct Purchases exceeds
the sum of the six calendar year aggregations (12 months in the case of
purchases of Class C shares and of purchases of $1 million or more of Class A
shares or purchases by certain retirement plans of Class A shares) of Direct
Purchases may be redeemed without charge ("Free Amount"). Moreover, no CDSC is
ever assessed on additional shares acquired through the automatic reinvestment
of dividends or capital gain distributions ("Reinvested Shares"). Therefore, at
the time of redemption of a particular class, (i) any Free Amount is not subject
to the CDSC, and (ii) the amount of 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 as described in Appendix A hereto.
GENERAL: The following information applies to redemptions and repurchases of all
classes of the Fund's shares.
SIGNATURE GUARANTEE. In order to protect shareholders against fraud, the Fund
requires, in certain instances as indicated above, that the shareholder's
signature be guaranteed. In these cases the shareholder's signature must be
guaranteed by an eligible bank, broker, dealer, credit union, national
securities exchange, registered securities association, clearing agency or
savings association. Signature guarantees shall be accepted in accordance with
policies established by the Shareholder Servicing Agent.
REINSTATEMENT PRIVILEGE. Shareholders of the Fund who have redeemed their shares
have a one-time right to reinvest the redemption proceeds in the same class of
shares of any of the MFS Funds (if shares of such Fund are available for sale)
at net asset value (with a credit for any CDSC paid) within 90 days of the
redemption pursuant to the Reinstatement Privilege. If the shares credited for
any CDSC paid are then redeemed within six years of the initial purchase in the
case of Class B shares or within 12 months of the initial purchase for Class C
shares and certain Class A share purchases, a CDSC will be imposed upon
redemption. Such purchases under the Reinstatement Privilege are subject to all
limitations in the SAI regarding this privilege.
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IN-KIND DISTRIBUTIONS. The Trust agrees to redeem shares of the Fund solely in
cash up to the lesser of $250,000 or 1% of the net asset value of the Fund
during any 90-day period for any one shareholder. The Fund has reserved the
right to pay other redemptions either totally or partially, by a distribution
in-kind of securities (instead of cash) from the Fund's portfolio. The
securities distributed in such a distribution would be valued at the same amount
as that assigned to them in calculating the net asset value for the shares being
sold. If a shareholder received a distribution in-kind, the shareholder could
incur brokerage or transaction charges when converting the securities to cash.
INVOLUNTARY REDEMPTIONS/SMALL ACCOUNTS. Due to the relatively high cost of
maintaining small accounts, the Fund reserves the right to redeem shares in any
account for their then-current value if at any time the total investment in such
account drops below $500 because of redemptions, except in the case of accounts
being established for monthly automatic investments and certain payroll savings
programs, Automatic Exchange Plan accounts and tax-deferred retirement plans,
for which there is a lower minimum investment requirement. See "Purchases --
General -- Minimum Investment." Shareholders will be notified that the value of
their account is less than the minimum investment requirement and allowed 60
days to make an additional investment before the redemption is processed.
DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class A, Class B and Class C
shares pursuant to Section 12(b) of the 1940 Act and Rule 12b-1 thereunder (the
"Distribution Plan"), after having concluded that there is a reasonable
likelihood that the Plan would benefit the Fund and its shareholders.
In certain circumstances, the fees described below may not be imposed or are
being waived. These circumstances, if any, are described below under the heading
"Current Level of Distribution and Service Fees."
FEATURES COMMON TO EACH CLASS OF SHARES: There are features of the Distribution
Plan that are common to each class of shares, as described below.
SERVICE FEES. The Distribution Plan provides that the Fund may pay MFD a service
fee of up to 0.25% of the average daily net assets attributable to the class of
shares to which the Distribution Plan relates (i.e., Class A shares, Class B
shares or Class C shares, as appropriate) (the "Designated Class") annually in
order that MFD may pay expenses on behalf of the Fund relating to the servicing
of shares of the Designated Class. The service fee is used by MFD to compensate
dealers which enter into a sales agreement with MFD in consideration for all
personal services and/or account maintenance services rendered by the dealer
with respect to shares of the Designated Class owned by investors for whom such
dealer is the dealer or holder of record. MFD may from time to time reduce the
amount of the service fees paid for shares sold prior to a certain date. Service
fees may be reduced for a dealer that is the holder or dealer of record for an
investor who owns shares of the Fund having an aggregate net asset value at or
above a certain dollar level. Dealers may from time to time be required to meet
certain criteria in order to receive service fees. MFD or its affiliates are
entitled to retain all service fees payable under the Distribution Plan for
which there is no dealer of record or for which qualification standards have not
been met as partial consideration for personal services and/or account
maintenance services performed by MFD or its affiliates to shareholder accounts.
DISTRIBUTION FEES. The Distribution Plan provides that the Fund may pay MFD a
distribution fee based on the average daily net assets attributable to the
Designated Class as partial consideration for distribution services performed
and expenses incurred in the performance of MFD's obligations under its
distribution agreement with the Fund. See "Management of the Fund --
Distributor" in the SAI. The amount of the distribution fee paid by the Fund
with respect to each class differs under the Distribution Plan, as does the use
by MFD of such distribution fees. Such amounts and uses are described below in
the discussion of the provisions of the Distribution Plan relating to each class
of shares. While the amount of compensation received by MFD in the form of
distribution fees during any year may be more or less than the expense incurred
by MFD under its distribution agreement with the Fund, the Fund is not liable to
MFD for any losses MFD may incur in performing services under its distribution
agreement with the Fund.
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OTHER COMMON FEATURES. Fees payable under the Distribution Plan are charged to,
and therefore reduce, income allocated to shares of the Designated Class. The
provisions of the Distribution Plan relating to operating policies as well as
initial approval, renewal, amendment and termination are substantially identical
as they relate to each class of shares covered by the Distribution Plan.
FEATURES UNIQUE TO EACH CLASS OF SHARES: There are certain features of the
Distribution Plan that are unique to each class of shares, as described below.
CLASS A SHARES. Class A shares are generally offered pursuant to an initial
sales charge, a substantial portion of which is paid to or retained by the
dealer making the sale (the remainder of which is paid to MFD). See "Purchases
- -- Class A Shares" above. In addition to the initial sales charge, the dealer
also generally receives the ongoing 0.25% per annum service fee, as discussed
above.
The distribution fee paid to MFD under the Distribution Plan is equal, on an
annual basis, to 0.10% of the Fund's average daily net assets attributable to
Class A shares. As noted above, MFD may use the distribution fee to cover
distribution-related expenses incurred by it under its distribution agreement
with the Fund, including commissions to dealers and payments to wholesalers
employed by MFD (e.g., MFD pays commission to dealers with respect to purchases
of $1 million or more and purchases by certain retirement plans of Class A
shares which are sold at net asset value but which are subject to a 1% CDSC for
one year after purchase). See "Purchases -- Class A Shares" above. In addition,
to the extent that the aggregate service and distribution fees paid under the
Distribution Plan do not exceed 0.35% per annum of the average daily net assets
of the Fund attributable to Class A shares, the Fund is permitted to pay such
distribution-related expenses or other distribution-related expenses.
CLASS B SHARES. Class B shares are offered at net asset value without an initial
sales charge but subject to a CDSC. See "Purchases -- Class B Shares" above. MFD
will advance to dealers the first year service fee described above at a rate
equal to 0.25% of the purchase price of such shares and, as compensation
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 to
receive the ongoing 0.25% per annum service fee with respect to such shares
commencing in the thirteenth month following purchase.
Under the Distribution Plan, the Fund pays MFD a distribution fee equal, on an
annual basis, to 0.75% of the Fund's average daily net assets attributable to
Class B shares. As noted above, this distribution fee may be used by MFD to
cover its distribution-related expenses under its distribution agreement with
the Fund (including the 3.75% commission it pays to dealers upon purchase of
Class B shares, as described under "Purchases -- Class B Shares" above).
CLASS C SHARES. Class C shares are offered at net asset value without an initial
sales charge but subject to a CDSC. See "Purchases -- Class C Shares" above. MFD
will pay a commission to dealers of 1.00% of the purchase price of Class C
shares purchased through dealers at the time of purchase. In compensation for
this 1.00% commission paid by MFD to dealers, MFD will retain the 1.00% per
annum Class C distribution and service fees paid by the Fund with respect to
such shares for the first year after purchase, and dealers will become eligible
to receive from MFD the ongoing 1.00% per annum distribution and service fees
paid by the Fund to MFD with respect to such shares commencing in the thirteenth
month following purchase.
This ongoing 1.00% fee is comprised of the 0.25% per annum service fee paid to
MFD under the Distribution Plan (which MFD in turn pays to dealers), as
discussed above, and a distribution fee paid to MFD (which MFD also in turn pays
to dealers) under the Distribution Plan equal, on an annual basis, to 0.75% of
the Fund's average daily net assets attributable to Class C shares.
CURRENT LEVEL OF DISTRIBUTION AND SERVICE FEES. The Fund's Class A, Class B and
Class C distribution and service fees for its current fiscal year are 0.25%,
1.00% and 1.00% per annum, respectively. Distribution fees under the
Distribution Plan equal to 0.10% per annum of the average daily net assets
attributable to Class A shares are currently being waived. This waiver may be
rescinded at any time without notice to shareholders.
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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 not expected that the Fund will be required to pay
any federal income or excise taxes, although the Fund's foreign-source income
may be subject to foreign withholding taxes.
Shareholders of the Fund normally will have to pay federal income taxes, and any
state or local taxes, on the dividends and capital gain distributions they
receive from the Fund, whether paid in cash or reinvested in additional shares.
A portion of the dividends received from the Fund (but none of the Fund's
capital gains distributions) may qualify for the dividends received deduction
for corporations. Shortly after the end of each calendar year, each shareholder
will be sent a statement setting forth the federal income tax status of all
dividends and distributions for that year, including the portion taxable as
ordinary income, the portion taxable as long-term capital gain, the portion, if
any, representing a return of capital (which is free of current taxes but
results in a basis reduction), the portion that may qualify for the corporate
dividends received deduction, and the amount, if any, of federal income tax
withheld. 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.
Fund distributions will reduce the Fund's net asset value per share.
Shareholders who buy shares shortly before the Fund makes a distribution may
thus pay the full price for the shares and then effectively receive a portion of
the purchase price back as a taxable distribution.
The Fund intends to withhold U.S. federal income tax at the rate of 30% on
dividends and other payments that are subject to such withholding and that are
made to persons who are neither citizens nor residents of the U.S., regardless
of whether a lower rate may be permitted under an applicable treaty. The Fund is
also required in certain circumstances to apply backup withholding at the rate
of 31% on taxable dividends and redemption proceeds paid to any shareholder
(including a shareholder who is neither a citizen nor a resident of the U.S.)
who does not furnish to the Fund certain information and certifications or who
is otherwise subject to backup withholding. Backup withholding will not,
however, be applied on payments that have been subject to 30% withholding.
Prospective investors should read the Fund's Account Application for additional
information regarding backup withholding of federal income tax and should
consult their own tax advisers as to the tax consequences of an investment in
the Fund.
26
<PAGE> 129
NET ASSET VALUE
The net asset value per share of each class of the Fund is determined each day
during which the Exchange is open for trading. This determination is made once
each day as of the close of regular trading on the Exchange by deducting the
amount of the liabilities attributable to the class from the value of the assets
attributable to the class and dividing the difference by the number of shares of
the class outstanding. Assets in the Fund's portfolio are valued on the basis of
their market values or otherwise at their fair values, as described in the SAI.
All investments and assets are expressed in U.S. dollars based upon current
currency exchange rates. The net asset value per share of each class of shares
is effective for orders received by the dealer prior to its calculation and
received by MFD prior to the close of that business day.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund, one of two series of the Trust, has three classes of shares which it
offers to the general public, entitled Class A, Class B and Class C shares of
Beneficial Interest (without par value). The Fund also has a class of shares
which it offers exclusively to institutional investors entitled Class I shares.
The Trust has reserved the right to create and issue additional classes and
series of shares, in which case each class of shares of a series would
participate equally in the earnings, dividends and assets attributable to that
class of that particular series. Shareholders are entitled to one vote for each
share held and shares of each series would be entitled to vote separately to
approve investment advisory agreements or changes in investment restrictions,
but shares of all series would vote together in the election of Trustees and
selection of accountants. Additionally, each class of shares of a series will
vote separately on any material increases in the fees under the Distribution
Plan or on any other matter that affects solely that class of shares, but will
otherwise vote together with all other classes of shares of the series on all
other matters. The Trust does not intend to hold annual shareholder meetings.
The Trust's Declaration of Trust provides that a Trustee may be removed from
office in certain instances (see "Description of Shares, Voting Rights and
Liabilities" in the SAI).
Each share of a class of the Fund represents an equal proportionate interest in
the Fund with each other class share, subject to the liabilities of the
particular class. Shares have no pre-emptive or conversion rights (except as set
forth in "Purchases -- Conversion of Class B shares"). Shares are fully paid and
non-assessable. Should the Fund be liquidated, shareholders of each class are
entitled to share pro rata in the net assets attributable to that class
available for distribution to shareholders. Shares will remain on deposit with
the Shareholder Servicing Agent and certificates will not be issued except in
connection with pledges and assignments and in certain other limited
circumstances.
The 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, will
give effect to the imposition of any applicable CDSC assessed upon redemptions
of the Fund's Class B and Class C shares. Such total rate of return quotations
may be accompanied by quotations which do not reflect the reduction in value of
the initial investment due to the sales charge or the deduction of a CDSC, and
which will thus be higher. The Fund offers multiple classes of shares which were
initially offered for sale to the public on different dates. The calculation of
total rate of return for a class of shares which initially was offered for sale
to the public subsequent to another class of shares of the Fund is based both on
(i) the performance of the Fund's newer class from the date it initially was
offered for sale to the public and (ii) the performance of the Fund's oldest
class from the date it initially was offered for sale to the public up to the
date
27
<PAGE> 130
that the newer class initially was offered for sale to the public. See the SAI
for further information on the calculation of total rate of return for share
classes initially offered for sale to the public on different dates.
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 SAI. For further information
about the Fund's performance for the fiscal year ended October 31, 1996, 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").
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 or
the shareholder does not respond to mailings from the Shareholder Servicing
Agent with regard to uncashed distribution checks, such shareholder's
distribution option will automatically be converted to having all dividends and
other distributions reinvested in additional shares. Any request to change a
distribution option must be received by the Shareholder Servicing Agent by the
record date for a dividend or distribution in order to be effective for that
dividend or distribution. No interest will accrue on amounts represented by
uncashed distribution or redemption checks.
INVESTMENT AND WITHDRAWAL PROGRAMS -- For the convenience of shareholders, the
Fund makes available the following programs designed to enable shareholders to
add to their investment in an account with the Fund or withdraw from it with a
minimum of paper work. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or the Fund:
LETTER OF INTENT: If a shareholder (other than a group purchaser as
described in the SAI) anticipates purchasing $50,000 or more of Class A shares
of the Fund alone or in combination with shares of any of the 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.
28
<PAGE> 131
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on purchases of Class A shares when his new investment, together with
the current offering price value of all holdings of Class A, B and C shares of
that shareholder in the MFS Funds or MFS Fixed Fund (a bank collective
investment fund) reaches a discount level.
DISTRIBUTION INVESTMENT PROGRAM: Shares of a particular class of the Fund
may be sold at net asset value (and without any applicable CDSC) through the
automatic reinvestment of dividend and capital gain distributions from the same
class of another MFS Fund. Furthermore, distributions made by the Fund may be
automatically invested at net asset value in shares of the same class of another
MFS Fund, if shares of such Fund are available for sale (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, based upon the value of his account. Each payment under a Systematic
Withdrawal Plan (a "SWP") must be at least $100, except in certain limited
circumstances. The aggregate withdrawals of Class B and Class C shares in any
year pursuant to a SWP will not be subject to a CDSC and are generally limited
to 10% of the value of the account at the time of the establishment of the SWP.
The CDSC will not be waived in the case of SWP redemptions of Class A shares
which are subject to CDSC.
DOLLAR COST AVERAGING PROGRAMS --
AUTOMATIC INVESTMENT PLAN: Cash investments of $50 or more may be made
through a shareholder's checking account on any day of the month. If the
Shareholder does not specify a date, the investment will automatically occur on
the first business day of the month. Required forms are available from the
Shareholder Servicing Agent or investment dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may 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 six different funds. A
shareholder should consider the objectives and policies of a fund and review its
prospectus before electing to exchange money into such fund through the
Automatic Exchange Plan. No transaction fee is imposed in connection with
exchange transactions under the Automatic Exchange Plan. However, exchanges of
shares of MFS Money Market Fund, MFS Government Money Market Fund or Class A
shares of MFS Cash Reserve Fund will be subject to any applicable sales charge.
For federal and (generally) state income tax purposes, an exchange is treated as
a sale of the shares exchanged and, therefore, could result in a capital gain or
loss to the shareholder making the exchange. See the SAI for further information
concerning the Automatic Exchange Plan. Investors should consult their tax
advisers for information regarding the potential capital gain and loss
consequences of transactions under the Automatic Exchange Plan.
Because a dollar cost averaging program involves periodic purchases of shares
regardless of fluctuating share offering prices, a shareholder should consider
his financial ability to continue his purchases through periods of low price
levels. Maintaining an investment program concurrently with a withdrawal program
would be disadvantageous because of the sales charges included in share
purchases in the case of Class A shares, and because of the assessment of the
CDSC for share redemption (if applicable) in the case of Class A shares.
29
<PAGE> 132
TAX-DEFERRED RETIREMENT PLANS -- Except as noted under "Purchases -- Class C
Shares", shares of the Fund may be purchased by all types of tax-deferred
retirement plans, including IRAs, SEP-IRA plans, 401(k) plans, 403(b) plans and
other corporate pension and profit-sharing plans. Investors should consult with
their tax adviser before establishing any of the tax-deferred retirement plans
described above.
------------------------------
The Fund's SAI, dated March 1, 1997 as amended or supplemented from time to
time, contains more detailed information about the Fund, including information
related to (i) the Fund's investment objective, 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 Plan; and (vii) various services and
privileges provided by the Fund for the benefit of its shareholders, including
additional information with respect to the exchange privilege.
30
<PAGE> 133
APPENDIX A
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable sales
charges are waived (Section I), the initial sales charge and the contingent
deferred sales charge (the "CDSC") for Class A shares are waived (Section II),
and the CDSC for Class B and Class C shares is waived (Section III).
I. WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on purchases of
Class A shares and the CDSC imposed on certain redemptions of Class A shares and
on redemptions of Class B and Class C shares, as applicable, are waived:
1. DIVIDEND REINVESTMENT
- Shares acquired through dividend or capital gain reinvestment; and
- Shares acquired by automatic reinvestment of distributions of dividends
and capital gains of any MFS fund in the MFS Family of Funds ("MFS
Funds") pursuant to the Distribution Investment Program.
2. CERTAIN ACQUISITIONS/LIQUIDATIONS
- Shares acquired on account of the acquisition or liquidation of assets of
other investment companies or personal holding companies.
3. AFFILIATES OF AN MFS FUND/CERTAIN DEALERS. SHARES ACQUIRED BY:
- Officers, eligible directors, employees (including retired employees) and
agents of Massachusetts Financial Services Company ("MFS"), Sun Life
Assurance Company of Canada ("Sun Life") or any of their subsidiary
companies;
- Trustees and retired trustees of any investment company for which MFS
Fund Distributors, Inc. ("MFD") serves as distributor;
- Employees, directors, partners, officers and trustees of any sub-adviser
to any MFS Fund;
- Employees or registered representatives of dealers and other financial
institutions ("dealers") which have a sales agreement with MFD;
- Certain family members of any such individual and their spouses
identified above and certain trusts, pension, profit-sharing or other
retirement plans for the sole benefit of such persons, provided the
shares are not resold except to the MFS Fund which issued the Shares; and
- Institutional Clients of MFS or MFS Institutional Advisors, Inc. ("MFSI")
4. INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
- Shares redeemed at an MFS Fund's direction due to the small size of a
shareholder's account. See "Redemptions and Repurchases -- General --
Involuntary Redemptions/Small Accounts" in the Prospectus.
A-1
<PAGE> 134
5. RETIREMENT PLANS (CDSC WAIVER ONLY). Shares redeemed on account of
distributions made under the following circumstances:
INDIVIDUAL RETIREMENT ACCOUNTS ("IRAS")
- Death or disability of the IRA owner.
SECTION 401(a) PLANS ("401(a) PLANS") AND SECTION 403(b) EMPLOYER SPONSORED
PLANS ("ESP PLANS")
- Death, disability or retirement of 401(a) or ESP Plan participant;
- Loan from 401(a) or ESP Plan (repayment of loans, however, will
constitute new sales for purposes of assessing sales charges);
- Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
- Termination of employment of 401(a) or ESP Plan participant (excluding,
however, a partial or other termination of the Plan);
- Tax-free return of excess 401(a) or ESP Plan contributions;
- To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the 401(a) or ESP Plan (e.g.,
participant account fees), provided that the Plan sponsor subscribes to
the MFS FUNDamental 401(k) Plan or another similar recordkeeping system
made available by MFS Service Center, Inc. ( the "Shareholder Servicing
Agent"); and
- Distributions from a 401(a) or ESP Plan that has invested its assets in
one or more of the MFS Funds for more than 10 years from the later to
occur of: (i) January 1, 1993 or (ii) the date such 401(a) or ESP Plan
first invests its assets in one or more of the MFS Funds.
- The sales charges will be waived in the case of a redemption of all of
the 401(a) or ESP Plan's shares in all MFS Funds (i.e., all the assets of
the 401(a) or ESP Plan invested in the MFS Funds are withdrawn), unless
immediately prior to the redemption, the aggregate amount invested by the
401(a) or ESP Plan in shares of the MFS Funds (excluding the reinvestment
of distributions) during the prior four years equals 50% or more of the
total value of the 401(a) or ESP Plan's assets in the MFS Funds, in which
case the sales charges will not be waived.
SECTION 403(b) SALARY REDUCTION ONLY PLANS ("SRO PLANS")
- Death or disability of SRO Plan participant.
6. CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY). Shares transferred:
- To an IRA rollover account where any sales charges with respect to the
shares being reregistered would have been waived had they been redeemed;
and
- From a single account maintained for a 401(a) Plan to multiple accounts
maintained by the Shareholder Servicing Agent on behalf of individual
participants of such Plan, provided that the Plan sponsor subscribes to
the MFS FUNDamental 401(k) Plan or another similar recordkeeping system
made available by the Shareholder Servicing Agent.
II. WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A shares
and the CDSC imposed on certain redemptions of Class A shares are waived:
A-2
<PAGE> 135
1. INVESTMENT OF REDEMPTION PROCEEDS FROM UNAFFILIATED MUTUAL FUNDS
- Shares acquired through the investment of redemption proceeds from
another open-end management investment company not distributed or managed
by MFD or its affiliates if: (i) the investment is made through a dealer
and appropriate documentation is submitted to MFD; (ii) the redeemed
shares were subject to an initial sales charge or deferred sales charge
(whether or not actually imposed); (iii) the redemption occurred no more
than 90 days prior to the purchase of Class A shares; and (iv) the MFS
Fund, MFD or its affiliates have not agreed with such company or its
affiliates, formally or informally, to waive sales charges on Class A
shares or provide any other incentive with respect to such redemption and
sale.
2. WRAP ACCOUNT INVESTMENTS
- Shares acquired by investments through certain dealers which have entered
into an agreement with MFD which includes a requirement that such shares
be sold for the sole benefit of clients participating in a "wrap" account
or a similar program under which such clients pay a fee to such dealer.
3. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
- Shares acquired by insurance company separate accounts.
4. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
- Shares acquired by retirement plans whose third party administrators or
dealers have entered into an administrative services agreement with MFD
or one of its affiliates to perform certain administrative services,
subject to certain operational and minimum size requirements specified
from time to time by MFD or one or more of its affiliates.
REINVESTMENT OF DISTRIBUTIONS FROM QUALIFIED RETIREMENT PLANS
- Shares acquired through the automatic reinvestment in Class A shares of
Class A or Class B distributions which constitute required withdrawals
from qualified retirement plans.
SHARES REDEEMED ON ACCOUNT OF DISTRIBUTIONS MADE UNDER THE FOLLOWING
CIRCUMSTANCES:
IRAS
- Distributions made on or after the IRA owner has attained the age of
59 1/2 years old; and
- Tax-free returns of excess IRA contributions.
401(a) PLANS
- Distributions made on or after the 401(a) Plan participant has attained
the age of 59 1/2 years old; and
- Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a 401(a) Plan.
ESP PLANS AND SRO PLANS
- Distributions made on or after the ESP or SRO Plan participant has
attained the age of 59 1/2 years old.
A-3
<PAGE> 136
III. WAIVERS OF CLASS B AND CLASS C SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B and Class C shares is
waived:
1. SYSTEMATIC WITHDRAWAL PLAN
- Systematic Withdrawal Plan redemptions with respect to up to 10% per year
of the account value at the time of establishment.
2. DEATH OF OWNER
- Shares redeemed on account of the death of the account owner if the
shares are held solely in the deceased individual's name or in a living
trust for the benefit of the deceased individual.
3. DISABILITY OF OWNER
- Shares redeemed on account of the disability of the account owner if
shares are held either solely or jointly in the disabled individual's
name or in a living trust for the benefit of the disabled individual (in
which case a disability certification form is required to be submitted to
the Shareholder Servicing Agent).
4. RETIREMENT PLANS. Shares redeemed on account of distributions made under
the following circumstances:
IRAS, 401(a) PLANS, ESP PLANS AND SRO PLANS
- Distributions made on or after the IRA owner or the 401(a), ESP or SRO
Plan participant, as applicable, has attained the age of 70 1/2 years
old, but only with respect to the minimum distribution under applicable
Internal Revenue Code ("Code") rules.
SALARY REDUCTION SIMPLIFIED EMPLOYEE PENSION PLANS ("SAR-SEP PLANS")
- Distributions made on or after the SAR-SEP Plan participant has attained
the age of 70 1/2 years old, but only with respect to the minimum
distribution under applicable Code rules; and
- Death or disability of a SAR-SEP Plan participant.
A-4
<PAGE> 137
[LOGO] MFS(SM)
Investment Adviser INVESTMENT MANAGEMENT
Massachusetts Financial Services Company We invented the mutual fund(SM)
500 Boylston Street
Boston, MA 02116
(617) 954-5000 MFS(R) WORLD GROWTH FUND
Distributor Prospectus
MFS Fund Distributors, Inc. March 1, 1997
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 Auditors
Deloitte & Touche LLP
125 Summer Street
Boston, MA 02110
[LOGO] MFS(SM)
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
MFS(R) WORLD GROWTH FUND
500 Boylston Street
Boston, MA 02116
MWF-1-3/97/245M 09/209/309
<PAGE> 138
[LOGO]
STATEMENT OF
ADDITIONAL INFORMATION
March 1, 1997
MFS(R) WORLD
GROWTH FUND
(A member of the MFS Family of Funds(R))
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
1. Definitions........................................................................... 2
2. Investment Objective, Policies and Restrictions....................................... 2
3. Management of the Fund................................................................ 12
Trustees.............................................................................. 12
Officers.............................................................................. 12
Trustee Compensation Table............................................................ 13
Investment Adviser.................................................................... 14
Sub-Advisers.......................................................................... 15
Custodian............................................................................. 15
Shareholder Servicing Agent........................................................... 15
Distributor........................................................................... 15
4. Portfolio Transactions and Brokerage Commissions...................................... 16
5. Shareholder Services.................................................................. 18
Investment and Withdrawal Programs.................................................... 18
Exchange Privilege.................................................................... 20
Tax-Deferred Retirement Plans......................................................... 21
6. Tax Status............................................................................ 21
7. Distribution Plan..................................................................... 22
8. Determination of Net Asset Value and Performance...................................... 23
9. Description of Shares, Voting Rights and Liabilities.................................. 26
10. Independent Auditors and Financial Statements......................................... 26
Appendix A -- Description of Bond Ratings............................................. A-1
Appendix B -- Performance Information................................................. B-1
</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, as amended or supplemented from time
to time (the "SAI"), sets forth information which may be of interest to
investors but which is not necessarily included in the Fund's Prospectus dated
March 1, 1997. This SAI should be read in conjunction with the Prospectus, a
copy of which may be obtained without charge by contacting the Shareholder
Servicing Agent (see back cover for address and phone number).
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE
INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
<PAGE> 139
1. DEFINITIONS
<TABLE>
<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" -- Foreign & Colonial
Management Ltd. ("FCM")
and its subsidiary,
Foreign & Colonial
Emerging Markets Limited
("FCEM").
"MFD" -- MFS Fund Distributors
Inc., a Delaware
corporation.
"Prospectus" -- The Prospectus of the
Fund, dated March 1, 1997,
as amended or supplemented
from time to time.
</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 three 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. Under the terms of most sponsored
arrangements, depositories agree to distribute notices of shareholder meetings
and voting instructions, and to provide shareholder communications and other
information to the ADR holders at the request of the issuer of the deposited
securities. The depository of an unsponsored ADR, on the other hand, is under no
obligation to distribute shareholder communications received from the issuer of
the deposited securities or to pass through voting rights to ADR holders in
respect of the deposited securities. The Fund may invest in either type of ADR.
Although the U.S. investor holds a substitute receipt of ownership rather than
direct stock certificates, the use of the depository receipts in the United
States can reduce costs and delays as well as potential currency exchange and
other difficulties. The Fund may purchase securities in local markets and direct
delivery of these ordinary shares to the local depository of an ADR agent bank
in the foreign country. Simultaneously, the ADR agents create a certificate
which settles at the Fund's custodian in five days. The Fund may also execute
trades on the U.S. markets using existing ADRs. A foreign issuer of the security
underlying an ADR is generally not subject to the same reporting requirements in
the United States as a domestic issuer. Accordingly the information available to
a U.S. investor will be limited to the information the foreign issuer is
required to disclose in its own country and the market value of an ADR may not
reflect undisclosed material information concerning the issuer of the underlying
security. ADRs may also be subject to exchange rate risks if the underlying
foreign securities are denominated in foreign currency.
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
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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.
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 Services ("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. 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.
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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 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.
INDEXED SECURITIES: The Fund may purchase securities whose prices are indexed to
the prices of other securities, securities indices, currencies, precious metals
or other commodities, or other financial indicators. Indexed securities
typically, but not always, are debt securities or deposits whose value at
maturity or coupon rate is determined by reference to a specific instrument or
statistic. Gold-indexed securities, for example, typically provide for a
maturity value that depends on the price of gold, resulting in a security whose
price tends to rise and fall together with gold prices. Currency-indexed
securities typically are short-term to intermediate-term debt securities whose
maturity values or interest rates are determined by reference to the values of
one or more specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities of equivalent issuers. Currency-indexed securities
may be positively or negatively indexed; that is, their maturity value may
increase when the specified currency value increases, resulting in a security
that performs similarly to a foreign-denominated instrument, or their maturity
value may decline when foreign currencies increase, resulting in a security
whose price characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
government agencies.
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 liquid assets in a segregated
account with its custodian. A put option written by the Fund is "covered" if the
Fund maintains liquid assets 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 liquid assets 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.
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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, 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
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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 liquid assets 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 liquid
assets 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 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
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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 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
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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, liquid assets in an amount equal to the value of its
commitments under Forward Contracts. While these contracts are not presently
regulated by the CFTC, the CFTC may in the future assert authority to regulate
Forward Contracts. In such event, the Fund's ability to utilize Forward
Contracts in the manner set forth above may be restricted.
OPTIONS ON FOREIGN CURRENCIES: The Fund may purchase and write put and call
options on foreign currencies ("Options on Foreign Currencies") for the purpose
of protecting against declines in the dollar value of foreign portfolio
securities and against increases in the dollar cost of foreign securities to be
acquired. For example, a decline in the dollar value of a foreign currency in
which portfolio securities are denominated will reduce the dollar value of such
securities, even if their value in the foreign currency remains constant. In
order to protect against such diminutions in the value of portfolio securities,
the Fund may purchase put options on the foreign currency. If the value of the
currency did decline, the Fund would have the right to sell such currency for a
fixed amount in dollars and would thereby offset, in whole or in part, the
adverse effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby increasing the cost of such
securities, the Fund may purchase call options thereon. The purchase of such
options could offset, at least partially, the effects of the adverse movements
in exchange rates. As in the case of other types of options, however, the
benefit to the Fund deriving from purchases of foreign currency options would be
reduced by the amount of the premium and related transaction costs. In addition,
where currency exchange rates do not move in the direction or to the extent
anticipated, the Fund could sustain losses on transactions in foreign currency
options, which would require it to forego a portion or all of the benefits of
advantageous changes in such rates.
The Fund may write Options on Foreign Currencies for hedging purposes in a
manner similar to the way Forward Contracts will be utilized. For example, where
the Fund anticipates a decline in the dollar value of foreign-denominated
securities due to adverse fluctuations in exchange rates it may, instead of
purchasing a put option, write a call option on the relevant currency. If the
expected decline occurred, the option would most likely not be exercised, and
the diminution in value of portfolio securities would be offset by the amount of
the premium received less related transaction costs.
Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, the Fund could write a
put option on the relevant currency which, if rates move in the manner
projected, will expire unexercised and allow the Fund to hedge such increased
cost up to the amount of the premium. As in the case of other types of options,
however, the writing of a foreign currency option will constitute only a partial
hedge up to the amount of the premium, less transaction costs, and only if rates
move in the expected direction. If this does not occur, the option may be
exercised and the Fund would be required to purchase or sell the underlying
currency at a loss which may not be offset by the amount of the premium. Through
the writing of Options on Foreign Currencies, the Fund also may be required to
forego all or a portion of the benefits which might otherwise have been obtained
from favorable movements in exchange rates.
All call and put options written on foreign currencies will be covered. A call
option written on foreign currencies by the Fund is "covered" if the Fund owns
the underlying foreign currency covered by the call or has an absolute and
immediate right to acquire that foreign currency without additional cash
consideration (or for additional cash consideration 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 liquid assets 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 liquid assets 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
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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 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.
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ADDITIONAL RISKS OF TRANSACTIONS RELATED TO FOREIGN CURRENCIES AND TRANSACTIONS
NOT CONDUCTED ON U.S. EXCHANGES -- The available information on which the Fund
will make trading decisions concerning transactions related to foreign
currencies or foreign securities may not be as complete as the comparable data
on which the Fund makes investment and trading decisions in connection with
other transactions. Moreover, because the foreign currency market is a global,
24-hour market, and the markets for foreign securities as well as markets in
foreign countries may be operating during non-business hours in the U.S., events
could occur in such markets which would not be reflected until the following
day, thereby rendering it more difficult for the Fund to respond in a timely
manner.
In addition, over-the-counter transactions can only be entered into with a
financial institution willing to take the opposite side, as principal, of the
Fund's position, unless the institution acts as broker and is able to find
another counterparty willing to enter into the transaction with the Fund. This
could make it difficult or impossible to enter into a desired transaction or
liquidate open positions, and could therefore result in trading losses. Further,
over-the-counter transactions are not subject to the performance guarantee of an
exchange clearing house and the Fund will therefore be subject to the risk of
default by, or the bankruptcy of, a financial institution or other counterparty.
Transactions on exchanges located in foreign countries may not be conducted in
the same manner as those entered into on U.S. exchanges, and may be subject to
different margin, exercise, settlement or expiration procedures.
As a result, many of the risks of over-the-counter trading may be present in
connection with such transactions. Moreover, the SEC or CFTC have jurisdiction
over the trading in the U.S. of many types of over-the-counter and foreign
instruments, and such agencies could adopt regulations or interpretations which
would make it difficult or impossible for the Fund to enter into the trading
strategies identified herein or to liquidate existing positions.
As a result of its investments in foreign securities, the Fund may receive
interest or dividend payments, or the proceeds of the sale or redemption of such
securities, in the foreign currencies in which such securities are denominated.
The Fund may also be required to receive delivery of the foreign currencies
underlying Options on Foreign Currencies or Forward Contracts it has entered
into. This could occur, for example, if an option written by the Fund is
exercised or the Fund is unable to close out a Forward Contract it has entered
into. In addition, the Fund may elect to take delivery of such currencies. Under
certain circumstances, such as where the Adviser 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 leveraging effect of such Futures
Contract is minimized.
WHEN-ISSUED OR FORWARD DELIVERY SECURITIES -- When the Fund commits to purchase
a security on a "when-issued" or "forward delivery" basis, it will set up
procedures consistent with the General Statement of Policy of the SEC concerning
such purchases. Since that policy currently recommends that an amount of the
Fund's assets equal to the amount of the purchase be held aside or segregated to
be used to pay for the commitment, the Fund will always have liquid assets
sufficient to cover any commitments or to limit any potential risk. However,
although the Fund does not intend to make such purchases for speculative
purposes and intends to adhere to the provisions of the SEC policy, purchases of
securities on such bases may involve more risk than other types of purchases.
For example, the Fund may have to sell assets which have been set aside in order
to meet redemptions. Also, if the Fund determines it necessary to sell the
"when-issued" or "forward delivery" securities before delivery, it may incur a
loss because of market fluctuations since the time the commitment to purchase
such securities was made.
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, U.S. Government securities or an irrevocable letter of
credit maintained on a current basis at an amount at least equal to the
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market value of the securities loaned. The Fund would have the right to call a
loan and obtain the securities loaned at any time on customary industry
settlement notice (which will usually not exceed five days). During the
existence of a loan, the Fund would continue to receive the equivalent of the
interest or dividends paid by the issuer on the securities loaned and would also
receive compensation based on investment of cash collateral or a fee. The Fund
would not, however, have the right to vote any securities having voting rights
during the existence of the loan, but would call the loan in anticipation of an
important vote to be taken among holders of the securities or of the giving or
withholding of their consent on a material matter affecting the investment. As
with other extensions of credit there are risks of delay in recovery or even
loss of rights in the collateral should the borrower 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 SAI, means the lesser of (i) more than 50%
of the outstanding shares of the Trust or a series or class, as applicable or
(ii) 67% or more of the outstanding shares of the Trust or a series or class, as
applicable present at a meeting 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;
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(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;
(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 (born 8/4/35)
Massachusetts Financial Services Company, Chairman
RICHARD B. BAILEY* (born 9/14/26)
Private Investor; Massachusetts Financial Services Company, Former Chairman
(prior to September 30, 1991); Cambridge Bancorp, Director; Cambridge Trust
Company, Director
MARSHALL N. COHAN (born 11/14/26)
Private Investor
Address: 2524 Bedford Mews Drive, Wellington, Florida
LAWRENCE H. COHN, M.D. (born 3/11/37)
Brigham and Women's Hospital, Chief of Cardiac Surgery; Harvard Medical School,
Professor of Surgery
Address: 75 Francis Street, Boston, Massachusetts
THE HON. SIR J. DAVID GIBBONS, KBE (born 6/15/27)
Edmund Gibbons Limited, Chief Executive Officer; Bank of NT Butterfield & Son
Limited, Chairman.
Address: 21 Reid Street, Hamilton, Bermuda HM 12
ABBY M. O'NEILL (born 4/27/28)
Private Investor; Rockefeller Financial Services, Inc. (investment advisers),
Director
Address: 30 Rockefeller Plaza, Room 5600, New York, New York
WALTER E. ROBB, III (born 7/9/27)
Benchmark Advisors, Inc., (Corporate Financial Consultants), President and
Treasurer; Benchmark Consulting Group, Inc. (office services), President;
Landmark Funds (mutual fund), Trustee
Address: 110 Broad Street, Boston, Massachusetts
ARNOLD D. SCOTT* (born 12/16/42)
Massachusetts Financial Services Company, Senior Executive Vice President and
Secretary
JEFFREY L. SHAMES* (born 6/2/55)
Massachusetts Financial Services Company, President
J. DALE SHERRATT (born 9/23/38)
Insight Resources, Inc. (acquisition planning specialists), President
Address: One Liberty Square, Boston, Massachusetts
WARD SMITH (born 9/13/30)
NACCO Industries (holding company), Chairman; (prior to June 1994) Sundstrand
Corporation (diversified mechanical manufacturer), Director
Address: 5875 Landerbrook Drive, Mayfield Heights, Ohio
OFFICERS
JEFFREY L. SHAMES,* Vice President (born 6/2/55)
Massachusetts Financial Services Company, President
JOHN D. LAUPHEIMER, JR.,* Vice President (born 7/30/57)
Massachusetts Financial Services Company, Senior Vice President
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LESLIE J. NANBERG,* Vice President (born 11/4/45)
Massachusetts Financial Services Company, Senior Vice President
JAMES T. SWANSON,* Vice President (born 6/12/49)
Massachusetts Financial Services Company, Senior Vice President
W. THOMAS LONDON,* Treasurer (born 3/1/44)
Massachusetts Financial Services Company, Senior Vice President
STEPHEN E. CAVAN,* Secretary and Clerk (born 11/6/53)
Massachusetts Financial Services Company, Senior Vice President, General Counsel
and Assistant Secretary
JAMES R. BORDEWICK, JR.,* Assistant Secretary (born 3/6/55)
Massachusetts Financial Services Company, Senior Vice President and Associate
General Counsel
JAMES O. YOST,* Assistant Treasurer; (born 6/12/60)
Massachusetts Financial Services Company, Vice President
- ---------------
* "Interested persons" (as defined in the Investment Company Act of 1940 as
amended (the "1940 Act")) of the Adviser, whose address is 500 Boylston
Street, Boston, Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain affiliates of
MFS or with certain other funds of which MFS or a subsidiary is the investment
adviser or distributor. Mr. Brodkin, the Chairman of MFD, Messrs. Shames and
Scott, Directors of MFD, and Mr. Cavan, the Secretary of MFD, hold similar
positions with certain other MFS affiliates. Mr. Bailey is a Director of Sun
Life Assurance Company of Canada (U.S.) ("Sun Life of Canada (U.S.)"), the
corporate parent of MFS.
The Fund pays the compensation of non-interested Trustees and Mr. Bailey who
currently receive a fee of $1,250 per year plus $225 per meeting and $225 per
committee meeting attended, together with such Trustee's out-of-pocket expenses.
The Trust has adopted a retirement plan for non-interested Trustees and Mr.
Bailey. Under this plan, a Trustee will retire upon reaching age 75 and if the
Trustee has completed at least 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 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 Fund for Messrs. Brodkin, Scott and
Shames. 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.
Set forth below is certain information concerning the cash compensation paid to
the Trustees and benefits accrued and estimated benefits payable, under the
retirement plan.
TRUSTEE COMPENSATION TABLE
<TABLE>
<CAPTION>
RETIREMENT
BENEFIT
ACCRUED AS ESTIMATED TOTAL TRUSTEE
PART OF CREDITED FEES FROM
TRUSTEE FEES FUND YEARS OF FUND AND FUND
TRUSTEE FROM FUND(1) EXPENSE(1) SERVICE(2) COMPLEX(3)
- ---------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Bailey.... $3,275 $ 443 8 $ 247,168
A. Keith Brodkin..... -0- -0- N/A -0-
Marshall N. Cohan.... 4,400 494 8 149,258
Lawrence H. Cohn..... 3,950 443 18 136,508
The Hon. Sir J. David
Gibbons............ 3,949 443 8 136,508
Abby M. O'Neill...... 3,500 426 9 123,758
Walter E. Robb,
III................ 4,400 494 8 149,258
Arnold D. Scott...... -0- -0- N/A -0-
Jeffrey L. Shames.... -0- -0- N/A -0-
J. Dale Sherratt..... 4,400 494 20 149,258
Ward Smith........... 4,400 494 12 149,258
</TABLE>
(1) For fiscal year ended October 31, 1996.
(2) Based on normal retirement age of 75.
(3) For calendar year 1996. All Trustees receiving compensation served as
Trustees of 41 funds within the MFS fund complex (having aggregate net
assets at December 31, 1996, of approximately $14.9 billion) except Mr.
Bailey, who served as Trustee of 81 funds within the MFS fund complex
(having aggregate net assets at December 31, 1996, of approximately $38.5
billion).
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
<TABLE>
<CAPTION>
YEARS OF SERVICE
--------------------------------------------------
AVERAGE TRUSTEE FEES 3 5 7 10 OR MORE
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
$2,948 $ 442 $ 737 $ 1,032 $ 1,474
3,326 499 832 1,164 $ 1,663
3,705 556 926 1,297 $ 1,852
4,083 612 1,021 1,429 $ 2,042
4,462 669 1,115 1,562 $ 2,231
4,840 726 1,210 1,694 $ 2,420
</TABLE>
(4) Other funds in the MFS fund complex provide similar retirement benefits to
the Trustees.
As of January 31, 1997, the Trustees and officers, as a group, owned less than
1% of the Fund's shares outstanding not including 348,665 shares (which
represent approximately 1.3% of the outstanding shares of the Fund) owned of
record by certain employee benefit plans of MFS of which Messrs. Brodkin, Scott
and Shames are Trustees.
As of January 31, 1997, Merrill Lynch Pierce Fenner & Smith, Inc., P.O. Box
45286, 4800 Deer Lake Drive E. 3rd Floor, Jacksonville, Florida 32246, was the
owner of 10.57% of the outstanding Class A shares of the Fund. As of January 31,
1996, Merrill Lynch Pierce Fenner & Smith, Inc., P.O. Box 45286, 4800 Deer Lake
Drive E. 3rd Floor, Jacksonville, Florida 32246, was the owner of 17.13% of the
outstanding Class B shares of the Fund. As of January 31, 1996, Merrill Lynch
Pierce Fenner & Smith, Inc., P.O. Box 45286, 4800 Deer Lake Drive E. 3rd Floor,
13
<PAGE> 151
Jacksonville, Florida 32246, was the owner of 31.42% 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 wholly
owned subsidiary of Sun Life Assurance Company of Canada ("Sun Life").
INVESTMENT ADVISORY AGREEMENT -- The Adviser manages the Fund pursuant to an
Investment Advisory Agreement, dated August 30, 1993 (the "Advisory Agreement").
Under the Advisory Agreement, the Adviser provides the Fund with overall
investment advisory services. Subject to such policies as the Trustees may
determine, the Adviser makes investment decisions for the Fund. For these
services and facilities, the Adviser receives an annual management fee, computed
and paid monthly, in an amount equal to 0.90% of the average daily net assets of
the Fund on an annualized basis.
For the Fund's fiscal year ended October 31, 1996, MFS received management fees
under the Advisory Agreement of $4,060,523 (equivalent on an annualized basis to
0.90% of the Fund's average daily net assets), of which $679,730, $333,582 and
$567,666 were paid to the Fund's Sub-Advisers, Oechsle International Advisers,
L.P. ("Oeschle"), Batterymarch Financial Management, Inc. ("Batterymarch") and
Foreign & Colonial Management Ltd. ("FCM"), respectively. Oeschle and
Batterymarch no longer serve as sub-advisers to the Fund.
For the Fund's fiscal year ended October 31, 1995, MFS received management fees
under the Advisory Agreement of $3,459,664 (equivalent on an annualized basis to
0.90% of the Fund's average daily net assets), of which $576,319 and $651,916
were paid to the Fund's Sub-Advisers, Oechsle and Batterymarch, respectively.
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, (equivalent on an annualized basis to 0.90% of
the Fund's average daily net assets) of which $359,241 and $389,337 were paid to
the Fund's 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 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.
The Advisory Agreement will remain in effect until August 1, 1997 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
14
<PAGE> 152
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
Prior to March 18, 1996 and October 31, 1996, MFS had retained Batterymarch and
Oechsle, respectively, as sub-advisers to the Fund. Under this arrangement, the
Fund paid an investment advisory fee to MFS and MFS paid sub-advisory fees to
Batterymarch and Oechsle.
On March 18, 1996, shareholders of the Fund approved the replacement of
Batterymarch as a sub-adviser to the Fund with Foreign & Colonial Management
Limited ("FCM") and its subsidiary, Foreign & Colonial Emerging Markets Limited
("FCEM"). Effective October 31, 1996, MFS terminated Oechsle as a sub-adviser to
the Fund. On November 1, 1996, MFS began managing the assets of the Fund
previously managed by Oechsle. These assets are managed by MFS using a committee
of investment research analysts as described in the Prospectus under the caption
"Management of the Fund -- Investment Adviser." A further description of FCM and
FCEM is contained in the Prospectus under the caption "Management of the
Fund -- Sub-Investment Advisers."
ADMINISTRATOR
MFS provides the Fund with certain administrative services pursuant to a Master
Administrative Services Agreement dated March 1, 1997. Under this Agreement, MFS
provides the Fund with certain financial, legal, compliance, shareholder
communications and other administrative services. As a partial reimbursement for
the cost of providing these services, the Fund pays MFS an administrative fee up
to 0.015% per annum of the Fund's average daily net assets, provided that the
administrative fee is not assessed on Fund assets that exceed $3 billion.
CUSTODIAN
State Street Bank and Trust Company (the "Custodian") is the custodian of the
Fund's assets. The Custodian's responsibilities include safekeeping and
controlling the Fund's cash and securities, handling the receipt and delivery of
securities, determining income and collecting interest and dividends on the
Fund's investments, maintaining books of original entry for portfolio and fund
accounting and other required books and accounts, and calculating the daily net
asset value of each class of shares of the Fund. The Custodian does not
determine the investment policies of the Fund or decide which securities the
Fund will buy or sell. The Fund may, however, invest in securities of the
Custodian and may deal with the Custodian as principal in securities
transactions. The Custodian also acts as the dividend disbursing agent of the
Fund. 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 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 calculated as a percentage of the average daily net
assets of the Fund at an effective annual rate of 0.13%. In addition, the
Shareholder Servicing Agent will be reimbursed by the Fund for certain expenses
incurred by the Shareholder Servicing Agent on behalf of the Fund. State Street
Bank and Trust Company, the dividend and distribution disbursing agent of the
Fund, has contracted with the Shareholder Servicing Agent to perform certain
dividend 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 as amended and restated. 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)
15
<PAGE> 153
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 SAI).
Class A shares of the Fund may be sold at their net asset value to certain
persons and in certain instances, as described in the Prospectus. Such sales are
made without a sales charge to promote good will with employees and others with
whom MFS, MFD 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, CLASS C SHARES AND CLASS I SHARES: MFD acts as agent in selling
Class B, Class C shares and Class I shares of the Fund. The public offering
price of Class B, Class C shares and Class I shares is their net asset value
next computed after the sale (see "Purchases" in the Prospectus and the
Prospectus Supplement pursuant to which Class I shares are offered).
GENERAL: Neither MFD nor dealers are permitted to delay placing orders to
benefit themselves by a price change. On occasion, MFD may obtain brokers loans
from various banks, including the custodian banks for the MFS Funds, to
facilitate the settlement of sales of shares of the Fund to dealers. MFD may
benefit from its temporary holding of funds paid to it by investment dealers for
the purchase of Fund shares.
During the Fund's fiscal year ended October 31, 1996, MFD received sales charges
of $80,312 and dealers received sales charges of $612,017 (as their concession
on gross sales charges of $692,329) for selling Class A shares of the Fund; the
Fund received $32,192,386 representing the aggregate net asset value of such
shares. During the Fund's fiscal year ended October 31, 1995, MFD received sales
charges of $75,546 and dealers received sales charges of $907,160 (as their
concession on gross sales charges of $982,706) for selling Class A shares of the
Fund; the Fund received $35,772,603 representing the aggregate net asset value
of such 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.
During the Fund's fiscal year ended October 31, 1996, the CDSC imposed on
redemption of Class A, Class B and Class C shares were $1,528, $538,744 and
$1,141, respectively. During the Fund's fiscal year ended October 31, 1995, the
CDSC imposed on redemption of Class A and Class B shares were $1,700 and
$732,574, respectively. For the period from commencement of operations on
November 18, 1993 until October 31, 1994, the CDSC imposed on redemptions of
Class A and Class B shares were $208 and $320,082, respectively.
The Distribution Agreement will remain in effect until August 1, 1997 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 -- 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
16
<PAGE> 154
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 from time to time through such broker-dealers on behalf of the
Fund. The Trustees (together with the Trustees of the other MFS Funds) have
directed the Adviser to allocate a total of $39,100 of commission business from
the MFS Funds to the Pershing Division of Donaldson Lufkin & Jenrette as
consideration for the annual renewal of certain publications provided by Lipper
Analytical Securities Corporation (which provides information useful to the
Trustees in reviewing the relationship between the Fund and the Adviser).
The Adviser's 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, 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, 1996, total brokerage commissions
of $1,327,540 were paid on total transactions (other than U.S. Government
securities, purchase options transactions and short-term obligations) of
$3,489,480,421. For the Fund's fiscal year ended October 31, 1995, total
brokerage commissions of $1,494,102 were paid on total transactions (other than
U.S. Government securities, purchase options transactions and short-term
obligations) of $546,418,442. 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.
During the Fund's fiscal year ended October 31, 1996, the Fund did not acquire
or sell securities issued by affiliates of regular broker-dealers of the Fund.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for that of one or more of the other clients of the
Adviser, 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
17
<PAGE> 155
the same security, the securities are allocated among clients in a manner
believed by the Adviser to be equitable to each. It is recognized that in some
cases this system could have a detrimental effect on the price or volume of the
security as far as the Fund is concerned. In other cases, however, the Fund
believes that its ability to participate in volume transactions will produce
better executions for the Fund.
5. SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS -- The Fund makes available the following
programs designed to enable shareholders to add to their investment or withdraw
from it with a minimum of paper work. These are described below and, in certain
cases, in the Prospectus. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or the Fund.
LETTER OF INTENT -- If a shareholder (other than a group purchaser described
below) anticipates purchasing $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 Class A, B and C shares
of that shareholder in the MFS Funds or MFS Fixed Fund (a bank collective
investment fund) reaches a discount level. See "Purchases" in the Prospectus for
the sales charges on quantity 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.
SUBSEQUENT INVESTMENT BY TELEPHONE: Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-free
at (800) 225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this telephone
purchase privilege must so elect on their Account Application and designate
thereon a bank and account number from which purchases will be made. If a
telephone purchase request is received by the Shareholder Servicing Agent on any
business day prior to the close of regular trading on the Exchange (generally,
4:00 p.m., Eastern time), the purchase will occur at the closing net asset value
of the shares purchased on that day. The Shareholder Servicing Agent may be
liable for any losses resulting from unauthorized telephone transactions if it
does not follow reasonable procedures designed to verify the identity of the
caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
DISTRIBUTION INVESTMENT PROGRAM -- Distributions of dividends and capital gains
made by the Fund with respect to a particular class of shares may be
automatically invested in shares of the same class of one of the other MFS
Funds, if shares of the fund are available for sale. Such investments will be
subject to additional purchase minimums. Distributions will be invested at net
asset value (exclusive of any sales charge) and will not
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<PAGE> 156
subject to any CDSC. Distributions will be invested at the close of business on
the payable date for the distribution. A shareholder considering the
Distribution Investment Program should obtain and read the prospectus of the
other fund and consider the differences in objectives and policies before making
any investment.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder Servicing
Agent to send him (or anyone he designates) regular periodic payments, based
upon the value of his account. Each payment under a Systematic Withdrawal Plan
("SWP") must be at least $100, except certain limited circumstances. The
aggregate withdrawals of Class B shares in any year pursuant to a SWP generally
are limited to 10% of the value of the account at the time of establishment of
the SWP. SWP payments are drawn from the proceeds of share redemptions (which
would be a return of principal and, if reflecting a gain, would be taxable).
Redemptions of Class B and Class C shares will be made in the following order:
(i) any "Reinvested Shares"; (ii) to the extent necessary, any "Free Amount";
and (iii) to the extent necessary, the "Direct Purchase" subject to the lowest
CDSC (as such terms are defined in "Contingent Deferred Sales Charge" in the
Prospectus). The CDSC will be waived in the case of redemptions of Class B and
Class C shares pursuant to a SWP, but will not be waived in the case of SWP
redemptions of Class A shares which are subject to a CDSC. To the extent that
redemptions for such periodic withdrawals exceed dividend income reinvested in
the account, such redemptions will reduce and may eventually exhaust the number
of shares in the shareholder's account. All dividend and capital gain
distributions for an account with a SWP will be received in full and fractional
shares of the Fund at the net asset value in effect at the close of business on
the record date for such distributions. To initiate this service, shares having
an aggregate value of at least $5,000 either must be held on deposit by, or
certificates for such shares must be deposited with, the Shareholder Servicing
Agent. With respect to Class A shares, maintaining a withdrawal plan
concurrently with an investment program would be disadvantageous because of the
sales charges included in share purchases and the imposition of a CDSC on
certain redemptions. The shareholder may deposit into the account additional
shares of the Fund, change the payee or change the 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 six different funds
effective on the seventh day of each month or of every third month, depending
whether monthly or quarterly exchanges are elected by the shareholder. If the
seventh day of the month is not a business day, the transaction will be
processed on the next business day. Generally, the initial exchange will occur
after receipt and processing by the Shareholder Servicing Agent of an
application in good order. Exchanges will continue to be made from a
shareholder's account in any MFS Fund, as long as the balance of the account is
sufficient to complete the exchanges. Additional payments made to a
shareholder's account will extend the period that exchanges will continue to be
made under the Automatic Exchange Plan. However, if additional payments are
added to an account subject to the Automatic Exchange Plan shortly before an
exchange is scheduled, such funds may not be available for exchanges until the
following month; therefore, care should be used to avoid inadvertently
terminating the Automatic Exchange Plan through exhaustion of the account
balance.
No transaction fee for exchanges will be charged in connection with the
Automatic Exchange Plan. However, exchanges of shares of MFS Money Market Fund,
MFS Government Money Market Fund and Class A shares of MFS Cash Reserve Fund
will be subject to any applicable sales charge. Changes in amounts to be
exchanged to each fund, the funds to which exchanges are to be made and the
timing of exchanges (monthly or quarterly), or termination of a shareholder's
participation in the Automatic Exchange Plan will be made after instructions in
writing or by telephone (an "Exchange Change Request") are received by the
Shareholder Servicing Agent in proper form (i.e., if in writing --
19
<PAGE> 157
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 C shares and 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
and if the purchaser is eligible to purchase the class of shares) at net asset
value. Exchanges will be made only after instructions in writing or by telephone
(an "Exchange Request") are received for an established account by the
Shareholder Servicing Agent.
Each Exchange Request must be in proper form (i.e., if in writing -- signed by
the record owner(s) exactly as the shares are registered; if by
telephone -- proper account identification is given by the dealer or shareholder
of record), and each exchange must involve either shares having an aggregate
value of at least $1,000 ($50 in the case of retirement plan participants whose
sponsoring organizations subscribe to MFS Fundamental 401(k) Plan or another
similar 401(k) recordkeeping system made available by the Shareholder Servicing
Agent) or all the shares in the account. Each exchange involves the redemption
of the shares of the Fund to be exchanged and the purchase at net asset value
(i.e., without a sales charge) of shares of the same class of the other MFS
Fund. Any gain or loss on the redemption of the shares exchanged is reportable
on the shareholder's federal income tax return, unless both the shares received
and the shares surrendered in the exchange are held in a tax-deferred retirement
plan or other tax-exempt account. No more than five exchanges may be made in any
one Exchange Request by telephone. If the Exchange Request is received by the
Shareholder Servicing Agent prior to the close of regular trading on the
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 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
20
<PAGE> 158
only benefit residents of such states. Investors should consult with their own
tax advisers to be sure this is an appropriate investment, based on their
residency and each state's income tax laws.
The exchange privilege (or any aspect of it) may be changed or discontinued and
is subject to certain limitations (see "Purchases" in the Prospectus).
TAX-DEFERRED RETIREMENT PLANS -- Shares of the Fund may be purchased by all
types of tax-deferred retirement plans. MFD makes available through investment
dealers plans and/or custody agreements for the following:
Individual Retirement Accounts (IRAs) (for individuals and their
non-employed spouses who desire to make limited contributions to a
tax-deferred retirement program and, if eligible, to receive a federal
income tax deduction for amounts contributed);
Simplified Employee Pension (SEP-IRA) Plans;
Retirement Plans Qualified under Section 401(k) of the Internal Revenue
Code of 1986 (the "Code") as amended;
403(b) Plans (deferred compensation arrangements for employees of public
school systems and certain non-profit organizations); and
Certain other qualified pension and profit-sharing plans.
The plan documents provided by MFD designate a trustee or custodian (unless
another trustee or custodian is designated by the individual or group
establishing the plan) and contain specific information about the plans. Each
plan provides that dividends and distributions will be reinvested automatically.
For further details with respect to any plan, including fees charged by the
trustee, custodian or MFD, tax consequences and redemption information, see the
specific documents for that plan. Plan documents other than those provided by
MFD may be used to establish any of the plans described above. Third party
administrative services, available for some corporate plans, may limit or delay
the processing of transactions.
Investors should consult with their 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 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 taxes. If the Fund should fail to qualify as a "regulated investment
company" in any year, the Fund would incur a regular corporate federal income
tax upon its taxable income and Fund distributions would generally be taxable as
ordinary dividend income to the shareholders.
Shareholders of the Fund normally will have to pay federal income taxes, and any
state or local taxes, on the dividends and capital gain distributions they
receive from the Fund. Dividends from ordinary income and any distributions from
net short-term capital gains are taxable to shareholders as ordinary income for
federal income tax purposes, whether the distributions are paid in cash or
reinvested in additional shares. A portion of the Fund's ordinary income
dividends is normally eligible for the dividends received deduction for
corporations if the recipient otherwise qualifies for that deduction with
respect to its holding of Fund shares. Availability of the deduction for
particular shareholders is subject to certain limitations, and deducted amounts
may be subject to the alternative minimum tax or result in certain basis
adjustments. Distributions of net capital gains (i.e., the excess of net
long-term capital gains over net short-term capital losses), whether paid in
cash or reinvested in additional shares, are taxable to the Fund's shareholders
as long-term capital gains without regard to the length of time the shareholders
have held their shares. Any Fund dividend that is declared in October, November,
or December of any calendar year that is payable to shareholders of record in
such a month and that is paid the following January will be treated as if
received by the shareholders on December 31 of the year in which the dividend is
declared. The Fund will notify shareholders regarding the federal tax status of
its distributions after the end of each calendar year.
Any Fund distribution will have the effect of reducing the per share net asset
value of shares in the Fund by the amount of the distribution. Shareholders
purchasing shares shortly before the record date of any distribution may thus
pay the full price for the shares and then effectively receive a portion of the
purchase price back as a taxable distribution.
In general, any gain or loss realized upon a taxable disposition of shares of
the Fund by a shareholder that holds such shares as a capital asset will be
treated as a long-term capital gain or loss if the shares have been held for
more than twelve months and otherwise as short-term capital gain or loss.
However, any loss realized upon a disposition of shares in the Fund held for six
months or less will be treated as a long-term capital loss to the extent of any
distributions of net capital gain made with respect to those shares. Any loss
realized upon a disposition of shares may also be disallowed under rules
relating to wash sales. Gain may be increased (or loss reduced) upon a
redemption of Class A shares of the Fund within ninety days after their purchase
(including purchases by exchange or by reinvestment) followed by any purchase
without payment of an addi-
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<PAGE> 159
tional sales charge of Class A shares of the Fund or of another MFS Fund (or any
other shares of an MFS Fund generally sold subject to a sales charge).
The Fund's current dividend and accounting policies will affect the amount,
timing, and character of distributions to shareholders, and may, under certain
circumstances, make an economic return of capital taxable to shareholders. Any
investment in zero coupon bonds, deferred interest bonds, payment-in-kind bonds,
and certain securities purchased at a market discount will cause the Fund to
recognize income prior to the receipt of cash payments with respect to those
securities. In order to distribute this income and avoid a tax on the Fund, the
Fund may be required to liquidate portfolio securities that it might otherwise
have continued to hold, potentially resulting in additional taxable gain or loss
to the Fund.
The Fund's transactions in options, Futures Contracts and Forward Contracts will
be subject to special tax rules that may affect the amount, timing, and
character of Fund income and distributions to shareholders. For example, certain
positions held by the Fund on the last business day of each taxable year will be
marked to market (i.e., treated as if closed out) on that day, and any gain or
loss associated with the positions will be treated as 60% long-term and 40%
short term capital gain or loss. Certain positions held by the Fund that
substantially diminish its risk of loss with respect to other positions in its
portfolio may constitute "straddles," and may be subject to special tax rules
that would cause deferral of Fund losses, adjustments in the holding periods of
Fund securities, and conversion of short-term into long-term capital losses.
Certain tax elections exist for straddles that may alter the effects of these
rules. The Fund will limit its activities in options, Futures Contracts and
Forward Contracts to the extent necessary to meet the requirements of Subchapter
M of the Code.
Special tax considerations apply with respect to foreign investments of the
Fund. Foreign exchange gains and losses realized by the Fund will generally be
treated as ordinary income and losses. The holding of foreign currencies for
non-hedging purposes and investment by the Fund in certain "passive foreign
investment companies" may be limited in order to avoid taxes on the Fund.
Investment income received by the Fund from foreign securities may be subject to
foreign taxes. The United States has entered into tax treaties with many foreign
countries that may entitle the Fund to a reduced rate of tax or an exemption
from tax on such income; the Fund intends to qualify for treaty reduced rates
where available. It is not possible, however, to determine the Fund's effective
rate of foreign tax in advance since the amount of the Fund's assets to be
invested within various countries is not known. If the Fund holds more than 50%
of its assets in foreign stock and 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 (subject to such limitations)
be able to claim a credit but not a deduction. No deduction will be permitted to
individuals in computing their alternative minimum tax liability. If the Fund
does not qualify or elect to "pass through" to the Fund's shareholders foreign
income taxes paid by it, shareholders will not be able to claim any deduction or
credit for any part of the foreign taxes paid by the Fund.
Dividends and certain other payments to persons who are not citizens or
residents of the United States or U.S. entities ("Non-U.S. Persons") are
generally subject to U.S. tax withholding at a rate of 30%. The Fund intends to
withhold U.S. federal income tax at the rate of 30% on taxable dividends and
other payments to Non-U.S. Persons that are subject to such withholding,
regardless of whether a lower rate may be permitted under an applicable treaty.
Any amounts overwithheld may be recovered by such persons by filing a claim for
refund with the U.S. Internal Revenue Service within the time period appropriate
to such claims. Distributions received from the Fund by Non-U.S. Persons also
may be subject to tax under the laws of their own jurisdictions. The Fund is
also required in certain circumstances to apply backup withholding at the rate
of 31% on taxable dividends and redemption proceeds paid to any shareholder
(including a Non-U.S. Person) who does not furnish to the Fund certain
information and certifications or who is otherwise subject to backup
withholding. Backup withholding will not, however, be applied to payments that
have been subject to 30% withholding.
As long as it qualifies as a regulated investment company under the Code, the
Fund will not be required to pay Massachusetts income or excise taxes.
7. DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class A, Class B and Class C
shares (the "Distribution Plan") pursuant to Section 12(b) of the 1940 Act and
Rule 12b-1 thereunder (the "Rule") after having concluded that there is a
reasonable likelihood that the Distribution Plan would benefit the Fund and the
respective class of shareholders. The provisions of the Distribution Plan are
severable with respect to each class of shares offered by the Fund. The
Distribution Plan is designed to promote sales, thereby increasing the net
assets of the Fund. Such an increase may reduce the Fund's expense ratio to the
extent that the Fund's fixed costs are spread over a larger net asset base.
Also, an increase in net assets may lessen the adverse effect that could result
were the Fund required to liquidate portfolio securities to meet redemptions.
There is, however, no assurance that the net assets of the Fund will increase or
that the other benefits referred to above will be realized.
The Distribution Plan is described in the Prospectus under the caption
"Distribution Plan," which is incorporated herein by reference. The following
information supplements this Prospectus discussion.
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<PAGE> 160
SERVICE FEES. With respect to Class A shares, no service fees will be paid: (i)
to any dealer who is the holder or dealer of record for investors who own Class
A shares having an aggregate net asset value less than $750,000, or such other
amount as may be determined from time to time by MFD (MFD, however, may waive
this minimum amount requirement from time to time); or (ii) to any insurance
company which has entered into an agreement with the Fund and MFD that permits
such insurance company to purchase Class A shares from the Fund at their net
asset value in connection with annuity agreements issued in connection with the
insurance company's separate accounts. Dealers may from time to time be required
to meet certain other criteria in order to receive service fees.
With respect to Class B shares, except in the case of the first year service
fee, no service fees will be paid to any securities dealer who is the holder or
dealer of record for investors who own Class B shares having an aggregate net
asset value of less than $750,000 or such other amount as may be determined by
MFD from time to time. Dealers may from time to time be required to meet certain
other criteria in order to receive service fees.
MFD or its affiliates shall be entitled to receive any service fee payable under
the Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by MFD or its affiliates
for shareholder accounts.
DISTRIBUTION FEES: The purpose of distribution payments to MFD under the
Distribution Plan is to compensate MFD for its distribution services to the
Fund. MFD pays commissions to dealers as well as expenses of printing
prospectuses and reports used for sales purposes, expenses with respect to the
preparation and printing of sales literature and other distribution related
expenses, including, without limitation, the cost necessary to provide
distribution-related services, or personnel, travel, office expenses and
equipment.
DISTRIBUTION AND SERVICE FEES PAID DURING THE FUND'S LAST FISCAL YEAR: During
the fiscal year ended October 31, 1996, the Fund paid the following Distribution
Plan expenses:
<TABLE>
<CAPTION>
AMOUNT OF AMOUNT OF AMOUNT OF
DISTRIBUTION DISTRIBUTION DISTRIBUTION
AND SERVICE AND SERVICE AND SERVICE
FEES PAID BY FEES RETAINED FEES RECEIVED
CLASSES OF SHARES FUND BY MFD BY DEALERS
<S> <C> <C> <C>
Class A Shares $ 405,197 $ 74,728 $330,469
Class B Shares $ 2,717,921 $2,117,886 $600,035
Class C Shares $ 172,983 $ 16,824 $156,159
</TABLE>
GENERAL: The Distribution Plan will remain in effect until August 1, 1997, and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by vote of both the Trustees and a majority of the
Trustees who are not "interested persons" or financially interested parties of
such Plan ("Distribution Plan Qualified Trustees"). The Distribution Plan also
requires that the Fund and MFD each shall provide the Trustees, and the Trustees
shall review, at least quarterly, a written report of the amounts expended (and
purposes therefor) under such Plan. The Distribution Plan may be terminated at
any time by vote of a majority of the Distribution Plan Qualified Trustees or by
vote of the holders of a majority of the respective class of the Fund's shares
(as defined in "Investment Restrictions"). All agreements relating to the
Distributions Plan entered into between the Fund or MFD and other organizations
must be approved by the Board of Trustees, including a majority of the
Distribution Plan Qualified Trustees. Agreements under the Distribution Plan
must be in writing, will be terminated automatically if assigned, and may be
terminated at any time without payment of any penalty, by vote of a majority of
the Distribution Plan Qualified Trustees or by vote of the holders of a majority
of the respective class of the Fund's shares. The Distribution Plan may not be
amended to increase materially the amount of permitted distribution expenses
without the approval of a majority of the respective class of the Fund's shares
(as defined in "Investment Restrictions") or may not be materially amended in
any case without a vote of the Trustees and a majority of the Distribution Plan
Qualified Trustees. The selection and nomination of Distribution Plan Qualified
Trustees shall be committed to the discretion of the non-interested Trustees
then in office. No Trustee who is not an "interested person" has any financial
interest in the Distribution Plan or in any related agreement.
8. DETERMINATION OF NET ASSET VALUE AND PERFORMANCE
NET ASSET VALUE: The net asset value per share of each class of the Fund is
determined each day during which the Exchange is open for trading. (As of the
date of this SAI, the Exchange is open for trading every weekday except for the
following holidays
(or the days on which they are observed): New Year's Day, 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
23
<PAGE> 161
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 1% maximum for Class C
shares purchased after April 1, 1996) and therefore may result in a higher rate
of return, (ii) a total rate of return assuming an initial account value of
$1,000, which will result in a higher rate of return since the value of the
initial account will not be reduced by the sales charge (5.75% maximum) and/or
(iii) total rates of return which represent aggregate performance over a period
or year-by-year performance, and which may or may not reflect the effect of the
maximum or other sales charge or CDSC. The fund offers multiple classes of
shares which were initially offered for sale to the public on different dates.
The calculation of total rate of return for a class of shares which initially
was offered for sale to the public subsequent to another class of shares of the
Fund is based both on (i) the Performance of the Fund's newer class from the
date it initially was offered for sale to the public and (ii) the performance of
the Fund's oldest class from the date it initially was offered for sale to the
public up to the date that the newer class initially was offered for sale to the
public.
As discussed in the Prospectus, the sales charges, expenses and expense ratios,
and therefore the performance, of the Fund's classes of shares differ. In
calculating total rate of return for a newer class of shares in accordance with
certain formulas required by the SEC, the performance will be adjusted to take
into account the fact that the newer class is subject to a different sales
charge than the oldest class (e.g., if the newer class is Class A shares, the
total rate of return quoted will reflect the deduction of the initial sales
charge applicable to Class A shares; if the newer class is Class B shares, the
total rate of return quoted will reflect the deduction of the CDSC applicable to
Class B shares). However, the performance will not be adjusted to take into
account the fact that the newer class of shares bears different class specific
expenses than the oldest class of shares (e.g., Rule 12b-1 fees). Therefore, the
total rate of return quoted for a newer class of shares will differ from the
return that would be quoted had the newer class of shares been outstanding for
the entire period over which the calculation is based (i.e., the total rate of
return quoted for the newer class will be higher than the return that would have
been quoted had the newer class of shares been outstanding for the entire period
over which the calculation is based if the class specific expenses for the newer
class are higher than the class specific expenses of the oldest class, and the
total rate of return quoted for the newer class will be lower than the return
that would be quoted had the newer class of shares been outstanding for this
entire period if the class specific expenses for the newer class are lower than
the class specific expenses of the oldest class).
Total rate of return quotations for each class are presented in Appendix B
attached hereto under the heading "Performance Quotations."
PERFORMANCE RESULTS -- The performance results for Class A shares presented in
Appendix B attached hereto under the heading entitled "Performance Quotations"
assume initial investment of $10,000 in Class A shares and cover the period from
November 18, 1993 through December 31, 1996. It has been assumed that dividend
and capital gain distributions were reinvested in additional shares. Any
performance results or total rate of return quotation provided by the Fund
should not be considered as representative of the performance of the Fund in the
future since the net asset value of shares of the Fund will vary based not only
on the type, quality and maturities of the securities held in the Fund's
portfolio, but also on changes in the current value of such securities and on
changes in the
24
<PAGE> 162
expenses of the Fund. These factors and possible differences in the methods used
to calculate total rates of return should be considered when comparing the total
rate of return of the Fund to total rates of return published for other
investment companies or other investment vehicles. Total rate of return reflects
the performance of both principal and income. Current net asset value and
account balance information may be obtained by calling 1-800-MFS-TALK
(637-8255).
From time to time the Fund may, as appropriate, quote Fund rankings or reprint
all or a portion of evaluations of fund performance and operations appearing in
various independent publications, including but not limited to the following:
Money, Fortune, U.S. News and World Report, Kiplinger's Personal Finance, The
Wall Street Journal, Barron's, Investors Business Daily, Newsweek, Financial
World, Financial Planning, Investment 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.
From time to time, the Fund may discuss or quote its current portfolio manager
as well as other investment personnel, including such persons' views on: the
economy; securities markets; portfolio securities and their issuers; investment
philosophies, strategies, techniques and criteria used in the selection of
securities to be purchased or sold for the Fund; the Fund's portfolio holdings;
the investment research and analysis process; the formulation and evaluation of
investment recommendations; and the assessment and evaluation of credit,
interest rate, market and economic risks and similar or related matters.
From time to time the Fund may also discuss or quote the views of its
distributor, its investment adviser and other financial planning, legal, tax,
accounting, insurance, estate planning and other professionals, or from surveys,
regarding individual and family financial planning. Such views may include
information regarding: retirement planning; tax management strategies; estate
planning; general investment techniques (e.g., asset allocation and disciplined
saving and investing); business succession; ideas and information provided
through the MFS Heritage Planning(SM) program, an intergenerational financial
planning assistance program; issues with respect to insurance (e.g., disability
and life insurance and Medicare supplemental insurance); and issues regarding
financial and health care management for elderly family members; and other
similar or related matters.
MFS FIRSTS: MFS has a long history of innovations.
<TABLE>
<S> <C>
-- 1924 -- Massachusetts Investors Trust is
established as the first open-end mutual fund
in America.
-- 1924 -- Massachusetts Investors Trust is the
first mutual fund to make full public
disclosure of its operations in shareholder
reports.
-- 1932 -- One of the first internal research
departments is established to provide
in-house analytical capability for an
investment management firm.
-- 1933 -- Massachusetts Investors Trust is the
first mutual fund to register under the
Securities Act of 1933.
-- 1936 -- Massachusetts Investors Trust is the
first mutual fund to allow shareholders to
take capital gain distributions either in
additional shares or in cash.
-- 1976 -- MFS(R) Municipal Bond Fund is among
the first municipal bond funds established.
-- 1979 -- Spectrum becomes the first
combination fixed/ variable annuity with no
initial sales charge.
-- 1981 -- MFS(R) World Governments Fund is
established as America's first globally
diversified fixed-income mutual fund.
-- 1984 -- MFS(R) Municipal High Income Fund is
the first open-end mutual fund to seek high
tax-free income from lower-rated municipal
securities.
-- 1986 -- MFS(R) Managed Sectors Fund becomes
the first mutual fund to target and shift
investments among industry sectors for
shareholders.
-- 1986 -- MFS(R) Municipal Income Trust is the
first closed-end, high-yield municipal bond
fund traded on the New York Stock Exchange.
-- 1987 -- MFS(R) Multimarket Income Trust is
the first closed-end, multimarket high income
fund listed on the New York Stock Exchange.
-- 1989 -- MFS(R) Regatta becomes America's
first non-qualified market-value-adjusted
fixed/variable annuity.
-- 1990 -- MFS(R) World Total Return Fund is the
first global balanced fund.
</TABLE>
25
<PAGE> 163
<TABLE>
<S> <C>
-- 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.
</TABLE>
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
four classes of shares of each series of the Trust (Class A, Class B, Class C
and Class I shares). Each share of a class of the Fund represents an equal
proportionate interest in the assets of the Fund allocable to that class. Upon
liquidation of the Fund, shareholders of each class of the Fund are entitled to
share pro rata in the Fund's net assets allocable to such class available for
distribution to shareholders. The 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 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 AUDITORS AND
FINANCIAL STATEMENTS
Deloitte & Touche LLP are 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.
The Portfolio of Investments at October 31, 1996, the Statement of Assets and
Liabilities at October 31, 1996, the Statement of Operations for the year ended
October 31, 1996, the Statement of Changes in Net Assets for each of the years
in the two-year period ended October 31, 1996, the Notes to Financial Statements
and the Independent Auditors' Report, each of which is included in the Annual
Report to Shareholders of the Fund are incorporated by reference into this SAI
and have been so incorporated in reliance upon the report of Deloitte & Touche
LLP, independent auditors, given upon their authority as experts in accounting
and auditing. A copy of the Annual Report accompanies this SAI.
26
<PAGE> 164
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. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
CA: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
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.
A-1
<PAGE> 165
B: Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB -
rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B - rating.
CC: The rating CC is typically applied to debt subordinated to senior debt that
is assigned an actual or implied CCC rating.
C: The rating C is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC - debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service
payments are continued.
CI: The rating CI is reserved for income bonds on which no interest is being
paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The "D" rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
categories.
NR indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
FITCH
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.
A-2
<PAGE> 166
APPENDIX B
PERFORMANCE RESULTS AND QUOTATIONS
The performance results and quotations below should not be considered as
representative of the performance of the Fund in the future since the net asset
value and public offering price of shares of the Fund will vary. See
"Determination of Net Asset Value and Performance" in the SAI.
PERFORMANCE RESULTS
CLASS A SHARES
<TABLE>
<CAPTION>
VALUE OF VALUE OF
INITIAL CAPITAL VALUE OF
$10,000 GAIN REINVESTED TOTAL
YEAR ENDED INVESTMENT DISTRIBUTIONS DIVIDENDS VALUE
- --------------------------------------------------- ---------- ------------- ---------- -------
<S> <C> <C> <C> <C>
December 31, 1993(1)............................... $ 10,094 $ 0 $ 0 $10,094
December 31, 1994.................................. 10,251 0 137 10,388
December 31, 1995.................................. 10,829 116 1,137 12,082
December 31, 1996.................................. 11,614 552 1,538 13,704
</TABLE>
(1) Based on initial investment made on November 18, 1993, the initial public
offering date of Class A shares.
EXPLANATORY NOTES:
The results in the table assume that income dividends and capital gain
distributions were invested in additional shares. The results also assume that
the initial investment in Class A shares was reduced by the current maximum
applicable sales charge. No adjustment has been made for income taxes, if any,
payable by shareholders.
PERFORMANCE QUOTATIONS
All performance quotations are for the fiscal year ended October 31, 1996.
AVERAGE ANNUAL TOTAL RETURNS
<TABLE>
<CAPTION>
LIFE
1 YEAR OF FUND
------ -------
<S> <C> <C>
Class A shares with sales charge................................................ 9.06% 10.36%(1)
Class A shares without sales charge............................................. 15.73% 12.60%(1)
Class B shares with CDSC........................................................ 10.77% 10.87%(2)
Class B shares without CDSC..................................................... 14.77% 11.69%(2)
Class C shares with CDSC........................................................ 13.88% 11.80%(3)
Class C shares without CDSC..................................................... 14.88% 11.80%(3)
</TABLE>
(1) From initial public offering date of Class A shares on November 18, 1993.
(2) From the initial public offering date of Class B shares on November 18,
1993.
(3) Class C share performance includes the performance of the Fund's Class A
shares for periods prior to the commencement of offering of Class C shares
on January 3, 1994. Sales charges, expenses and expense ratios, and
therefore performance, for Class A and Class C shares differ. Class C share
performance has been adjusted to reflect that Class C shares generally are
subject to a lower CDSC (unless the performance quotation does not give
effect to the CDSC) whereas Class A shares generally are subject to an
initial sales charge. Class C share performance has not, however, been
adjusted to reflect differences in operating expenses (e.g. Rule 12b-1
fees), which generally are lower for Class A shares.
B-1
<PAGE> 167
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617) 954-5000
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
CUSTODIAN AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800) 225-2606
Mailing Address:
P.O. Box 2281, Boston, MA 02107-9906
INDEPENDENT AUDITORS
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
MFS(R)
WORLD GROWTH
FUND
500 BOYLSTON STREET
BOSTON, MA 02116
LOGO
MWF-13-3/97/500 09/209/309
<PAGE>
[logo] MFS Annual Report
INVESTMENT MANAGEMENT for Year Ended
October 31, 1996
MFS{R) WORLD GROWTH FUND
[graphic omitted]
AMERICA LEARNS HOW "WE INVENTED THE MUTUAL FUND", (see page 36)
<PAGE>
TABLE OF CONTENTS
Letter from the Chairman .................................................. 1
Portfolio Managers' Overview .............................................. 3
Fund Facts ................................................................ 4
Portfolio Managers' Profiles .............................................. 5
Portfolio Concentration ................................................... 5
Performance Summary ....................................................... 6
Portfolio of Investments .................................................. 9
Financial Statements ...................................................... 21
Notes to Financial Statements ............................................. 27
Independent Auditors' Report .............................................. 34
MFS Family of Funds ....................................................... 35
Trustees and Officers ..................................................... 37
HIGHLIGHTS
* FOR THE 12 MONTHS ENDED OCTOBER 31, 1996, THE NET ASSET VALUE OF CLASS A
SHARES PROVIDED A TOTAL RETURN OF 15.73%, CLASS B SHARES 14.77%, AND CLASS
C SHARES 14.88%.
* OVERWEIGHTING THE UNITED STATES, ONE OF THE BEST-PERFORMING WORLD MARKETS
OVER THE PAST YEAR, HELPED THE FUND'S PERFORMANCE, AS DID OUR
OVERWEIGHTING IN TWO STRONG SECTORS, TECHNOLOGY AND LEISURE.
* PERFORMANCE WAS ALSO HELPED BY AN OVERWEIGHTING IN EMERGING MARKETS,
ESPECIALLY IN LATIN AMERICAN COUNTRIES SUCH AS BRAZIL, MEXICO, AND PERU,
WHOSE ECONOMIES APPEAR TO BE COMING OUT OF RECESSION FASTER THAN EXPECTED.
* WHILE CONTINUED ECONOMIC SLOWDOWN IN EUROPE HURT SOME OF OUR MORE
CYCLICAL-GROWTH STOCK HOLDINGS, WE BELIEVE BUYING OPPORTUNITIES HAVE BEEN
CREATED BY THIS SLOWER-THAN-ANTICIPATED RECOVERY.
<PAGE>
LETTER FROM THE CHAIRMAN
[Photo of A. Keith Brodkin]
Dear Shareholders:
As we enter the final months of 1996, the U.S. economy appears to have settled
into a pattern of moderate growth and inflation -- two factors that we think can
be important contributors to a favorable long-term investment climate. During
the first quarter of 1996, real (inflation-adjusted) economic growth was 2.3% on
an annualized basis, followed by a rate of 4.7% in the second quarter. However,
this unexpectedly high level was followed by a more moderate 2.2% pace during
the third quarter. Overall, real growth in gross domestic product has surpassed
our expectations this year, and we now expect that growth for all of 1996 could
exceed 2.5%. Although individual consumers appear to be carrying an excessive
debt load, the consumer sector itself, which represents two-thirds of the
economy, continues to support the automobile and housing markets. Consumer
spending has also been positively impacted by widespread job growth and, more
recently, increasing wages. However, recent statistics appear to show a slowdown
in consumer spending. This is particularly true when considering overall retail
sales, which have been flat for several months. Furthermore, the economies of
Europe and Japan continue to be in the doldrums, weakening U.S. export markets
while subduing the capital spending plans of American corporations. Thus, while
economic growth should continue, we expect some slackening toward the end of the
year.
While we do not expect the U.S. stock market to match the extraordinary
performance of 1995, we continue to be positive about the equity market this
year. Although we believe the equity market represents fair value at current
levels, the expected slowdown in corporate earnings growth and interest rate
increases earlier in the year have raised some near-term concerns, as was seen
in July's stock market correction. Further interest rate increases, and an
acceleration of inflation coupled with an additional slowdown in corporate
earnings growth, could have a negative effect on the stock market in the near
term. However, to the extent that some earnings disappointments are taken as a
sign that the economy is not overheating, this may prove beneficial for the
equity market's longer-term health. We believe many of the technology-driven
productivity gains that U.S. companies have made in recent years will continue
to enhance corporate America's competitiveness and profitability. Therefore,
while we have some near-term concerns, we remain quite constructive on the
long-term viability of the equity market.
Outside the United States, we see similar economic backdrops, with slow to
moderate growth and low inflation in the developed countries of Europe and
Japan. We believe the long-term underperformance of many of these markets
relative to the United States has created some attractive valuations. European
markets such as the United Kingdom and Germany have recently eased monetary
policy, a trend which may continue as German and other central banks seek
economic stimulus. Meanwhile, corporate earnings growth is expected to improve
in these markets, which may lead to their outperforming the U.S. market.
Finally, as you may notice, this report to shareholders incorporates a number
of changes which we hope you will find informative and useful. Following the
Portfolio Managers' Overview, we have added new information on the Fund's
holdings, including a chart illustrating the portfolio's concentration in the
types of investments that meet its criteria. Near the back of the report,
telephone numbers and addresses are listed if you would like to contact MFS.
We appreciate your support and welcome any questions or comments you may have.
Respectfully,
/s/ A. Keith Brodkin
A. Keith Brodkin
Chairman and President
November 12, 1996
<PAGE>
PORTFOLIO MANAGERS' OVERVIEW
Dear Shareholders:
The Fund's performance over the past year reflected our decision to continue
overweighting stocks in the U.S. and emerging markets. As a result, for the 12
months ended October 31, 1996, Class A shares of the Fund provided a total
return of 15.73%, Class B shares 14.77%, and Class C shares 14.88%. These
returns assume the reinvestment of distributions but exclude the effects of any
sales charges. During this same period, the Morgan Stanley Capitol International
(MSCI) World Index, a broad, unmanaged index of global equities, returned
16.83%.
The Fund invests in companies worldwide that are expected to grow much faster
than the overall U.S. economy, in what we consider the most attractive markets
with the best long-term growth potential. We have identified three of these
markets: U.S. small-capitalization and emerging growth stocks, which represent
43% of the Fund's assets; growth stocks in mature foreign markets such as Europe
and Japan, representing 33%; and stocks in emerging markets, representing 22%.
Overweighting the United States, one of the best-performing world markets over
the past year, helped the Fund's performance, as did our overweighting in two
strong sectors, technology and leisure. The U.S. sector of the portfolio focuses
on companies with dynamic earnings growth driven by leadership positions in
rapidly growing markets. Thus, our holdings include software and networking
companies such as Oracle, BMC Software, and Cisco, whose focus on increasing
productivity is driving earnings growth. In the consumer area, lodging companies
such as HFS and Promus Hotel significantly outperformed the market due to strong
demand and favorable pricing. Performance was also helped by an underweighting
in health maintenance organizations, where pricing and utilization trends have
continued to deteriorate.
The Fund's performance was helped by its overweighting in emerging markets,
especially in Latin American countries such as Brazil, Mexico and Peru, whose
economies appear to be coming out of recession faster than expected. Performance
was also helped by overweighting Hong Kong and China, where solid gross domestic
product growth prevailed in the face of slowing inflation, and by underweighting
the rest of emerging Asia, where economic growth rates are slowing from the
accelerated levels of the early 1990s. We also identified many companies in
Eastern Europe whose strong export growth drove earnings acceleration and
contributed to performance.
On the negative side, performance was hurt by the Fund's holdings in Japan, a
lackluster market. There, economic recovery was disappointing despite low
interest rates. The continued economic slowdown in Europe also hurt some of our
more cyclical-growth stock holdings. However, we believe buying opportunities
have been created by this slower-than-anticipated recovery. Our favorite area
now in developed foreign markets is continental Europe, where we expect
companies focusing on restructuring, turnaround, and unit growth to do well in
the anticipated slow economic recovery. Reflecting this strategy, major holdings
include ASDA, a U.K. retailer; Wolters Kluwer, a Dutch publisher; and
Novo-Nordisk, a Scandinavian pharmaceutical company.
Looking forward, the Fund must be attentive to three different economic
trends. First, we believe that U.S. growth in 1997 could be slower relative to
1996, making the higher earnings rates of U.S. emerging growth companies even
more valuable. Second, we expect Europe and Japan to continue their recoveries
from recession, with an accompanying acceleration in earnings growth. Third, we
anticipate robust earnings increases from companies in emerging markets, where
market reforms could enhance trade and open up further opportunities for
development. Recognizing these pervasive trends, we are constantly searching for
the fastest growing companies at the most attractive valuations.
Respectfully,
/s/ John W. Ballen /s/ David Mannheim /s/ Toni Y. Shimura
John W. Ballen David Mannheim Toni Y. Shimura
Portfolio Manager Portfolio Manager Portfolio Manager
FUND FACTS
STRATEGY: THE FUND'S INVESTMENT OBJECTIVE IS TO SEEK
CAPITAL APPRECIATION BY INVESTING IN SECURITIES
OF COMPANIES WORLDWIDE THAT ARE GROWING AT RATES
EXPECTED TO BE WELL ABOVE THE GROWTH RATE OF THE
OVERALL U.S. ECONOMY.
COMMENCEMENT OF
INVESTMENT OPERATIONS: NOVEMBER 18, 1993
SIZE: $474.8 MILLION NET ASSETS AS OF OCTOBER 31, 1996
<PAGE>
PORTFOLIO MANAGERS' PROFILES
JOHN BALLEN BEGAN HIS CAREER AT MFS AS AN INDUSTRY SPECIALIST IN 1984. A
GRADUATE OF HARVARD COLLEGE, THE UNIVERSITY OF NEW SOUTH WALES AND THE
STANFORD UNIVERSITY GRADUATE SCHOOL OF BUSINESS ADMINISTRATION, HE WAS
PROMOTED TO INVESTMENT OFFICER IN 1986, VICE PRESIDENT - INVESTMENTS IN 1987,
DIRECTOR OF RESEARCH IN 1988 AND SENIOR VICE PRESIDENT IN 1990. IN 1993, HE
BECAME DIRECTOR OF EQUITY PORTFOLIO MANAGEMENT AND ON MAY 1, 1995 HE BECAME
CHIEF EQUITY OFFICER. HE HAS BEEN PORTFOLIO MANAGER OF MFS WORLD GROWTH FUND
SINCE 1993.
DAVID MANNHEIM BEGAN HIS CAREER AT MFS IN 1988 AS A RESEARCH SPECIALIST AND
WAS PROMOTED TO ASSISTANT VICE PRESIDENT - INVESTMENTS IN 1991 AND VICE
PRESIDENT - INVESTMENTS IN 1992. IN 1993 HE WAS NAMED PORTFOLIO MANAGER OF
MFS WORLD GROWTH FUND. MR. MANNHEIM IS A GRADUATE OF AMHERST COLLEGE AND OF
MASSACHUSETTS INSTITUTE OF TECHNOLOGY'S SLOAN SCHOOL OF MANAGEMENT.
TONI SHIMURA JOINED THE MFS RESEARCH DEPARTMENT IN 1987. A GRADUATE OF
WELLESLEY COLLEGE AND OF MASSACHUSETTS INSTITUTE OF TECHNOLOGY'S SLOAN SCHOOL
OF MANAGEMENT, SHE WAS PROMOTED TO INVESTMENT OFFICER IN 1990, ASSISTANT VICE
PRESIDENT - INVESTMENTS IN 1991, AND VICE PRESIDENT - INVESTMENTS IN 1992. IN
1993, SHE WAS NAMED PORTFOLIO MANAGER OF MFS WORLD GROWTH FUND.
PORTFOLIO CONCENTRATION AS OF OCTOBER 31, 1996
<TABLE>
TOP TEN HOLDINGS
<C> <C>
HFS, INC. ASTRA AB
Franchiser of hotels and real estate companies Swedish pharmaceutical manufacturer
ORACLE SYSTEMS CORP. COMPUTER ASSOCIATES INTERNATIONAL, INC.
Developer and manufacturer of Computer software company
database software
CISCO SYSTEMS, INC.
TECHNOLOGY SOLUTIONS CO. Computer network developer
Computer systems consulting company
SHARP CORP.
CADENCE DESIGN SYSTEMS, INC. Japanese consumer and industrial electronics
Computer software and systems company company
BMC SOFTWARE, INC. DAIMLER-BENZ AG
Computer software company German automaker
</TABLE>
<PAGE>
LARGEST SECTORS
Miscellaneous 64.2%
Technology 18.5%
Leisure 8.4%
Health Care 4.8%
Utilities & Communications 4.7%
*For a more complete breakdown refer to Portfolio of Investments.
TAX FORM SUMMARY
IN JANUARY 1997, SHAREHOLDERS WILL BE MAILED A TAX FORM SUMMARY
REPORTING THE FEDERAL TAX STATUS OF ALL DISTRIBUTIONS PAID DURING THE
CALENDAR YEAR 1996.
THE MFS WORLD GROWTH FUND HAS DESIGNATED $4,074,755 AS A LONG-TERM CAPITAL
GAIN DISTRIBUTION.
FOREIGN TAX CREDIT
THE FUND IS ESTIMATED TO HAVE DERIVED APPROXIMATELY 77.24% OF ITS ORDINARY
INCOME FROM DIVIDENDS PAID BY FOREIGN COMPANIES, AND TO HAVE PAID FOREIGN
TAXES EQUIVALENT TO APPROXIMATELY 8.84% OF ITS ORDINARY INCOME.
DIVIDENDS RECEIVED DEDUCTION
FOR THE YEAR ENDED OCTOBER 31, 1996, THE AMOUNT OF DISTRIBUTIONS FROM
ORDINARY INCOME ELIGIBLE FOR THE 70% DIVIDENDS-RECEIVED DEDUCTION FOR
CORPORATIONS CAME TO 1.00%.
PERFORMANCE SUMMARY
The information on the following page illustrates the historical performance of
MFS World Growth Fund Class A shares and Class B shares in comparison to various
market indicators. Class A share results reflect the deduction of the 5.75%
maximum sales charge; benchmark comparisons are unmanaged and do not reflect any
fees or expenses. You cannot invest in an index. All results are historical and
assume the reinvestment of dividends and capital gains.
<PAGE>
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the Period from December 1, 1993 to October 31, 1996)
MFS World Consumer MFS World
Growth Fund MSCI Russell S&P 500 Price Index Growth Fund
Class A World 2000 Composite U.S. Class B
----------- ----- ------- --------- ----------- -----------
12/93 9422.00 10000.0 10000.0 10000.0 10000.0 10000.0
10/94 10954.0 11464.0 10305.0 10493.0 10254.0 11547.0
10/95 11553.0 12613.0 12193.0 13252.0 10542.0 12079.0
10/96 13370.0 14737.0 14218.0 16428.0 10860.0 13863.0
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
1 Year Life of Fund+
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MFS World Growth Fund (Class A) including 5.75% sales charge + 9.06% +10.36%
- ------------------------------------------------------------------------------------------------------------------------
MFS World Growth Fund (Class A) at net asset value +15.73% +12.60%
- ------------------------------------------------------------------------------------------------------------------------
MFS World Growth Fund (Class B) with CDSC +10.77% +10.87%
- ------------------------------------------------------------------------------------------------------------------------
MFS World Growth Fund (Class B) without CDSC +14.77% +11.69%
- ------------------------------------------------------------------------------------------------------------------------
MFS World Growth Fund (Class C) with CDSC +13.88% +11.80%
- ------------------------------------------------------------------------------------------------------------------------
MFS World Growth Fund (Class C) without CDSC +14.88% +11.80%
- ------------------------------------------------------------------------------------------------------------------------
Average global portfolio## +15.52% +11.25%
- ------------------------------------------------------------------------------------------------------------------------
Morgan Stanley Capital International (MSCI) World Index +16.83% +14.21%
- ------------------------------------------------------------------------------------------------------------------------
Russell 2000 Total Return Index* +16.61% +12.82%
- ------------------------------------------------------------------------------------------------------------------------
Standard & Poor's 500 Composite Index** +24.08% +18.54%
- ------------------------------------------------------------------------------------------------------------------------
Consumer Price Index# + 3.01% + 2.87%
- ------------------------------------------------------------------------------------------------------------------------
<FN>
*The Russell 2000 Total Return Index is comprised of 2,000 of the smallest U.S.-domiciled company common stocks which
are traded in the United States on the New York Stock Exchange, the American Stock Exchange, and NASDAQ.
**The Standard & Poor's 500 Composite Index (the S&P 500) is a popular, unmanaged index of common stock performance.
#The Consumer Price Index is a popular measure of change in prices.
##Source: Lipper Analytical Services.
+Commencement of operations for class A and B shares is November 18, 1993.
</FN>
</TABLE>
Class A SEC results include the maximum 5.75% sales charge. Class B SEC results
reflect the applicable contingent deferred sales charge (CDSC), which declines
over six years as follows: 4%, 4%, 3%, 3%, 2%, 1%, 0%. Class C shares have no
initial sales charge but, along with Class B shares, have higher annual fees and
expenses than Class A shares. Class C share purchases made on or after April 1,
1996 will be subject to a 1% CDSC if redeemed within 12 months of purchase. See
the prospectus for details.
Class C share performance includes the performance of the Fund's Class A shares
for periods prior to the commencement of offering of Class C shares on January
3, 1994. Sales charges and operating expenses for Class A and Class C shares
differ. The Class A share performance, which is included within the Class C
share SEC performance, has been adjusted to reflect the CDSC generally
applicable to Class C shares rather than the initial sales charge generally
applicable to Class A shares. Class C share performance has not been adjusted,
however, to reflect differences in operating expenses (e.g., Rule 12b-1 fees),
which generally are lower for Class A shares.
Investment return and principal value will fluctuate, and shares, when redeemed,
may be worth more or less than their original cost. Past performance is no
guarantee of future results.
<PAGE>
PORTFOLIO OF INVESTMENTS - October 31, 1996
Stocks - 84.7%
- ---------------------------------------------------------------------------
Issuer Shares Value
- ---------------------------------------------------------------------------
Foreign Stocks - 53.5%
Argentina - 0.7%
Banco de Galicia y Buenos Aires S.A. de
C.V., ADR (Banks and Credit Companies) 33,821 $ 613,006
Mirgor Sacifia, ADR (Auto Parts)##* 108,000 172,800
Perez Companc S.A. (Oils) 102,672 652,097
Telefonica de Argentina, ADR (Utilities
- Telephone) 25,100 583,575
YPF Sociedad Anonima, ADR (Oils) 56,000 1,274,000
------------
$ 3,295,478
- ---------------------------------------------------------------------------
Australia - 1.4%
Broken Hill Proprietary (Mining) 53,400 $ 708,405
News Corp. Ltd. (Media) 430,400 2,447,496
News Corp. Ltd., Preferred (Media) 43,700 192,088
Sydney Harbour Casinos Ltd., Preferred
(Entertainment)* 655,800 934,908
Western Mining Corp. Ltd., ADS (Metals
and Minerals) 377,060 2,368,148
------------
$ 6,651,045
- ---------------------------------------------------------------------------
Brazil - 2.9%
Banco Bradesco S.A., Preferred (Banks
and Credit Companies) 111,171,934 $ 947,986
Brasmotor S.A., Preferred (Furniture and
Home Appliances)* 2,560,000 869,697
CEMIG (Utilities - Electric) 17,500,000 557,043
Centrais Eletricas Brasile, ADR
(Utilities - Electric) 63,200 1,027,000
Cia Brasileira de Distribuicao Grupo Pao
de Acucar, GDS (Supermarkets)## 45,000 877,500
Cia Cervejaria Brahma, Preferred
(Beverages) 2,630,433 1,625,937
Cia de Tecidos Norte de Minas -
Coteminas (Textiles) 470,000 157,841
Cia Siderurgica de Tubarao (Steel) 23,400 409,500
Cia Vale do Rio Doce, Preferred (Iron
and Steel) 29,553 612,751
Itausa Investimentos Itau S.A.
(Conglomerate) 750,000 591,356
Petrol Brasileiros (Oils) 8,110,000 1,049,966
Rhodia-Ster S.A., GDR (Chemicals)## 36,000 112,500
Sider Paulista, Pfd., "B" (Iron and
Steel)* 168,000 127,557
Souza Cruz S.A. (Tobacco) 87,000 523,372
Telebras, ADR (Telecommunications) 39,490 2,932,133
Telecommunicacoes Sao Paulo,
(Telecommunications) 107,140 18,251
Telecommunicacoes Sao Paulo, Preferred
(Telecommunications)* 2,500,000 457,510
Usinas Siderurgicas de Minas Gerais
S.A., ADR (Steel) ## 94,700 970,675
------------
$ 13,868,575
- ---------------------------------------------------------------------------
Canada - 1.0%
BioChem Pharma, Inc. (Biotechnology)* 36,400 $ 1,551,550
Echo Bay Mines Ltd. (Precious Metals and
Minerals) 147,200 1,150,000
Loewen Group, Inc. (Business Services)## 16,000 633,119
Placer Dome, Inc. (Precious Metals and
Minerals) 55,400 1,329,600
------------
$ 4,664,269
- ---------------------------------------------------------------------------
Chile - 0.1%
Moneda Chile Fund Ltd. (Finance)*+ 63,000 $ 567,000
- ---------------------------------------------------------------------------
China - 0.3%
Huaneng Power International, Inc., ADR
(Utilities - Electric) 19,800 $ 301,950
Qingling Motors Co., "H" (Automotive) 694,000 291,721
Shanghai Petrochemical Co., Ltd. (Oils) 2,417,000 648,664
Yizheng Chemical Fibre Co., Ltd.
(Textiles) 1,476,000 341,715
------------
$ 1,584,050
- ---------------------------------------------------------------------------
Colombia - 0.7%
Banco Industrial Colombiano, ADR (Banks
and Credit Companies) 127,000 $ 2,317,750
Cementos Diamante S.A., ADR
(Construction)## 90,700 1,258,462
------------
$ 3,576,212
- ---------------------------------------------------------------------------
Denmark - 0.4%
Novo-Nordisk A/S, "B"
(Biopharmaceuticals) 11,336 $ 1,882,494
- ---------------------------------------------------------------------------
France - 3.0%
Alcatel Alsthom Compagnie (Electrical
Equipment) 40,738 $ 3,465,711
Business Objects S.A. (Computer
Software)* 9,600 142,800
Compagnie de Suez (Banks and Credit
Companies) 44,380 1,905,958
Compagnie Financiere de Paribas (Banks
and Credit Companies) 27,700 1,778,205
Eaux (Compagnie Generale) (Utilities - Water) 27,576 3,287,597
Sidel (Machinery) 17,412 1,158,875
Valeo S.A. (Automotive) 39,092 2,340,181
------------
$ 14,079,327
- ---------------------------------------------------------------------------
Germany - 3.5%
Adidas AG (Stores) 9,450 $ 808,044
Daimler-Benz AG (Automotive) 90,530 5,301,790
Hoechst AG (Chemicals) 24,920 934,910
Mannesmann AG (Diversified Machinery) 8,541 3,308,372
SAP AG (Computer Software - Systems) 19,600 2,631,410
SAP AG, ADR (Computer Software -
Systems)## 8,000 354,000
Volkswagen AG (Automotive) 7,948 3,121,867
------------
$ 16,460,393
- ---------------------------------------------------------------------------
Hong Kong - 3.5%
Bank of East Asia (Banks and Credit
Companies) 252,360 $ 985,717
Cheung Kong Holdings (Restaurants) 245,000 1,964,639
China Light & Power (Utilities - Electric) 400 1,857
Citic Pacific Ltd. (Conglomerate) 200,000 972,619
Hang Seng Bank (Banks and Credit
Companies) 156,000 1,851,210
Henderson China Holdings Ltd. (Real
Estate)* 185,272 419,346
Hutchison Whampoa (Real Estate) 267,000 1,864,790
New World Development Co. (Real Estate) 605,000 3,521,218
Sun Hung Kai Properties (Real Estate) 173,000 1,969,037
Swire Pacific Air Ltd. (Transportation) 165,000 1,456,504
Wharf Holdings Ltd. (Real Estate) 308,000 1,270,769
Zhenhai Refining & Chemical Co. Ltd.
(Oils) 1,200,000 318,171
------------
$ 16,595,877
- ---------------------------------------------------------------------------
India - 0.9%
Gujarat Ambuja Cements Ltd. (Building
Materials) 50,000 $ 412,500
Hindalco Industries Ltd. (Mining)## 7,450 133,206
India Gateway Fund Ltd. (Finance)+* 107,000 520,020
ITC Ltd. (Conglomerate) 165,000 1,463,550
Mahanagar Telephone Nigam Ltd.
(Telecommunications) 190,000 1,209,578
Tata Engineering & Locomotive Co. Ltd.
(Autos and Trucks) 65,000 752,535
------------
$ 4,491,389
- ---------------------------------------------------------------------------
Indonesia - 0.3%
Industrial Development Bank (Banks and
Credit Companies) 280,000 $ 824,225
PT Gudang Garam (Tobacco) 144,000 575,184
------------
$ 1,399,409
- ---------------------------------------------------------------------------
Israel - 0.2%
Koor Industries Ltd., ADR (Conglomerate) 8,700 $ 151,163
NICE Systems Ltd., ADR
(Telecommunications)* 16,700 336,087
Teva Pharmaceutical Industries Ltd., ADR
(Pharmaceuticals) 8,700 364,313
------------
$ 851,563
- ---------------------------------------------------------------------------
Italy - 2.4%
Fiat S.p.A. (Automotive) 1,143,900 $ 3,055,675
Fila Holdings S.p.A., ADR (Apparel and
Textiles) 23,600 1,699,200
Gucci Group N.V. (Retail - Apparel)* 2,100 144,900
Instituto Nazionale delle Assicurazioni
(Insurance) 538,000 742,497
Luxottica Group S.p.A., ADR (Consumer
Goods and Services) 19,000 1,206,500
Olivetti Group (Computers)* 2,839,628 824,951
Pirelli S.p.A (Tire and Rubber) 1,435,400 2,543,627
Stet Societa Finanziaria Telefonica
S.p.A. (Telecommunications) 293,800 1,014,171
------------
$ 11,231,521
- ---------------------------------------------------------------------------
Japan - 11.3%
Canon, Inc. (Office Equipment) 16,000 $ 305,723
DDI Corp. (Telecommunications) 392 2,937,681
Daiei, Inc. (Retail) 245,000 2,168,902
Daiwa Securities Co. Ltd. (Finance) 253,000 2,727,583
Eisai Co. Ltd. (Pharmaceuticals) 77,000 1,376,808
Isetan Co. (Retail) 38,000 506,267
Ito-Yokado Co. Ltd. (Retail) 39,000 1,941,625
Japan Tobacco, Inc. (Consumer Goods and
Services) 31 218,459
Kawasaki Heavy Industries (Aerospace) 377,000 1,721,597
Komori Corp. (Printing Machinery) 63,000 1,413,621
Kyocera Corp. (Electronics) 21,000 1,382,330
Matsuzakaya Co., Ltd. (Retail) 69,000 725,743
Mitsubishi Trust & Banking (Finance) 132,000 1,943,729
Murata Manufacturing Co. Ltd.
(Electrical Equipment) 17,000 545,359
NEC Corp. (Electronics - Semiconductor) 135,000 1,467,263
Nichido Fire & Marine Ltd. (Insurance) 250,000 1,555,789
Nikon Corp. (Consumer Goods) 40,000 441,756
Nippon Steel Corp. (Steel) 950,000 2,764,484
Nippon Telephone & Telegraph Co.
(Telecommunications) 371 2,585,196
Nissan Motor Co. (Automotive) 419,000 3,162,056
NKK Corp. (Steel)* 422,000 1,057,867
Nomura Securities (Finance) 33,000 543,781
NTT Data Communications Systems Co.
(Computer Software - Systems) 92 2,717,504
Obayashi Corp. (Engineering and
Construction) 165,000 1,269,787
Pioneer Electronics Corp. (Electronics) 77,000 1,518,538
Rohm Co. (Electronics) 6,000 354,983
Sharp Corp. (Electronics) 359,000 5,443,685
Sony Corp. (Electronics) 50,100 2,999,237
Sumitomo Bank (Banks and Credit
Companies) 131,000 2,296,433
Sumitomo Realty & Development (Real
Estate) 386,000 2,801,367
Taisei Corp. (Engineering and
Construction) 149,000 914,191
------------
$ 53,809,344
- ---------------------------------------------------------------------------
Malaysia - 1.7%
DCB Holdings Berhad (Finance) 135,000 $ 462,292
Genting Berhad (Leisure) 142,000 1,062,470
Malayan Bank Berhad (Banks and Credit
Companies) 71,000 702,692
Petronas Gas Berhad (Gas)## 152,000 619,794
Renong Berhad (Conglomerate) 662,000 1,043,056
Resorts World Berhad (Entertainment) 344,000 1,974,664
Rothmans of Pall Mall (Tobacco Products) 61,000 601,306
Sime Darby Berhad (Conglomerate) 255,000 903,504
Tenaga Nasional Berhad (Utilities - Electric) 155,000 619,755
------------
$ 7,989,533
- ---------------------------------------------------------------------------
Mexico - 2.1%
Cemex S.A. de C.V., "B" (Construction) 291,506 $ 993,191
Cifra S.A. de C.V. (Retail) 490,300 631,419
Corporacion GEO S.A. de C.V. (Home
Builders)##* 45,000 807,435
Empresas ICA Sociedad Controladora S.A.,
ADR (Construction) 58,500 760,500
Fomento Economico Mexicano S.A. de C.V.,
"B" (Brewery) 110,000 335,584
Gruma S.A., "B" (Food Products)* 374,000 1,865,792
Grupo Carso S.A. de C.V. (Conglomerate)* 138,300 337,190
Grupo Carso S.A. de C.V., "A1"
(Conglomerate)* 171,300 781,752
Grupo Financiero Banamex, "B" (Finance) 292,200 621,080
Grupo Financiero Banamex, "L"
(Finance)## 11,997 24,600
Grupo Financiero Inbursa S.A. de C.V.,
"B" (Finance) 4,825 15,685
Kimberly-Clark de Mexico S.A. de C.V.
(Forest and Paper Products) 30,000 581,395
Telefonos de Mexico S.A. (Utilities -
Telecommunications) 1,021,000 1,549,755
Tubos de Acero de Mexico S.A. (Steel)* 60,000 667,500
------------
$ 9,972,878
- ---------------------------------------------------------------------------
Netherlands - 0.4%
Wolters Kluwer (Publishing) 14,320 $ 1,835,768
- ---------------------------------------------------------------------------
Pakistan - 0.6%
Cherat Cement Co. (Construction)* 16,500 $ 8,542
Fauji Fertilizer (Chemicals)* 176,600 345,887
Hub Power Co. (Utilities - Electric)* 1,694,500 1,441,681
Pakistan Synthetic (Textiles) 9,000 2,897
Pakistan Telecom (Telecommunications)* 11,910 962,787
Sui Northern Gas (Oil Services) 284,200 296,042
------------
$ 3,057,836
- ---------------------------------------------------------------------------
Peru - 0.9%
Compania de Minas Buenaventura S.A.
(Mining) 104,430 $ 815,162
CrediCorp. Ltd. (Finance) 112,282 1,964,935
Telefonica del Peru S.A. (Utilities -
Telephone) 594,954 1,261,534
------------
$ 4,041,631
- ---------------------------------------------------------------------------
Philippines - 0.5%
Ayala Land, Inc., "B" (Real Estate) 854,700 $ 912,027
Manila Electric Co., "B" (Utilities -
Electric) 47,387 348,540
Philippine Long Distance Telephone Co., ADR
(Utilities - Telephone) 6,185 370,327
Pilipino Telephone (Utilities - Telephone) 385,000 341,130
San Miguel Corp., "B", ADR (Food and
Beverage Products) 9,768 362,610
------------
$ 2,334,634
- ---------------------------------------------------------------------------
Poland - 1.2%
Bank Rozwoju Eksportu S.A. (Banks and
Credit Companies) 25,000 $ 742,882
Bank Slaski S.A. w Katowicach (Banks and
Credit Companies) 14,000 1,295,374
Bydgoska Fabryka Kabli S.A. (Wire and
Cable Products) 130,000 906,762
Elektrim Spolka Akcyjna S.A. (Electrical
Equipment) 156,373 1,307,746
Stomil Olsztyn S.A. (Tire and Rubber) 51,960 551,035
Wielkopolski Bank Kredytowy S.A. (Banks
and Credit Companies) 135,000 840,747
------------
$ 5,644,546
- ---------------------------------------------------------------------------
Portugal - 0.7%
Banco Espirito Santo e Comercial de
Lisboa S.A. (Banks and Credit Companies) 28,500 $ 499,609
Cimpor Cimentos Portugal (Building Materials) 34,946 732,625
Engil SGPS (Engineering and Construction) 36,079 366,785
Portugal Telecom S.A. (Utilities - Telephone) 33,250 862,398
Sonae Investimentos SGPS S.A. (Forest
and Paper Products) 34,180 999,228
------------
$ 3,460,645
- ---------------------------------------------------------------------------
Russia - 1.4%
Fleming Russia Securities Fund,
Preferred (Finance)*+ 110,200 $ 1,116,326
Lukoil Holding Co., ADR (Oils) 59,900 2,336,100
Mosenergo, ADR (Utilities - Electric)## 112,200 3,141,600
------------
$ 6,594,026
- ---------------------------------------------------------------------------
Singapore - 1.2%
City Developments Ltd. (Real Estate) 267,000 $ 2,104,901
Development Bank of Singapore Ltd.
(Banks and Credit Companies) 62,000 744,176
Fraser & Neave Ltd. (Beverages) 102,000 1,014,204
Keppel Corp. (Transportation) 167,000 1,245,383
Overseas Chinese Banking Corp. Ltd.
(Banks and Credit Companies) 63,000 720,384
------------
$ 5,829,048
- ---------------------------------------------------------------------------
South Africa - 0.6%
De Beers Centenary AG (Diamonds -
Precious Stones) 21,100 $ 622,572
Free State Consolidated Gold Mines Ltd.
(Gold Mining) 20,000 174,691
Iscor Ltd. (Steel) 225,000 160,577
Liberty Life Association of Africa Ltd.
(Insurance) 14,800 404,367
Nedcor Ltd. (Financial Services) 17,000 248,083
Sappi Ltd. (Forest and Paper Products) 17,500 154,719
Sasol Ltd. (Oils) 50,000 609,821
South African Breweries Ltd. (Beverages) 22,500 584,789
------------
$ 2,959,619
- ---------------------------------------------------------------------------
South Korea - 0.6%
Cho Sun Brewery (Beverages) 7,251 $ 193,595
Commerce Bank of Korea (Banks and Credit
Companies) 18,000 155,097
Hana Bank (Banks and Credit Companies) 10,000 151,699
Hana Bank (New) (Banks and Credit
Companies) 1,731 20,797
Korea Electric Power Corp. (Utilities -
Electric) 10,420 307,289
Korea Europe Fund (Finance)+ 42 126,000
Korea Mobile Telecommunications
(Telecommunications) 272 272,825
L.G. Chemicals (Chemicals) 24,000 289,806
New Korea Trust (Finance) 92,000 1,150,000
Samsung Electronics, GDR (Electronics)## 11,380 238,980
Samsung Electronics, GDR (Electronics)## 3,429 54,864
Samsung Electronics, GDR (Electronics)## 200 6,900
Samsung Electronics, GDR (Electronics)## 664 29,880
Shinhan Bank (Banks and Credit
Companies) 1,280 20,660
------------
$ 3,018,392
- ---------------------------------------------------------------------------
Spain - 0.9%
Banco de Santander S.A. (Banks and
Credit Companies) 6,985 $ 357,715
Telefonica de Espania (Utilities -
Telephone) 185,780 3,718,505
------------
$ 4,076,220
- ---------------------------------------------------------------------------
Sweden - 1.4%
Astra AB, Free Shares, "A"
(Pharmaceuticals) 142,890 $ 6,561,664
Astra AB, Free Shares, "B"
(Pharmaceuticals) 402 18,338
------------
$ 6,580,002
- ---------------------------------------------------------------------------
Switzerland - 1.1%
Ciba-Geigy AG (Medical and Health
Products) 1,905 $ 2,336,420
Roche Holdings AG (Pharmaceuticals) 104 783,175
Sandoz AG (Pharmaceuticals) 2,022 2,327,012
------------
$ 5,446,607
- ---------------------------------------------------------------------------
Taiwan - 0.7%
GVC Corp., GDR (Computers)##* 1,099 $ --
Taipei Fund (Finance) 338 2,784,444
Yageo Corp. (Electronics)* 23,476 217,153
Yageo Corp. (Electronics)##* 51,680 478,040
------------
$ 3,479,637
- ---------------------------------------------------------------------------
Thailand - 0.9%
Bank of Ayudhya Public Co. Ltd. (Banks
and Credit Companies) 148,000 $ 423,487
National Petrochemical PCL (Chemicals) 185,000 192,164
Phatra Thanakit Co. (Finance) 48,200 178,540
Robinson Department Store Public Co.
Ltd. (Retail) 110,000 184,325
Siam Cement Public Co. Ltd. (Building
Materials) 5,100 174,318
Siam City Cement Public Co. Ltd.
(Building Materials) 8,600 53,935
TelecomAsia Corp., Ltd. (Utilities -
Telephone) 225,000 432,150
Thai Euro Fund (Finance)+ 85,000 2,530,450
------------
$ 4,169,369
- ---------------------------------------------------------------------------
Turkey - 0.1%
Aksa Akrilik Kimya Sanayii A.S.
(Textiles) 378,000 $ 52,052
Alarko Holding A.S. (Conglomerate) 492,600 87,032
Arcelik A.S. (Furniture and Home
Appliances) 441,515 43,592
Turkiye Garanti Bankasi (Finance) 2,750,000 137,186
------------
$ 319,862
- ---------------------------------------------------------------------------
United Kingdom - 3.7%
ASDA Group PLC (Retail) 1,639,300 $ 3,119,597
Cadbury Schweppes PLC (Food and Beverage
Products) 107,200 892,727
Danka Business Systems, ADR (Business
Services) 49,400 1,957,475
Glaxo Wellcome PLC (Pharmaceuticals) 34,882 547,498
Huntingdon International Holdings PLC, ADR
(Consumer Goods and Services) 46,000 373,750
Ladbroke Group PLC (Leisure) 439,400 1,425,795
Pace Micro Technology (Electronics) 373,800 1,386,207
Rentokil Group PLC (Commercial Services) 276,100 1,852,442
Safeway PLC (Supermarkets) 398,800 2,364,323
Vodafone Group PLC (Telecommunications) 912,600 3,525,317
------------
$ 17,445,131
- ---------------------------------------------------------------------------
Venezuela - 0.2%
Mavesa S.A., ADR (Food and Beverage
Products)## 1,645 $ 10,281
Siderurgica Venezolana Sivensa Saica
S.A.C.A., ADR (Conglomerate) 250,000 882,812
-------------
$ 893,093
- ---------------------------------------------------------------------------
Total Foreign Stocks $254,156,423
- ---------------------------------------------------------------------------
U.S. Stocks - 31.2%
Apparel and Textiles - 0.1%
Nine West Group, Inc.* 5,200 $ 259,350
- ---------------------------------------------------------------------------
Automotive - 0.2%
APS Holding Corp.* 41,000 $ 850,750
Harvard Industries, Inc., "B"* 24,000 225,000
United Auto Group, Inc. 700 24,063
------------
$ 1,099,813
- ---------------------------------------------------------------------------
Business Machines - 1.0%
Affiliated Computer Services, Inc., "A"* 48,900 $ 2,689,500
Sun Microsystems, Inc.* 33,100 2,019,100
------------
$ 4,708,600
- ---------------------------------------------------------------------------
Business Services - 5.2%
Abacus Direct Corp. 900 $ 23,625
AccuStaff, Inc.* 22,700 607,225
ADT Ltd.* 78,500 1,550,375
Alco Standard Corp. 11,000 510,125
Computer Sciences Corp.* 19,700 1,462,725
CUC International, Inc.* 114,650 2,808,925
DST Systems, Inc.* 54,600 1,678,950
Employee Solutions, Inc.* 53,400 1,181,475
Equity Corp. International* 22,450 516,350
Ingram Micro, Inc. 2,900 52,200
International Network Services* 800 28,600
Learning Tree International, Inc.* 116,300 4,913,675
SABRE Group Holdings, Inc. 11,900 362,950
Superior Consultant, Inc. 2,700 66,150
Technology Solutions Co.* 220,000 8,552,500
Thermo Fibergen, Inc.* 21,700 273,962
------------
$ 24,589,812
- ---------------------------------------------------------------------------
Computer Software - Personal Computers - 1.0%
Autodesk, Inc. 1,000 $ 22,875
First Data Corp. 33,901 2,703,605
Microsoft Corp.* 5,200 713,700
Transaction System Architects, Inc.* 32,200 1,336,300
------------
$ 4,776,480
- ---------------------------------------------------------------------------
Computer Software - Systems - 8.0%
Adobe Systems, Inc. 5,400 $ 186,975
BMC Software, Inc.* 87,700 7,279,100
Cadence Design Systems, Inc.* 210,700 7,690,550
Computer Associates International, Inc. 95,650 5,655,306
Compuware Corp.* 24,400 1,287,100
Informix Corp.* 64,700 1,435,531
Oracle Systems Corp.* 253,000 10,705,062
Parametric Technology Corp.* 30,300 1,480,913
Sybase, Inc.* 36,900 650,363
Synopsys, Inc.* 5,400 243,000
USCS International, Inc.* 19,500 351,000
Viasoft, Inc.* 12,900 635,325
Xionics Document Technologies* 45,700 582,675
------------
$ 38,182,900
- ---------------------------------------------------------------------------
Construction Services - 0.4%
Shaw Group, Inc. 87,000 $ 2,142,375
- ---------------------------------------------------------------------------
Consumer Goods and Services - 0.9%
Carson, Inc. 70,600 $ 1,147,250
Service Corp. International 12,600 359,100
Tyco International Ltd. 53,800 2,669,825
------------
$ 4,176,175
- ---------------------------------------------------------------------------
Electronics - 1.3%
Altera Corp. 36,600 $ 2,269,200
Analog Devices, Inc. 12,300 319,800
Intel Corp. 12,000 1,318,500
Linear Technology Corp. 17,600 589,600
LSI Logic Corp.* 36,700 972,550
VLSI Technology, Inc.* 17,600 303,600
Xilinx, Inc.* 7,000 229,250
------------
$ 6,002,500
- ---------------------------------------------------------------------------
Entertainment - 1.4%
Cox Radio, Inc. 62,700 $ 1,136,437
Harrah's Entertainment, Inc.* 115,000 1,926,250
Hollywood Entertainment Corp. 67,700 1,404,775
Jacor Communications, Inc.* 34,600 968,800
LIN Television Corp.* 23,200 878,700
Sinclair Broadcast Group, Inc. 13,300 405,650
------------
$ 6,720,612
- ---------------------------------------------------------------------------
Financial Institutions - 0.3%
Corporate Express, Inc. 41,500 $ 1,353,938
- ---------------------------------------------------------------------------
Food and Beverage Products - 0.1%
Earthgrains Co. 6,900 $ 365,700
- ---------------------------------------------------------------------------
Machinery - 0.1%
S I Handling Systems, Inc. 26,000 $ 351,000
- ---------------------------------------------------------------------------
Medical and Health Products - 0.1%
Ventritex, Inc.* 11,800 $ 269,188
- ---------------------------------------------------------------------------
Medical and Health Technology and Services - 1.3%
Columbia Healthcare Corp. 600 $ 21,450
Foundation Health Corp. 700 20,912
HealthSource, Inc.* 18,100 221,725
HealthSouth Corp.* 65,800 2,467,500
Pacificare Health Systems, Inc., "B"* 9,900 695,475
St. Jude Medical, Inc.* 10,500 414,750
United Healthcare Corp. 61,400 2,325,525
------------
$ 6,167,337
- ---------------------------------------------------------------------------
Oil Services - 0.1%
Barrett Resources Corp.* 10,800 $ 414,450
National Oilwell, Inc. 1,400 32,550
------------
$ 447,000
- ---------------------------------------------------------------------------
Pollution Control - 0.3%
Republic Industries, Inc. 900 $ 28,013
USA Waste Services, Inc.* 40,600 1,299,200
------------
$ 1,327,213
- ---------------------------------------------------------------------------
Printing and Publishing
Pulitzer Publishing Co. 800 $ 50,800
- ---------------------------------------------------------------------------
Railroads - 0.1%
Wisconsin Central Transportation Corp.* 19,700 $ 709,200
- ---------------------------------------------------------------------------
Restaurants and Lodging - 5.1%
Applebee's International, Inc. 74,400 $ 1,813,500
HFS, Inc.* 246,700 18,070,775
Promus Hotel Corp.* 93,250 2,960,687
Renaissance Hotel Group 65,000 1,194,375
U.S. Franchise Services, Inc. 1,500 21,750
------------
$ 24,061,087
- ---------------------------------------------------------------------------
Stores - 0.7%
General Nutrition Cos., Inc.* 40,800 $ 744,600
Micro Warehouse, Inc.* 8,600 197,800
Office Depot, Inc.* 60,600 1,189,275
Staples, Inc.* 76,500 1,424,812
------------
$ 3,556,487
- ---------------------------------------------------------------------------
Technology
Spectrum Holobyte, Inc.* 20,100 $ 113,063
- ---------------------------------------------------------------------------
Telecommunications - 3.5%
3Com Corp.* 28,700 $ 1,940,838
Advanced Fibre Communications 900 51,413
Bay Networks, Inc.* 900 18,225
Cabletron Systems, Inc.* 33,100 2,064,612
Cisco Systems, Inc.* 91,300 5,649,187
Glenayre Technologies, Inc.* 73,200 1,884,900
Heritage Media Corp. 12,300 187,575
International Business Communications
Systems Inc.+*(+) 40,300 399,776
Sterling Commerce, Inc.* 11,000 309,375
Tel-Save Holdings, Inc. 2,450 61,250
U.S. Robotics Corp.* 500 31,438
Univision Communications, Inc. 14,400 486,000
WorldCom, Inc. 156,000 3,802,500
------------
$ 16,887,089
- ---------------------------------------------------------------------------
Total U.S. Stocks $148,317,719
- ---------------------------------------------------------------------------
Total Stocks (Identified Cost, $354,125,273) $402,474,142
- ---------------------------------------------------------------------------
Warrants - 0.5%
- ---------------------------------------------------------------------------
Issuer Shares Value
- ---------------------------------------------------------------------------
Hong Kong & China Gas Ltd.* 27,900 $ 10,284
India Gateway Fund Ltd.+* 16,000 --
Intel Corp.* 31,300 2,218,877
- ---------------------------------------------------------------------------
Total Warrants (Identified Cost, $1,798,666) $ 2,229,161
- ---------------------------------------------------------------------------
Convertible Bonds - 0.1%
- ---------------------------------------------------------------------------
Principal Amount
(000 Omitted)
- ---------------------------------------------------------------------------
Republic of Italy, 5s, 2001 (Insurance) $ 305 $ 305,000
Ventritex, Inc., 5.75s, 2001 (Medical and
Health Products) 80 115,800
- ---------------------------------------------------------------------------
Total Convertible Bonds (Identified Cost, $385,000) $ 420,800
- ---------------------------------------------------------------------------
Short-Term Obligations - 13.9%
- ---------------------------------------------------------------------------
Federal Farm Credit Bank, due 11/01/96 -
11/13/96 $24,485 $ 24,462,712
Federal Home Loan Bank, due 11/12/96 11,370 11,351,830
Federal National Mortgage Assn.,
due 11/06/96 - 11/18/96 20,325 20,301,108
Student Loan Marketing Assn., due 11/01/96 9,790 9,790,000
- ---------------------------------------------------------------------------
Total Short-Term Obligations, at Amortized Cost $ 65,905,650
- ---------------------------------------------------------------------------
Total Investments (Identified Cost, $422,214,589) $471,029,753
Other Assets, Less Liabilities - 0.8% 3,738,340
- ---------------------------------------------------------------------------
Net Assets - 100.0% $474,768,093
- ---------------------------------------------------------------------------
*Non-income producing security.
##SEC Rule 144A restriction.
+Restricted security.
(+)Security valued by or at the direction of the Trustees.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- -----------------------------------------------------------------------------
October 31, 1996
- -----------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $422,214,589) $471,029,753
Cash 105,848
Foreign currency, at value (identified cost, $83,730) 80,886
Receivable for investments sold 5,080,597
Receivable for Fund shares sold 413,471
Interest and dividends receivable 327,685
Deferred organization expenses 14,884
Other assets 166,494
------------
Total assets $477,219,618
------------
Liabilities:
Payable for investments purchased $ 1,645,108
Payable for Fund shares reacquired 348,852
Payable to affiliates -
Management fee 11,652
Shareholder servicing agent fee 2,482
Distribution fee 132,597
Accrued expenses and other liabilities 310,834
------------
Total liabilities $ 2,451,525
------------
Net assets $474,768,093
============
Net assets consist of:
Paid-in capital $403,766,324
Unrealized appreciation on investments and translation of
assets and liabilities in foreign currencies 48,810,073
Accumulated undistributed net realized gain on investments
and foreign currency transactions 22,567,448
Accumulated net investment loss (375,752)
------------
Total $474,768,093
============
Shares of beneficial interest outstanding 25,052,300
==========
Class A shares:
Net asset value per share
(net assets of $172,106,103 / 9,014,099 shares of
beneficial interest outstanding) $19.09
======
Offering price per share (100/94.25) $20.25
======
Class B shares:
Net asset value and offering price per share
(net assets $282,668,221 / 14,977,356 shares of beneficial
interest outstanding) $18.87
======
Class C shares:
Net asset value and offering price per share
(net assets of $19,993,769 / 1,060,845 shares of beneficial
interest outstanding) $18.85
======
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, Class
B, and Class C shares. See notes to financial statements
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- -----------------------------------------------------------------------------
Year Ended October 31, 1996
- -----------------------------------------------------------------------------
Net investment income:
Income -
Dividends $ 4,727,103
Interest 1,228,398
Foreign taxes withheld (448,080)
-----------
Total investment income $ 5,507,421
------------
Expenses -
Management fee $ 4,060,523
Trustees' compensation 39,476
Shareholder servicing agent fee (Class A) 243,118
Shareholder servicing agent fee (Class B) 597,943
Shareholder servicing agent fee (Class C) 25,948
Distribution and service fee (Class A) 568,157
Distribution and service fee (Class B) 2,717,921
Distribution and service fee (Class C) 172,983
Custodian fee 430,870
Printing 111,407
Postage 84,802
Auditing fees 83,238
Legal fees 24,492
Amortization of organization expenses 6,390
Miscellaneous 507,759
-----------
Total expenses $ 9,675,027
Reduction of expenses by distributor (162,960)
Fees paid indirectly (70,021)
-----------
Net expenses $ 9,442,046
-----------
Net investment loss $(3,934,625)
-----------
Realized and unrealized gain (loss) on investments:
Realized gain (identified cost basis) -
Investment transactions $26,049,429
Foreign currency transactions 876,983
-----------
Net realized gain on investments and foreign currency
transactions $26,926,412
-----------
Change in unrealized appreciation -
Investments $37,634,292
Translation of assets and liabilities in foreign currencies 653,636
-----------
Net unrealized gain on investments and foreign currency
translation $38,287,928
-----------
Net realized and unrealized gain on investments and
foreign currency $65,214,340
-----------
Increase in net assets from operations $61,279,715
===========
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- ----------------------------------------------------------------------------------------------
Year Ended October 31, 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment loss $ (3,934,625) $ (1,957,148)
Net realized gain on investments and foreign currency
transactions 26,926,412 38,220,302
Net unrealized gain (loss) on investments and foreign
currency translation 38,287,928 (16,132,432)
------------ ------------
Increase in net assets from operations $ 61,279,715 $ 20,130,722
------------ ------------
Distributions declared to shareholders -
From net investment income (Class A) $ (102,984) $ --
From net realized gain on investments and foreign
currency transactions (Class A) (13,664,586) (1,679,929)
From net realized gain on investments and foreign
currency transactions (Class B) (21,606,221) (1,881,561)
From net realized gain on investments and foreign currency
transactions (Class C) (1,215,266) (124,750)
------------ ------------
Total distributions declared to shareholders $(36,589,057) $ (3,686,240)
------------ ------------
Fund share (principal) transactions -
Net proceeds from sale of shares $332,230,172 $196,631,074
Net asset value of shares issued to shareholders in
reinvestment of distributions 28,656,096 2,741,334
Cost of shares reacquired (315,137,560) (191,833,455)
------------ ------------
Increase in net assets from Fund share transactions $ 45,748,708 $ 7,538,953
------------ ------------
Total increase in net assets $ 70,439,366 $ 23,983,435
Net assets:
At beginning of period 404,328,727 380,345,292
------------ ------------
At end of period (including accumulated net investment
loss and accumulated undistributed net investment income
of $375,752 and $382,012, respectively) $474,768,093 $404,328,727
============ ============
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
- -------------------------------------------------------------------------------------------------
Year Ended October 31, 1996 1995 1994*
- -------------------------------------------------------------------------------------------------
Class A
- -------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C>
Net asset value - beginning of period $18.16 $17.45 $15.00
------ ------ ------
Income from investment operations# -
Net investment loss(S) $(0.07) $ -- $(0.02)
Net realized and unrealized gain on investments and
foreign currency transactions 2.73 0.93 2.47
------ ------ ------
Total from investment operations $ 2.66 $ 0.93 $ 2.45
------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.01) $ -- $ --
From net realized gain on investments and foreign
currency transactions (1.72) (0.22) --
------ ------ ------
Total distributions declared to shareholders $(1.73) $(0.22) $ --
------ ------ ------
Net asset value - end of period $19.09 $18.16 $17.45
====== ====== ======
Total return(+) 15.73% 5.47% 16.33%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.58% 1.63% 1.57%+
Net investment income (loss) (0.35)% 0.02% (0.14)%+
Portfolio turnover 95% 149% 100%
Average commission rate### $0.0130 $ -- $ --
Net assets at end of period (000 omitted) $172,106 $143,543 $131,503
<FN>
*For the period from the commencement of offering of Class A shares, November 18, 1993 to October 31, 1994.
+Annualized.
++Not annualized.
#Per share data is based on average shares outstanding.
(+)Total returns for Class A shares do not include the applicable sales charge. If the sales charge had been
included, the results would have been lower.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for
fees paid indirectly.
###Average commission rate is calculated for funds with fiscal years beginning on or after September 1, 1995.
(S)The distributor did not impose a portion of its distribution fee for the periods indicated. If this fee had
been incurred by the Fund, the net investment loss per share and ratios would have been:
Net investment loss $(0.09) $ -- $(0.04)
Ratios (to average net assets):
Expenses## 1.68% 1.73% 1.67%+
Net investment loss (0.45)% (0.08)% (0.24)%+
</FN>
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
- -------------------------------------------------------------------------------------------------
Year Ended October 31, 1996 1995 1994*
- -------------------------------------------------------------------------------------------------
Class B
- -------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C>
Net asset value - beginning of period
$17.97 $17.32 $15.00
------ ------ ------
Income from investment operations# -
Net investment loss $(0.21) $(0.14) $(0.15)
Net realized and unrealized gain on investments and
foreign currency transactions 2.70 0.92 2.47
------ ------ ------
Total from investment operations $ 2.49 $ 0.78 $ 2.32
------ ------ ------
Less distributions declared to shareholders from net
realized gain on investments and foreign currency
transactions $(1.59) $(0.13) $ --
------ ------ ------
Net asset value - end of period $18.87 $17.97 $17.32
====== ====== ======
Total return 14.77% 4.61% 15.47%++
Ratios (to average net assets)/Supplemental data:
Expenses## 2.39% 2.45% 2.39%+
Net investment loss (1.16)% (0.80)% (0.95)%+
Portfolio turnover 95% 149% 100%
Average commission rate### $0.0130 $ -- $ --
Net assets at end of period (000 omitted) $282,668 $247,437 $236,971
<FN>
*For the period from the commencement of offering of Class B shares, November 18, 1993 to October 31, 1994.
+Annualized.
++Not annualized.
#Per share data is based on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for
fees paid indirectly.
###Average commission rate is calculated for funds with fiscal years beginning on or after September 1, 1995.
</FN>
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
- -------------------------------------------------------------------------------------------------
Year Ended October 31, 1996 1995 1994*
- -------------------------------------------------------------------------------------------------
Class C
- -------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C>
Net asset value - beginning of period $17.96 $17.34 $16.04
------ ------ ------
Income from investment operations# -
Net investment loss $(0.20) $(0.13) $(0.13)
Net realized and unrealized gain on investments and
foreign currency transactions 2.70 0.92 1.43
------ ------ ------
Total from investment operations $ 2.50 $ 0.79 $ 1.30
------ ------ ------
Less distributions declared to shareholders from net
realized gain on investments and foreign currency
transactions $(1.61) $(0.17) $ --
------ ------ ------
Net asset value - end of period $18.85 $17.96 $17.34
====== ====== ======
Total return 14.88% 4.68% 8.10%++
Ratios (to average net assets)/Supplemental data:
Expenses## 2.32% 2.38% 2.31%+
Net investment loss (1.10)% (0.72)% (0.83)%+
Portfolio turnover 95% 149% 100%
Average commission rate### $0.0130 $ -- $ --
Net assets at end of period (000 omitted) $19,994 $13,349 $11,872
<FN>
*For the period from the commencement of offering of Class C shares, January 3, 1994 to October 31, 1994.
+Annualized.
++Not annualized.
#Per share data is based on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for
fees paid indirectly.
###Average commission rate is calculated for funds with fiscal years beginning on or after September 1, 1995.
</FN>
</TABLE>
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS World Growth 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.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Investments
in foreign securities are vulnerable to the effects of changes in the relative
values of the local currency and the U.S. dollar and to the effects of changes
in each country's legal, political and economic environment.
Investment Valuations - Equity securities listed on securities exchanges or
reported through the NASDAQ system are valued at last sale prices. Unlisted
equity securities or listed equity securities for which last sale prices are not
available are valued at last quoted bid prices. Debt securities (other than
short-term obligations which mature in 60 days or less), including listed issues
and forward contracts, are valued on the basis of valuations furnished by
dealers or by a pricing service with consideration to factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data, without exclusive reliance upon exchange or over-the-counter prices.
Short-term obligations, which mature in 60 days or less, are valued at amortized
cost, which approximates market value. Non-U.S. dollar denominated short-term
obligations are valued at amortized cost as calculated in the base currency and
translated into U.S. dollars at the closing daily exchange rate. Securities for
which there are no such quotations or valuations are valued at fair value as
determined in good faith by or at the direction of the Trustees.
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases and
sales of foreign investments, 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 result 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 Fund
operations.
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 into these contracts from the potential inability of counterparties to
meet the terms of their contracts and from unanticipated movements in the value
of a foreign currency relative to the U.S. dollar. The Fund will enter into
forward contracts for hedging purposes as well as for non-hedging purposes. For
hedging purposes, the Fund may enter into contracts to deliver or receive
foreign currency it will receive from or require for its normal investment
activities. The Fund may also use contracts in a manner intended to protect
foreign currency-denominated securities from declines in value due to
unfavorable exchange rate movements. For non-hedging purposes, the Fund may
enter into contracts with the intent of changing the relative exposure of the
Fund's portfolio of securities to different currencies to take advantage of
anticipated changes. The forward foreign currency exchange contracts are
adjusted by the daily exchange rate of the underlying currency and any gains or
losses are recorded for financial statement purposes as unrealized until the
contract settlement date.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
original issue discount are amortized or accreted for financial statement and
tax reporting purposes as required by federal income tax regulations. 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.
Fees Paid Indirectly - The Fund's custodian bank calculates its fee based on the
Fund's average daily net assets. The fee is reduced according to a fee
arrangement, which provides for custody fees to be reduced based on a formula
developed to measure the value of cash deposited with the custodian by the Fund.
This amount is shown as a reduction of expenses on the Statement of Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided. The Fund files a tax
return annually using tax accounting methods required under provisions of the
Code which may differ from generally accepted accounting principles, the basis
on which these financial statements are prepared. Accordingly, the amount of net
investment income and net realized gain reported on these financial statements
may differ from that reported on the Fund's tax return and, consequently, the
character of distributions to shareholders reported in the financial highlights
may differ from that reported to shareholders on Form 1099-DIV.
Foreign taxes have been provided for on interest and dividend income earned on
foreign investments in accordance with the applicable country's tax rates and to
the extent unrecoverable are recorded as a reduction of investment income.
Distributions to shareholders are recorded on the ex-dividend date. The Fund
expects to pass through to shareholders foreign income taxes paid. The election
increases the taxable distributions of the Fund by the amount of the foreign
taxes paid. An individual shareholder who itemizes deductions, or a corporate
shareholder, will be able to claim an offsetting deduction or a tax credit (but
not both) on their federal income tax returns. Individuals who do not itemize
deductions may claim a foreign tax credit but not a deduction. The foreign
source income is considered passive income for the purpose of computing the
foreign tax credit limitations.
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 tax return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or accumulated net realized
gains. During the year ended October 31, 1996, $3,290,695 was reclassified from
accumulated undistributed net realized gain on investments and foreign currency
transactions and $10,850 and $3,279,845 were reclassified to paid-in capital and
accumulated net investment loss, respectively, due to differences between book
and tax accounting for investment losses and currency transactions. This change
had no effect on the net assets or net asset value per share. At October 31,
1996, accumulated undistributed net investment income (realized gain on
investments and foreign currency transactions) under book accounting was
different from tax accounting due to temporary differences in accounting for
passive foreign investment companies, short-term capital gains and currency
transactions.
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. All
shareholders bear the common expenses of the Fund pro rata based on the average
daily net assets of each class, without distinction between share classes.
Dividends are declared separately for each class. No class has preferential
dividend rights; differences in per share dividend rates are generally due to
differences in separate class expenses.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an annual rate of 0.90% of
average daily net assets. The advisory agreement permits the adviser to engage
one or more sub-advisers and the adviser has engaged Oechsle International
Advisers, L.P. ("Oechsle"), a Delaware Limited Partnership, and Batterymarch
Financial Management, Inc. ("Batterymarch"), a Maryland corporation, to assist
in the performance of its services. Effective April 1, 1996, Foreign & Colonial
Management Limited and its subsidiary, Foreign & Colonial Emerging Markets
Limited, replaced Batterymarch as a sub-adviser to the Fund. Effective November
1, 1996, Oechsle was terminated as a sub-adviser to the Fund.
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 officers and Trustees of the
Fund are officers or directors of MFS, MFS Fund Distributors, Inc. (MFD) and MFS
Service Center, Inc. (MFSC). The Fund has an unfunded defined benefit plan for
all of its independent Trustees and Mr. Bailey. Included in Trustees'
compensation is a net periodic pension expense of $7,202 for the year ended
October 31, 1996.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$80,312 for the year ended October 31, 1996, 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 MFD up to 0.35%
per annum of its average daily net assets attributable to Class A shares in
order that MFD may pay expenses on behalf of the Fund related to the
distribution and servicing of its shares. These expenses include a service fee
to each securities dealer who enters into a sales agreement with MFD of up to
0.25% per annum of the Fund's average daily net assets attributable to Class A
shares which are attributable to that securities dealer, a distribution fee to
MFD of up to 0.10% per annum of the Fund's average daily net assets attributable
to Class A shares, commissions to dealers and payments to MFD wholesalers for
sales at or above a certain dollar level, and other such distribution-related
expenses that are approved by the Fund. The Class A distribution fee is
currently being waived on a voluntary basis and may be imposed at the discretion
of MFD. MFD retains the service fee for accounts not attributable to a
securities dealer which amounted to $74,728 for the year ended October 31, 1996.
Fees incurred under the distribution plan during the year ended October 31, 1996
were 0.25% of average daily net assets attributable to Class A shares on an
annualized basis.
The Class B and Class C distribution plans provide that the Fund will pay MFD a
distribution fee of 0.75% per annum, and a service fee of up to 0.25% per annum,
of the Fund's average daily net assets attributable to Class B and Class C
shares. MFD will pay to securities dealers who enter into a sales agreement with
MFD 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. MFD retains the service fee for accounts not attributable to a
securities dealer, which amounted to $79,446 and $16,824 for Class B and Class C
shares, respectively, for the year ended October 31, 1996. Fees incurred under
the distribution plans during the year ended October 31, 1996 were 1.00% of
average daily net assets attributable to Class B and Class C shares on an
annualized basis.
Purchases over $1 million of Class A shares and certain purchases into
retirement plans are subject to a contingent deferred sales charge in the event
of a shareholder redemption within 12 months following such purchase. A
contingent deferred sales charge is imposed on shareholder redemptions of Class
B shares in the event of a shareholder redemption within six years of purchase.
A contingent deferred sales charge is imposed on shareholder redemptions of
Class C shares in the event of a shareholder redemption within 12 months of
purchases made on or after April 1, 1996. MFD receives all contingent deferred
sales charges. Contingent deferred sales charges imposed during the year ended
October 31, 1996 were $1,528, $538,744, and $1,141 for Class A, Class B, and
Class C shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as a
percentage of the average daily net assets of each class of shares at an
effective annual rate of up to 0.15%, 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 U.S. government securities,
purchased option transactions and short-term obligations, aggregated
$406,387,052 and $424,126,648, 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 $424,065,523
============
Gross unrealized appreciation $ 75,936,798
Gross unrealized depreciation (28,972,568)
------------
Net unrealized appreciation $ 46,964,230
============
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
Class A Shares
Year Ended October 31, 1996 October 31, 1995
---------------------------- ---------------------------
Shares Amount Shares Amount
- -----------------------------------------------------------------------------
Shares sold 13,198,505 $248,410,300 5,928,735 $101,800,639
Shares issued to
shareholders in
reinvestment of
distributions 703,305 12,156,888 80,625 1,312,572
Shares reacquired (12,790,324) (241,363,733) (5,642,373) (97,398,576)
---------- ------------ --------- ------------
Net increase 1,111,486 $ 19,203,455 366,987 $ 5,714,635
========== ============ ========= ============
Class B Shares
Year Ended October 31, 1996 October 31, 1995
---------------------------- ---------------------------
Shares Amount Shares Amount
- -----------------------------------------------------------------------------
Shares sold 3,986,473 $ 73,258,330 5,294,273 $ 88,484,082
Shares issued to
shareholders in
reinvestment of
distributions 923,243 15,760,023 83,849 1,359,205
Shares reacquired (3,703,963) (68,245,006) (5,291,911) (89,028,777)
--------- ------------ --------- ------------
Net increase 1,205,753 $ 20,773,347 86,211 $ 814,510
========= ============ ========= ============
Class C Shares
Year Ended October 31, 1996 October 31, 1995
---------------------------- ---------------------------
Shares Amount Shares Amount
- -----------------------------------------------------------------------------
Shares sold 574,128 $10,561,542 375,273 $ 6,346,353
Shares issued to
shareholders in
reinvestment of
distributions 43,379 739,185 4,294 69,557
Shares reacquired (300,073) (5,528,821) (320,994) (5,406,102)
------- ----------- ------- -----------
Net increase 317,434 $ 5,771,906 58,573 $ 1,009,808
======= =========== ======= ===========
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $350 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Fund shares. Interest is charged to each
fund, based on its borrowings, at a rate equal to the bank's base rate. In
addition, a commitment fee, based on the average daily unused portion of the
line of credit, is allocated among the participating funds at the end of each
quarter. The commitment fee allocated to the Fund for the year ended October 31,
1996 was $5,032.
(7) Financial Instruments
The Fund trades financial instruments with off-balance sheet risk in the normal
course of its investing activities in order to manage exposure to market risks
such as interest rates and foreign currency exchange rates. These financial
instruments include 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. At October 31, 1996 the Fund did not
hold any of these financial instruments.
(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, 1996, the
Fund owned the following restricted securities (constituting 1.11% 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.
<TABLE>
<CAPTION>
Date of
Description Acquisition Shares Cost Value
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fleming Russia Securities Fund, Preferred 7/07/95 110,200 $ 892,620 $1,116,326
India Gateway Fund Ltd. 6/02/94-2/02/96 107,000 941,870 520,020
India Gateway Fund Ltd., Warrants 6/02/94 16,000 -- --
International Business Communications Systems, Inc. 8/29/95 40,300 399,776 399,776
Korea Europe Fund 11/02/94-1/09/96 42 186,125 126,000
Moneda Chile Fund Ltd. 8/22/95 63,000 630,000 567,000
Thai Euro Fund 6/12/96-10/25/96 85,000 2,817,562 2,530,450
----------
$5,259,572
==========
</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 (a series of MFS Series
Trust VIII) as of October 31, 1996, the related statement of operations for the
year then ended, the statement of changes in net assets for the years ended
October 31, 1996 and 1995, and the financial highlights for the years ended
October 31, 1996 and 1995 and 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at October
31, 1996 by correspondence with the custodian and brokers; where replies were
not received from brokers, we performed other auditing procedures. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS World Growth
Fund at October 31, 1996, the results of its operations, the changes in its net
assets, and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
November 29, 1996
--------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
MFS(R) WORLD GROWTH FUND
<TABLE>
<C> <C>
TRUSTEES ASSISTANT SECRETARY
A. Keith Brodkin* - Chairman and President James R. Bordewick, Jr.*
Richard B. Bailey* - Private Investor; CUSTODIAN
Former Chairman and Director (until 1991), Deloitte & Touche LLP
Massachusetts Financial Services Company;
Director, Cambridge Bancorp; AUDITORS
Director, Cambridge Trust Company Ernst & Young LLP
Marshall N. Cohan - Private Investor INVESTOR INFORMATION
For MFS stock and bond market outlooks,
Lawrence H. Cohn, M.D. - Chief of Cardiac call toll free: 1-800-637-4458
Surgery, Brigham and Women's Hospital; anytime from a touch-tone telephone.
Professor of Surgery, Harvard Medical School
For information on MFS mutual funds,
The Hon. Sir J. David Gibbons, KBE - Chief call your financial adviser or, for an
Executive Officer, Edmund Gibbons Ltd.; information kit, call toll free:
Chairman, Bank of N.T. Butterfield & Son Ltd. 1-800-637-2929 any business day from
9 a.m. to 5 p.m. Eastern time (or leave
Abby M. O'Neill - Private Investor; a message anytime).
Director, Rockefeller Financial Services, Inc.
(investment advisers) INVESTOR SERVICE
MFS Service Center, Inc.
Walter E. Robb, III - President and Treasurer, P.O. Box 2281
Benchmark Advisors, Inc. (corporate financial Boston, MA 02107-9906
consultants); President, Benchmark Consulting
Group, Inc. (office services); Trustee, For general information, call toll free:
Landmark Funds (mutual funds) 1-800-225-2606 any business day from
8 a.m. to 8 p.m. Eastern time.
Arnold D. Scott* - Senior Executive
Vice President, Director and Secretary, For service to speech- or hearing-impaired,
Massachusetts Financial Services Company call toll free: 1-800-637-6576 any business
day from 9 a.m. to 5 p.m. Eastern time.
Jeffrey L. Shames* - President and Director, (To use this service, your phone must
Massachusetts Financial Services Company be equipped with a Telecommunications
Device for the Deaf.)
J. Dale Sherratt - President, Insight Resources,
Inc. (acquisition planning specialists) For share prices, account balances, and
exchanges, call toll free: 1-800-MFS-TALK
Ward Smith - Former Chairman (until 1994), (1-800-637-8255) anytime from a touch-tone
NACCO Industries; Director, Sundstrand Corporation telephone.
INVESTMENT ADVISER WORLD WIDE WEB
Massachusetts Financial Services Company www.mfs.com
500 Boylston Street
Boston, MA 02116-3741
DISTRIBUTOR
MFS Fund Distributors, Inc. [DALBAR For the third year in a row,
500 Boylston Street LOGO] MFS earned a #1 ranking in
Boston, MA 02116-3741 TOP RATED DALBAR, Inc. Broker/Dealer
SERVICE Survey, Main Office Operations
PORTFOLIO MANAGERS Service Quality Category. The
John W. Ballen* firm achieved a 3.48 overall score on a
David Mannheim* scale of 1 to 4 in the 1996 survey. A total
Toni Y. Shimura* of 110 firms responded, offering input on the
quality of service they received from 29
TREASURER mutual fund companies nationwide. The survey
W. Thomas London* contained questions about service quality in
15 categories, including "knowledge of phone
ASSISTANT TREASURER service contacts," "accuracy of transaction
James O. Yost* processing," and "overall ease of doing
business with the firm."
SECRETARY
Stephen E. Cavan*
*Affiliated with the Investment Adviser
</TABLE>
<PAGE>
-------------
MFS(R) WORLD GROWTH FUND [DALBAR LOGO: #1 BULK RATE
TOP RATED SERVICE] U.S. POSTAGE
PAID
500 Boylston Street PERMIT #55638
Boston, MA 02116 BOSTON, MA
-------------
[LOGO: M F S(SM)
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)]
(C)1996 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116
MWF-2 12/96 86M 09/209/309
<PAGE> 168
PART C
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
MFS STRATEGIC INCOME FUND
(a) FINANCIAL STATEMENTS INCLUDED IN PART A:
For the period from commencement of investment operations on
October 29, 1987 to October 31, 1996:
Financial Highlights
FINANCIAL STATEMENTS INCLUDED IN PART B:
At October 31, 1996:
Portfolio of Investments*
Statement of Assets and Liabilities*
For the year ended October 31, 1996:
Statement of Operations*
For the two years ended October 31, 1996:
Statement of Changes in Net Assets*
MFS WORLD GROWTH FUND
(a) FINANCIAL STATEMENTS INCLUDED IN PART A:
For the period from commencement of investment operations on
November 18, 1993 to October 31, 1996:
Financial Highlights
FINANCIAL STATEMENTS INCLUDED IN PART B:
At October 31, 1996:
Portfolio of Investments**
Statement of Assets and Liabilities**
For the year ended October 31, 1996:
Statement of Operations**
For the two years ended October 31, 1996:
Statement of Changes in Net Assets**
- -------------------
* Incorporated herein by reference to the Fund's Annual Report to Shareholders
dated October 31, 1996, filed with the SEC on January 7, 1997.
** Incorporated herein by reference to the Fund's Annual Report to Shareholders
dated October 31, 1996, filed with the SEC on January 7, 1997.
<PAGE> 169
(b) EXHIBITS
1 (a) Amended and Restated Declaration of Trust dated
February 2, 1995. (1)
(b) Amendment to Declaration of Trust, dated June 12, 1996.
(7)
(c) Amendment to Declaration of Trust redesignating Class P
shares as Class I shares, dated December 19, 1996; filed
herewith.
2 Amended and Restated By-Laws dated December 14, 1994.
(1)
3 Not Applicable.
4 Form of Share Certificate for Classes of Shares. (6)
5 (a) Investment Advisory Agreement dated September 9, 1987
by and between MFS Strategic Income Fund and
Massachusetts Financial Services Company. (1)
(b) Investment Advisory Agreement dated August 30, 1993
by and between the MFS Series Trust VIII on behalf of
MFS World Growth Fund and Massachusetts Financial
Services Company. (1)
(c) Sub-Investment Advisory Agreement dated August 30, 1993
by and between Massachusetts Financial Services
Company and Oechsle International Advisors. (1)
(d) Sub-Investment Advisory Agreement dated April 1, 1996 by
and between Massachusetts Financial Services Company and
Foreign & Colonial Management Ltd.; filed herewith.
6 (a) Distribution Agreement dated January 1, 1995. (1)
(b) Dealer Agreement between MFS Fund Distributors, Inc.
("MFD"), and a dealer dated December 28, 1994 and the
Mutual Fund Agreement between MFD and a bank or NASD
affiliate, dated December 28, 1994. (2)
7 Retirement Plan for Non-Interested Person Trustees,
dated January 1, 1991. (1)
8 (a) Custodian Agreement between Registrant and State Street
Bank & Trust Company, dated May 6, 1991. (1)
(b) Amendment to the Custodian Agreement, dated October 9,
1991. (1)
<PAGE> 170
9 (a) Shareholder Servicing Agent Agreement between Registrant
and MFS Service Center, Inc., dated May 6, 1991. (1)
(b) Amendment to Shareholder Servicing Agent Agreement,
dated January 1, 1997 to amend fee schedule; filed
herewith.
(c) Exchange Privilege Agreement, dated February 8, 1989, as
amended and restated through and including January 1,
1997; filed herewith.
(d) Loan Agreement by and among the Banks named therein, the
MFS Funds named therein, and The First National Bank of
Boston, dated as of February 21, 1995. (4)
(e) Dividend Disbursing Agent Agreement dated May 6, 1991.
(1)
10 Consent of Counsel and Opinion filed with Registrant's
Rule 24 f- 2 Notice for fiscal year ended October 31,
1996 on December 23, 1996.
11 (a) Consent of Ernst & Young LLP - MFS Strategic Income
Fund; filed herewith.
(b) Consent of Deloitte & Touche LLP - MFS World Growth
Fund; filed herewith.
12 Not Applicable.
13 Investment Representation Letters. (1)
14 (a) Forms for Individual Retirement Account Disclosure
Statement as currently in effect. (5)
(b) Forms for MFS 403(b) Custodial Account Agreement as
currently in effect. (5)
(c) Forms for MFS Prototype Paired Defined Contribution
Plans and Fund Agreement as currently in effect. (5)
15 (a) Master Distribution Plan pursuant to Rule 12b-1 under
the Investment Company Act of 1940 effective January 1,
1997. (8)
16 Schedule for Computation of Performance Quotations -
Yield, Distribution Rate and Average and Aggregate Total
Return. (2)
<PAGE> 171
17 Financial Data Schedules for each Class of each Series;
filed herewith.
18 Plan pursuant to Rule 18f-3(d) under the Investment
Company Act of 1940. (6)
Power of Attorney, dated August 11, 1994. (1)
- -----------------------------
(1) Incorporated by reference to the Registrant's Post-Effective Amendment
No. 10 filed with the SEC via EDGAR on November 8, 1995.
(2) Incorporated by reference to MFS Municipal Series Trust (File Nos.
2-92915 and 811-4096) Post-Effective Amendment No. 26 filed with the
SEC via EDGAR on February 22, 1995.
(3) Incorporated by reference to MFS Series Trust X (File Nos. 33-1657 and
811-4492) Post-Effective Amendment No. 13 filed with the SEC via EDGAR
on November 28, 1995.
(4) Incorporated by reference to Amendment No. 8 on Form N-2 for MFS
Municipal Income Trust (File No. 811-4841) filed with the SEC via EDGAR
on February 28, 1995.
(5) Incorporated by reference to MFS Series Trust IX (File Nos. 2-50409 and
811-2464) Post-Effective Amendment No. 32 filed with the SEC via EDGAR
on August 28, 1995.
(6) Incorporated by reference to MFS Series Trust I (File Nos. 33-7638 and
811-4777) Post-Effective Amendment No. 25 filed with the SEC via EDGAR
on August 27, 1996.
(7) Incorporated by reference to the Registrant's Post-Effective Amendment
No. 12 filed with the SEC via EDGAR on August 28, 1996.
(8) Incorporated by reference to MFS Series Trust I (File Nos. 33-7638 and
811-4777) Post-Effective Amendment No. 27 filed with the SEC via EDGAR
on December 27, 1996.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
FOR MFS STRATEGIC INCOME FUND
<TABLE>
<CAPTION>
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
<S> <C>
Class A Shares of Beneficial Interest 4,207
(without par value) (as of January 31, 1997)
Class B Shares of Beneficial Interest 1,571
(without par value) (as of January 31, 1997)
Class C Shares of Beneficial Interest 291
(without par value) (as of January 31, 1997)
Class I Shares of Beneficial Interest 2
(without par value) (as of January 31, 1997)
</TABLE>
<PAGE> 172
<TABLE>
<CAPTION>
FOR MFS WORLD GROWTH FUND
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
<S> <C>
Class A Shares of Beneficial Interest 22,434
(without par value) (as of January 31, 1997)
Class B Shares of Beneficial Interest 26,299
(without par value) (as of January 31, 1997)
Class C Shares of Beneficial Interest 1,462
(without par value) (as of January 31, 1997)
Class I Shares of Beneficial Interest 4
(without par value) (as of January 31, 1997)
</TABLE>
ITEM 27. INDEMNIFICATION
Reference is hereby made to (a) Article V of the Registrant's
Amended and Restated Declaration of Trust and (b) Section 9 of the Shareholder
Servicing Agent Agreement, incorporated by reference to the Registrant's
Post-Effective Amendment No. 10 filed with the SEC via EDGAR on November 8,
1995.
The Trustees and officers of the Registrant and the personnel of the
Registrant's investment adviser and principal underwriter are insured under an
errors and omissions liability insurance policy. The Registrant and its officers
are also insured under the fidelity bond required by Rule 17g-1 under the
Investment Company Act of 1940, as amended.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
MFS serves as investment adviser to the following open-end Funds
comprising the MFS Family of Funds: Massachusetts Investors Trust, Massachusetts
Investors Growth Stock Fund, MFS Growth Opportunities Fund, MFS Government
Securities Fund, MFS Government Limited Maturity Fund, MFS Series Trust I (which
has thirteen series: MFS Managed Sectors Fund, MFS Cash Reserve Fund, MFS World
Asset Allocation Fund, MFS Aggressive Growth Fund, MFS Research Growth and
Income Fund, MFS Core Growth Fund, MFS Equity Income Fund, MFS Special
Opportunities Fund, MFS Convertible Securities Fund, MFS Blue Chip Fund, MFS New
Discovery Fund, MFS Science and Technology Fund and MFS Research International
Fund), MFS Series Trust II (which has four series: MFS Emerging Growth Fund, MFS
Capital Growth Fund, MFS Intermediate Income Fund and MFS Gold & Natural
Resources Fund), MFS Series Trust III (which has two series: MFS High Income
Fund and MFS Municipal High Income Fund), MFS Series Trust IV (which has four
series: MFS Money Market Fund, MFS Government Money Market Fund, MFS Municipal
Bond Fund and MFS OTC Fund), MFS Series Trust V (which has two series: MFS Total
Return Fund and MFS Research Fund), MFS Series Trust VI (which has three series:
MFS World Total Return Fund, MFS Utilities Fund and MFS World Equity Fund), MFS
Series Trust VII (which has two series: MFS World Governments Fund and MFS Value
Fund), MFS Series Trust VIII (which has two
<PAGE> 173
series: MFS Strategic Income Fund and MFS World Growth Fund), MFS Series Trust
IX (which has three series: MFS Bond Fund, MFS Limited Maturity Fund and MFS
Municipal Limited Maturity Fund), MFS Series Trust X (which has four series: MFS
Government Mortgage Fund, MFS/Foreign & Colonial Emerging Markets Equity Fund,
MFS/Foreign & Colonial International Growth Fund and MFS/Foreign & Colonial
International Growth and Income Fund), and MFS Municipal Series Trust (which has
16 series: MFS Alabama Municipal Bond Fund, MFS Arkansas Municipal Bond Fund,
MFS California Municipal Bond Fund, MFS Florida Municipal Bond Fund, MFS Georgia
Municipal Bond Fund, MFS Maryland Municipal Bond Fund, MFS Massachusetts
Municipal Bond Fund, MFS Mississippi Municipal Bond Fund, MFS New York Municipal
Bond Fund, MFS North Carolina Municipal Bond Fund, MFS Pennsylvania Municipal
Bond Fund, MFS South Carolina Municipal Bond Fund, MFS Tennessee Municipal Bond
Fund, MFS Virginia Municipal Bond Fund, MFS West Virginia Municipal Bond Fund
and MFS Municipal Income Fund) (the "MFS Funds"). The principal business address
of each of the MFS Funds is 500 Boylston Street, Boston, Massachusetts 02116.
MFS also serves as investment adviser of the following no-load,
open-end Funds: MFS Institutional Trust ("MFSIT") (which has seven series), MFS
Variable Insurance Trust ("MVI") (which has twelve series) and MFS Union
Standard Trust ("UST"). The principal business address of each of the
aforementioned funds is 500 Boylston Street, Boston, Massachusetts 02116.
In addition, MFS serves as investment adviser to the following
closed-end funds: MFS Municipal Income Trust, MFS Multimarket Income Trust, MFS
Government Markets Income Trust, MFS Intermediate Income Trust, MFS Charter
Income Trust and MFS Special Value Trust (the "MFS Closed-End Funds"). The
principal business address of each of the MFS Closed-End Funds is 500 Boylston
Street, Boston, Massachusetts 02116.
Lastly, MFS serves as investment adviser to MFS/Sun Life Series
Trust ("MFS/SL"), Money Market Variable Account, High Yield Variable Account,
Capital Appreciation Variable Account, Government Securities Variable Account,
World Governments Variable Account, Total Return Variable Account and Managed
Sectors Variable Account. The principal business address of each of the
aforementioned funds is One Sun Life Executive Park, Wellesley Hills,
Massachusetts 02181.
MFS International Ltd. ("MIL"), a limited liability company
organized under the laws of Bermuda and a subsidiary of MFS, whose principal
business address is Cedar House, 41 Cedar Avenue, Hamilton HM12 Bermuda, serves
as investment adviser to and distributor for MFS American Fund (which has six
portfolios: MFS American Funds-U.S. Equity Fund, MFS American Funds-U.S.
Emerging Growth Fund, MFS American Funds-U.S. High Yield Bond Fund, MFS American
Funds - U.S. Dollar Reserve Fund, MFS American Funds-Charter Income Fund and MFS
American Funds-U.S. Research Fund) (the "MIL Funds"). The MIL Funds are
organized in Luxembourg and qualify as an undertaking for collective investments
in transferable securities (UCITS). The principal business address of the MIL
Funds is 47, Boulevard Royal, L-2449 Luxembourg.
MIL also serves as investment adviser to and distributor for MFS
Meridian U.S. Government Bond Fund, MFS Meridian Charter Income Fund, MFS
Meridian Global Government Fund, MFS Meridian U.S. Emerging Growth Fund, MFS
Meridian Global Equity Fund, MFS Meridian Limited Maturity Fund, MFS Meridian
World Growth Fund, MFS
<PAGE> 174
Meridian Money Market Fund, MFS Meridian World Total Return Fund, MFS Meridian
U.S. Equity Fund, MFS Meridian Research Fund and MFS Emerging Markets Debt Fund
(collectively the "MFS Meridian Funds"). Each of the MFS Meridian Funds is
organized as an exempt company under the laws of the Cayman Islands. The
principal business address of each of the MFS Meridian Funds is P.O. Box 309,
Grand Cayman, Cayman Islands, British West Indies.
MFS International (U.K.) Ltd. ("MIL-UK"), a private limited company
registered with the Registrar of Companies for England and Wales whose current
address is 4 John Carpenter Street, London, England ED4Y 0NH, is involved
primarily in marketing and investment research activities with respect to
private clients and the MIL Funds and the MFS Meridian Funds.
MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary of
MFS, serves as distributor for the MFS Funds, MVI, UST and MFSIT.
Clarendon Insurance Agency, Inc. ("CIAI"), a wholly owned subsidiary
of MFS, serves as distributor for certain life insurance and annuity contracts
issued by Sun Life Assurance Company of Canada (U.S.).
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of MFS,
serves as shareholder servicing agent to the MFS Funds, the MFS Closed-End
Funds, MFSIT, MVI and UST.
MFS Institutional Advisors, Inc. ("MFSI"), a wholly owned subsidiary
of MFS, provides investment advice to substantial private clients.
MFS Retirement Services, Inc. ("RSI"), a wholly owned subsidiary of
MFS, markets MFS products to retirement plans and provides administrative and
record keeping services for retirement plans.
MFS
The Directors of MFS are A. Keith Brodkin, Jeffrey L. Shames, Arnold
D. Scott, Donald A. Stewart and John D. McNeil. Mr. Brodkin is the Chairman, Mr.
Shames is the President, Mr. Scott is a Senior Executive Vice President and
Secretary, Bruce C. Avery, William S. Harris, William W. Scott, Jr., and
Patricia A. Zlotin are Executive Vice Presidents, Stephen E. Cavan is a Senior
Vice President, General Counsel and an Assistant Secretary, Robert T. Burns is a
Senior Vice President, Associate General Counsel and an Assistant Secretary of
MFS, and Thomas B. Hastings is a Vice President and Treasurer of MFS.
<PAGE> 175
MASSACHUSETTS INVESTORS TRUST
MASSACHUSETTS INVESTORS GROWTH STOCK FUND
MFS GROWTH OPPORTUNITIES FUND
MFS GOVERNMENT SECURITIES FUND
MFS SERIES TRUST I
MFS SERIES TRUST V
MFS SERIES TRUST VI
MFS SERIES TRUST X
MFS GOVERNMENT LIMITED MATURITY FUND
A. Keith Brodkin is the Chairman and President, Stephen E. Cavan is
the Secretary, W. Thomas London is the Treasurer, James O. Yost, Vice President
of MFS, is the Assistant Treasurer, James R. Bordewick, Jr., Senior Vice
President and Associate General Counsel of MFS, is the Assistant Secretary.
MFS SERIES TRUST II
A. Keith Brodkin is the Chairman and President, Leslie J. Nanberg,
Senior Vice President of MFS, is a Vice President, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost is the Assistant
Treasurer, and James R. Bordewick, Jr., is the Assistant Secretary.
MFS GOVERNMENT MARKETS INCOME TRUST
MFS INTERMEDIATE INCOME TRUST
A. Keith Brodkin is the Chairman and President, Leslie J. Nanberg,
Senior Vice President of MFS, is a Vice President, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost is the Assistant
Treasurer, and James R. Bordewick, Jr., is the Assistant Secretary.
MFS SERIES TRUST III
A. Keith Brodkin is the Chairman and President, James T. Swanson,
Robert J. Manning, Cynthia M. Brown and Joan S. Batchelder, Senior Vice
Presidents of MFS, Bernard Scozzafava, Vice President of MFS, and Matthew
Fontaine, Assistant Vice President of MFS, are Vice Presidents, Sheila
Burns-Magnan, Assistant Vice President of MFS, and Daniel E. McManus, Vice
President of MFS, are Assistant Vice Presidents, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost is the Assistant
Treasurer, and James R. Bordewick, Jr., is the Assistant Secretary.
MFS SERIES TRUST IV
MFS SERIES TRUST IX
A. Keith Brodkin is the Chairman and President, Robert A. Dennis and
Geoffrey L. Kurinsky, Senior Vice Presidents of MFS, are Vice Presidents,
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O.
Yost is the Assistant Treasurer and James R. Bordewick, Jr., is the Assistant
Secretary.
<PAGE> 176
MFS SERIES TRUST VII
A. Keith Brodkin is the Chairman and President, Leslie J. Nanberg
and Stephen C. Bryant, Senior Vice Presidents of MFS, are Vice Presidents,
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O.
Yost is the Assistant Treasurer and James R. Bordewick, Jr., is the Assistant
Secretary.
MFS SERIES TRUST VIII
A. Keith Brodkin is the Chairman and President, Jeffrey L. Shames,
Leslie J. Nanberg, Patricia A. Zlotin, James T. Swanson and John D. Laupheimer,
Jr., Vice President of MFS, are Vice Presidents, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost is the Assistant
Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
MFS MUNICIPAL SERIES TRUST
A. Keith Brodkin is the Chairman and President, Cynthia M. Brown and
Robert A. Dennis are Vice Presidents, David B. Smith, Geoffrey L. Schechter and
David R. King, Vice Presidents of MFS, are Vice Presidents, Daniel E. McManus,
Vice President of MFS, is an Assistant Vice President, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost is the Assistant
Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
MFS VARIABLE INSURANCE TRUST
MFS UNION STANDARD TRUST
MFS INSTITUTIONAL TRUST
A. Keith Brodkin is the Chairman and President, Stephen E. Cavan is
the Secretary, W. Thomas London is the Treasurer, James O. Yost is the Assistant
Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
MFS MUNICIPAL INCOME TRUST
A. Keith Brodkin is the Chairman and President, Cynthia M. Brown and
Robert J. Manning are Vice Presidents, Stephen E. Cavan is the Secretary, W.
Thomas London is the Treasurer, James O. Yost, is the Assistant Treasurer and
James R. Bordewick, Jr., is the Assistant Secretary.
MFS MULTIMARKET INCOME TRUST
MFS CHARTER INCOME TRUST
A. Keith Brodkin is the Chairman and President, Leslie J. Nanberg
and James T. Swanson are Vice Presidents, Stephen E. Cavan is the Secretary, W.
Thomas London is the Treasurer, James O. Yost, Vice President of MFS, is the
Assistant Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
<PAGE> 177
MFS SPECIAL VALUE TRUST
A. Keith Brodkin is the Chairman and President, Jeffrey L. Shames
and Robert J. Manning are Vice Presidents, Stephen E. Cavan is the Secretary, W.
Thomas London is the Treasurer, James O. Yost, is the Assistant Treasurer and
James R. Bordewick, Jr., is the Assistant Secretary.
MFS/SUN LIFE SERIES TRUST
John D. McNeil, Chairman and Director of Sun Life Assurance Company
of Canada, is the Chairman, Stephen E. Cavan is the Secretary, W. Thomas London
is the Treasurer, James O. Yost, is the Assistant Treasurer and James R.
Bordewick, Jr., is the Assistant Secretary.
MONEY MARKET VARIABLE ACCOUNT
HIGH YIELD VARIABLE ACCOUNT
CAPITAL APPRECIATION VARIABLE ACCOUNT
GOVERNMENT SECURITIES VARIABLE ACCOUNT
TOTAL RETURN VARIABLE ACCOUNT
WORLD GOVERNMENTS VARIABLE ACCOUNT
MANAGED SECTORS VARIABLE ACCOUNT
John D. McNeil is the Chairman, Stephen E. Cavan is the Secretary,
and James R. Bordewick, Jr., is the Assistant Secretary.
MIL
A. Keith Brodkin is a Director and the Chairman, Arnold D. Scott and
Jeffrey L. Shames are Directors, Ziad Malek, Senior Vice President of MFS, is
the President, Thomas J. Cashman, Jr., a Senior Vice President of MFS, is a
Senior Vice President, Stephen E. Cavan is a Director, Senior Vice President and
the Clerk, James R. Bordewick, Jr. is a Director, Vice President and an
Assistant Clerk, Robert T. Burns is an Assistant Clerk, Joseph W. Dello Russo,
Senior Vice President and Chief Financial Officer of MFS, is the Treasurer and
Thomas B. Hastings is the Assistant Treasurer.
MIL-UK
A. Keith Brodkin is a Director and the Chairman, Arnold D. Scott,
Jeffrey L. Shames, and James R. Bordewick, Jr., are Directors, Stephen E. Cavan
is a Director and the Secretary, Ziad Malek is the President, James E. Russell
is the Treasurer, and Robert T. Burns is the Assistant Secretary.
MIL FUNDS
A. Keith Brodkin is the Chairman, President and a Director, Richard
B. Bailey, John A. Brindle, Richard W. S. Baker and William F. Waters are
Directors, Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer,
James O. Yost is the Assistant Treasurer and James R. Bordewick, Jr., is the
Assistant Secretary, and Ziad Malek is a Senior Vice President.
<PAGE> 178
MFS MERIDIAN FUNDS
A. Keith Brodkin is the Chairman, President and a Director, Richard
B. Bailey, John A. Brindle, Richard W. S. Baker, Arnold D. Scott, Jeffrey L.
Shames and William F. Waters are Directors, Stephen E. Cavan is the Secretary,
W. Thomas London is the Treasurer, James R. Bordewick, Jr., is the Assistant
Secretary, James O. Yost is the Assistant Treasurer, and Ziad Malek is a Senior
Vice President.
MFD
A. Keith Brodkin is the Chairman and a Director, Arnold D. Scott and
Jeffrey L. Shames are Directors, William W. Scott, Jr., an Executive Vice
President of MFS, is the President, Stephen E. Cavan is the Secretary, Robert T.
Burns is the Assistant Secretary, Joseph W. Dello Russo is the Treasurer, and
Thomas B. Hastings is the Assistant Treasurer.
CIAI
A. Keith Brodkin is the Chairman and a Director, Arnold D. Scott and
Jeffrey L. Shames are Directors, Cynthia Orcott is President, Bruce C. Avery is
the Vice President, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings
is the Assistant Treasurer, Stephen E. Cavan is the Secretary, and Robert T.
Burns is the Assistant Secretary.
MFSC
A. Keith Brodkin is the Chairman and a Director, Arnold D. Scott and
Jeffrey L. Shames are Directors, Joseph A. Recomendes, a Senior Vice President
of MFS, is Vice Chairman and a Director, Janet A. Clifford is the Executive Vice
President, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer, Stephen E. Cavan is the Secretary, and Robert T. Burns is
the Assistant Secretary.
MFSI
A. Keith Brodkin is the Chairman and a Director, Jeffrey L. Shames,
and Arnold D. Scott are Directors, Thomas J. Cashman, Jr., is the President and
a Director, Leslie J. Nanberg is a Senior Vice President, a Managing Director
and a Director, George F. Bennett, Carol A. Corley, John A. Gee, Brianne Grady
and Kevin R. Parke are Senior Vice Presidents and Managing Directors, Joseph W.
Dello Russo is the Treasurer, Thomas B. Hastings is the Assistant Treasurer and
Robert T. Burns is the Secretary.
RSI
William W. Scott, Jr. and Bruce C. Avery are Directors, Arnold D.
Scott is the Chairman and a Director, Joseph W. Dello Russo is the Treasurer,
Thomas B. Hastings is the Assistant Treasurer, Stephen E. Cavan is the
Secretary, Robert T. Burns is the Assistant Secretary and Sharon A. Brovelli and
Martin E. Beaulieu are Senior Vice Presidents.
In addition, the following persons, Directors or officers of MFS,
have the
<PAGE> 179
affiliations indicated:
A. Keith Brodkin Director, Sun Life Assurance Company of
Canada (U.S.), One Sun Life Executive Park,
Wellesley Hills, Massachusetts
Director, Sun Life Insurance and Annuity
Company of New York, 67 Broad Street, New
York, New York
Donald A. Stewart President and a Director, Sun Life Assurance
Company of Canada, Sun Life Centre, 150
King Street West, Toronto, Ontario, Canada
(Mr. Stewart is also an officer and/or Director
of various subsidiaries and affiliates of Sun
Life)
John D. McNeil Chairman, Sun Life Assurance Company of
Canada, Sun Life Centre, 150 King Street West,
Toronto, Ontario, Canada (Mr. McNeil is also
an officer and/or Director of various
subsidiaries and affiliates of Sun Life)
Joseph W. Dello Russo Director of Mutual Fund Operations, The Boston
Company, Exchange Place, Boston,
Massachusetts (until August, 1994)
ITEM 29. DISTRIBUTORS
(a) Reference is hereby made to Item 28 above.
(b) Reference is hereby made to Item 28 above; the principal
business address of each of these persons is 500 Boylston Street, Boston,
Massachusetts 02116.
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The accounts and records of the Registrant are located, in whole or
in part, at the office of the Registrant and the following locations:
<TABLE>
<CAPTION>
NAME ADDRESS
---- -------
<S> <C>
Massachusetts Financial Services 500 Boylston Street
Company Boston, MA 02116
MFS Fund Distributors, Inc. 500 Boylston Street
Boston, MA 02116
</TABLE>
<PAGE> 180
State Street Bank and Trust Company State Street South
5 - West
North Quincy, MA 02171
MFS Service Center, Inc. 500 Boylston Street
Boston, MA 02116
ITEM 31. MANAGEMENT SERVICES
Not applicable.
ITEM 32. UNDERTAKINGS
(a) Not applicable.
(b) Not applicable.
(c) The registrant undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest annual report to
shareholders upon request and without charge.
(d) Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to trustees, officers and controlling
persons of the Registrant pursuant to the provisions set forth in Item 27 of
this Part C, or otherwise, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a trustee, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the Securities being Registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
<PAGE> 181
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of Boston and
The Commonwealth of Massachusetts on the 27th day of February, 1997.
MFS SERIES TRUST VIII
By: JAMES R. BORDEWICK, JR.
Name: James R. Bordewick, Jr.
Title: Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to its Registration Statement has been signed below by
the following persons in the capacities indicated on February 27, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
A. KEITH BRODKIN* Chairman, President (Principal
- ----------------------------------
A. Keith Brodkin Executive Officer) and Trustee
W. THOMAS LONDON* Treasurer (Principal Financial Officer
- ----------------------------------
W. Thomas London and Principal Accounting Officer)
RICHARD B. BAILEY* Trustee
- ----------------------------------
Richard B. Bailey
MARSHALL N. COHAN* Trustee
- ----------------------------------
Marshall N. Cohan
LAWRENCE H. COHN, M.D.* Trustee
- ----------------------------------
Lawrence H. Cohn, M.D.
SIR J. DAVID GIBBONS* Trustee
- ----------------------------------
Sir J. David Gibbons
</TABLE>
<PAGE> 182
<TABLE>
<CAPTION>
<S> <C>
ABBY M. O'NEILL* Trustee
- ----------------------------------
Abby M. O'Neill
WALTER E. ROBB, III* Trustee
- ----------------------------------
Walter E. Robb, III
ARNOLD D. SCOTT* Trustee
- ----------------------------------
Arnold D. Scott
JEFFREY L. SHAMES* Trustee
- ----------------------------------
Jeffrey L. Shames
J. DALE SHERRATT* Trustee
- ----------------------------------
J. Dale Sherratt
WARD SMITH* Trustee
- ----------------------------------
Ward Smith
</TABLE>
*By: JAMES R. BORDEWICK, JR.
Name: James R. Bordewick, Jr.
as Attorney-in-fact
Executed by James R. Bordewick, Jr. on
behalf of those indicated pursuant to a
Power of Attorney dated August 11, 1994,
incorporated by reference to
Registrant's Post-Effective Amendment
No. 10 filed with the SEC via EDGAR on
November 8, 1995.
<PAGE> 183
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO.
- ----------- ---------------------- --------
<S> <C> <C>
1 (c) Amendment to Declaration of Trust redesignating Class P
shares as Class I shares, dated December 19, 1996.
5 (d) Sub-Investment Advisory Agreement dated April
1, 1996 by and between Massachusetts Financial
Services Company and Foreign & Colonial
Management Ltd.
9 (b) Amendment to Shareholder Servicing Agent
Agreement, dated January 1, 1997 to amend fee
schedule.
(c) Exchange Privilege Agreement, dated February 8, 1989, as
amended and restated through and including January 1, 1997.
11 (a) Consent of Ernst & Young LLP - MFS Strategic
Income Fund.
(b) Consent of Deloitte & Touche LLP - MFS World
Growth Fund.
17 Financial Data Schedules for each Class of each
Series.
</TABLE>
<PAGE> 1
EXHIBIT NO. 99.1(c)
MFS SERIES TRUST VII
CERTIFICATION OF AMENDMENT
TO THE DECLARATION OF TRUST
REDESIGNATION
OF CLASS P SHARES AS CLASS I SHARES
The undersigned, being a majority of the Trustees of MFS Series Trust VIII
(the "Trust"), a business trust organized under the laws of The Commonwealth of
Massachusetts pursuant to an Amended and Restated Declaration of Trust dated
February 3, 1995 as amended (the "Declaration"), acting pursuant to Section 6.10
of the Declaration, do hereby redesignate the shares previously designated as
Class P shares of each series of the Trust as Class I shares.
<PAGE> 2
IN WITNESS WHEREOF, a majority of the Trustees of the Trust have executed
this amendment, in one or more counterparts, all constituting a single
instrument, as an instrument under seal in The Commonwealth of Massachusetts, as
of this 11th day of December, 1996.
<TABLE>
<S> <C>
A. KEITH BRODKIN WALTER E. ROBB, III
- ------------------------------ ---------------------
A. Keith Brodkin Walter E. Robb, III
76 Farm Road 35 Farm Road
Sherborn, MA 01770 Sherborn, MA 01770
RICHARD B. BAILEY ARNOLD D. SCOTT
- ------------------------------ ---------------------
Richard B. Bailey Arnold D. Scott
63 Atlantic Avenue 20 Rowes Wharf
Boston, MA 02110 Boston, MA 02110
MARSHALL N. COHAN JEFFREY L. SHAMES
- ------------------------------ ---------------------
Marshall N. Cohan Jeffrey L. Shames
2524 Bedford Mews Drive 60 Brookside Road
Wellington, FL 33414 Needham, MA 02192
LAWRENCE H. COHN J. DALE SHERRATT
- ------------------------------ ----------------
Lawrence H. Cohn J. Dale Sherratt
45 Singletree Road 86 Farm Road
Chestnut Hill, MA 02167 Sherborn, MA 01770
SIR J. DAVID GIBBONS WARD SMITH
- --------------------------------- --------------------
Sir J. David Gibbons Ward Smith
"Leeward" 36080 Shaker Blvd
5 Leeside Drive Hunting Valley, OH 44022
"Point Shares"
Pembroke, Bermuda HM 05
ABBY M. O'NEILL
- --------------------------------
Abby M. O'Neill
200 Sunset Road
Oyster Bay, NY 11771
</TABLE>
<PAGE> 1
EXHIBIT NO. 99.5(d)
SUB-ADVISORY AGREEMENT
SUB-ADVISORY AGREEMENT, dated this 1st day of April, 1996, by and
between MASSACHUSETTS FINANCIAL SERVICES COMPANY, a Delaware corporation (the
"Adviser") and FOREIGN & COLONIAL MANAGEMENT LTD., a company incorporated under
the laws of England and Wales (the "Sub-Adviser").
WITNESSETH:
WHEREAS, the Adviser provides MFS World Growth Fund (the "Fund"), a
series of MFS Series Trust VIII (the "Trust"), an open-end investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"), business services pursuant to the terms and conditions of an investment
advisory agreement dated August 30, 1993 (the "Advisory Agreement") between the
Adviser and the Trust, on behalf of the Fund; and
WHEREAS, the Sub-Adviser is willing to provide services to the Adviser
on the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
of the parties hereto as herein set forth, the parties covenant and agree as
follows:
1. Duties of the Sub-Adviser. The Sub-Adviser will furnish the Adviser
with information and advice, including advice on the allocation of investments
among emerging market countries or regions, relating to such portion of the
Fund's assets as the Adviser shall from time to time designate (the "Designated
Assets"). Subject to the supervision of the Trustees of the Trust and the
Adviser, the Sub-Adviser will: (a) manage the Designated Assets on behalf of the
Fund in accordance with the Fund's investment objective, policies and
limitations as stated in the Fund's then current Prospectus (the "Prospectus")
and Statement of Additional Information (the "Statement"), and the Trust's
Declaration of Trust dated July 31, 1987, as amended and restated May 6, 1991,
and Amended and Restated By-Laws, each as from time to time in effect
(respectively, the "Declaration" and the "By-Laws") and in compliance with the
1940 Act and the rules, regulations and orders thereunder; (b) make investment
decisions with respect to the Designated Assets; (c) place purchase and sale
orders for portfolio transactions with respect to the Designated Assets; (d)
manage otherwise uninvested cash assets with respect to the Designated Assets;
(e) as the agent of the Fund, give instructions (including trade tickets) to the
custodian and any sub-custodian of the Fund as to deliveries of securities,
transfers of currencies and payments of cash with respect to the Designated
Assets (the Sub-Adviser shall promptly notify the
- 1 -
<PAGE> 2
Adviser of such instructions); (f) employ professional portfolio managers to
provide research services to the Fund; (g) attend periodic meetings of the Board
of Trustees of the Trust and (h) obtain all the registrations, qualifications
and consents, on behalf of the Fund, which are necessary for the Fund to
purchase and sell assets in each jurisdiction (other than the United States) in
which the Fund's Designated Assets are to be invested (the Sub-Adviser shall
promptly provide the Adviser with copies of any such registrations,
qualifications and consents). In providing these services, the Sub- Adviser will
furnish continuously an investment program with respect to the Designated
Assets. The Sub-Adviser shall be responsible for monitoring the Fund's
compliance with the Prospectus, the Statement, the Declaration, the By-Laws and
the 1940 Act and the rules, regulations and orders thereunder and in monitoring
such compliance the Sub-Adviser shall do so in the functional currency of the
Fund. The Sub-Adviser shall only be responsible for compliance with the
above-mentioned restrictions in regards to the Designated Assets. The Adviser
agrees to provide the Sub- Adviser with such assistance as may be reasonably
requested by the Sub-Adviser in connection with its activities under this
Agreement, including, without limitation, information concerning the Fund, its
funds available, or to become available, for investment and generally as to the
conditions of the Fund's affairs. From time to time the Adviser will notify the
Sub-Adviser of the aggregate U.S. Dollar amount of the Designated Assets. The
Adviser will have responsibility for exercising proxy, consent and other rights
pertaining to the Designated Assets; provided, however, that the Sub- Adviser
will, as requested, make recommendations to the Adviser as to the manner in
which such proxy, consent and other rights should be exercised.
Should the Trustees of the Trust or the Adviser at any time make any
determination as to investment policy and notify the Sub-Adviser thereof in
writing, the Sub-Adviser shall be bound by such determination for the period, if
any, specified in such notice or until notified that such determination has been
revoked. Further, the Adviser or the Trustees of the Trust may at any time, upon
written notice to the Sub- Adviser, suspend or restrict the right of the
Sub-Adviser to determine what Designated Assets shall be purchased or sold and
what portion, if any, of the Fund's Designated Assets shall be held uninvested.
It is understood that the Adviser undertakes to discuss with the Sub-Adviser any
such determinations of investment policy and any such suspension or restrictions
on the right of the Sub-Adviser to determine what Designated Assets shall be
purchased or sold or held uninvested, prior to the implementation thereof.
2. Certain Information to the Sub-Adviser. Copies of the Prospectus,
the Statement, the Declaration and the By-Laws have been delivered to the
Sub-Adviser. The Adviser agrees to notify the Sub-Adviser of each change in the
investment policies of the Fund and to provide to the Sub-Adviser as promptly as
practicable copies of all amendments and supplements to the Prospectus, the
Statement, the Declaration and the By-Laws. In addition, the Adviser will
promptly provide the Sub-Adviser with any
- 2 -
<PAGE> 3
procedures applicable to the Sub-Adviser adopted from time to time by the
Trustees of the Trust and agrees to provide promptly to the Sub-Adviser copies
of all amendments thereto.
3. Execution of Certain Documents. Subject to any other written
instructions of the Adviser and the Trustees of the Trust, the Sub-Adviser is
hereby appointed the Adviser's and the Trust's agent and attorney-in-fact to
execute account documentation, agreements, contracts and other documents as the
Sub-Adviser shall be requested by brokers, dealers, counterparties and other
persons in connection with its management of the Designated Assets.
4. Reports. The Sub-Adviser shall furnish to the Trustees of the Trust or
the Adviser, or both, as may be appropriate, quarterly reports of its activities
on behalf of the Fund, as required by applicable law or as otherwise requested
from time to time by the Trustees of the Trust or the Adviser, and such
additional information, reports, evaluations, analyses and opinions as the
Trustees of the Trust or the Adviser, as appropriate, may request from time to
time.
5. Brokerage. In connection with the selections of brokers, dealers or
other entities and the placing of orders for the purchase and sale of portfolio
investments for the Fund, the Sub-Adviser is directed to seek for the Fund
execution at the most favorable price by responsible brokerage firms at
reasonably competitive commission rates. In fulfilling this requirement, the
Sub-Adviser shall not be deemed to have acted unlawfully or to have breached any
duty, created by this Agreement or otherwise, solely by reason of its having
caused the Fund to pay a broker, dealer or other entity an amount of commission
for effecting a securities transaction in excess of the amount of
commission another broker, dealer or other entity would have charged for
effecting that transaction, if the Sub-Adviser determined in good faith that
such amount of commission was reasonable in relation to the value of the
brokerage and research services (within the meaning of Section 28(e) of the
Securities Exchange Act of 1934, as amended) provided by such broker, dealer or
other entity, viewed in terms of either that particular transaction or the
Sub-Adviser's overall responsibilities with respect to the Fund and to other
clients of the Sub-Adviser as to which the Sub-Adviser exercises investment
discretion.
6. Services to Other Companies or Accounts. On occasions when the Sub-
Adviser deems the purchase or sale of a security to be in the best interest of
the Fund as well as other clients, the Sub-Adviser, to the extent permitted by
applicable laws and regulations, may, but shall be under no obligation to,
aggregate the securities to be so purchased or sold in order to obtain the most
favorable price or lower brokerage commissions and efficient execution. In such
event, allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction will be made by the Sub-Adviser in the
manner it considers to be the most equitable. The Sub-Adviser
- 3 -
<PAGE> 4
agrees to allocate similarly opportunities to sell or otherwise dispose of
securities among the Fund and other clients of the Sub-Adviser.
7. Other Sub-Advisers. The Sub-Adviser may from time to time enter into
investment sub-advisory agreements with one or more investment advisers, (an
"Other Sub-Adviser"), to the Fund to perform some or all of the services for
which the Sub- Adviser is responsible pursuant to this Agreement upon such terms
and conditions as the Adviser and the Sub-Adviser may determine; provided,
however, that such investment sub-advisory agreements have been approved by a
majority of the Trustees of the Trust who are not interested persons of the
Trust, or the Sub-Adviser or the Other Sub-Adviser and by vote of a majority of
the outstanding voting securities of the Fund; and, provided, further, that the
Sub-Adviser shall own a majority of the voting securities of any Other
Sub-Adviser. The Sub-Adviser may terminate the services of any Other Sub-Adviser
at any time in its sole discretion, and shall at such time assume the
responsibilities of such Other Sub-Adviser unless and until a successor Other
Sub- Adviser is selected. The Sub-Adviser shall be liable for any error of
judgment or mistake of law by any Other Sub-Adviser and for any act or omission
in the execution and management of the Fund by any Other Sub-Adviser.
8. Compensation of the Sub-Adviser. For the services to be rendered by
the Sub-Adviser under this Agreement, the Adviser shall pay to the Sub-Adviser
compensation, computed and paid monthly in arrears in U.S. dollars, at a rate of
1.00% per annum of the average daily net asset value of the Designated Assets.
If the Sub- Adviser shall serve for less than the whole of any month, the
compensation payable to the Sub-Adviser with respect to the Fund will be
prorated. The Sub-Adviser will pay its expenses incurred in performing its
duties under this Agreement. Neither the Trust nor the Fund shall be liable to
the Sub-Adviser for the compensation of the Sub-Adviser. For the purpose of
determining fees payable to the Sub-Adviser, the value of the Fund's net assets
shall be computed at the times and in the manner specified in the Prospectus
and/or Statement. In the event that the Adviser reduces its management fee
payable under the Advisory Agreement in order to comply with the expense
limitations of a State securities commission or otherwise (but not a voluntary
reduction), the Sub- Adviser agrees to reduce its fee payable under this
Agreement by a pro rata amount.
9. Limitation of Liability of the Sub-Adviser. 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 and obligations hereunder. The
Trust, on behalf of the Fund, may enforce any obligations of the Sub-Adviser
under this Agreement and may recover directly from the Sub-Adviser for any
liability it may have to the Fund.
- 4 -
<PAGE> 5
10. Activities of the Sub-Adviser. The services of the Sub-Adviser to
the Fund are not deemed to be exclusive, the Sub-Adviser being free to render
investment advisory and/or other services to others. It is understood that the
Trustees, officers and shareholders of the Trust, the Fund or the Adviser are or
may be or become interested in the Sub-Adviser or any person controlling,
controlled by or under common control with the Sub-Adviser, as trustees,
officers, employees or otherwise and that trustees, officers and employees of
the Sub-Adviser or any person controlling, controlled by or under common control
with the Sub-Adviser may become similarly interested in the Trust, the Fund or
the Adviser and that the Sub-Adviser may be or become interested in the Fund as
a shareholder or otherwise.
11. Covenants of the Sub-Adviser. The Sub-Adviser agrees that it (a)
will not deal with itself, "affiliated persons" of the Sub-Adviser, the Trustees
of the Trust or the Fund's distributor, as principals, agents, brokers or
dealers in making purchases or sales of securities or other property for the
account of the Fund, except as permitted by the 1940 Act and the rules,
regulations and orders thereunder and subject to the prior written approval of
the Adviser, (b) will not take a long or short position in the shares of the
Fund except as permitted by the Declaration and (c) will comply with all other
provisions of the Declaration and the By-Laws and the then-current Prospectus
and Statement relative to the Sub-Adviser and its trustees, officers, employees
and affiliates.
12. Representations, Warranties and Additional Agreements of the Sub-
Adviser. The Sub-Adviser represents, warrants and agrees that:
(a) It: (i) is registered as an investment adviser under the U.S.
Investment Advisers Act of 1940 (the "Advisers Act"), is
authorized to undertake investment business in the United
Kingdom by virtue of its membership in the Investment
Management Regulatory Organisation ("IMRO") and is registered
under the laws of any jurisdiction in which the Sub-Adviser is
required to be registered as an investment adviser in order to
perform its obligations under this Agreement, and will
continue to be so registered for so long as this Agreement
remains in effect; (ii) is not prohibited by the 1940 Act or
the Advisers Act from performing the services contemplated by
this Agreement; (iii) has met, and will continue to meet for
so long as this Agreement remains in effect, any other
applicable Federal or State requirements, or the applicable
requirements of any regulatory or industry self-regulatory
agency, necessary to be met in order to perform the services
contemplated by this Agreement; (iv) has the authority to
enter into and perform the services contemplated by this
Agreement; (v) will immediately notify the Adviser in writing
of the occurrence of any event that would disqualify the
Sub-Adviser
- 5 -
<PAGE> 6
from serving as an investment adviser of an investment company
pursuant to Section 9(a) of the 1940 Act or otherwise; and
(vi) will immediately notify the Adviser in writing of any
change of control of the Sub-Adviser or any parent of the
Sub-Adviser resulting in an "assignment" of this Agreement.
(b) It will maintain, keep current and preserve on behalf of the
Fund, in the manner and for the periods of time required or
permitted by the 1940 Act and the rules, regulations and
orders thereunder and the Advisers Act and the rules,
regulations and orders thereunder, records relating to
investment transactions made by the Sub- Adviser for the Fund
as may be reasonably requested by the Adviser or the Fund from
time to time. The Sub-Adviser agrees that such records are the
property of the Fund, and will be surrendered to the Fund
promptly upon request; provided, however, that the Sub-Adviser
may retain copies of such records for archival purposes as
required by IMRO.
(c) The Sub-Adviser has adopted a written code of ethics complying
with the requirements of Rule 17j-1 under the 1940 Act and, if
it has not already done so, will provide the Adviser and the
Trust with a copy of such code of ethics, and upon any
amendment to such code of ethics, promptly provide such
amendment. At least annually the Sub-Adviser will provide the
Trust and the Adviser with a certificate signed by the chief
compliance officer (or the person performing such function) of
the Sub-Adviser certifying, to the best of his or her
knowledge, compliance with the code of ethics during the
immediately preceding twelve (12) month period, including any
material violations of or amendments to the code of ethics or
the administration thereof.
(d) It has provided the Adviser and the Trust with a copy of its
Form ADV as most recently filed with the Securities and
Exchange Commission (the "SEC") and will, promptly after
filing any amendment to its Form ADV with the SEC, furnish a
copy of such amendment to the Adviser and the Trust.
13. Duration and Termination of this Agreement. This Agreement shall
become effective on the date first above written and shall govern the relations
between the parties hereto thereafter, and shall remain in force until April 1,
1998 and each year thereafter but only so long as its continuance is
"specifically approved at least annually" (a) by the vote of a majority of the
Trustees of the Trust who are not "interested persons" of the Trust or of the
Adviser or of the Sub-Adviser at a meeting specifically called for
- 6 -
<PAGE> 7
the purpose of voting on such approval, and (b) by the Board of Trustees of the
Trust, or by "vote of a majority of the outstanding voting securities" of the
Fund. This Agreement may be terminated at any time without the payment of any
penalty by the Trustees of the Trust, by "vote of a majority of the outstanding
voting securities" of the Fund or by the Adviser, on not more than sixty days
nor less than thirty days written notice, or by the Sub-Adviser on not more than
ninety days nor less than sixty days written notice. This Agreement shall
automatically terminate in the event of its "assignment" or in the event that
the Advisory Agreement shall have terminated for any reason.
14. Amendments to this Agreement. This Agreement may be amended only if
such amendment is approved by "vote of a majority of the outstanding voting
securities" of the Fund, by the Adviser and by the Sub-Adviser.
15. Certain Definitions. The terms "specifically approved at least
annually", "vote of a majority of the outstanding voting securities",
"assignment", "control", "affiliated persons" and "interested person", when used
in this Agreement, shall have the respective meanings specified, and shall be
construed in a manner consistent with, the 1940 Act and the rules, regulations
and orders thereunder, subject, however, to such exemptions as may be granted by
the SEC under the 1940 Act.
16. Survival of Representations and Warranties; Duty to Update
Information. All representations and warranties made by the Sub-Adviser pursuant
to Section 12 hereof shall survive for the duration of this Agreement and the
Sub-Adviser shall immediately notify, but in no event later than five (5)
business days, the Adviser in writing upon becoming aware that any of the
foregoing representations and warranties are no longer true.
17. Miscellaneous. This Agreement shall be governed by and construed in
accordance with the internal laws of The Commonwealth of Massachusetts. All
notices provided for by this Agreement shall be in writing and shall be deemed
given when received, against appropriate receipt, by the Sub-Adviser's Secretary
in the case of the Sub-Adviser, the Adviser's General Counsel in the case of the
Adviser, and the Trust's Secretary in the case of the Fund, or such other person
as a party shall designate by notice to the other parties. This Agreement
constitutes the entire agreement among the parties hereto and supersedes any
prior agreement among the parties relating to the subject matter hereof. The
section headings of this Agreement are for convenience of reference and do not
constitute a part hereof.
- 7 -
<PAGE> 8
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
and delivered in their names and on their behalf by the undersigned, thereunto
duly authorized, and their respective seals to be hereto affixed, all as of the
day and year first written above.
MASSACHUSETTS FINANCIAL
SERVICES COMPANY
By: JEFFREY L. SHAMES
---------------------------
Jeffrey L. Shames
President
FOREIGN & COLONIAL
MANAGEMENT LTD.
By: JAMES OGLIVY
---------------------------
James Oglivy
By: JONATHAN LUBRAN
---------------------------
Jonathan Lubran
The foregoing is hereby agreed to:
A copy of the Declaration of Trust of the Trust is on file with the
Secretary of State of The Commonwealth of Massachusetts. The parties hereto
acknowledge that the obligations of or arising out of this instrument are not
binding upon any of the Trust's trustees, officers, employees, agents or
shareholders individually, but are binding solely upon the assets and property
of the Trust in accordance with its proportionate interest hereunder. If this
instrument is executed by the Trust on behalf of one or more series of the
Trust, the parties hereto acknowledge that the assets and liabilities of each
series of the Trust are separate and distinct and that the obligations of or
arising out of this instrument are binding solely upon the assets or property of
the series on whose behalf the Trust has executed this instrument. If the Trust
has executed this instrument on behalf of more than one series of the Trust, the
parties hereto also agree that the
- 8 -
<PAGE> 9
obligations of each series hereunder shall be several and not joint, in
accordance with its proportionate interest hereunder, and the parties hereto
agree not to proceed against any series for the obligations of another series.
MFS SERIES TRUST VIII
on behalf of MFS WORLD
GROWTH FUND
By: A. KEITH BRODKIN
---------------------------
A. Keith Brodkin
Chairman
- 9 -
<PAGE> 1
EXHIBIT NO. 99.9(b)
[MFS SERIES TRUST VIII LETTERHEAD]
January 1, 1997
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116
Dear Sir/Madam:
This will confirm our understanding that Exhibit B to the Shareholder Servicing
Agent Agreement between us, dated August 1, 1985, as amended, is hereby
amended, effective immediately, to read in its entirety as set forth on
Attachment 1 hereto.
Please indicate your acceptance of the foregoing by signing below.
Sincerely,
MFS SERIES TRUST VIII
By: /s/ W. THOMAS LONDON
------------------------------
W. Thomas London
Treasurer
Accepted and Agreed:
MFS SERVICE CENTER, INC.
By: /s/ JOSEPH W. DELLO RUSSO
---------------------------
Joseph W. Dello Russo
Treasurer
<PAGE> 2
ATTACHMENT 1
January 1, 1997
EXHIBIT B TO THE SHAREHOLDER
SERVICING AGENT AGREEMENT BETWEEN
MFS SERVICE CENTER, INC. ("MFSC")
AND MFS SERIES TRUST VIII (THE "FUND")
The fees to be paid by the Fund on behalf of its series with respect to all
shares of each series of the Fund to MFSC, for MFSC's services as shareholder
servicing agent, shall be 0.13% of the average daily net assets of the Fund.
<PAGE> 1
EXHIBIT NO. 99.9(c)
EXCHANGE PRIVILEGE AGREEMENT
AGREEMENT, dated as of September 1, 1993 and as amended and restated as of
January 1, 1997, by and among each of the trusts (on behalf of each of their
series from time to time) listed below (collectively, the "Funds") and MFS Fund
Distributors, Inc.
("MFD").
WITNESSETH THAT:
WHEREAS, pursuant to the terms of a distribution agreement by and between
each Fund and MFD, MFD has the exclusive right to arrange for the sale of shares
of each class of each Fund at the net asset value used in determining the public
offering price on which orders for shares were based, subject to the exceptions
therein set forth or referred to; and
WHEREAS, the Funds have differing investment objectives as set out in their
prospectuses and consider it appropriate to make available to existing and
future shareholders of the Funds the opportunity to implement changes to their
investments through the acquisition, without sales charge or reinitiating the
time period used in calculating the amount of contingent deferred sales charge
assessable upon redemption, of the shares of any one or more of the Funds by use
of the proceeds of redemption of shares of any other Fund (if available for sale
and if the purchaser is eligible to purchase such shares) (herein referred to in
various grammatical forms of the word "exchange"), subject to reasonable
conditions designed to limit expense and administrative inconvenience or imposed
in the best interest of the other shareholders of any of the Funds;
NOW, THEREFORE, the parties hereto agree as follows:
1. During the term of this Agreement, shares of each Fund may, subject to
the policies and restrictions set forth in the Funds' then current prospectuses,
be exchanged for shares of any one or more other Funds at net asset value;
provided that the shares being acquired are then available for sale and the
purchaser is then eligible to purchase such shares. Front-end sales loads,
deferred sales loads, administrative fees, redemption fees and Rule 12b-1 fees
(as such terms are defined or used in Rule 11a-3 under the Investment Company
Act of 1940 (the "1940 Act")), shall be imposed,
- 1 -
<PAGE> 2
suspended or tolled, reinstated, and continued, as applicable, with respect to
such exchanges in accordance with Rule 11a-3 under the 1940 Act and the policies
described in the Funds' then current prospectuses.
2. MFD shall serve as the agent of the Funds in effecting share exchanges.
In accordance with the provisions of Section 1 above, MFD may charge the
shareholder a reasonable amount for its services in effecting the exchange. MFD
shall report daily to the Funds concerning all exchanges made pursuant to this
Agreement. MFD will not seek reimbursement from the Funds for any expenses
incurred by it in connection with any such purchases.
3. Each of the Funds may, by written notice to each of the other Funds and
MFD, terminate its exchange offer provided by this Agreement and require MFD and
the other Funds to terminate the exchange offer in respect of the shares of the
Fund so giving notice. MFD may by written notice to any Fund terminate its
services in effecting such exchanges on behalf of such Fund. The exchange offers
with respect to shares of a Fund made by MFD to the shareholders of the other
Funds pursuant to this Agreement shall in any event be terminated effective upon
the termination of the services of MFD as distributor of the shares of such
Fund.
4. Nothing in this Agreement shall modify or reduce the obligations of a
Fund or MFD contained in the distribution agreement, if any, between MFD and
such Fund as the same may from time to time be modified or amended.
5. To the extent that a Fund's current prospectus contains provisions that
are inconsistent with the terms of this Agreement, the terms of the prospectus
shall be controlling.
6. This Agreement supersedes all prior or contemporaneous agreements between
the parties hereto relating to the subject matter hereof.
7. The terms of this Agreement shall become effective as of the date first
above written.
8. A copy of the Declaration of Trust of each Fund is on file with the
Secretary of State of The Commonwealth of Massachusetts. MFD acknowledges that
the obligations of or arising out of this instrument are not binding upon any of
the Funds' trustees, officers, employees, agents or shareholders individually,
but are binding solely upon the assets and property of the Fund. If this
instrument is executed by a Fund on behalf of one or more series of the Fund,
MFD further acknowledges that the assets and
- 2 -
<PAGE> 3
liabilities of each series of the Fund are separate and distinct and that the
obligations of or arising out of this instrument are binding solely upon the
assets or property of the series on whose behalf the Fund has executed this
instrument. If a Fund has executed this instrument on behalf of more than one
series of the Fund, MFD also agrees that the obligations of each series
hereunder shall be several and not joint, in accordance with its proportionate
interest hereunder, and MFD agrees not to proceed against any series for the
obligations of another series.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written and caused their seals to be affixed by their
representatives thereunto duly authorized.
MFS SERIES TRUST I MFS SERIES TRUST IX
MFS SERIES TRUST II MFS SERIES TRUST X
MFS SERIES TRUST III MFS MUNICIPAL SERIES TRUST
MFS SERIES TRUST IV MFS GROWTH OPPORTUNITIES FUND
MFS SERIES TRUST V MFS GOVERNMENT SECURITIES FUND
MFS SERIES TRUST VI MASSACHUSETTS INVESTORS GROWTH STOCK FUND
MFS SERIES TRUST VII MFS GOVERNMENT LIMITED MATURITY FUND
MFS SERIES TRUST VIII MASSACHUSETTS INVESTORS TRUST
By: A. KEITH BRODKIN
-----------------------------
A. Keith Brodkin
Chairman
MFS FUND DISTRIBUTORS, INC.
By: WILLIAM W. SCOTT, JR.
-----------------------------
William W. Scott, Jr.,
President
- 3 -
<PAGE> 1
Exhibit 99.11(a)
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference made to our firm under the captions "Condensed
Financial Information" in the Prospectus and "Independent Auditors and Financial
Statements" in the Statement of Additional Information and to the incorporation
by reference in this Post-Effective Amendment No. 13 to Registration Statement
No. 33- 37972 on Form N-1A of our report dated December 12, 1996, on the
financial statements and financial highlights of MFS Strategic Income Fund, a
series of MFS Series Trust VIII, included in the 1996 Annual Report to
Shareholders.
ERNST & YOUNG LLP
Ernst & Young LLP
Boston, Massachusetts
February 24, 1997
<PAGE> 1
Exhibit 99.11(b)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Post-Effective
Amendment No. 13 to Registration Statement No. 33-37972 of MFS Series Trust
VIII of our report dated November 29, 1996 appearing in the annual report to
shareholders for the year ended October 31, 1996, of MFS World Growth Fund, a
series of MFS Series Trust VIII and to the references to us under the headings
"Condensed Financial Information" in the Prospectus and "Independent Auditors
and Financial Statements" in the Statement of Additional Information, both of
which are part of such Registration Statement.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 24, 1997
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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