As filed with the Securities and Exchange Commission on December 29, 1998
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. 15
AND
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 14
MFS(R) 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)
[ ] on [date] pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[X] on February 28, 1999 pursuant to paragraph (a)(i)
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on [date] pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
================================================================================
<PAGE>
MFS(R) STRATEGIC INCOME FUND
Supplement dated March 1, 1999 to the Current Prospectus
This Supplement describes the fund's class I shares, and it supplements certain
information in the fund's Prospectus dated March 1, 1999. The caption headings
used in this Supplement correspond with the caption headings used in the
Prospectus.
You may purchase class I shares only if you are an eligible institutional
investor, as described under the caption "Description of Share Classes" below.
1. RISK RETURN SUMMARY
Performance Table. The "Performance Table" is supplemented as follows:
Average Annual Total Returns as of December 31, 1998
<TABLE>
<CAPTION>
1 Year 5 Year 10 Year
------ ------ -------
<S> <C> <C> <C>
Class I shares ___% ___% ___%
Credit Suisse First Boston High Yield Index++* ___% ___% ___%
Lehman Brothers Government Corporate Bond Index+** ___% ___% ___%
Salomon Brothers World Governments Bond Index+*** ___% ___% ___%
</TABLE>
- -----------------------------
+ Source: Lipper Analytical Services, Inc.
++ Source: AIM
* The Credit Suisse First Boston High Yield Index is an unmanaged,
trader-priced portfolio constructed to mirror the high-yield debt
market.
** The Lehman Brothers Government/Corporate Bond Index is an unmanaged,
market-value-weighted index of all debt obligations of the U.S.
Treasury and U.S. government agencies (excluding mortgage-backed
securities) and of all publicly issued fixed-rate, nonconvertible,
investment-grade domestic corporate debt. It is not possible to invest
direct in an index.
*** The Salomon Brothers World Governments Bond Index is unmanaged and
consists of complete universes of government bonds with remaining
maturities of at lest five years. It is not possible to invest directly
in an index.
The fund initially offered class A shares on October 29, 1987 and class I shares
on January 8, 1997. Class I share performance includes the performance of the
fund's class A shares for periods prior to the offering of class I shares. Class
I share performance generally would have been higher than class A share
performance had class I shares been offered for the entire period, because
operating expenses (e.g., distribution and service fees) attributable to class I
shares are lower than those of class A shares. Class I share performance has
been adjusted to take into account the fact that class I shares have no initial
sales charge.
2. EXPENSE SUMMARY
Expense Table. The "Expense Table" is supplemented as follows:
Annual Fund Operating Expenses (expenses that are deducted from fund
assets):
<TABLE>
<S> <C>
Management Fees.......................................... 1.15%
Distribution and Service (12b-1) Fees.................... 0.00%
Other Expenses(1) ....................................... 0.34%
----
Total Annual Fund Operating Expenses..................... 1.49%
Fee Waiver and/or Expense Reimbursement(2)............. 1.00%
----
Net Expenses........................................... 0.49%
</TABLE>
- -----------------------------
(1) The fund has an expense offset arrangement which reduces the fund's
custodian fee based upon the amount of cash maintained by the fund with
its custodian and dividend disbursing agent. The fund
-1-
<PAGE>
may enter into other similar arrangements and directed brokerage
arrangements, which would also have the effect of reducing the fund's
expenses. "Other Expenses" do not take into account these expense
reductions, and therefore do not represent the actual expenses of the
fund.
(2) MFS has voluntarily waived its right to receive the management fee to a
maximum of 0.50% annually of the average daily net assets of the Fund.
MFS has also agreed to bear all of the fund's expenses, excluding
management fees, distribution and service fees, taxes, extraordinary
expenses, brokerage and transaction costs and class specific expenses.
These arrangements will remain in effect until March 1, 2000 absent an
earlier modification approved by the board of trustees which oversees the
Fund.
Example of Expenses. The "Example of Expenses" table is supplemented as follows:
<TABLE>
<CAPTION>
Share Class Year 1 Year 3 Year 5 Year 10
----------- ------ ------ ------ -------
<S> <C> <C> <C> <C>
Class I shares $51 $160 $280 $628
</TABLE>
3. DESCRIPTIONS OF SHARE CLASSES
The "Description of Share Classes" is supplemented as follows:
If you are an eligible institutional investor (as described below), you may
purchase class I shares at net asset value without an initial sales charge or
CDSC upon redemption. Class I shares do not have annual distribution and service
fees, and do not convert to any other class of shares of the fund.
The following eligible institutional investors may purchase class I shares:
o certain retirement plans established for the benefit of employees of
MFS and employees of MFS' affiliates;
o any fund distributed by MFS, if the fund seeks to achieve its
investment objective by investing primarily in shares of the fund and
other MFS funds;
o any retirement plan, endowment or foundation which:
[arrow] purchases shares directly through MFD (rather than through
a third party broker or dealer or other financial
adviser);
[arrow] has, at the time of purchase of class I shares, aggregate
assets of at least $100 million; and
[arrow] 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 (additional investments may be
made in any amount).
MFD may accept purchases from smaller plans, endowments or foundations
or in smaller amounts if it believes, in its sole discretion, that such
entity's aggregate assets will equal or exceed $100 million, or that
such entity will make additional investments which will cause its total
investment to equal or exceed $10 million, within a reasonable period
of time;
o bank trust departments or law firms acting as trustee or manager for
trust accounts which initially invest, on behalf of their clients, at
least $100,000 in class I shares of the fund (additional investments
may be made in any amount). MFD may accept smaller initial purchases
if it believes, in its sole discretion, that the bank trust department
or law firm will make additional investments, on behalf of its trust
clients, which will cause its total investment to equal or exceed
$100,000 within a reasonable period of time; and
-2-
<PAGE>
o certain retirement plans offered, administered or sponsored by
insurance companies, provided that these plans and insurance companies
meet certain criteria established by MFD from time to 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 in
class I shares.
4. HOW TO PURCHASE, EXCHANGE AND REDEEM SHARES
The discussion of "How to Purchase, Exchange and Redeem Shares" is supplemented
as follows:
You may purchase, redeem and exchange class I shares only through your MFD
representative or by contacting MFSC (see the back cover of the Prospectus for
address and phone number). You may exchange your class I shares for class I
shares of another MFS Fund (if you are eligible to purchase them) and for shares
of the MFS Money Market Fund at net asset value.
5. FINANCIAL HIGHLIGHTS
The "Financial Highlights" table is supplemented as follows:
Financial Statements - class I Shares
<TABLE>
<CAPTION>
Year Ended Period Ended
October 31, 1998 October 31, 1997*
---------------- -----------------
<S> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 8.25 $ 8.15
Income from Investment Operations# -
Net investment income loss[sec] $ 0.72 $ 0.49
Net realized and unrealized gain on investments
and foreign currency transactions (0.85) 0.15
------ -------
Total from investment operations $(0.13) $ 0.64
------ -------
Less distributions declared to shareholders -
From net investment income $(0.66) $ (0.54)
From net realized gain on investments and
foreign currency transactions $(0.13) --
------ -------
Net asset value - end of period $ 7.33 $ 8.25
------ -------
Total return 2.00% 5.98%++
Ratios (to average net assets)/Supplemental data[sec] -
Expenses## 0.50% 0.44%+
Net investment loss 8.51% 7.69%+
Portfolio turnover 299% 217%
Net assets at end of period (000 omitted) $ 238 $ 230
</TABLE>
- ----------------------------------------
* For the period from the inception of class I shares, January 2, 1997,
through October 31, 1998.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## 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. The fund's expenses are calculated
without reduction for this expense offset arrangement.
-3-
<PAGE>
[sec]The Investment Adviser and/or the distributor voluntarily waived a portion
of their management and/or other fees and/or distribution fee,
respectively, for certain periods indicated. If the fee had been incurred
by the Fund, the net investment income per share and the ratios would have
been:
<TABLE>
<S> <C> <C>
Net investment loss $0.63 $0.40
Ratios (to average net assets):
Expenses 1.49% 1.66%+
Net Investment loss 7.49% 6.47%+
</TABLE>
The date of this Supplement is March 1, 1999.
-4-
<PAGE>
MFS[RegTM] STRATEGIC INCOME FUND
M A R C H 1, 1 9 9 9
Prospectus
Class A Shares
Class B Shares
Class C Shares
- --------------------------------------------------------------------------------
This Prospectus describes the MFS Strategic Income Fund. The fund's primary
investment objective is to provide high current income by investing in fixed
income securities. The fund's secondary objective is to provide significant
capital appreciation.
The Securities and Exchange Commission has not approved the fund's shares or
determined whether this prospectus is accurate or complete. Anyone who tells you
otherwise is committing a crime.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
Page
I Risk Return Summary ........................................... 1
II Expense Summary ............................................... 6
III Investment Objective, Strategies and Principal Risks .......... 8
IV Management of the Fund ........................................ 14
V Description of Share Classes .................................. 15
VI How to Purchase, Exchange and Redeem Shares ................... 18
VII Investor Services and Programs ................................ 22
VIII Other Information ............................................. 24
IX Financial Highlights .......................................... 27
Appendix A -- Investment Techniques and Practices ............. A-1
Appendix B -- Sales Charge Categories Available to Certain
Retirement Plans .............................................. B-1
</TABLE>
<PAGE>
I RISK RETURN SUMMARY
[arrow] Investment Objective
Primary: High current income by investing in fixed income securities.
Secondary: Significant capital appreciation.
[arrow] Principal Investment Policies
The fund invests, under normal market conditions, at least 65% of its
total assets in fixed income securities. These securities include:
o U.S. government securities, which are bonds or other debt
obligations issued by, or whose principal and interest
payments are guaranteed by, the U.S. government or one of its
agencies or instrumentalities,
o foreign government securities, which are bond or other debt
obligations issued by foreign governments, including emerging
market governments; these foreign government securities are
either:
[arrow] issued or guaranteed as to payment of principal and
interest by foreign governments, foreign government
agencies, foreign semi-governmental entities, or
supra-national entities,
[arrow] interests issued by entities organized and operated
for the purpose of restructuring the investment
characteristics of foreign government securities, or
[arrow] Brady Bonds, which are long-term bonds issued as part
of a restructuring of commercial loans to emerging
market countries,
o mortgage-backed and asset-backed securities, which represent
interests in a pool of assets such as mortgage loans, car loan
receivables, or credit card receivables, and
o corporate bonds, which are bonds or other debt obligations
issued by domestic or foreign (including emerging market)
corporations or similar entities; the fund may invest in:
[arrow] investment grade bonds, which are bonds assigned
higher credit ratings by credit rating agencies or
which are unrated and considered by MFS to be
comparable to higher rated bonds,
[arrow] lower rated bonds, commonly known as junk bonds,
which are bonds assigned lower credit ratings by
credit rating agencies or which are unrated and
considered by MFS to be comparable to lower rated
bonds, and
[arrow] crossover bonds, which are junk bonds that MFS
expects will appreciate in value due to an
anticipated upgrade in the issuer's credit-rating
(thereby crossing over into investment grade bonds).
The fund allocates its investments across these categories of
fixed income securities with a view toward broad diversification across
these categories and also within these
1
<PAGE>
categories. In selecting fixed income investments for the fund, MFS
considers the views of its large group of fixed income portfolio
managers and research analysts. This group periodically assesses the
three-month total return outlook for various segments of the fixed
income markets. This three-month "horizon" outlook is used by the
portfolio manager(s) of MFS' fixed income oriented funds (including the
fund) as a tool in making or adjusting a fund's asset allocations to
various segments of the fixed income markets. In assessing the credit
quality of fixed income securities, MFS does not rely solely on the
credit ratings assigned by credit rating agencies, but rather performs
its own independent credit analysis.
The fund may have exposure to foreign currencies through its
investments in foreign securities, its direct holdings of foreign
currencies, or through its use of foreign currency exchange contracts
for the purchase or sale of a fixed quantity of a foreign currency at a
future date.
The fund may invest in derivative securities. Derivatives are
securities whose value may be based on other securities, currencies,
interest rates, or indices. Derivatives include:
o futures and forward contracts,
o options on futures contracts, foreign currencies, securities
and bond indices,
o structured notes and indexed securities, and
o swaps, caps, collars and floors.
The fund may engage in active and frequent trading to achieve
its principal investment strategies. This may result in the realization
and distribution to shareholders of higher capital gains as compared to
a fund with less active trading policies, which would increase your tax
liability. Frequent trading also increases transaction costs, which
could detract from the fund's performance.
The fund is a non-diversified mutual fund. This means that the
fund may invest a relatively high percentage of its assets in a small
number of issuers.
[arrow] Principal Risks of an Investment
Your investment in the fund is subject to certain risks:
o Allocation Risk: The fund will allocate its investments among
various segments of the fixed income markets based upon
judgments made by MFS. The fund could miss attractive
investment opportunities by underweighting markets where there
are significant returns, and could lose value by overweighting
markets where there are significant declines.
o Interest Rate Risk: When interest rates rise, the prices of
fixed income securities in the fund's portfolio will generally
fall. Conversely, when interest rates fall, the prices of
fixed income securities in the fund's portfolio will generally
rise.
o Maturity Risk: This interest rate risk will affect the price
of a fixed income security more if the security has a longer
maturity. The average maturity of the fund's fixed income
investments will affect the volatility of the fund's share
price.
2
<PAGE>
o Credit Risk: The fund is subject to the risk that the issuer
of a fixed income security will not be able to pay principal
and interest when due.
o Liquidity Risk: The fixed income securities purchased by the
fund may be traded in the over-the-counter market rather than
on an organized exchange and are subject to liquidity risk.
This means that they may be harder to purchase or sell at a
fair price. The inability to purchase or sell these fixed
income securities at a fair price could have a negative impact
on the fund's performance.
o Junk Bond Risk:
[arrow] Higher Credit Risk: Junk bonds are subject to a
substantially higher risk that the issuer will
default on payments of principal and interest than
higher rated bonds.
[arrow] Higher Liquidity Risk: During recessions and periods
of broad market declines, junk bonds could become
less liquid, meaning that they will be harder to
value or sell at a fair price.
o Mortgage and Asset-Backed Securities Risk:
[arrow] Maturity Risk: Mortgage-backed and asset-backed
securities do not have a fixed maturity, and their
expected maturities may vary when interest rates rise
or fall.
[arrow] Credit Risk: As with any fixed income security,
mortgage-backed and asset-backed securities are
subject to the risk of default on principal and
interest payments. It may be difficult to enforce
rights against the assets underlying mortgage-backed
and asset-backed securities in the case of default.
o Derivatives Risk: The fund may use derivatives to hedge
against an opposite position that the fund also holds. While
hedging can reduce or eliminate losses, it can also reduce or
eliminate gains. The fund may also use derivatives as an
investment vehicle to gain market exposure. Gains or losses
from derivative investments may be substantially greater than
the derivative's original cost. Derivatives may not be
available to the fund upon acceptable terms. As a result, the
fund may be unable to use derivatives for hedging or other
purposes.
o Foreign Markets Risk: The fund's investment in foreign
securities involves additional risks relating to political and
economic developments abroad. Other risks from these
investments result from the differences between the
regulations to which U.S. and foreign issuers and markets are
subject.
o Currency Risk: The fund's exposure to foreign currencies may
cause the value of the fund to decline in the event that the
U.S. dollar strengthens against these currencies, or in the
event that foreign governments intervene in the currency
markets.
o Non Diversified Status Risk: Because the fund may invest its
assets in a small number of issuers, the fund is more
susceptible to any single economic, political or regulatory
event affecting those issuers than is a diversified fund.
o As with any mutual fund, you could lose money on your
investment in the fund.
An investment in the fund is not a bank deposit and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or
any other government agency.
3
<PAGE>
[arrow] Bar Chart and Performance Table
The bar chart and performance table below are intended to indicate some
of the risks of investing in the fund by showing changes in the fund's
performance over time. The chart and table provide past performance
information. The fund's past performance does not necessarily indicate
how the fund will perform in the future. The performance information in
the chart and table is based upon calendar year periods, while the
performance information presented under the caption "Financial
Highlights" and in the fund's shareholder reports is based upon the
fund's fiscal year. Therefore, these performance results differ.
Bar Chart
The bar chart shows changes in the annual total returns of the fund's
class A shares for each calendar year since class A shares were first
offered. The chart and related notes do not take into account any sales
charges that you may be required to pay upon purchase or redemption of
the fund's shares, but do include the reinvestment of distributions.
Any sales charge will reduce your return. The return of the fund's
other classes of shares will differ from the class A returns shown in
the bar chart, depending upon the expenses of those classes.
[TABULAR REPRESENTATION OF BAR CHART]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
4.13% 1.10% 24.86% 5.27% 13.22% -5.93% 20.28% 9.94% 10.64% __%
</TABLE>
[END OF BAR CHART]
4
<PAGE>
During the period shown in the bar chart, the highest
quarterly return was % (for the calendar quarter ended )
and the lowest quarterly return was % (for the calendar quarter
ended ).
Performance Table
This table shows how the average annual total returns of each class of
the fund compares to various market indicators and assumes the
reinvestment of distributions.
Average Annual Total Returns as of December 31, 1998
.........................................................................
<TABLE>
<CAPTION>
1 Year 5 Year 10 Year
<S> <C> <C> <C>
Class A shares % % %
Class B shares % % %
Class C shares % % %
Credit Suisse First Boston High Yield Index++* % % %
Lehman Brothers Government/Corporate Bond Index+** % % %
Salomon Brothers World Governments Bond Index+*** % % %
</TABLE>
--------
+ Source: CDA/Wiesenberger
++ Source: AIM
* The Credit Suisse First Boston High Yield Index is an unmanaged,
trader-priced portfolio constructed to mirror the high yield debt
market.
** The Lehman Brothers Government/Corporate Bond Index is an unmanaged,
market-value weighted index of all debt obligations of the U.S. Treasury
and U.S. government agencies (excluding mortgage-backed securities) and
of all publicly issued fixed-rate, nonconvertible, investment-grade
domestic corporate debt. It is not possible to invest directly in an
index.
*** The Salomon Brothers World Government Bond Index is unmanaged and
consists of complete universes of government bonds with remaining
maturities of at least five years. It is not possible to invest directly
in an index.
Share performance is calculated according to Securities and Exchange
Commission rules. Class A share performance takes into account the
deduction of the 4.75% maximum sales charge. Class B share performance
takes into account the deduction of the applicable contingent deferred
sales charge (referred to as a CDSC), which declines over six years
from 4% to 0%. Class C share performance takes into account the
deduction of the 1% CDSC.
The fund initially offered class A shares on October 29, 1987, class B
shares on September 7, 1993 and class C shares on September 1, 1994.
Class B and class C share performance include the performance of the
fund's class A shares for periods prior to the offering of class B and
class C shares. Class B and class C share performance generally would
have been lower than class A share performance had class B and class C
shares been offered for the entire period, because certain operating
expenses (e.g., distribution and service fees) attributable to class B
and class C shares are higher than those of class A shares. Class B and
class C share performance has been adjusted to take into account the
CDSC applicable to class B and class C shares, rather than the initial
sales charge applicable to class A shares.
If you would like the fund's current yield, contact the MFS
Service Center at the toll-free number set forth on the back cover
page.
5
<PAGE>
II EXPENSE SUMMARY
[arrow] Expense Table
This table describes the fees and expenses that you may pay when you
buy, redeem and hold shares of the fund.
Shareholder Fees (fees paid directly from your investment):
.......................................................................
<TABLE>
<CAPTION>
Class A Class B Class C
<S> <C> <C> <C>
Maximum Sales Charge (Load) Imposed on
Purchases(as a percentage of offering price) ......... 4.75% 0.00% 0.00%
Maximum Deferred Sales Charge (Load) (as a
percentage of original purchase price or See
redemption proceeds, whichever is less) .............. Below(1) 4.00% 1.00%
</TABLE>
Annual Fund Operating Expenses (expenses that are deducted from fund
assets):
.......................................................................
<TABLE>
<S> <C> <C> <C>
Management Fees ..................................... 1.15% 1.15% 1.15%
Distribution and Service (12b-1) Fees(2) ............ 0.35% 1.00% 1.00%
Other Expenses(3) ................................... 0.35% 0.35% 0.35%
---- ---- ----
Total Annual Fund Operating Expenses ................ 1.84% 2.50% 2.50%
Fee Waiver and/or Expense Reimbursement(4) ......... 1.00% 1.00% 1.00%
---- ---- ----
Net Expenses ....................................... 0.84% 1.50% 1.50%
</TABLE>
--------
(1) An initial sales charge will not be deducted from your purchase if you
buy $1 million or more of class A shares, or if you are investing
through a retirement plan and your class A purchase meets certain
requirements. However, in this case, a contingent deferred sales charge
(referred to as a CDSC) of 1% may be deducted from your redemption
proceeds if you redeem your investment within 12 months.
(2) The fund adopted a distribution plan under Rule 12b-1 that permits it
to pay marketing and other fees to support the sale and distribution of
class A, B and C shares and the services provided to you by your
financial adviser (referred to as distribution and service fees).
(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. The Fund may enter into
other similar arrangements and directed brokerage arrangements, which
would also have the effect of reducing the fund's expenses. "Other
Expenses" do not take into account these expense reductions, and are
therefore higher than the actual expenses of the fund.
(4) MFS has voluntarily waived its right to receive the management fee to
a maximum of 0.50% annually of the average daily net assets of the
Fund. MFS has also agreed to bear all of the fund's expenses, excluding
management fees, distribution and service fees, taxes, extraordinary
expenses, brokerage and transaction costs and class specific expenses.
These arrangements will remain in effect until at least March 1,2000
absent an earlier modification approved by the Board of Trustees which
oversees the Fund.
6
<PAGE>
[arrow] Example of Expenses
These examples are intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds.
The examples assume that:
o You invest $10,000 in the fund for the time periods indicated
and you redeem your shares at the end of the time periods;
o Your investment has a 5% return each year and dividends and
other distributions are reinvested; and
o The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, under these
assumptions your costs would be:
<TABLE>
<CAPTION>
Share Class Year 1 Year 3 Year 5 Year 10
- ----------------------------------------------- -------- -------- -------- ----------
<S> <C> <C> <C> <C>
Class A shares $ 558 $ 733 $ 924 $ 1,474
Class B shares
Assuming redemption at end of period $ 554 $ 777 $1,024 $ 1,622
Assuming no redemption $ 154 $ 477 $ 824 $ 1,622
Class C shares
Assuming redemption at end of period $ 254 $ 477 $ 824 $ 1,802
Assuming no redemption $ 154 $ 477 $ 824 $ 1,802
</TABLE>
7
<PAGE>
III INVESTMENT OBJECTIVE, STRATEGIES AND PRINCIPAL RISKS
[arrow] Investment Objective
The fund's main investment objective is to provide high current income
by investing in fixed income securities. Its secondary objective is to
provide significant capital appreciation. The fund's objective may be
modified without shareholder approval.
[arrow] How the Fund Intends to Achieve its Objective
The fund invests, under normal market conditions, at least 65% of its
total assets in fixed income securities. These securities include:
o U.S. government securities, which are bonds or other debt
obligations issued by, or whose principal and interest
payments are guaranteed by, the U.S. government or one of its
agencies or instrumentalities,
o foreign government securities, which are bond or other debt
obligations issued by foreign governments, including emerging
market governments; these foreign government securities are
either:
[arrow] issued or guaranteed as to payment of principal and
interest by foreign governments, foreign government
agencies, foreign semi-governmental entities, or
supra-national entities,
[arrow] interests issued by entities organized and operated
for the purpose of restructuring the investment
characteristics of foreign government securities, or
[arrow] Brady Bonds, which are long-term bonds issued as part
of a restructuring of commercial loans to emerging
market countries,
o mortgage-backed and asset-backed securities, which represent
interests in a pool of assets such as mortgage loans, car loan
receivables, or credit card receivables, and
o corporate bonds, which are bonds or other debt obligations
issued by domestic or foreign (including emerging market)
corporations or other similar entities; the fund may invest
in:
[arrow] investment grade bonds, which are bonds assigned
higher credit ratings by credit rating agencies or
which are unrated and considered by MFS to be
comparable to higher rated bonds,
[arrow] lower rated bonds, commonly known as junk bonds,
which are bonds assigned low credit ratings by credit
rating agencies or which are unrated and considered
by MFS to be comparable to lower rated bonds, and
[arrow] crossover bonds, which are junk bonds that MFS
expects will appreciate in value due to an
anticipated upgrade in the issuer's credit-rating
(thereby crossing over into investment grade bonds).
8
<PAGE>
The fund allocates its investments across these categories of
fixed income securities with a view toward broad diversification across
these categories and also within these categories. In selecting fixed
income investments for the fund, MFS considers the views of its large
group of fixed income portfolio managers and research analysts. This
group periodically assesses the three-month total return outlook for
various segments of the fixed income markets. This three-month
"horizon" outlook is used by the portfolio manager(s) of MFS' fixed
income oriented funds (including the fund) as a tool in making or
adjusting a fund's asset allocations to various segments of the fixed
income markets. In assessing the credit quality of fixed income
securities, MFS does not rely solely on the credit ratings assigned by
credit rating agencies, but rather performs its own independent credit
analysis.
The fund may have exposure to foreign currencies through its
investments in foreign securities, its direct holdings of foreign
currencies, or through its use of foreign currency exchange contracts
for the purchase or sale of a fixed quantity of a foreign currency at a
future date.
The fund may invest in derivative securities. Derivatives are
securities whose value may be based on other securities, currencies,
interest rates, or indices. Derivatives include:
o futures and forward contracts,
o options on futures contracts, foreign currencies, securities
and bond indices,
o structured notes and indexed securities, and
o swaps, caps, collars and floors.
The fund is a non-diversified mutual fund. This means that the
fund may invest a relatively high percentage of its assets in a small
number of issuers.
The fund may depart from its principal investment strategies
by temporarily investing for defensive purposes when adverse market,
economic or political conditions exist. While the fund invests
defensively, it may not be able to pursue its investment objective. The
fund's defensive investment position may not be effective in protecting
its value.
The fund may engage in active and frequent trading to achieve
its principal investment strategies. This may result in the realization
and distribution to shareholders of higher capital gains as compared to
a fund with less active trading policies, which would increase your tax
liability. Frequent trading also increases transaction costs, which
could detract from the fund's performance.
The fund may invest in various types of securities and engage
in various investment techniques and practices which are not the
principal focus of the fund and therefore are not described in this
Prospectus. The types of securities and investment techniques and
practices in which the fund may engage are identified in Appendix A to
this Prospectus, and are discussed, together with their risks, in the
fund's Statement of Additional Information (referred to as the SAI),
which you may obtain by contacting MFS Service Center, Inc. (see back
cover for address and phone number).
9
<PAGE>
[arrow] Principal Risks
The principal risks of investing in the fund and the circumstances
reasonably likely to cause the value of your investment in the fund to
decline are described below. As with any non-money market mutual fund,
the share price of the fund will change daily based on market
conditions and other factors. Please note that there are many
circumstances which could cause the value of your investment in the
fund to decline, and which could prevent the fund from achieving its
objective, that are not described here.
The principal risks of investing in the fund are:
o Allocation Risk: The fund will allocate its investments among
various segments of the fixed income markets based upon
judgments made by MFS. The fund could miss attractive
investment opportunities by underweighting markets where there
are significant returns, and could lose value by overweighting
markets where there are significant declines.
o Interest Rate Risk: When interest rates rise, the prices of
fixed income securities in the fund's portfolio will generally
fall. Conversely, when interest rates fall, the prices of
fixed income securities in the fund's portfolio will generally
rise.
o Maturity Risk: Interest rate risk will affect the price of a
fixed income security more if the security has a longer
maturity because changes in interest rates are increasingly
difficult to predict over longer periods of time. Fixed income
securities with longer maturities will therefore be more
volatile than other fixed income securities with shorter
maturities. Conversely, fixed income securities with shorter
maturities will be less volatile but generally provide lower
returns than fixed income securities with longer maturities.
The average maturity of the fund's fixed income investments
will affect the volatility of the fund's share price.
o Credit Risk: Credit risk is the risk that the issuer of a
fixed income security will not be able to pay principal and
interest when due. Rating agencies assign credit ratings to
certain fixed income securities to indicate their credit risk.
The price of a fixed income security will generally fall if
the issuer defaults on its obligation to pay principal or
interest, the rating agencies downgrade the issuer's credit
rating or other news affects the market's perception of the
issuer's credit risk.
o Liquidity Risk: The fixed income securities purchased by the
fund may be traded in the over-the-counter market rather than
on an organized exchange and are subject to liquidity risk.
This means that they may be harder to purchase or sell at a
fair price. The inability to purchase or sell these fixed
income securities at a fair price could have a negative impact
on the fund's performance.
o Junk Bond Risk:
[arrow] Higher Credit Risk: Junk bonds (including crossover
bonds) are subject to a substantially higher degree
of credit risk than higher rated bonds. During
recessions, a high percentage of issuers of junk
bonds may default on payments of principal and
interest. The price of a junk bond may therefore
fluctuate drastically due to bad news about the
issuer or the economy in general.
10
<PAGE>
[arrow] Higher Liquidity Risk: During recessions and periods
of broad market declines, junk bonds could become
less liquid, meaning that they will be harder to
value or sell at a fair price.
o Mortgage and Asset-Backed Securities:
[arrow] Maturity Risk:
[dagger] Mortgage-Backed Securities: A
mortgage-backed security will mature when
all the mortgages in the pool mature or are
prepaid. Therefore, mortgage-backed
securities do not have a fixed maturity, and
their expected maturities may vary when
interest rates rise or fall.
* When interest rates fall,
homeowners are more likely to
prepay their mortgage loans. An
increased rate of prepayments on
the fund's mortgage-backed
securities will result in an
unforeseen loss of interest income
to the fund. Because prepayments
increase when interest rates fall,
the price of mortgage-backed
securities does not increase as
much as other fixed income
securities when interest rates
fall.
* When interest rates rise,
homeowners are less likely to
prepay their mortgage loans. A
decreased rate of prepayments
lengthens the expected maturity of
a mortgage-backed security.
Therefore, the prices of
mortgage-backed securities may
decrease more than prices of other
fixed income securities when
interest rates rise.
[dagger] Collateralized Mortgage Obligations: The
fund may invest in mortgage-backed
securities called collateralized mortgage
obligations (CMOs). CMOs are issued in
separate classes with different stated
maturities. As the mortgage pool experiences
prepayments, the pool pays off investors in
classes with shorter maturities first. By
investing in CMOs, the fund may manage the
prepayment risk of mortgage-backed
securities. However, prepayments may cause
the actual maturity of a CMO to be
substantially shorter than its stated
maturity.
[dagger] Asset-Backed Securities: Asset-backed
securities have prepayment risks similar to
mortgage-backed securities.
[arrow] Credit Risk: As with any fixed income security,
mortgage-backed and asset-backed securities are
subject to the risk that the issuer will default on
principal and interest payments. It may be difficult
to enforce rights against the assets underlying
mortgage-backed and asset-backed securities in the
case of default. The U.S. government or its agencies
may guarantee the payment of principal and interest
on some mortgage-backed securities. Mortgage-backed
securities and asset-backed securities issued by
private lending institutions or other financial
intermediaries may be supported by insurance or other
forms of guarantees.
o Derivatives Risk
[arrow] Hedging Risk: When a derivative is used as a hedge
against an opposite position that the fund also
holds, any loss generated by the derivative should be
substan-
11
<PAGE>
tially offset by gains on the hedged investment, and
vice versa. While hedging can reduce or eliminate
losses, it can also reduce or eliminate gains.
[arrow] Correlation Risk: When the fund uses derivatives to
hedge, it takes the risk that changes in the value of
the derivative will not match those of the asset
being hedged. Incomplete correlation can result in
unanticipated losses.
[arrow] Investment Risk: When the fund uses derivatives as an
investment vehicle to gain market exposure, rather
than for hedging purposes, any loss on the derivative
investment will not be offset by gains on another
hedged investment. The fund is therefore directly
exposed to the risks of that derivative. Gains or
losses from derivative investments may be
substantially greater than the derivative's original
cost.
[arrow] Availability Risk: Derivatives may not be available
to the fund upon acceptable terms. As a result, the
fund may be unable to use derivatives for hedging or
other purposes.
[arrow] Credit Risk: When the fund uses derivatives, it is
subject to the risk that the other party to the
agreement will not be able to perform.
o Foreign Securities: Investments in foreign securities involve
risks relating to political, social and economic developments
abroad, as well as risks resulting from the differences
between the regulations to which U.S. and foreign issuers and
markets are subject:
[arrow] These risks may include the seizure by the government
of company assets, excessive taxation, withholding
taxes on dividends and interest, limitations on the
use or transfer of portfolio assets, and political or
social instability.
[arrow] Enforcing legal rights may be difficult, costly and
slow in foreign countries, and there may be special
problems enforcing claims against foreign
governments.
[arrow] Foreign companies may not be subject to accounting
standards or governmental supervision comparable to
U.S. companies, and there may be less public
information about their operations.
[arrow] Foreign markets may be less liquid and more volatile
than U.S. markets.
[arrow] Foreign securities often trade in currencies other
than the U.S. dollar, and the fund may directly hold
foreign currencies and purchase and sell foreign
currencies through forward exchange contracts.
Changes in currency exchange rates will affect the
fund's net asset value, the value of dividends and
interest earned, and gains and losses realized on the
sale of securities. An increase in the strength of
the U.S. dollar relative to these other currencies
may cause the value of the fund to decline. Certain
foreign currencies may be particularly volatile, and
foreign governments may intervene in the currency
markets, causing a decline in value or liquidity in
the fund's foreign currency holdings. By entering
into forward foreign currency exchange contracts, 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 the
purpose of increasing return, the fund may sustain
losses which
12
<PAGE>
will reduce its gross income. Forward foreign
currency exchange contracts involve the risk that the
party with which the fund enters the contract may
fail to perform its obligations to the fund.
o Emerging Markets Risk: Emerging markets are generally defined
as countries in the initial stages of their industrialization
cycles with low per capita income. Investments in emerging
markets securities involve all of the risks of investments in
foreign securities, and also have additional risks:
[arrow] All of the risks of investing in foreign securities
are heightened by investing in emerging markets
countries.
[arrow] The markets of emerging markets countries have been
more volatile than the markets of developed countries
with more mature economies. These markets often have
provided significantly higher or lower rates of
return than developed markets, and significantly
greater risks, to investors.
o Non-Diversified Status Risk: Because the fund may invest a
higher percentage of its assets in a small number of issuers,
the fund is more susceptible to any single economic, political
or regulatory event affecting those issuers than is a
diversified fund.
13
<PAGE>
IV MANAGEMENT OF THE FUND
[arrow] Investment Adviser
Massachusetts Financial Services Company (referred to as MFS or the
adviser) is the fund's investment adviser. 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, Massachusetts Investors Trust. Net assets under the
management of the MFS organization were approximately $ billion on
behalf of approximately million investor accounts as of January 31,
1999. As of such date, the MFS organization managed approximately $
billion of net assets in equity funds and equity portfolios.
Approximately $ billion of the assets managed by MFS are invested in
fixed income funds and fixed income portfolios, and approximately $
billion of the assets are invested in U.S. Government Securities. MFS
is located at 500 Boylston Street, Boston, Massachusetts 02116.
MFS provides overall investment advisory services and facilities to the
fund, for which the fund pays MFS an annual management fee 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. MFS has voluntarily waived
its right to receive a portion of this fee as described under "Expense
Summary."
[arrow] Portfolio Manager
The fund's portfolio manager is James T. Swanson, a Senior Vice
President of MFS and a Vice President of the Trust. Mr. Swanson has
been the portfolio manager of the fund since December, 1991 and has
been employed as a portfolio manager by MFS since 1985.
[arrow] Administrator
MFS provides the fund with certain financial, legal, compliance,
shareholder communications and other administrative services. MFS is
reimbursed by the fund for a portion of the costs it incurs in
providing these services.
[arrow] Distributor
MFS Fund Distributors, Inc. (referred to as MFD), a wholly owned
subsidiary of MFS, is the distributor of shares of the fund.
[arrow] Shareholder Servicing Agent
MFS Service Center, Inc. (referred to as MFSC), a wholly owned
subsidiary of MFS, performs transfer agency and certain other services
for the fund, for which it receives compensation from the fund.
14
<PAGE>
V DESCRIPTION OF SHARE CLASSES
The fund offers class A, B and C shares through this prospectus. The
fund also offers an additional class of shares, class I shares,
exclusively to certain institutional investors. Class I shares are made
available through a separate prospectus supplement provided to
institutional investors eligible to purchase them.
[arrow] Sales Charges
You may be subject to an initial sales charge when you purchase, or a
CDSC when you redeem, class A, B or C shares. These sales charges are
described below. In certain circumstances, these sales charges are
waived. These circumstances are described in the SAI. Special
considerations concerning the calculation of the CDSC that apply to
each of these classes of shares are described below under the heading
"Calculation of CDSC."
If you purchase your fund shares through a financial adviser (such as a
broker or bank), the adviser may receive commissions or other
concessions which are paid from various sources, such as from the sales
charges and distribution and service fees, or from MFS or MFD. These
commissions and concessions are described in the SAI.
[arrow] Class A Shares
You may purchase class A shares at net asset value plus an initial
sales charge (referred to as the offering price), but in some cases you
may purchase class A shares without an initial sales charge but subject
to a 1% CDSC upon redemption within one year. Class A shares have
annual distribution and service fees up to a maximum of 0.35% of net
assets annually.
Purchases Subject to an Initial Sales Charge. The amount of the initial
sales charge you pay when you buy class A shares differs depending upon
the amount you invest, as follows:
<TABLE>
<CAPTION>
Sales Charge* as Percentage of:
-------------------------------
Offering Net Amount
Amount of Purchase Price Invested
<S> <C> <C>
Less than $100,000 4.75% 4.99%
$100,000 but less than $250,000 4.00 4.17
$250,000 but less than $500,000 2.95 3.04
$500,000 but less than $1,000,000 2.20 2.25
$1,000,000 or more None** None**
</TABLE>
--------
* Because of rounding in the calculation of offering price, actual
sales charges you pay may be more or less than those calculated using
these percentages.
** A 1% CDSC will apply to such purchases, as discussed below.
Purchases Subject to a CDSC (but not an initial sales charge). You pay
no initial sales charge when you invest $1 million or more in class A
shares. However, a CDSC of 1% will be deducted from your redemption
proceeds if you redeem within 12 months of
15
<PAGE>
your purchase. This pricing structure also applies to investments in
class A shares by certain retirement plans, as described in Appendix B.
[arrow] Class B Shares
You may purchase class B shares at net asset value without an initial
sales charge, but if you redeem your shares within the first six years
you may be subject to a CDSC (declining from 4.00% during the first
year to 0% after six years). Class B shares have annual distribution
and service fees up to a maximum of 1.00% of net assets annually.
The CDSC is imposed according to the following schedule:
<TABLE>
<CAPTION>
Contingent Deferred
Year of Redemption After Purchase Sales Charge
- ----------------------------------- --------------------
<S> <C>
First 4%
Second 4%
Third 3%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh and following 0%
</TABLE>
If you hold class B shares for approximately eight years, they will
convert to class A shares of the fund. All class B shares you purchased
through the reinvestment of dividends and distributions will be held in
a separate sub-account. Each time any class B shares in your account
convert to class A shares, a proportionate number of the class B shares
in the sub-account will also convert to class A shares.
[arrow] Class C Shares
You may purchase class C shares at net asset value without an initial
sales charge, but if you redeem your shares within the first year you
may be subject to a CDSC of 1.00%. Class C shares have annual
distribution and service fees up to a maximum of 1.00% of net assets
annually. Class C shares do not convert to any other class of shares of
the fund.
[arrow] Calculation of CDSC
As discussed above, certain investments in class A, B and C shares will
be subject to a CDSC. Three different aging schedules apply to the
calculation of the CDSC:
o Purchases of class A shares made on any day during a calendar
month will age one month on the last day of the month, and
each subsequent month.
o Purchases of class C shares, and purchases of class B shares
on or after January 1, 1993, made on any day during a calendar
month will age one year at the close of business on the last
day of that month in the following calendar year, and each
subsequent year.
16
<PAGE>
o Purchases of class B shares prior to January 1, 1993 made on
any day during a calendar year will age one year at the close
of business on December 31 of that year, and each subsequent
year.
No CDSC is assessed on the value of your account represented by
appreciation or additional shares acquired through the automatic
reinvestment of dividends or capital gain distributions. Therefore,
when you redeem your shares, only the value of the shares in excess of
these amounts (i.e., your direct investment) is subject to a CDSC.
The CDSC will be applied in a manner that results in the CDSC being
imposed at the lowest possible rate, which means that the CDSC will be
applied against the lesser of your direct investment or the total cost
of your shares. The applicability of a CDSC will not be affected by
exchanges or transfers of registration, except as described in the SAI.
[arrow] Distribution and Service Fees
The fund has adopted a plan under Rule 12b-1 that permits it to pay
marketing and other fees to support the sale and distribution of class
A, B and C shares and the services provided to you by your financial
adviser. These annual distribution and service fees may equal up to
0.35% for class A shares and 1.00% for each of class B and class C
shares, and are paid out of the assets of these classes. The 0.25% per
annum service fee is reduced to 0.15% per annum for shares purchased
prior to May 14, 1991. Over time, these fees will increase the cost of
your shares and may cost you more than paying other types of sales
charges.
17
<PAGE>
VI HOW TO PURCHASE, EXCHANGE AND REDEEM SHARES
You may purchase, exchange and redeem class A, B and C shares of the
fund in the manner described below. In addition, you may be eligible to
participate in certain investor services and programs to purchase,
exchange and redeem these classes of shares, which are described in the
next section under the caption "Investor Services and Programs."
[arrow] How to Purchase Shares
Initial Purchase. You can establish an account by having your financial
adviser process your purchase. The minimum initial investment is
$1,000. However, in the following circumstances the minimum initial
investment is only $50 per account:
o if you establish an automatic investment plan;
o if you establish an automatic exchange plan; or
o if you establish an account under either:
[arrow] tax-deferred retirement programs (other than IRAs)
where investments are made by means of group remittal
statements; or
[arrow] employer sponsored investment programs.
The minimum initial investment for IRAs is $250 per account. The
maximum investment in class C shares is $1,000,000 per transaction.
Class C shares are not available for purchase by any retirement plan
qualified under Section 401(a) or 403(b) of the Internal Revenue Code
if the plan or its sponsor subscribes to certain recordkeeping services
made available by MFSC, such as the MFS Fundamental 401(k) Plan.
Adding to Your Account. There are several easy ways you can make
additional investments of at least $50 to your account:
o send a check with the returnable portion of your statement;
o ask your financial adviser to purchase shares on your behalf;
o wire additional investments through your bank (call MFSC first
for instructions); or
o authorize transfers by phone between your bank account and
your MFS account (the maximum purchase amount for this method
is $100,000). You must elect this privilege on your account
application if you wish to use it.
[arrow] How to Exchange Shares
You can exchange your shares for shares of the same class of certain
other MFS funds at net asset value by having your financial adviser
process your exchange request or by contacting MFSC directly. The
minimum exchange amount is generally $1,000 ($50 for exchanges made
under the automatic exchange plan). Shares otherwise subject to a CDSC
will not be charged a CDSC in an exchange. However, when you redeem the
shares acquired
18
<PAGE>
through the exchange, the shares you redeem may be subject to a CDSC,
depending upon when you originally purchased the shares you exchanged.
For purposes of computing the CDSC, the length of time you have owned
your shares will be measured from the date of original purchase and
will not be affected by any exchange.
Sales charges may apply to exchanges made from the MFS money
market funds. Certain qualified retirement plans may make exchanges
between the MFS funds and the MFS Fixed Fund, a bank collective
investment fund, and sales charges may also apply to these exchanges.
Call MFSC for information concerning these sales charges.
Exchanges are subject to the MFS funds' market timing
policies, which are policies designed to protect the funds and their
shareholders from the effect of frequent exchanges. These market timing
policies are described below under the caption "Market Timing
Policies." You should read the prospectus of the MFS fund into which
you are exchanging and consider the differences in objectives, policies
and rules before making any exchange.
[arrow] How to Redeem Shares
You may redeem your shares either having your financial adviser process
your redemption or by contacting MFSC directly. The fund sends out your
redemption proceeds within seven days after your request is received in
good order. "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.
In addition, you need to have your signature guaranteed and/or submit
additional documentation to redeem your shares. See "Signature
Guarantee/Additional Documentation" below, or contact MFSC for details
(see back cover page for address and phone number).
Under unusual circumstances such as when the New York Stock
Exchange is closed, trading on the Exchange is restricted or if there
is an emergency, the fund may suspend redemptions or postpone payment.
If you purchased the shares you are redeeming by check, the fund may
delay the payment of the redemption proceeds for up to 15 days from the
purchase date to assure that the check has cleared.
Redeeming directly through MFSC
o By telephone. You can call MFSC to have shares redeemed from
your account and the proceeds wired or mailed (depending on
the amount redeemed) directly to a pre-designated bank
account. MFSC will request personal or other information from
you and will generally record the calls. MFSC will be
responsible for losses that result from unauthorized telephone
transactions if it does not follow reasonable procedures
designed to verify your identity. You must elect this
privilege on your account application if you wish to use it.
o By mail. To redeem shares by mail, you can send a letter to
MFSC with the name of your fund, your account number, and the
number of shares or dollar amount to be sold.
Redeeming through your financial adviser. You can call your financial
adviser to process a redemption on your behalf. Your financial adviser
will be responsible for furnishing all necessary documents to MFSC and
may charge you for this service.
19
<PAGE>
Signature guarantee/Additional documentation. In order to protect
against fraud, the fund requires that your signature be guaranteed in
order to redeem your shares. Your signature may be guaranteed by an
eligible bank, broker, dealer, credit union, national securities
exchange, registered securities association, clearing agency, or
savings association. MFSC may require additional documentation for
certain types of registrations and transactions. Signature guarantees
and this additional documentation shall be accepted in accordance with
policies established by MFSC, and MFSC may make certain deminimis
exceptions to these requirements.
[arrow] Other Considerations
Right to Reject Purchase and Exchange Orders. Purchases and exchanges
should be made for investment purposes only. The MFS funds each reserve
the right to reject or restrict any specific purchase or exchange
request. Because an exchange request involves both a request to redeem
shares of one fund and to purchase shares of another fund, the MFS
Funds consider the underlying redemption and purchase requests
conditioned upon the acceptance of each of these underlying requests.
Therefore, in the event that the MFS Funds reject an exchange request,
neither the redemption nor the purchase side of the exchange will be
processed.
Market Timing Policies. The MFS Funds are not designed for professional
market timing organizations or other entities using programmed or
frequent exchanges. The MFS Funds define a "market timer" as an
individual, or organization acting on behalf of one or more
individuals, if:
o the individual or organization makes during the calendar year
either (i) six or more exchange requests among the MFS Funds
or (ii) three or more exchange requests out of any of the MFS
high yield bond funds or MFS municipal bond funds; and
o any one of such exchange requests represents shares equal in
value to $1 million or more.
Accounts under common ownership or control, including accounts
administered by market timers, will be aggregated for purposes of this
definition.
The MFS Funds may impose specific limitations on market timers,
including:
o delaying for up to seven days the purchase side of an exchange
request by market timers;
o rejecting or otherwise restricting purchase or exchange
requests by market timers; and
o permitting exchanges by market timers only into certain MFS
Funds.
Reinstatement privilege. After you have redeemed shares, you have a
one-time right to reinvest the proceeds within 90 days of the
redemption at the current net asset value (without an initial sales
charge). If the redemption involved a CDSC, your account will be
credited with the appropriate amount of the CDSC paid; however, your
new shares will be subject to a CDSC which will be determined from the
date you originally purchased the shares redeemed. This privilege
applies to shares of the MFS money market funds only under certain
circumstances.
20
<PAGE>
In-kind distributions. The MFS funds have reserved the right to pay
redemption proceeds by a distribution in-kind of portfolio securities
(rather than cash). In the event that the fund makes an in-kind
distribution, you could incur the brokerage and transaction charges
when converting the securities to cash. The fund does not expect to
make in-kind distributions, and if it does, the fund will pay, during
any 90-day period, your redemption proceeds in cash up to either
$250,000 or 1% of the fund's net assets, whichever is less.
Involuntary Redemptions/Small Accounts. Because it is costly to
maintain small accounts, the MFS funds have generally reserved the
right to automatically redeem shares and close your account when it
contains less than $500 due to your redemptions or exchanges. Before
making this automatic redemption, you will be notified and given 60
days to make additional investments to avoid having your shares
redeemed.
21
<PAGE>
VII INVESTOR SERVICES AND PROGRAMS
As a shareholder of the fund, you have available to you a number of
services and investment programs. Some of these services and programs
may not be available to you if your shares are held in the name of your
financial adviser or if your investment in the fund is made through a
retirement plan.
[arrow] Distribution Options
The following distribution options are generally available to all
accounts and you may change your distribution option as often as you
desire by notifying MFSC:
o Dividends and capital gain distributions reinvested in
additional shares (this option will be assigned if no other
option is specified);
o Dividends in cash; capital gain distributions reinvested in
additional shares; or
o 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 as of 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 you have elected to
receive dividends and/or capital gain distributions in cash, and the
postal or other delivery service is unable to deliver checks to your
address of record, or you do not respond to mailings from MFSC with
regard to uncashed distribution checks, your distribution option will
automatically be converted to having all dividends and other
distributions reinvested in additional shares. Your request to change a
distribution option must be received by MFSC 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.
[arrow] Purchase and Redemption Programs
For your convenience, the following purchase and redemption programs
are made available to you with respect to class A, B and C shares,
without extra charge:
Automatic Investment Plan. You can make cash investments of $50 or more
through your checking account or savings account on any day of the
month. If you do not specify a date, the investment will automatically
occur on the first business day of the month.
Automatic Exchange Plan. If you have an account balance of at least
$5,000 in any MFS fund, you may participate in the automatic exchange
plan, a dollar-cost averaging program. This plan permits you to make
automatic monthly or quarterly exchanges from your account in an MFS
fund for shares of the same class of shares of other MFS funds. You may
make exchanges of at least $50 to up to six different funds under this
plan. Exchanges will generally be made at net asset value without any
sales charges. If you exchange shares out of the MFS Money Market Fund
or MFS Government Money Market Fund, or if you exchange
22
<PAGE>
class A shares out of the MFS Cash Reserve Fund, into class A shares of
any other MFS fund, you will pay the initial sales charge if you have
not already paid this charge on these shares.
Reinvest without a sales charge. You can reinvest dividend and capital
gain distributions into your account without a sales charge to add to
your investment easily and automatically.
Distribution Investment Program. You may purchase shares of any MFS
fund without paying an initial sales charge or a CDSC upon redemption
by automatically reinvesting a minimum of $50 of dividend and capital
gain distributions from the same class of another MFS fund.
Letter of Intent (LOI). If you intend to invest $50,000 or more in the
MFS funds (including the MFS Fixed Fund) within 13 months, you may buy
class A shares of the funds at the reduced sales charge as though the
total amount were invested in class A shares in one lump sum. If you
intend to invest $1 million or more under this program, the time period
is extended to 36 months. If the intended purchases are not completed
within the time period, shares will automatically be redeemed from a
special escrow account established with a portion of your investment at
the time of purchase to cover the higher sales charge you would have
paid had you not purchased your shares through this program.
Right of Accumulation. You will qualify for a lower sales charge on
your purchases of class A shares when your new investment in class A
shares, together with the current (offering price) value of all your
holdings in the MFS funds (including the MFS Fixed Fund), reaches a
reduced sales charge level.
Systematic Withdrawal Plan. You may elect to automatically receive (or
designate someone else to receive) regular periodic payments of at
least $100. Each payment under this systematic withdrawal is funded
through the redemption of your fund shares. For class B and C shares,
you can receive up to 10% (15% for certain IRA distributions) of the
value of your account through these payments in any one year (measured
at the time you establish this plan). You will incur no CDSC on class B
and C shares redeemed under this plan. For class A shares, there is no
similar percentage limitation; however, you may incur the CDSC (if
applicable) when class A shares are redeemed under this plan.
Free Checkwriting. You may redeem your class A or class C shares by
writing checks against your account. Checks must be for at least $500
and investments made by check must have been in your account for at
least 15 days before you can write checks against them. There is no
charge for this service. To authorize your account for checkwriting,
contact MFSC (see back cover page for address and phone number).
Shares in your account equal in value to the amount of the check plus
the applicable CDSC (if any) and any income tax required to be withheld
(if any) are redeemed to cover the amount of the check. If your account
value is not great enough to cover these amounts, your check will be
dishonored.
23
<PAGE>
VIII OTHER INFORMATION
[arrow] Pricing of Fund Shares
The price of each class of the fund's shares is based on its net asset
value. The net asset value of each class of shares is determined at the
close of regular trading each day that the New York Stock Exchange is
open for trading (generally, 4:00 p.m., Eastern time) (referred to as
the valuation time). To determine net asset value, the fund values its
assets at current market values, or at fair value as determined by the
Adviser under the direction of the Board of Trustees that oversees the
fund if current market values are unavailable. Fair value pricing may
be used by the fund when current market values are unavailable or when
an event occurs after the close of the exchange on which the fund's
portfolio securities are principally traded that is likely to have
changed the value of the securities. The use of fair value pricing by
the fund may cause the net asset value of its shares to differ
significantly from the net asset value that would be calculated using
current market values.
You will receive the net asset value next calculated, after
the deduction of applicable sales charges and any required tax
withholding, if your order is complete (has all required information)
and MFSC receives your order by:
o the valuation time, if placed directly by you (not through a
financial adviser such as a broker or bank) to MFSC; or
o MFSC's close of business, if placed through a financial
adviser, so long as the financial adviser (or its authorized
designee) received your order by the valuation time.
The fund invests in certain securities which are primarily listed on
foreign exchanges that trade on weekends and other days when the fund
does not price its shares. Therefore, the value of the fund's shares
may change on days when you will not be able to purchase or redeem the
fund's shares.
[arrow] Distributions
The fund intends to pay substantially all of its net income (including
net short-term capital gain) to shareholders as dividends on a monthly
basis. Any realized net capital gains are also distributed at least
annually.
[arrow] Tax Considerations
The following discussion is very general and therefore prospective
investors are urged to consult their own tax advisors regarding the
effect that an investment in the fund may have on their own tax
situation.
Taxability of distributions. As long as the fund qualifies for
treatment as a regulated investment company (which it has in the past
and intends to do in the future), it pays no federal income tax on the
earnings it distributes to shareholders.
24
<PAGE>
You will normally have to pay federal income taxes, and any state or
local taxes, on the distributions you receive from the Fund, whether
you take the distributions in cash or reinvest them in additional
shares. Distributions designated as capital gain dividends are taxable
as long-term capital gains. Other distributions are generally taxable
as ordinary income. Some dividends paid in January may be taxable as if
they had been paid the previous December.
The Form 1099 that is mailed to you every January details your
distributions and how they are treated for federal tax purposes.
Fund distributions will reduce the fund's net asset value per share.
Therefore, if you buy shares shortly before the record date of a
distribution, you may pay the full price for the shares and then
effectively receive a portion of the purchase price back as a taxable
distribution.
If you are neither a citizen nor a resident of the U.S., the fund will
withhold U.S. federal income tax at the rate of 30% on taxable
dividends and other payments that are subject to such withholding. You
may be able to arrange for a lower withholding rate under an applicable
tax treaty if you supply the appropriate documentation required by the
Fund. The fund is also required in certain circumstances to apply
backup withholding at the rate of 31% on taxable dividends and
redemption proceeds paid to any shareholder (including a shareholder
who is neither a citizen nor a resident of the U.S.) who does not
furnish to the fund certain information and certifications or who is
otherwise subject to backup withholding. Backup withholding will not,
however, be applied to payments that have been subject to 30%
withholding. Prospective investors should read the fund's Account
Application for additional information regarding backup withholding of
federal income tax.
Taxability of transactions. When you redeem, sell or exchange shares,
it is generally considered a taxable event for you. Depending on the
purchase price and the sale price of the shares you redeem, sell or
exchange, you may have a gain or a loss on the transaction. You are
responsible for any tax liabilities generated by your transaction.
[arrow] Unique Nature of Fund
MFS may serve as the investment adviser to other funds which have
similar investment goals and principal investment policies and risks to
the fund, and which may be managed by the fund's portfolio manager(s).
While the fund may have many similarities to these other funds, its
investment performance will differ from their investment performance.
This is due to a number of differences between the funds, including
differences in sales charges, expense ratios and cash flows.
[arrow] Year 2000 Issues
The fund could be adversely affected if the computer systems used by
MFS, the fund's other service providers or the companies in which the
fund invests do not properly process date-related information from and
after January 1, 2000 (the "Year 2000 Issue"). MFS recognizes the
importance of the Year 2000 Issue and, to address Year 2000 compliance,
created a Year 2000 Program Management Office in 1996, which is
separately funded, has a spe-
25
<PAGE>
cialized staff and reports directly to MFS Senior Management. The
Office, with the help of external consultants, is responsible for
ascertaining that all internal systems, data feeds and third party
applications are Year 2000 compliant. While MFS is confident that all
MFS systems will be Year 2000 compliant before the turn of the century,
there are significant systems interdependencies in the domestic and
foreign markets for securities, the business environments in which
companies held by the fund operate and in MFS' own business
environment. MFS has been actively working with the fund's other
service providers to identify and respond to potential problems in an
effort to ensure Year 2000 compliance or develop contingency plans.
Year 2000 compliance is also one of the factors considered by MFS in
its ongoing assessment of companies in which the fund invests. There
can be no assurance, however, that these steps will be sufficient to
avoid any adverse impact on the fund.
[arrow] Provision of Annual and Semiannual Reports
To avoid sending duplicate copies of materials to households, only one
copy of the fund's annual and semiannual report will be mailed to
shareholders having the same residential address on the fund's records.
However, any shareholder may contact MFSC (see back cover for address
and phone number) to request that copies of these reports be sent
personally to that shareholder.
26
<PAGE>
IX FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the
fund's financial performance for the past 5 years. Certain information
reflects financial results for a single fund share. The total returns
in the table represent the rate by which an investor would have earned
(or lost) on an investment in the fund (assuming reinvestment of all
distributions). This information has been audited by the fund's
independent auditors, whose report, together with the fund's financial
statements, are included in the fund's Annual Report to shareholders.
These financial statements are incorporated by reference into the SAI.
The fund's independent auditors are Ernst & Young LLP.
Class A Shares
............................................................................
<TABLE>
<CAPTION>
Year Ended October 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Per share data (for a share
outstanding throughout each
period):
Net asset value -- beginning of
period .................................. $ 8.24 $ 8.19 $ 8.07 $ 7.57 $ 8.34
------- ------- ------- ------- -------
Income from investment operations#
--
Net investment income[sec] .............. $ 0.66 $ 0.69 $ 0.62 $ 0.60 $ 0.48
Net realized and unrealized gain
(loss) on investments and
foreign currency transactions ......... (0.81) 0.13 0.18 0.48 (0.74)
------- ------- ------- ------- -------
Total from investment
operations ........................... $ (0.15) $ 0.82 $ 0.80 $ 1.08 $ (0.26)
------- ------- ------- ------- -------
Less distributions declared to
shareholders --
From net investment income .............. $ (0.63) $ (0.69) $ (0.60) $ (0.58) $ --
From net realized gain on
investments and foreign
currency transactions ................. (0.13) (0.08) (0.08) -- --
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)
------- ------- ------- ------- -------
Total distributions declared to
shareholders ......................... $ (0.76) $ (0.77) $ (0.68) $ (0.58) $ (0.51)
------- ------- ------- ------- -------
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Year Ended October 31,
------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Net asset value -- end of period ..................... $ 7.33 $ 8.24 $ 8.19 $ 8.07 $ 7.57
------- ------- ------- ------- -------
Total return+ ........................................ (2.21)% 10.40% 10.42% 15.00% (3.15)%
Ratios (to average net assets)/
Supplemental data[sec]:
Expenses## .......................................... 0.85% 0.79% 1.13% 1.54% 1.71%
Net investment income .............................. 8.26% 8.26% 7.63% 7.86% 6.11%
Portfolio Turnover ................................... 299% 217% 287% 249% 153%
Net Assets at end of period
(000 omitted) ....................................... $95,292 $69,874 $49,432 $41,688 $44,032
</TABLE>
--------
# Per share data for the periods subsequent to October 31, 1993, are
based on average shares outstanding.
## For fiscal years ending after September 1, 1995, 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. The Fund's expenses are calculated without
reduction for this expense offset arrangement.
+ 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.
[sec]The investment adviser and/or the distributor voluntarily waived a
portion of their management and/or other fees and/or distribution fee,
respectively, for certain of the periods indicated. If the fee had been
incurred by the fund, the net investment income per share and ratios
would have been:
<TABLE>
<S> <C> <C> <C> <C> <C>
Net investment income ........... $ 0.58 $ 0.58 $ 0.54 $ 0.53 $ 0.44
Ratios (to average net assets):
Expenses## .................... 1.84% 2.01% 2.06% 2.47% 2.21%
Net investment income ......... 7.24% 7.04% 6.70% 6.89% 5.62%
</TABLE>
28
<PAGE>
Class B Shares
............................................................................
<TABLE>
<CAPTION>
Year Ended October 31,
------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share
outstanding throughout each
period):
Net asset value -- beginning of period ............. $ 8.18 $ 8.14 $ 8.03 $ 7.53 $ 8.33
------- ------ ------ ------ -------
Income from investment operations# --
Net investment income[sec] ........................ $ 0.61 $ 0.61 $ 0.56 $ 0.55 $ 0.45
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions .................................... (0.81) 0.15 0.18 0.48 (0.78)
------- ------ ------ ------ -------
Total from investment operations ................ $ (0.20) $ 0.76 $ 0.74 $ 1.03 $ (0.33)
------ ------ ------ -------
Less distributions declared to
shareholders --
From net investment income ........................ $ (0.58) $(0.64) $(0.55) $(0.53) $ --
From net realized gain on investments
and foreign currency transactions ............... (0.13) (0.08) (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)
Total distributions declared to
shareholders ................................... $ (0.71) $(0.72) $ (0.63) $ (0.53) $ (0.47)
------- ------- ------- ------- -------
Net asset value -- end of period ................... $ 7.27 $ 8.18 $ 8.14 $ 8.03 $ 7.53
------- ------- ------- ------- -------
Total return+ ...................................... (2.84)% 9.64% 9.68% 14.23% (3.97)%
Ratios (to average net assets)/
Supplemental Data[sec]:
Expenses## ........................................ 1.51% 1.44% 1.80% 2.27% 2.43%
Net investment income ............................. 7.64% 7.51% 7.02% 7.15% 5.97%
Portfolio turnover ................................. 299% 217% 287% 249% 153%
Net assets at end of period
(000 omitted) ..................................... $133,872 $71,459 $25,361 $ 8,365 $ 5,350
</TABLE>
--------
# Per share data are based on average shares outstanding.
## For fiscal years ending after September 1, 1995, 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. The fund's expenses are calculated without
reduction for this expenses offset arrangement.
[sec]The investment adviser and/or the distributor voluntarily waived a
portion of their management and/or other fees and/or distribution fee,
respectively, for certain of the periods indicated. If the fee had been
incurred by the fund, the net investment income per share and the ratios
would have been:
<TABLE>
<S> <C> <C> <C> <C> <C>
Net investment income ........... $ 0.53 $ 0.50 $ 0.49 $ 0.48 $ 0.41
Ratios (to average net assets):
Expenses## .................... 2.50% 2.66% 2.73% 3.20% 2.92%
Net investment income ......... 6.62% 6.29% 6.09% 6.18% 5.48%
</TABLE>
29
<PAGE>
Class C Shares
............................................................................
<TABLE>
<CAPTION>
Year Ended October 31,
1998 1997 1996 1995 1994***
------------ ---------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share
outstanding throughout each
period):
Net asset value -- beginning of period ............. $ 8.16 $ 8.12 $ 8.00 $ 7.53 $ 7.53
------- ------ ------ ------ --------
Income from investment operations# --
Net investment income[sec] ........................ $ 0.61 $ 0.60 $ 0.57 $ 0.54 $ 0.12
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions .................................... (0.81) 0.16 0.18 0.48 (0.03)
------- ------ ------ ------ --------
Total from investment operations ................ $ (0.20) $ 0.76 $ 0.75 $ 1.02 $ 0.09
------- ------ ------ ------ --------
Less distributions declared to shareholders --
From net investment income ........................ $ (0.58) $(0.64) $(0.55) $(0.55) $ --
From net realized gain on investments
and foreign currency transactions ............... (0.13) (0.08) (0.08) -- --
From paid-in capital .............................. -- -- -- -- (0.09)
------- ------- ------- ------- --------
Total distributions declared to
shareholders ................................... $ (0.71) $(0.72) $(0.63) $(0.55) $ (0.09)
------- ------- ------- ------- --------
Net asset value -- end of period ................... $ 7.25 $ 8.16 $ 8.12 $ 8.00 $ 7.53
------- ------- ------- --------
Total return ....................................... (2.84)% 9.68% 9.80% 14.17% 1.23%++
Ratios (to average net assets/
Supplemental Data[sec]:
Expenses## ........................................ 1.51% 1.44% 1.71% 2.20% 2.16%+
Net investment income ............................. 7.65% 7.44% 7.12% 7.23% 8.99%+
Portfolio Turnover ................................. 299% 217% 287% 249% 153%
Net assets at end of period
(000 omitted) ..................................... $42,213 $20,464 $5,478 $1,060 $ 13
</TABLE>
--------
+ Annualized.
++ Not annualized.
*** For the period from the inception of class C shares, September 1,
1994, through October 31, 1994.
# Per share data are based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the fund has an
expense offset arrangement which reduced the fund's custodian fee based
upon the amount of cash maintained by the fund with its custodian and
dividend disbursing agent. The fund's expenses are calculated without
reduction for this expense offset arrangement.
[sec]The investment adviser and/or the distributor voluntarily waived a
portion of their management and/or other fees and/or distribution fee,
respectively, for certain of the periods indicated. If the fee had been
incurred by the fund, the net investment income per share and the ratios
would have been:
<TABLE>
<S> <C> <C> <C> <C> <C>
Net investment income ........... $ 0.53 $ 0.50 $ 0.51 $ 0.46 $ 0.11
Ratios (to average net assets):
Expenses## .................... 2.50% 2.66% 2.64% 3.13% 2.65%+
Net investment income ......... 6.63% 6.21% 6.19% 6.26% 8.50%+
</TABLE>
30
<PAGE>
A p p e n d i x A
[arrow] Investment Techniques and Practices
In pursuing its investment objective, the fund may engage in the
following investment tech-niques and practices, which are described,
together with their risks, in the SAI.
Investment Techniques/Practices
............................................................................
<TABLE>
<S> <C>
Symbols [check] permitted -- not permitted
- ----------------------------------------------------------------
Debt Securities
Asset-Backed Securities
Collateralized Mortgage Obligations and Multiclass
Pass-Through Securities [check]
Corporate Asset-Backed Securities [check]
Mortgage Pass-Through Securities [check]
Stripped Mortgage-Backed Securities [check]
Corporate Securities [check]
Loans and Other Direct Indebtedness [check]
Lower Rated Bonds [check]
Municipal Bonds [check]
Speculative Bonds [check]
U.S. Government Securities [check]
Variable and Floating Rate Obligations [check]
Zero Coupon Bonds, Deferred Interest Bonds and PIK Bonds [check]
Equity Securities [check]
Foreign Securities Exposure
Brady Bonds [check]
Depositary Receipts --
Dollar-Denominated Foreign Debt Securities [check]
Emerging Markets [check]
Foreign Securities [check]
Forward Contracts [check]
Futures Contracts [check]
Indexed Securities [check]
Inverse Floating Rate Obligations [check]
Investment in Other Investment Companies [check]
</TABLE>
A-1
<PAGE>
Investment Techniques/Practices (continued)
............................................................................
<TABLE>
<S> <C>
Symbols [check] permitted -- not permitted
- ----------------------------------------------------------
Lending of Portfolio Securities [check]
Leveraging Transactions
Bank Borrowings --
Mortgage "Dollar-Roll" Transactions [check]
Reverse Repurchase Agreements --
Options
Options on Foreign Currencies [check]
Options on Futures Contracts [check]
Options on Securities [check]
Options on Stock Indices [check]
Reset Options [check]
"Yield Curve" Options [check]
Repurchase Agreements [check]
Restricted Securities [check]
Short Sales --
Short Sales Against the Box --
Short Term Instruments [check]
Swaps and Related Derivative Instruments [check]
Temporary Borrowings [check]
Temporary Defensive Positions [check]
Warrants [check]
"When-issued" Securities [check]
</TABLE>
A-2
<PAGE>
A p p e n d i x B
[arrow] Sales Charge Categories Available to Certain Retirement Plans
Purchases made under the following four categories are not subject to
an initial sales charge. However, a CDSC of 1% will be deducted from
redemption proceeds if the redemption is made within 12 months of
purchase. The CDSC is based on the value of the shares redeemed
(excluding reinvested dividend and capital gain distributions) or the
total cost of the shares, whichever is less.
o Investments in class A shares by certain retirement plans
subject to the Employee Retirement Income Security Act of
1974, as amended (referred to as ERISA), if, prior to July 1,
1996
[arrow] the plan had established an account with MFSC; and
[arrow] the sponsoring organization had demonstrated to the
satisfaction of MFD that either;
+ the employer had at least 25 employees; or
+ the total purchases by the retirement plan
of class A shares of the MFS Family of Funds
(the MFS Funds) would be in the amount of at
least $250,000 within a reasonable period of
time, as determined by MFD in its sole
discretion.
o Investments in class A shares by certain retirement plans
subject to ERISA, if
[arrow] the retirement plan and/or sponsoring organization
participates in the MFS Fundamental 401(k) Program or
any similar recordkeeping system made available by
MFSC (referred to as the MFS participant
recordkeeping system);
[arrow] the plan establishes an account with MFSC on or after
July 1, 1996;
[arrow] the total purchases by the retirement plan of class A
shares of the MFS Funds will be in the amount of at
least $500,000 within a reasonable period of time, as
determined by MFD in its sole discretion; and
[arrow] the plan has not redeemed its class B shares in the
MFS funds in order to purchase class A shares under
this category.
o Investments in class A shares by certain retirement plans
subject to ERISA, if
[arrow] the plan establishes an account with MFSC on or after
July 1, 1996; and
[arrow] 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 MFSC prior to the purchases that the plan has
a market value of $500,000 or more invested in shares
of any class or
B-1
<PAGE>
classes of the MFS Funds; MFSC has no obligation
independently to determine whether such a plan
qualifies under this category; and
o Investments in class A shares by certain retirement plans
subject to ERISA, if
[arrow] the plan establishes an account with MFSC on or after
July 1, 1997;
[arrow] the plan's records are maintained on a pooled basis
by MFSC; and
[arrow] the sponsoring organization demonstrates to the
satisfaction of MFD that, at the time of purchase,
the employer has at least 200 eligible employees and
the plan has aggregate assets of at least $2,000,000.
B-2
<PAGE>
MFS[RegTM] STRATEGIC INCOME FUND
If you want more information about the fund, the following documents
are available free upon request:
Annual/Semiannual Reports. These reports contain information about the
fund's actual investments. Annual reports discuss the effect of recent
market conditions and the fund's investment strategy on the fund's
performance during its last fiscal year.
Statement of Additional Information (SAI). The SAI, dated March 1,
1999, provides more detailed information about the fund and is
incorporated into this prospectus by reference.
You can get free copies of the annual/semiannual reports, the SAI and
other information about the fund, and make inquiries about the fund, by
contacting:
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116-3741
Telephone: 1-800-225-2606
Internet: http://www.mfs.com
Information about the fund (including its prospectus, SAI and
shareholder reports) can be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C. 20549-6009
Information on the operation of the Public Reference Room may be
obtained by calling the Commission at 1-800-SEC-0330. Reports and other
information about the fund are available on the Commission's Internet
website at http://www.sec.gov, and copies of this information may be
obtained, upon payment of a duplicating fee, by writing the Public
Reference Section at the above address.
The fund's Investment Company Act file number is 811-5262
MSG 11/98 224M 90/290/390/890
<PAGE>
MFS(R) GLOBAL GROWTH FUND
Supplement dated March 1, 1999 to the Current Prospectus
This Supplement describes the fund's class I shares, and it supplements certain
information in the fund's Prospectus dated March 1, 1999. The caption headings
used in this Supplement correspond with the caption headings used in the
Prospectus.
You may purchase class I shares only if you are an eligible institutional
investor, as described under the caption "Description of Share Classes" below.
1. RISK RETURN SUMMARY
Performance Table. The "Performance Table" is supplemented as follows:
Average Annual Total Returns as of December 31, 1998
<TABLE>
<CAPTION>
1 Year 5 Year Life*
<S> <C> <C> <C>
Class I shares % % %
Morgan Stanley Capital International (MSCI) World Index+** % % %
Russel 2000 Total Return Index++*** % % %
</TABLE>
- -----------------------------
+ Source: Lipper Analytical Services, Inc.
++ Source: CDA/Wisenberger.
* For the period from the commencement of the Fund's investment operations
on November 18, 1993 through December 31, 1998. Index results are from
December 31, 1993.
** The Morgan Stanley Capital International (MSCI) World Index is an
unmanaged market-capitalization-weighted total return index which measures
the performance of 23 developed-country global stock markets, including
the United States, Canada, Europe, Australia, New Zealand, and the Far
East. It is not possible to invest in an index. Complete list: Australia,
Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong,
Ireland, Italy, Japan, Malaysia, Netherlands, New Zealand, Norway,
Singapore, South African gold mines, Spain, Sweden, Switzerland, United
Kingdom, United States. It is not possible to invest directly in an index.
*** The Russell 2000 Total Return Index is an unmanaged index comprised of
2,000 of the smallest U.S.-domiciled company common stocks (on the basis
of capitalization) that are traded in the United States on the NYSE, AMEX,
and NASDAQ. It is not possible to invest directly in an index.
The fund initially offered class A shares on November 18, 1993 and class I
shares on January 2, 1997. Class I share performance includes the performance of
the fund's class A shares for periods prior to the offering of class I shares.
Class I share performance generally would have been higher than class A share
performance had class I shares been offered for the entire period, because
operating expenses (e.g., distribution and service fees) attributable to class I
shares are lower than those of class A shares. Class I share performance has
been adjusted to take into account the fact that class I shares have no initial
sales charge.
2. EXPENSE SUMMARY
Expense Table. The "Expense Table" is supplemented as follows:
Annual Fund Operating Expenses (expenses that are deducted from fund
assets):
<TABLE>
<S> <C>
Management Fees........................................................... 0.90%
Distribution and Service (12b-1) Fees..................................... 0.00%
Other Expenses(1)......................................................... 0.34%
-----
Total Annual Fund Operating Expenses...................................... 1.24%
</TABLE>
- --------------------------
(1) The fund has an expense offset arrangement which reduces the fund's
custodian fee based upon the amount of cash maintained by the fund with
its custodian and dividend disbursing agent. The
-1-
<PAGE>
fund may enter into other similar arrangements and directed brokerage
arrangements, which would also have the effect of reducing the fund's
expenses. "Other Expenses" do not take into account these expense
reductions, and therefore do not represent the actual expenses of the
fund.
Example of Expenses. The "Example of Expenses" table is supplemented as
follows:
<TABLE>
<CAPTION>
Share Class Year 1 Year 3 Year 5 Year 10
----------- ------ ------ ------ -------
<S> <C> <C> <C> <C>
Class I shares $126 $393 $681 $1,500
</TABLE>
3. DESCRIPTIONS OF SHARE CLASSES
The "Description of Share Classes" is supplemented as follows:
If you are an eligible institutional investor (as described below), you may
purchase class I shares at net asset value without an initial sales charge or
CDSC upon redemption. Class I shares do not have annual distribution and service
fees, and do not convert to any other class of shares of the fund.
The following eligible institutional investors may purchase class I shares:
o certain retirement plans established for the benefit of employees of MFS
and employees of MFS' affiliates;
o any fund distributed by MFS, if the fund seeks to achieve its investment
objective by investing primarily in shares of the fund and other MFS
funds;
o any retirement plan, endowment or foundation which:
[arrow] purchases shares directly through MFD (rather than through a
third party broker or dealer or other financial adviser);
[arrow] has, at the time of purchase of class I shares, aggregate
assets of at least $100 million; and
[arrow] 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 (additional investments may be made
in any amount).
MFD may accept purchases from smaller plans, endowments or foundations or
in smaller amounts if it believes, in its sole discretion, that such
entity's aggregate assets will equal or exceed $100 million, or that such
entity will make additional investments which will cause its total
investment to equal or exceed $10 million, within a reasonable period of
time;
o bank trust departments or law firms acting as trustee or manager for
trust accounts which initially invest, on behalf of their clients, at
least $100,000 in class I shares of the fund (additional investments may
be made in any amount). MFD may accept smaller initial purchases if it
believes, in its sole discretion, that the bank trust department or law
firm will make additional investments, on behalf of its trust clients,
which will cause its total investment to equal or exceed $100,000 within
a reasonable period of time; and
o certain retirement plans offered, administered or sponsored by insurance
companies, provided that these plans and insurance companies meet certain
criteria established by MFD from time to 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 in
class I shares.
-2-
<PAGE>
4. HOW TO PURCHASE, EXCHANGE AND REDEEM SHARES
The discussion of "How to Purchase, Exchange and Redeem Shares" is supplemented
as follows:
You may purchase, redeem and exchange class I shares only through your MFD
representative or by contacting MFSC (see the back cover of the Prospectus for
address and phone number). You may exchange your class I shares for class I
shares of another MFS Fund (if you are eligible to purchase them) and for shares
of the MFS Money Market Fund at net asset value.
5. FINANCIAL HIGHLIGHTS
The "Financial Highlights" table is supplemented as follows:
Financial Statements - class I shares
<TABLE>
<CAPTION>
Year Ended Period Ended
October 31, 1998 October 31, 1997*
---------------- -----------------
<S> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 20.84 $ 18.34
------- -------
Income from investment operations# -
Net investment income $ 0.04 $ 0.04
Net realized and unrealized gain on investments
and foreign currency transactions (0.40) 2.46
---------- --------
Total from investment operations $ (0.36) $ 2.50
--------- -------
Less distributions declared to shareholders from net realized
gain on investments and foreign currency transactions $ (2.16) --
Net asset value - end of period $ 18.32 $ 20.84
-------- --------
Total return (1.64%) 13.58%++
Ratios (to average net assets)/Supplemental data -
Expenses## 1.24% 1.21%+
Net investment income 0.19% 0.20%+
Portfolio turnover 104% 133%
Net assets at end of period (000 omitted) $5,445 $6,550
</TABLE>
- ----------------------------------------
* For the period from the inception of class I, January 2, 1997,through
October 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## 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. The Fund's expenses are calculated without
reduction for this expense offset arrangement.
The date of this Supplement is March 1, 1999.
<PAGE>
MFS[RegTM] GLOBAL GROWTH FUND
M A R C H 1, 1 9 9 9
Prospectus
Class A Shares
Class B Shares
Class C Shares
- --------------------------------------------------------------------------------
This Prospectus describes the MFS Global Growth Fund. The investment objective
of the fund is to provide 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.
The Securities and Exchange Commission has not approved the fund's shares or
determined whether this prospectus is accurate or complete. Anyone who tells
you otherwise is committing a crime.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
Page
I Risk Return Summary ........................................... 1
II Expense Summary ............................................... 6
III Investment Objective, Strategies and Principal Risks .......... 8
IV Management of the Fund ........................................ 12
V Description of Share Classes .................................. 15
VI How to Purchase, Exchange and Redeem Shares ................... 18
VII Investor Services and Programs ................................ 22
VIII Other Information ............................................. 24
IX Financial Highlights .......................................... 27
Appendix A -- Investment Techniques and Practices ............. A-1
Appendix B -- Sales Charge Categories Available to Certain
Retirement Plans .............................................. B-1
</TABLE>
<PAGE>
I RISK RETURN SUMMARY
[arrow] Investment Objective
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.
[arrow] Principal Investment Strategies
The fund invests, under normal market conditions, at least 65% of its
total assets in common stocks and related securities, such as preferred
stock, convertible securities and depositary receipts, of companies in
three distinct market sectors:
o U.S. emerging growth companies, which are domestic companies
that the fund's investment adviser, Massachusetts Financial
Services Company (referred to as MFS or the adviser), believes
are either early in their life cycle but which have the
potential to become major enterprises, or are major
enterprises whose rates of earnings growth are expected to
accelerate,
o Foreign growth companies, which are foreign companies located
in more developed securities markets (such as Australia,
Canada, Japan, New Zealand and Western European countries)
that MFS believes have favorable growth prospects and
attractive valuations based on current and expected earnings
and cash flow. The fund generally seeks to purchase foreign
growth securities of companies with relatively large
capitalizations relative to the market in which they are
traded, and
o Emerging market securities, which are securities of issuers
whose principal activities are located in emerging market
countries. Emerging market countries include any country
determined 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.
MFS directly manages the U.S. emerging growth companies and foreign
growth companies sectors. MFS has engaged Foreign & Colonial Management
Limited (referred to as FCM) and Foreign & Colonial Emerging Markets
Limited (referred to as FCEM) to manage the emerging markets securities
sector. FCM and FCEM are referred to as the sub-advisers.
MFS uses a bottom-up, as opposed to a top-down, investment style in
managing the equity-oriented funds (such as the fund) it advises. This
means that securities are selected based upon fundamental analysis
performed by the fund's portfolio manager and MFS' large group of
equity research analysts. The sub-advisers use a top down investment
style in managing the emerging markets securities sector of the fund.
This means that securities are selected for this sector based upon
allocations among various emerging markets.
The fund may have exposure to foreign currencies through its
investments in foreign securities, its direct holdings of foreign
currencies or through its use of foreign currency
1
<PAGE>
exchange contracts for the purchase or sale of a fixed quantity of a
foreign currency at a future date.
The fund is a non-diversified mutual fund. This means that the fund may
invest a relatively high percentage of its assets in a small number of
issuers.
The fund's investments may include securities traded in the
over-the-counter markets.
[arrow] Principal Risks of an Investment
Your investment in the fund is subject to certain risks:
o Allocation Risk: The fund will allocate its investments among
U.S. emerging growth companies, foreign growth companies and
emerging markets companies, based upon judgments made by MFS.
The fund could miss attractive investment opportunities by
underweighting markets where there are significant returns,
and could lose value by overweighting markets where there are
significant declines.
o Market and Company Risk: The value of the securities in which
the fund invests may decline due to changing economic,
political or market conditions, or due to the financial
condition of the company which issued the security.
o Emerging Growth Risk: Investments in emerging growth companies
may be subject to more abrupt or erratic market movements and
may involve greater risks than investments in other companies.
A decline in the value of these types of stocks may result in
a decline in the fund's net asset value and your investment.
o Foreign Securities Risk:
[arrow] Foreign Markets Risk: Investment in foreign
securities involves additional risks relating to
political, social and economic developments abroad.
Other risks from these investments result from the
differences between the regulations to which U.S. and
foreign issuers and markets are subject.
[arrow] Currency Risk: Exposure to foreign currencies may
cause the value of the fund to decline in the event
that the U.S. dollar strengthens against these
currencies, or in the event that foreign governments
intervene in the currency markets.
[arrow] Concentration: The fund may invest a substantial
amount of its assets in issuers located in a single
country or a limited number of countries. If the fund
concentrates its investments in this manner, it
assumes the risk that economic, political and social
conditions in those countries will have a significant
impact on its investment performance. The fund's
investment performance may also be more volatile if
it concentrates its investments in certain countries,
especially emerging market countries.
o Over-the-Counter Risk: Equity securities that are traded
over-the-counter may be more volatile than exchange listed
stocks, and the fund may experience difficulty in establishing
or closing out positions in these stocks at prevailing market
prices.
2
<PAGE>
o Non-Diversified Status Risk: Because the fund may invest its
assets in a small number of issuers, the fund is more
susceptible to any single economic, political or regulatory
event affecting those issuers than is a diversified fund.
o As with any mutual fund, you could lose money on your
investment in the fund.
An investment in the fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
3
<PAGE>
[arrow] Bar Chart and Performance Table
The bar chart and performance table below are intended to indicate some
of the risks of investing in the fund by showing changes in the fund's
performance over time. The chart and table provide past performance
information. The fund's past performance does not necessarily indicate
how the fund will perform in the future. The performance information in
the chart and table is based upon calendar year periods, while the
performance information presented under the caption "Financial
Highlights" and in the fund's shareholder reports is based upon the
fund's fiscal year. Therefore, these performance results differ.
Bar Chart
The bar chart shows changes in the annual total returns of the fund's
class A shares for each calendar year since class A shares were first
offered. The chart and related notes do not take into account any sales
charges that you may be required to pay upon purchase or redemption of
the fund's shares, but do include the reinvestment of distributions.
Any sales charge will reduce your return. The return of the fund's
other classes of shares will differ from the class A returns shown in
the bar chart, depending upon the expenses of those classes.
[TABULAR REPRESENTATION OF BAR CHART]
<TABLE>
<S> <C> <C> <C> <C>
1994 1995 1996 1997 1998
2.92% 16.30% 13.43% 13.65% __%
</TABLE>
[END OF BAR CHART]
4
<PAGE>
During the period shown in the bar chart, the highest
quarterly return was % (for the calendar quarter ended )
and the lowest quarterly return was % (for the calendar quarter
ended ).
Performance Table
This table shows how the average annual total returns of each class of
the fund compares to various market indicators and assumes the
reinvestment of distributions.
Average Annual Total Returns as of December 31, 1998
............................................................................
<TABLE>
<CAPTION>
1 Year 5 Year Life *
<S> <C> <C> <C>
Class A shares % % %
Class B shares % % %
Class C shares % % %
Morgan Stanley Capital International (MSCI)
World Index+** % % %
Russell 2000 Total Return Index++*** % % %
</TABLE>
--------
* For the period from the commencement of the fund's investment
operations on November 18, 1993 through December 31, 1998. Index results
are from December 31, 1993.
+ Source: Lipper Analytical Services, Inc.
++ Source: CDA/Wiesenberger.
** The Morgan Stanely Capital International (MSCI) World Index is an
unmanaged market-capitalization-weighted total return index which
measures the performance of 23 developed-country global stock markets,
including the United States, Canada, Europe, Australia, New Zealand, and
the Far East. It is not possible to invest in an index.
Complete list: Australia, Austria, Belgium, Canada, Denmark, Finland,
France, Germany, Hong Kong, Ireland, Italy, Japan, Malaysia,
Netherlands, New Zealand, Norway, Singapore, South African gold mines,
Spain, Sweden, Switzerland, United Kingdom, United States. It is not
possible to invest directly in an index.
*** The Russell 2000 Total Return Index is an unmanaged index comprised of
2,000 of the smallest U.S.-domiciled company common stocks (on the basis
of capitalization) that are traded in the United States on the NYSE,
AMEX, and NASDAQ. It is not possible to invest directly in an index.
Share performance is calculated according to Securities and Exchange
Commission rules. Class A share performance takes into account the
deduction of the 5.75% maximum sales charge. Class B share performance
takes into account the deduction of the applicable contingent deferred
sales charge (referred to as a CDSC), which declines over six years
from 4% to 0%. Class C share performance takes into account the
deduction of the 1% CDSC.
The fund initially offered class A and class B shares on
November 18, 1993, and class C shares on January 3, 1994. Class C share
performance include the performance of the fund's class B shares for
periods prior to the offering of class C shares. Class C share
performance generally would have been approximately the same as class A
share performance had class C shares been offered for the entire
period, because operating expenses (e.g., distribution and service
fees) attributable to class C shares are approximately the same as
those of class B shares. Class C share performance has been adjusted to
take into account the CDSC applicable to class C shares, rather than
the CDSC applicable to class B shares.
5
<PAGE>
II EXPENSE SUMMARY
[arrow] Expense Table
This table describes the fees and expenses that you may pay when you
buy, redeem and hold shares of the fund.
Shareholder Fees (fees paid directly from your investment):
............................................................................
<TABLE>
<CAPTION>
Class A Class B Class C
<S> <C> <C> <C>
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of offering price) ......... 5.75% 0.00% 0.00%
Maximum Deferred Sales Charge (Load) (as a
percentage of original purchase price or redemption See
proceeds, whichever is less) .......................... Below(1) 4.00% 1.00%
</TABLE>
Annual Fund Operating Expenses (expenses that are deducted from
fund assets):
............................................................................
<TABLE>
<S> <C> <C> <C>
Management Fees ..................................... 0.90% 0.90% 0.90%
Distribution and Service (12b-1) Fees(2) ............ 0.35% 1.00% 1.00%
Other Expenses(3) ................................... 0.34% 0.34% 0.34%
---- ---- ----
Total Annual Fund Operating Expenses ................ 1.59% 2.24% 2.24%
Fee Waiver and/or Expense Reimbursement(4) ......... 0.10% 0.00% 0.00%
Net Expenses ....................................... 1.49% 2.24% 2.24%
</TABLE>
--------
(1) An initial sales charge will not be deducted from your purchase if you
buy $1 million or more of class A shares, or if you are investing
through a retirement plan and your class A purchase meets certain
requirements. However, in this case, a contingent deferred sales charge
(referred to as a CDSC) of 1% may be deducted from your redemption
proceeds if you redeem your investment within 12 months.
(2) The fund adopted a distribution plan under Rule 12b-1 that permits it
to pay marketing and other fees to support the sale and distribution of
class A, B and C shares and the services provided to you by your
financial adviser (referred to as distribution and service fees).
(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. The Fund may enter into
other similar arrangements and directed brokerage arrangements, which
would also have the effect of reducing the fund's expenses. "Other
Expenses" do not take into account these expense reductions, and are
therefore higher than the actual expenses of the fund.
(4) MFS has also voluntarily waived its right to receive the 0.10% annual
distribution fee. This arrangement will remain in effect until at least
March 1, 2000 absent an earlier modification approved by the board of
trustees which oversees the fund.
6
<PAGE>
[arrow] Example of Expenses
These examples are intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds.
The examples assume that:
o You invest $10,000 in the fund for the time periods indicated
and you redeem your shares at the end of the time periods;
o Your investment has a 5% return each year and dividends and
other distributions are reinvested; and
o The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, under these
assumptions your costs would be:
<TABLE>
<CAPTION>
Share Class Year 1 Year 3 Year 5 Year 10
- ----------------------------------------------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Class A shares $ 727 $1,048 $ 1,391 $ 2,356
Class B shares
Assuming redemption at end of period $ 627 $1,000 $ 1,400 $ 2,409
Assuming no redemption $ 227 $ 700 $ 1,200 $ 2,409
Class C shares
Assuming redemption at end of perio d $ 327 $ 700 $ 1,200 $ 2,575
Assuming no redemption $ 227 $ 700 $ 1,200 $ 2,575
</TABLE>
7
<PAGE>
III INVESTMENT OBJECTIVE, STRATEGIES AND PRINCIPAL RISKS
[arrow] Investment Objective
The fund's investment objective is 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. The fund's objective
may be modified without shareholder approval.
[arrow] How the Fund Intends to Achieve its Objective
The fund invests, under normal market conditions, at least 65% of its
total assets in common stocks and related securities, such as
preferred stock, convertible securities and depositary receipts, of
companies in three distinct market sectors:
o U.S. emerging growth companies, which are domestic companies
that, MFS believes are either early in their life cycle but
which have the potential to become major enterprises, or are
major enterprises 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,
o Foreign growth companies, which are foreign companies located
in more developed securities markets (such as Australia,
Canada, Japan, New Zealand and Western European countries)
that MFS believes have favorable growth prospects and
attractive valuations based on current and expected earnings
and cash flow. The fund generally seeks to purchase foreign
growth securities of companies with relatively large
capitalizations relative to the market in which they are
traded, and
o Emerging market securities, which are securities of issuers
whose principal activities are located in emerging market
countries. Emerging market countries include any country
determined 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.
MFS directly manages the U.S. emerging growth companies and foreign
growth companies sectors. MFS has engaged the sub-advisers to manage
the emerging markets securities sector.
MFS uses a bottom-up, as opposed to a top-down, investment style in
managing the equity-oriented funds (such as the fund) it advises. This
means that securities are selected based upon fundamental analysis
performed by the fund's portfolio manager and MFS' large group of
equity research analysts. The sub-advisers use a top down investment
style in managing the emerging markets securities sector of the fund.
This means that securities are selected for this sector based upon a
determination of allocations among various emerging markets.
The fund may have exposure to foreign currencies through its investment
in foreign securities, its direct holdings of foreign currencies or
through its use of foreign currency
8
<PAGE>
exchange contracts for the purchase or sale of a fixed quantity of a
foreign currency at a future date.
The fund is a non-diversified mutual fund. This means that the fund may
invest a relatively high percentage of its assets in a small number of
issuers.
The fund's investments may include securities traded in the
over-the-counter markets.
The fund may depart from its principal investment strategies by
temporarily investing for defensive purposes when adverse market,
economic or political conditions exist. While the fund invests
defensively, it may not be able to pursue its investment objective.
The fund may engage in active and frequent trading to achieve its
principal investment strategies. This may result in the realization and
distribution to shareholders of higher capital gains as compared to a
fund with less active trading policies, which would increase your tax
liability. Frequent trading also increases transaction costs, which
could detract from the fund's performance.
The fund may invest in various types of securities and engage in
various investment techniques and practices which are not the principal
focus of the fund and therefore are not described in this Prospectus.
The types of securities and investment techniques and practices in
which the fund may engage are identified in Appendix A to this
Prospectus, and are discussed, together with their risks, in the fund's
Statement of Additional Information (referred to as the SAI), which you
may obtain by contacting MFS Service Center, Inc. (see back cover for
address and phone number).
[arrow] Principal Risks
The principal risks of investing in the fund and the circumstances
reasonably likely to cause the value of your investment in the fund to
decline are described below. As with any non-money market mutual fund,
the share price of the fund will change daily based on market
conditions and other factors. Please note that there are many
circumstances which could cause the value of your investment in the
fund to decline, and which could prevent the fund from achieving its
objective, that are not described here.
The principal risks of investing in the fund are:
o Allocation Risk: The fund will allocate its investments among
U.S. emerging growth companies, foreign growth companies and
emerging markets companies, based upon judgments made by MFS.
The fund could miss attractive investment opportunities by
underweighting markets where there are significant returns,
and could lose value by overweighting markets where there are
significant declines.
o Market Risk: This is the risk that the price of a security
held by the fund will fall due to changing economic, political
or market conditions or disappointing earnings results.
o Company Risk: Prices of securities react to the economic
condition of the company that issued the security. The fund's
equity investments in an issuer may rise and fall based on the
issuer's actual and anticipated earnings, changes in
management and the potential for takeovers and acquisitions.
9
<PAGE>
o Emerging Growth Companies: Investments in emerging growth
companies may be subject to more abrupt or erratic market
movements and may involve greater risks than investments in
other companies. Emerging growth companies often:
[arrow] have limited product lines, markets and financial
resources
[arrow] are dependent on management by one or a few key
individuals
[arrow] have shares which suffer steeper than average price
declines after disappointing earnings reports and are
more difficult to sell at satisfactory prices
o Foreign Markets Risk: Investing in foreign securities involves
risks relating to political, social and economic developments
abroad, as well as risks resulting from the differences
between the regulations to which U.S. and foreign issuers and
markets are subject:
[arrow] These risks may include the seizure by the government
of company assets, excessive taxation, withholding
taxes on dividends and interest, limitations on the
use or transfer of portfolio assets, and political or
social instability.
[arrow] Enforcing legal rights may be difficult, costly and
slow in foreign countries, and there may be special
problems enforcing claims against foreign
governments.
[arrow] Foreign companies may not be subject to accounting
standards or governmental supervision comparable to
U.S. companies, and there may be less public
information about their operations.
[arrow] Foreign markets may be less liquid and more volatile
than U.S. markets.
[arrow] Foreign securities often trade in currencies other
than the U.S. dollar, and the fund may directly hold
foreign currencies and purchase and sell foreign
currencies through forward exchange contracts.
Changes in currency exchange rates will affect the
fund's net asset value, the value of dividends and
interest earned, and gains and losses realized on the
sale of securities. An increase in the strength of
the U.S. dollar relative to these other currencies
may cause the value of the fund to decline. Certain
foreign currencies may be particularly volatile, and
foreign governments may intervene in the currency
markets, causing a decline in value or liquidity in
the fund's foreign currency holdings. By entering
into forward foreign currency exchange contracts, 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 the
purpose of increasing return, the fund may sustain
losses which will reduce its gross income. Forward
foreign currency exchange contracts involve the risk
that the party with which the fund enters the
contract may fail to perform its obligations to the
fund.
o Emerging Markets Risk: Investments in emerging markets
securities involve all of the risks of investments in foreign
securities, and also have additional risks:
[arrow] All of the risks of investing in foreign securities
are heightened by investing in emerging markets
countries.
10
<PAGE>
[arrow] The markets of emerging markets countries have been
more volatile than the markets of developed countries
with more mature economies. These markets often have
provided significantly higher or lower rates of
return than developed markets, and significantly
greater risks, to investors.
o Concentration: The fund may invest a substantial amount of its
assets in issuers located in a single country or a limited
number of countries. If the fund concentrates its investments
in this manner, it assumes the risk that economic, political
and social conditions in those countries will have a
significant impact on its investment performance. The fund's
investment performance may also be more volatile if it
concentrates its investments in certain countries, especially
emerging market countries.
o Over-the-Counter Risk: Over-the-counter (OTC) transactions
involve risks in addition to those associated with
transactions in securities traded on exchanges. OTC-listed
companies may have limited product lines, markets or financial
resources. Many OTC stocks trade less frequently and in
smaller volume than exchange-listed stocks. The values of
these stocks may be more volatile than exchange-listed stocks,
and the fund may experience difficulty in establishing or
closing out positions in these stocks at prevailing market
prices.
o Non-Diversified Status Risk: Because the fund may invest its
assets in a small number of issuers, the fund is more
susceptible to any single economic, political or regulatory
event affecting those issuers than is a diversified fund.
11
<PAGE>
IV MANAGEMENT OF THE FUND
[arrow] Investment Adviser
Massachusetts Financial Services Company (referred to as MFS or the
adviser) is the fund's investment adviser. 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, Massachusetts Investors Trust. Net assets under the
management of the MFS organization were approximately $ billion on
behalf of approximately million investor accounts as of January 31,
1999. As of such date, the MFS organization managed approximately $
billion of net assets in equity funds and equity portfolios and
approximately $ billion of assets in fixed income funds and fixed
income portfolios. Approximately $ billion of the assets managed by
MFS are invested in securities of foreign issuers and foreign
denominated securities of U.S. issuers. MFS is located at 500 Boylston
Street, Boston, Massachusetts 02116.
MFS provides overall investment advisory services and
facilities to the fund, for which the fund pays MFS an annual
management fee of 0.90% of the fund's average daily net asset value.
MFS has voluntarily waived its right to receive a portion of its
management fee. Under this arrangement, the management fee applied to
fund assets in excess of $1 billion has been reduced to 0.75% annually.
This arrangement will remain in effect until at least March 1, 2000
absent an earlier modification approved by the board of trustees which
oversees the fund.
[arrow] Sub-Investment Advisers
The Adviser has engaged two sub-advisers for the fund: Foreign &
Colonial Management Limited ("FCM") and Foreign & Colonial Emerging
Markets Limited ("FCEM"). 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 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. For its services, the Adviser
pays FCM a management fee in an amount equal to 0.65% annually of the
average daily net asset value of the Fund's assets managed by FCM.
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. For its service,
FCM pays FCEM a management fee in an amount equal to 0.65% annually of
the average daily net asset value of the Fund's assets managed by FCEM.
12
<PAGE>
[arrow] Portfolio Managers
The fund's assets are allocated by MFS among three sectors: 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. Each
sector has its own portfolio management team:
<TABLE>
<CAPTION>
Sector Management Team
------ ---------------
<S> <C>
Domestic Growth Companies John W. Ballen, President and David Mannheim,
Senior Vice President of MFS, and Toni Y. Shimura, a
Vice President of MFS. Mr. Ballen has been employed
as a portfolio manager by MFS since 1984 and has
been one of the fund's portfolio managers since
inception. Mr. Mannheim has been employed as a
portfolio manager by MFS since 1988 and has been
one of the fund's portfolio managers since inception.
Ms. Shimura has been employed as a portfolio
manager by MFS since 1987 and has been one of the
fund's portfolio managers since March 1, 1995.
Foreign Developed Markets Committee of investment research analysts. This
committee includes investment analysts employed not
only by MFS but also by MFS International (U.K.)
Limited, a wholly owned subsidiary of MFS. This
portion of the fund's assets are further allocated
among countries and industries by the 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.
Foreign Emerging Markets 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.
</TABLE>
13
<PAGE>
[arrow] Administrator
MFS provides the fund with certain financial, legal, compliance,
shareholder communications and other administrative services. MFS is
reimbursed by the fund for a portion of the costs it incurs in
providing these services.
[arrow] Distributor
MFS Fund Distributors, Inc. (referred to as MFD), a wholly owned
subsidiary of MFS, is the distributor of shares of the fund.
[arrow] Shareholder Servicing Agent
MFS Service Center, Inc. (referred to as MFSC), a wholly owned
subsidiary of MFS, performs transfer agency and certain other services
for the fund, for which it receives compensation from the fund.
14
<PAGE>
V DESCRIPTION OF SHARE CLASSES
The fund offers class A, B and C shares through this prospectus. The
fund also offers an additional class of shares, class I shares,
exclusively to certain institutional investors. Class I shares are made
available through a separate prospectus supplement provided to
institutional investors eligible to purchase them.
[arrow] Sales Charges
You may be subject to an initial sales charge when you purchase, or a
CDSC when you redeem, class A, B or C shares. These sales charges are
described below. In certain circumstances, these sales charges are
waived. These circumstances are described in the SAI. Special
considerations concerning the calculation of the CDSC that apply to
each of these classes of shares are described below under the heading
"Calculation of CDSC."
If you purchase your fund shares through a financial adviser
(such as a broker or bank), the adviser may receive commissions or
other concessions which are paid from various sources, such as from the
sales charges and distribution and service fees, or from MFS or MFD.
These commissions and concessions are described in the SAI.
[arrow] Class A shares
You may purchase class A shares at net asset value plus an initial
sales charge (referred to as the offering price), but in some cases you
may purchase class A shares without an initial sales charge but subject
to a 1% CDSC upon redemption within one year. Class A shares have
annual distribution and service fees up to a maximum of 0.35% of net
assets annually.
Purchases Subject to an Initial Sales Charge. The amount of the initial
sales charge you pay when you buy class A shares differs depending upon
the amount you invest, as follows:
<TABLE>
<CAPTION>
Sales Charge* as Percentage
of:
--------------------------
Offering Net Amount
Amount of Purchase Price Invested
<S> <C> <C>
Less than $50,000 5.75% 6.10
$50,000 but less than $100,000 4.75 4.99
$100,000 but less than $250,000 4.00 4.17
$250,000 but less than $500,000 2.95 3.04
$500,000 but less than $1,000,000 2.20 2.25
$1,000,000 or more None** None**
</TABLE>
--------
* Because of rounding in the calculation of offering price, actual
sales charges you pay may be more or less than those calculated using
these percentages.
** A 1% CDSC will apply to such purchases, as discussed below.
15
<PAGE>
Purchases Subject to a CDSC (but not an initial sales charge). You pay no
initial sales charge when you invest $1 million or more in class A shares.
However, a CDSC of 1% will be deducted from your redemption proceeds if
you redeem within 12 months of your purchase. This pricing structure also
applies to investments in class A shares by certain retirement plans, as
described in Appendix B.
[arrow] Class B shares
You may purchase class B shares at net asset value without an initial
sales charge, but if you redeem your shares within the first six years
you may be subject to a CDSC (declining from 4.00% during the first
year to 0% after six years). Class B shares have annual distribution
and service fees up to a maximum of 1.00% of net assets annually.
The CDSC is imposed according to the following schedule:
<TABLE>
<CAPTION>
Contingent Deferred
Year of Redemption After Purchase Sales Charge
- ----------------------------------- --------------------
<S> <C>
First 4%
Second 4%
Third 3%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh and following 0%
</TABLE>
If you hold class B shares for approximately eight years, they will
convert to class A shares of the fund. All class B shares you purchased
through the reinvestment of dividends and distributions will be held in
a separate sub-account. Each time any class B shares in your account
convert to class A shares, a proportionate number of the class B shares
in the sub-account will also convert to class A shares.
[arrow] Class C Shares
You may purchase class C shares at net asset value without an initial
sales charge, but if you redeem your shares within the first year you
may be subject to a CDSC of 1.00%. Class C shares have annual
distribution and service fees up to a maximum of 1.00% of net assets
annually. Class C shares do not convert to any other class of shares of
the fund.
16
<PAGE>
[arrow] Calculation of CDSC
As discussed above, certain investments in class A, B and C shares will
be subject to a CDSC. Three different aging schedules apply to the
calculation of the CDSC:
o Purchases of class A shares made on any day during a calendar
month will age one month on the last day of the month, and
each subsequent month.
o Purchases of class C shares, and purchases of class B shares
on or after January 1, 1993, made on any day during a calendar
month will age one year at the close of business on the last
day of that month in the following calendar year, and each
subsequent year.
o Purchases of class B shares prior to January 1, 1993 made on
any day during a calendar year will age one year at the close
of business on December 31 of that year, and each subsequent
year.
No CDSC is assessed on the value of your account represented by
appreciation or additional shares acquired through the automatic
reinvestment of dividends or capital gain distributions. Therefore,
when you redeem your shares, only the value of the shares in excess of
these amounts (i.e., your direct investment) is subject to a CDSC.
The CDSC will be applied in a manner that results in the CDSC
being imposed at the lowest possible rate, which means that the CDSC
will be applied against the lesser of your direct investment or the
total cost of your shares. The applicability of a CDSC will not be
affected by exchanges or transfers of registration, except as described
in the SAI.
[arrow] Distribution and Service Fees
The fund has adopted a plan under Rule 12b-1 that permits it to pay
marketing and other fees to support the sale and distribution of class
A, B and C shares and the services provided to you by your financial
adviser. These annual distribution and service fees may equal up to
0.35% for class A shares and 1.00% for each of class B and class C
shares, and are paid out of the assets of these classes. Over time,
these fees will increase the cost of your shares and may cost you more
than paying other types of sales charges.
17
<PAGE>
VI HOW TO PURCHASE, EXCHANGE AND REDEEM SHARES
You may purchase, exchange and redeem class A, B and C shares of the
fund in the manner described below. In addition, you may be eligible to
participate in certain investor services and programs to purchase,
exchange and redeem these classes of shares, which are described in the
next section under the caption "Investor Services and Programs."
[arrow] How to Purchase Shares
Initial Purchase. You can establish an account by having your financial
adviser process your purchase. The minimum initial investment is
$1,000. However, in the following circumstances the minimum initial
investment is only $50 per account:
o if you establish an automatic investment plan;
o if you establish an automatic exchange plan; or
o if you establish an account under either:
[arrow] tax-deferred retirement programs (other than IRAs)
where investments are made by means of group remittal
statements; or
[arrow] employer sponsored investment programs.
The minimum initial investment for IRAs is $250 per account. The
maximum investment in class C shares is $1,000,000 per transaction.
Class C shares are not available for purchase by any retirement plan
qualified under Section 401(a) or 403(b) of the Internal Revenue Code
if the plan or its sponsor subscribes to certain recordkeeping services
made available by MFSC, such as the MFS Fundamental 401(k) Plan.
Adding to Your Account. There are several easy ways you can make
additional investments of at least $50 to your account:
o send a check with the returnable portion of your statement;
o ask your financial adviser to purchase shares on your behalf;
o wire additional investments through your bank (call MFSC first
for instructions); or
o authorize transfers by phone between your bank account and
your MFS account (the maximum purchase amount for this method
is $100,000). You must elect this privilege on your account
application if you wish to use it.
[arrow] How to Exchange Shares
You can exchange your shares for shares of the same class of certain
other MFS funds at net asset value by having your financial adviser
process your exchange request or by contacting MFSC directly. The
minimum exchange amount is generally $1,000 ($50 for exchanges made
under the automatic exchange plan). Shares otherwise subject to a CDSC
will not be charged a CDSC in an exchange. However, when you redeem the
shares acquired
18
<PAGE>
through the exchange, the shares you redeem may be subject to a CDSC,
depending upon when you originally purchased the shares you exchanged.
For purposes of computing the CDSC, the length of time you have owned
your shares will be measured from the date of original purchase and
will not be affected by any exchange.
Sales charges may apply to exchanges made from the MFS money
market funds. Certain qualified retirement plans may make exchanges
between the MFS funds and the MFS Fixed Fund, a bank collective
investment fund, and sales charges may also apply to these exchanges.
Call MFSC for information concerning these sales charges.
Exchanges are subject to the MFS funds' market timing
policies, which are policies designed to protect the funds and their
shareholders from the effect of frequent exchanges. These market timing
policies are described below under the caption "Market Timing
Policies." You should read the prospectus of the MFS fund into which
you are exchanging and consider the differences in objectives, policies
and rules before making any exchange.
[arrow] How to Redeem Shares
You may redeem your shares either having your financial adviser process
your redemption or by contacting MFSC directly. The fund sends out your
redemption proceeds within seven days after your request is received in
good order. "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.
In addition, you need to have your signature guaranteed and/or submit
additional documentation to redeem your shares. See "Signature
Guarantee/Additional Documentation" below, or contact MFSC for details
(see back cover page for address and phone number).
Under unusual circumstances such as when the New York Stock
Exchange is closed, trading on the Exchange is restricted or if there
is an emergency, the fund may suspend redemptions or postpone payment.
If you purchased the shares you are redeeming by check, the fund may
delay the payment of the redemption proceeds for up to 15 days from the
purchase date to assure that the check has cleared.
[arrow] Redeeming directly through MFSC
o By telephone. You can call MFSC to have shares redeemed from
your account and the proceeds wired or mailed (depending on
the amount redeemed) directly to a pre-designated bank
account. MFSC will request personal or other information from
you and will generally record the calls. MFSC will be
responsible for losses that result from unauthorized telephone
transactions if it does not follow reasonable procedures
designed to verify your identity. You must elect this
privilege on your account application if you wish to use it.
o By mail. To redeem shares by mail, you can send a letter to
MFSC with the name of your fund, your account number, and the
number of shares or dollar amount to be sold.
Redeeming through your financial adviser. You can call your financial
adviser to process a redemption on your behalf. Your financial adviser
will be responsible for furnishing all necessary documents to MFSC and
may charge you for this service.
19
<PAGE>
Signature guarantee/Additional documentation. In order to protect
against fraud, the fund requires that your signature be guaranteed in
order to redeem your shares. Your signature may be guaranteed by an
eligible bank, broker, dealer, credit union, national securities
exchange, registered securities association, clearing agency, or
savings association. MFSC may require additional documentation for
certain types of registrations and transactions. Signature guarantees
and this additional documentation shall be accepted in accordance with
policies established by MFSC, and MFSC may make certain deminimis
exceptions to these requirements.
[arrow] Other Considerations
Right to Reject Purchase and Exchange Orders. Purchases and exchanges
should be made for investment purposes only. The MFS funds each reserve
the right to reject or restrict any specific purchase or exchange
request. Because an exchange request involves both a request to redeem
shares of one fund and to purchase shares of another fund, the MFS
Funds consider the underlying redemption and purchase requests
conditioned upon the acceptance of each of these underlying requests.
Therefore, in the event that the MFS Funds reject an exchange request,
neither the redemption nor the purchase side of the exchange will be
processed.
Market Timing Policies. The MFS Funds are not designed for professional
market timing organizations or other entities using programmed or
frequent exchanges. The MFS Funds define a "market timer" as an
individual, or organization acting on behalf of one or more
individuals, if:
o the individual or organization makes during the calendar year
either (i) six or more exchange requests among the MFS Funds
or (ii) three or more exchange requests out of any of the MFS
high yield bond funds or MFS municipal bond funds; and
o any one of such exchange requests represents shares equal in
value to $1 million or more.
Accounts under common ownership or control, including accounts
administered by market timers, will be aggregated for purposes of this
definition.
The MFS Funds may impose specific limitations on market timers,
including:
o delaying for up to seven days the purchase side of an exchange
request by market timers;
o rejecting or otherwise restricting purchase or exchange
requests by market timers; and
o permitting exchanges by market timers only into certain MFS
Funds.
Reinstatement privilege. After you have redeemed shares, you have a
one-time right to reinvest the proceeds within 90 days of the
redemption at the current net asset value (without an initial sales
charge). If the redemption involved a CDSC, your account will be
credited with the appropriate amount of the CDSC paid; however, your
new shares will be subject to a CDSC which will be determined from the
date you originally purchased the shares redeemed. This privilege
applies to shares of the MFS money market funds only under certain
circumstances.
20
<PAGE>
In-kind distributions. The MFS funds have reserved the right to pay
redemption proceeds by a distribution in-kind of portfolio securities
(rather than cash). In the event that the fund makes an in-kind
distribution, you could incur the brokerage and transaction charges
when converting the securities to cash. The fund does not expect to
make in-kind distributions, and if it does, the fund will pay, during
any 90-day period, your redemption proceeds in cash up to either
$250,000 or 1% of the fund's net assets, whichever is less.
Involuntary Redemptions/Small Accounts. Because it is costly to
maintain small accounts, the MFS funds have generally reserved the
right to automatically redeem shares and close your account when it
contains less than $500 due to your redemptions or exchanges. Before
making this automatic redemption, you will be notified and given 60
days to make additional investments to avoid having your shares
redeemed.
21
<PAGE>
VII INVESTOR SERVICES AND PROGRAMS
As a shareholder of the fund, you have available to you a number of
services and investment programs. Some of these services and programs
may not be available to you if your shares are held in the name of your
financial adviser or if your investment in the fund is made through a
retirement plan.
[arrow] Distribution Options
The following distribution options are generally available to all
accounts and you may change your distribution option as often as you
desire by notifying MFSC:
o Dividends and capital gain distributions reinvested in
additional shares (this option will be assigned if no other
option is specified);
o Dividends in cash; capital gain distributions reinvested in
additional shares; or
o 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 as of 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 you have elected to
receive dividends and/or capital gain distributions in cash, and the
postal or other delivery service is unable to deliver checks to your
address of record, or you do not respond to mailings from MFSC with
regard to uncashed distribution checks, your distribution option will
automatically be converted to having all dividends and other
distributions reinvested in additional shares. Your request to change a
distribution option must be received by MFSC 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.
[arrow] Purchase and Redemption Programs
For your convenience, the following purchase and redemption programs
are made available to you with respect to class A, B and C shares,
without extra charge:
Automatic Investment Plan. You can make cash investments of $50 or more
through your checking account or savings account on any day of the
month. If you do not specify a date, the investment will automatically
occur on the first business day of the month.
Automatic Exchange Plan. If you have an account balance of at least
$5,000 in any MFS fund, you may participate in the automatic exchange
plan, a dollar-cost averaging program. This plan permits you to make
automatic monthly or quarterly exchanges from your account in an MFS
fund for shares of the same class of shares of other MFS funds. You may
make exchanges of at least $50 to up to six different funds under this
plan. Exchanges will generally be made at net asset value without any
sales charges. If you exchange shares out of the MFS Money Market Fund
or MFS Government Money Market Fund, or if you exchange class A shares
out of the MFS Cash Reserve Fund, into class A shares of any other MFS
22
<PAGE>
fund, you will pay the initial sales charge if you have not already
paid this charge on these shares.
Reinvest without a sales charge. You can reinvest dividend and capital
gain distributions into your account without a sales charge to add to
your investment easily and automatically.
Distribution Investment Program. You may purchase shares of any MFS
fund without paying an initial sales charge or a CDSC upon redemption
by automatically reinvesting a minimum of $50 of dividend and capital
gain distributions from the same class of another MFS fund.
Letter of Intent (LOI). If you intend to invest $50,000 or more in the
MFS funds (including the MFS Fixed Fund) within 13 months, you may buy
class A shares of the funds at the reduced sales charge as though the
total amount were invested in class A shares in one lump sum. If you
intend to invest $1 million or more under this program, the time period
is extended to 36 months. If the intended purchases are not completed
within the time period, shares will automatically be redeemed from a
special escrow account established with a portion of your investment at
the time of purchase to cover the higher sales charge you would have
paid had you not purchased your shares through this program.
Right of Accumulation. You will qualify for a lower sales charge on
your purchases of class A shares when your new investment in class A
shares, together with the current (offering price) value of all your
holdings in the MFS funds (including the MFS Fixed Fund), reaches a
reduced sales charge level.
Systematic Withdrawal Plan. You may elect to automatically receive (or
designate someone else to receive) regular periodic payments of at
least $100. Each payment under this systematic withdrawal is funded
through the redemption of your fund shares. For class B and C shares,
you can receive up to 10% (15% for certain IRA distributions) of the
value of your account through these payments in any one year (measured
at the time you establish this plan). You will incur no CDSC on class B
and C shares redeemed under this plan. For class A shares, there is no
similar percentage limitation; however, you may incur the CDSC (if
applicable) when class A shares are redeemed under this plan.
23
<PAGE>
VIII OTHER INFORMATION
[arrow] Pricing of Fund Shares
The price of each class of the fund's shares is based on its net asset
value. The net asset value of each class of shares is determined at the
close of regular trading each day that the New York Stock Exchange is
open for trading (generally, 4:00 p.m., Eastern time) (referred to as
the valuation time). To determine net asset value, the fund values its
assets at current market values, or at fair value as determined by the
Adviser under the direction of the Board of Trustees that oversees the
fund if current market values are unavailable. Fair value pricing may
be used by the fund when current market values are unavailable or when
an event occurs after the close of the exchange on which the fund's
portfolio securities are principally traded that is likely to have
changed the value of the securities. The use of fair value pricing by
the fund may cause the net asset value of its shares to differ
significantly from the net asset value that would be calculated using
current market values.
You will receive the net asset value next calculated, after
the deduction of applicable sales charges and any required tax
withholding, if your order is complete (has all required information)
and MFSC receives your order by:
o the valuation time, if placed directly by you (not through a
financial adviser such as a broker or bank) to MFSC; or
o MFSC's close of business, if placed through a financial
adviser, so long as the financial adviser (or its authorized
designee) received your order by the valuation time.
The fund invests in certain securities which are primarily listed on
foreign exchanges that trade on weekends and other days when the fund
does not price its shares. Therefore, the value of the fund's shares
may change on days when you will not be able to purchase or redeem the
fund's shares.
[arrow] Distributions
The fund intends to pay substantially all of its net income (including
net short-term capital gain) to shareholders as dividends at least
annually. Any realized net capital gains are also distributed at least
annually.
[arrow] Tax Considerations
The following discussion is very general and therefore prospective
investors are urged to consult their own tax advisors regarding the
effect that an investment in the Fund may have on their own tax
situation.
Taxability of distributions. As long as the fund qualifies for
treatment as a regulated investment company (which it has in the past
and intends to do in the future), it pays no federal income tax on the
earnings it distributes to shareholders.
24
<PAGE>
You will normally have to pay federal income taxes, and any state or
local taxes, on the distributions you receive from the Fund, whether
you take the distributions in cash or reinvest them in additional
shares. Distributions designated as capital gain dividends are taxable
as long-term capital gains. Other distributions are generally taxable
as ordinary income. Some dividends paid in January may be taxable as if
they had been paid the previous December.
The Form 1099 that is mailed to you every January details your
distributions and how they are treated for federal tax purposes.
Fund distributions will reduce the fund's net asset value per share.
Therefore, if you buy shares shortly before the record date of a
distribution, you may pay the full price for the shares and then
effectively receive a portion of the purchase price back as a taxable
distribution.
If you are neither a citizen nor a resident of the U.S., the fund will
withhold U.S. federal income tax at the rate of 30% on taxable
dividends and other payments that are subject to such withholding. You
may be able to arrange for a lower withholding rate under an applicable
tax treaty if you supply the appropriate documentation required by the
fund. The fund is also required in certain circumstances to apply
backup withholding at the rate of 31% on taxable dividends and
redemption proceeds paid to any shareholder (including a shareholder
who is neither a citizen nor a resident of the U.S.) who does not
furnish to the fund certain information and certifications or who is
otherwise subject to backup withholding. Backup withholding will not,
however, be applied to payments that have been subject to 30%
withholding. Prospective investors should read the fund's Account
Application for additional information regarding backup withholding of
federal income tax.
Taxability of transactions. When you redeem, sell or exchange shares,
it is generally considered a taxable event for you. Depending on the
purchase price and the sale price of the shares you redeem, sell or
exchange, you may have a gain or a loss on the transaction. You are
responsible for any tax liabilities generated by your transaction.
[arrow] Unique Nature of Fund
MFS may serve as the investment adviser to other funds which have
similar investment goals and principal investment policies and risks to
the fund, and which may be managed by the fund's portfolio manager(s).
While the fund may have many similarities to these other funds, its
investment performance will differ from their investment performance.
This is due to a number of differences between the funds, including
differences in sales charges, expense ratios and cash flows.
[arrow] Year 2000 Issues
The fund could be adversely affected if the computer systems used by
MFS, the fund's other service providers or the companies in which the
fund invests do not properly process date-related information from and
after January 1, 2000 (the "Year 2000 Issue"). MFS recognizes the
importance of the Year 2000 Issue and, to address Year 2000 compliance,
created a
25
<PAGE>
Year 2000 Program Management Office in 1996, which is separately
funded, has a specialized staff and reports directly to MFS Senior
Management. The Office, with the help of external consultants, is
responsible for ascertaining that all internal systems, data feeds and
third party applications are Year 2000 compliant. While MFS is
confident that all MFS systems will be Year 2000 compliant before the
turn of the century, there are significant systems interdependencies in
the domestic and foreign markets for securities, the business
environments in which companies held by the fund operate and in MFS'
own business environment. MFS has been actively working with the fund's
other service providers to identify and respond to potential problems
in an effort to ensure Year 2000 compliance or develop contingency
plans. Year 2000 compliance is also one of the factors considered by
MFS in its ongoing assessment of companies in which the fund invests.
There can be no assurance, however, that these steps will be sufficient
to avoid any adverse impact on the fund.
[arrow] Provision of Annual and Semiannual Reports
To avoid sending duplicate copies of materials to households, only one
copy of the fund's annual and semiannual report will be mailed to
shareholders having the same residential address on the fund's records.
However, any shareholder may contact MFSC (see back cover for address
and phone number) to request that copies of these reports be sent
personally to that shareholder.
26
<PAGE>
IX FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the
fund's financial performance for the past 5 years. Certain information
reflects financial results for a single fund share. The total returns
in the table represent the rate by which an investor would have earned
(or lost) on an investment in the fund (assuming reinvestment of all
distributions). This information has been audited by the fund's
independent auditors, whose report, together with the fund's financial
statements, are included in the fund's Annual Report to shareholders.
These financial statements are incorporated by reference into the SAI.
The fund's independent auditors are Deloitte & Touche LLP.
Class A Shares
............................................................................
<TABLE>
<CAPTION>
Year Ended October 31,
-----------------------------------------------------
1998 1997 1996 1995 1994*
------------- ------------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share
outstanding throughout each
period):
Net asset value -- beginning of
period .............................. $ 20.79 $ 19.09 $ 18.16 $ 17.45 $ 15.00
------- ------- ------- ------- --------
Income from investment operations# --
Net investment loss[sec] ........... $ (0.01) $ (0.02) $ (0.07) $ -- $ (0.02)
Net realized and unrealized gain
(loss) on investments and
foreign currency transactions ..... (0.41) 2.77 2.73 0.93 2.47
------- ------- ------- -------- --------
Total from investment
operations .................. $ (0.42) $ 2.75 $ 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 ........... (2.10) (1.05) (1.72) (0.22) --
------- ------- ------- -------- --------
Total distributions declared
to shareholders .............. $ (2.10) $ (1.05) $ (1.73) $ (0.22) $ --
------- ------- ------- -------- --------
Net asset value -- end of period ..... $ 18.27 $ 20.79 $ 19.09 $ 18.16 $ 17.45
------- ------- ------- -------- --------
Total return++ ....................... (1.99)% 15.17% 15.73% 5.47% 16.33%++
Ratios (to average net assets)/
Supplemental data[sec]:
Expenses## ........................ 1.49% 1.52% 1.58% 1.63% 1.57%+
Net investment income (loss) ...... (0.06)% (0.10)% (0.35)% 0.02% (0.14)%+
Portfolio turnover ................... 104% 133% 95% 149% 100%
Net assets at end of period
(000 omitted) ....................... $195,194 $204,918 $172,106 $143,543 $131,503
</TABLE>
--------
* For the period from the commencement of the Fund's investment
operations, November 18, 1993, through October 31, 1994.
+ Annualized.
++ Not annualized.
27
<PAGE>
# Per share data are based on average shares outstanding.
## 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. For fiscal years ending
after September 1, 1995, the fund's expenses are calculated without
reduction for this expense offset arrangement.
++ 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.
[sec] The distributor waived a portion of its distribution fee for the
periods indicated. If the fee had been incurred by the fund, the net
investment loss per share and the ratios would have been:
<TABLE>
<S> <C> <C> <C> <C> <C>
Net investment loss ........... $ (0.03) $ (0.04) $ (0.09) $ -- $ (0.04)
Ratios (to average net assets):
Expenses## ................... 1.59% 1.62% 1.68% 1.73% 1.67%+
Net investment loss .......... (0.16)% (0.20)% (0.45)% (0.08)% (0.24)%+
</TABLE>
28
<PAGE>
Class B Shares
............................................................................
<TABLE>
<CAPTION>
Year Ended October 31,
-------------------------------------------------------
1998 1997 1996 1995 1994**
------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share
outstanding throughout each
period):
Net asset value -- beginning
of period ......................... $ 20.56 $ 18.87 $ 17.97 $ 17.32 $ 15.00
------- ------- ------- ------- --------
Income from investment
operations# --
Net investment loss ............ $ (0.16) $ (0.17) $ (0.21) $ (0.14) $ (0.15)
Net realized and
unrealized gain (loss)
on investments and
foreign currency
transactions .................. (0.40) 2.76 2.70 0.92 2.47
------- ------- ------- ------- --------
Total from investment
operations ................. $ (0.56) $ 2.59 $ 2.49 $ 0.78 $ 2.32
------- ------- ------- ------- --------
Less distributions declared to
shareholders --
From net realized gain on
investments and foreign
currency transactions ......... $ 1.94 $ (0.90) $ (1.59) $ (0.13) $ --
------- ------- ------- ------- --------
Net asset value -- end
of period ......................... $ 18.06 $ 20.56 $ 18.87 $ 17.97 $ 17.32
------- ------- ------- ------- --------
Total return ....................... (2.70)% 14.30% 14.77% 4.61% 15.47%++
Ratios (to average net assets)/
Supplemental data:
Expenses## ....................... 2.24% 2.28% 2.39% 2.45% 2.39%+
Net investment loss .............. (0.81)% (0.87)% (1.16)% (0.80)% (0.95)%+
Portfolio turnover ................. 104% 133% 95% 149% 100%
Net assets at end of period
(000 omitted) ..................... $259,345 $308,692 $282,668 $247,437 $236,971
</TABLE>
--------
* For the period from the commencement of the Fund's investment
operations, November 18, 1993, through October 31, 1994.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## 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. For fiscal years ending
after September 1, 1995, the fund's expenses are calculated without
reduction for this expense offset arrangement.
29
<PAGE>
Class C Shares
............................................................................
<TABLE>
<CAPTION>
Year Ended October 31,
-----------------------------------------------------
1998 1997 1996 1995 1994**
----------- ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share
outstanding throughout
each period):
Net asset value -- beginning
of period ......................... $ 20.49 $ 18.85 $ 17.96 $ 17.34 $ 16.04
------- ------- ------- ------- --------
Income from investment
operations# --
Net investment loss .............. $ (0.16) $ (0.17) $ (0.20) $ (0.13) $ (0.13)
Net realized and unrealized
gain (loss) on investments
and foreign currency
transactions ................... ( 0.40) 2.75 2.70 0.92 1.43
------- ------- ------- ------- --------
Total from investment
operations ................. $ (0.56) $ 2.58 $ 2.50 $ 0.79 $ 1.30
------- ------- ------- ------- --------
Less distributions declared to
shareholders --
From net realized gain on
investments and foreign
currency transactions ......... $ (1.94) $ (0.94) $ (1.61) $ (0.17) $ --
------- ------- ------- ------- --------
Net asset value -- end
of period ......................... $ 17.99 $ 20.49 $ 18.85 $ 17.96 $ 17.34
------- ------- ------- ------- --------
Total return ....................... (2.73)% 14.27% 14.88% 4.68% 8.10%++
Ratios (to average net assets)/
Supplemental data:
Expenses## ....................... 2.24% 2.25% 2.32% 2.38% 2.31%+
Net investment loss .............. (0.83)% (0.85)% (1.10)% (0.72)% (0.83)%+
Portfolio turnover ................. 104% 133% 95% 149% 100%
Net assets at end of period
(000 omitted) ..................... $19,149 $24,662 $19,994 $13,349 $ 11,872
</TABLE>
--------
** For the period from the inception of class C, January 3, 1994,
through October 31, 1994.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The fund has an 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. For fiscal years ending after
September 1, 1995, the fund's expenses are calculated without reduction
for this expense offset arrangement.
30
<PAGE>
A p p e n d i x A
[arrow] Investment Techniques and Practices
In pursuing its investment objective, the fund may engage in the
following investment techniques and practices, which are described,
together with their risks, in the SAI.
Investment Techniques/Practices
............................................................................
<TABLE>
<S> <C>
Symbols [check] permitted -- not permitted
- ----------------------------------------------------------------
Debt Securities
Asset-Backed Securities
Collateralized Mortgage Obligations and Multiclass
Pass-Through Securities --
Corporate Asset-Backed Securities --
Mortgage Pass-Through Securities --
Stripped Mortgage-Backed Securities --
Corporate Securities [check]
Loans and Other Direct Indebtedness --
Lower Rated Bonds [check]
Municipal Bonds --
Speculative Bonds [check]
U.S. Government Securities [check]
Variable and Floating Rate Obligations [check]
Zero Coupon Bonds, Deferred Interest Bonds and PIK Bonds [check]-
Equity Securities [check]
Foreign Securities Exposure
Brady Bonds --
Depositary Receipts [check]
Dollar-Denominated Foreign Debt Securities --
Emerging Markets [check]
Foreign Securities [check]
Forward Contracts [check]
Futures Contracts [check]
Indexed Securities --
Inverse Floating Rate Obligations --
Investment in Other Investment Companies [check]
Lending of Portfolio Securities [check]
</TABLE>
A-1
<PAGE>
Investment Techniques/Practices (continued)
............................................................................
<TABLE>
<S> <C>
Symbols [check] permitted -- not permitted
- ----------------------------------------------------------
Leveraging Transactions
Bank Borrowings --
Mortgage "Dollar-Roll" Transactions --
Reverse Repurchase Agreements --
Options
Options on Foreign Currencies [check]
Options on Futures Contracts [check]
Options on Securities [check]
Options on Stock Indices [check]
Reset Options --
"Yield Curve" Options --
Repurchase Agreements [check]
Restricted Securities [check]
Short Sales [check]
Short Sales Against the Box [check]
Short Term Instruments [check]
Swaps and Related Derivative Instruments --
Temporary Borrowings [check]
Temporary Defensive Positions [check]
Warrants [check]
"When-issued" Securities [check]
- -----------------------------------------------------------
</TABLE>
A-2
<PAGE>
A p p e n d i x B
[arrow] Sales Charge Categories Available to Certain Retirement Plans
Purchases made under the following four categories are not subject to
an initial sales charge. However, a CDSC of 1% will be deducted from
redemption proceeds if the redemption is made within 12 months of
purchase. The CDSC is based on the value of the shares redeemed
(excluding reinvested dividend and capital gain distributions) or the
total cost of the shares, whichever is less.
o Investments in class A shares by certain retirement plans
subject to the Employee Retirement Income Security Act of
1974, as amended (referred to as ERISA), if, prior to July 1,
1996
[arrow] the plan had established an account with MFSC; and
[arrow] the sponsoring organization had demonstrated to the
satisfaction of MFD that either:
+ the employer had at least 25 employees; or
+ the total purchases by the retirement plan
of class A shares of the MFS Family of Funds
(the MFS Funds) would be in the amount of at
least $250,000 within a reasonable period of
time, as determined by MFD in its sole
discretion.
o Investments in class A shares by certain retirement plans
subject to ERISA, if
[arrow] the retirement plan and/or sponsoring organization
participates in the MFS Fundamental 401(k) Program or
any similar recordkeeping system made available by
MFSC (referred to as the MFS participant
recordkeeping system);
[arrow] the plan establishes an account with MFSC on or after
July 1, 1996; and
[arrow] the total purchases by the retirement plan of class A
shares of the MFS Funds will be in the amount of at
least $500,000 within a reasonable period of time, as
determined by MFD in its sole discretion; and
[arrow] the plan has not redeemed its class B shares in the
MFS funds in order to purchase class A shares under
this category.
o Investments in class A shares by certain retirement plans
subject to ERISA, if
[arrow] the plan establishes an account with MFSC on or after
July 1, 1996; and
[arrow] 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 MFSC prior to the purchases that the plan has
a market value of $500,000 or more invested in shares
of any class or
B-1
<PAGE>
classes of the MFS Funds; MFSC has no obligation
independently to determine whether such a plan
qualifies under this category; and
o Investments in class A shares by certain retirement plans
subject to ERISA, if
[arrow] the plan establishes an account with MFSC on or after
July 1, 1997;
[arrow] the plan's records are maintained on a pooled basis
by MFSC; and
[arrow] the sponsoring organization demonstrates to the
satisfaction of MFD that, at the time of purchase,
the employer has at least 200 eligible employees and
the plan has aggregate assets of at least $2,000,000.
B-2
<PAGE>
MFS[RegTM] GLOBAL GROWTH FUND
If you want more information about the fund, the following documents
are available free upon request:
Annual/Semiannual Reports. These reports contain information about the
fund's actual investments. Annual reports discuss the effect of recent
market conditions and the fund's investment strategy on the fund's
performance during its last fiscal year.
Statement of Additional Information (SAI). The SAI, dated March 1,
1999, provides more detailed information about the fund and is
incorporated into this prospectus by reference.
You can get free copies of the annual/semiannual reports, the SAI and
other information about the fund, and make inquiries about the fund, by
contacting:
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116-3741
Telephone: 1-800-225-2606
Internet: http://www.mfs.com
Information about the fund (including its prospectus, SAI and
shareholder reports) can be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C., 20549-6009
Information on the operation of the Public Reference Room may be
obtained by calling the Commission at 1-800-SEC-0330. Reports and other
information about the fund are available on the Commission's Internet
website at http://www.sec.gov, and copies of this information may be
obtained, upon payment of a duplicating fee, by writing the Public
Reference Section at the above address.
The fund's Investment Company Act file number is 811-5262
<PAGE>
MFS[RegTM] STRATEGIC INCOME FUND
M A R C H 1, 1 9 9 9
[MFS LOGO} Statement of Additional
Information
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, 1999. This SAI should be read in conjunction with the Prospectus. The
Fund's financial statements are incorporated into this SAI by reference to the
Fund's most recent Annual Report to shareholders. A copy of the Annual Report
accompanies this SAI. You may obtain a copy of the Fund's Prospectus and Annual
Report without charge by contacting MFS Service Center, Inc. (see back cover
for address and phone number).
This SAI is divided into two Parts -- Part I and Part II. Part I contains
information that is particular to the Fund, while Part II contains information
that generally applies to each of the funds in the MFS Family of Funds (the
"MFS Funds"). Each Part of the SAI has a variety of appendices which can be
found at the end of Part I and Part II, respectively.
This SAI is NOT a prospectus and is authorized for distribution to prospective
investors only if preceded or accompanied by a current prospectus.
<PAGE>
Statement of Additional Information
PART I Part I of this SAI contains information that is particular to the Fund.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
I Definitions ............................................................... 1
II Management of the Fund .................................................... 1
The Fund .................................................................. 1
Trustees and Officers -- Identification and Background .................... 1
Trustee Compensation ...................................................... 1
Affiliated Service Provider Compensation .................................. 1
III Sales Charges and Distribution Plan Payments .............................. 1
Sales Charges ............................................................. 1
Distribution Plan Payments ................................................ 1
IV Portfolio Transactions and Brokerage Commissions .......................... 1
V Share Ownership ........................................................... 1
VI Performance Information ................................................... 1
VII Investment Techniques, Practices, Risks and Restrictions .................. 1
Investment Techniques, Practices and Risks ................................ 1
Investment Restrictions ................................................... 1
VIII Tax Considerations ........................................................ 2
IX Independent Auditors and Financial Statements ............................. 3
Appendix A -- Trustees and Officers -- Identification and Background ...... A-1
Appendix B -- Trustee Compensation ........................................ B-1
Appendix C -- Affiliated Service Provider Compensation .................... C-1
Appendix D -- Sales Charges and Distribution Plan Payments ................ D-1
Appendix E -- Portfolio Transactions and Brokerage Commissions ............ E-1
Appendix F -- Share Ownership ............................................. F-1
Appendix G -- Performance Information ..................................... G-1
</TABLE>
<PAGE>
I DEFINITIONS I
"Fund" -- MFS Strategic Income Fund, a series of the Trust.
"Trust" -- MFS Series Trust VIII, a Massachusetts business Trust,
organized on July 31, 1987. On May 16, 1994, the Fund's name was changed
from MFS Income and Opportunities 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.
"MFSC" -- MFS Service Center, Inc., a Delaware corporation.
"Prospectus" -- The Prospectus of the Fund, dated March 1, 1999, as
amended or supplemented from time to time.
II MANAGEMENT OF THE FUND
The Fund
The Fund is a non-diversified series of the Trust. The Trust is an
open-end management investment company.
Trustees and Officers -- Identification and Background
The identification and background of the Trustees and officers of the
Trust are set forth in Appendix A of this Part I.
Trustee Compensation
Compensation paid to the non-interested Trustees and to Trustees who are
not officers of the Trust, for certain specified periods, is set forth in
Appendix B of this Part I.
Affiliated Service Provider Compensation
Compensation paid by the Fund to its affiliated service providers -- to
MFS, for investment advisory and administrative services, and to MFSC,
for transfer agency services -- for certain specified periods is set
forth in Appendix C to this Part I.
MFS has agreed to waive and bear certain Fund expenses, as described in
the "Expense Summary" of the Prospectus.
III SALES CHARGES AND DISTRIBUTION PLAN o
PAYMENTS
Sales Charges
Sales charges paid in connection with the purchase and sale of Fund
shares for certain specified periods are set forth in Appendix D to this
Part I, together with the Fund's schedule of dealer reallowances.
Distribution Plan Payments
Payments made by the Fund under the Distribution Plan for its most recent
fiscal year end are set forth in Appendix D to this Part I.
IV PORTFOLIO TRANSACTIONS AND BROKERAGE
COMMISSIONS
Brokerage commissions paid by the Fund for certain specified periods, and
information concerning purchases by the Fund of securities issued by its
regular broker-dealers for its most recent fiscal year, are set forth in
Appendix E to this Part I.
V SHARE OWNERSHIP
Information concerning the ownership of Fund shares by Trustees and
officers of the Trust as a group, by investors who control the Fund, if
any, and by investors who own 5% or more of any class of Fund shares, if
any, is set forth in Appendix F to this Part I.
VI PERFORMANCE INFORMATION
Performance information, as quoted by the Fund in sales literature and
marketing materials, is set forth in Appendix G to this Part I.
VII INVESTMENT TECHNIQUES, PRACTICES, RISKS
AND RESTRICTIONS
Investment Techniques, Practices and Risks
The investment objective and principal investment policies of the Fund
are described in the Prospectus. In pursuing its investment objective and
principal investment policies, the Fund may engage in a number of
investment techniques and practices, which involve certain risks. These
investment techniques and practices, which may be changed without
shareholder approval unless indicated otherwise, are identified in
Appendix A to the Prospectus, and are more fully described, together with
their associated risks, in Part II of this SAI. The following percentage
limitations apply to these investment techniques and practices:
o Foreign Securities Exposure may not exceed 50% of the Fund's net assets
o Lower rated bonds may not exceed 100% of the Fund's net assets
o Lending of Portfolio Securities may not exceed 30% of the Fund's net
assets
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).
Part I -- 1
<PAGE>
Terms used below (such as Options and Futures Contracts) are defined
in Part II of this SAI.
The Fund may not:
(1) borrow money or pledge, mortgage or hypothecate its assets, except
as a temporary measure for extraordinary or emergency purposes, and
in no event in excess of 1/3 of its assets (the Fund will borrow
money only from banks; for the purpose of this restriction,
collateral arrangements with respect to options, Futures Contracts,
Options on Futures Contracts, options on foreign currencies and
collateral arrangements with respect to initial and variation margin
are not considered a pledge of assets). While borrowings exceed 5%
of the Fund's gross assets, no securities may be purchased; however,
the Fund may complete the purchase of securities already contracted
for;
(2) purchase any security or evidence of interest therein on margin,
except that the Fund may obtain such short-term credit as may be
necessary for the clearance of purchases and sales of securities and
except that the Fund may make deposits on margin in connection with
Futures Contracts, Options on Futures Contracts and options;
(3) underwrite securities issued by other persons except insofar as the
Fund may technically be deemed an underwriter under the Securities
Act of 1933 in selling a portfolio security;
(4) purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or
interests therein), interests in oil, gas or mineral leases,
commodities or commodity contracts (except currencies, currency
options or 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.
In addition, the Fund has the following non-fundamental 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 25% or more of the market value of its total assets in
securities of issuers in any one industry; or
(3) 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.
Except with respect to Fundamental Investment Restriction (1) and
Non-fundamental 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.
VIII TAX CONSIDERATIONS
For a discussion of tax considerations, see Part II of this SAI.
IX INDEPENDENT AUDITORS AND FINANCIAL o
STATEMENTS
Ernst & Young LLP are the Fund's independent auditors, providing audit
services, tax services, and assistance and consultation with
Part I -- 2
<PAGE>
respect to the preparation of filings with the Securities and Exchange
Commission.
The Portfolio of Investments and the Statement of Assets and
Liabilities at October 31, 1998, the Statement of Operations for the year
ended October 31, 1998, the Statement of Changes in Net Assets for the
two years ended October 31, 1998, the Notes to Financial Statements and
the Report of the 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.
Part I -- 3
<PAGE>
PART I -- APPENDIX A
TRUSTEES AND OFFICERS -- IDENTIFICATION
AND BACKGROUND
The Trustees and officers of the Trust are listed below, together with
their principal occupations during the past five years. (Their titles may
have varied during that period.)
Trustees
JEFFREY L. SHAMES* (born 6/2/55)
Massachusetts Financial Services Company, Chairman and Chief Executive
Officer
RICHARD B. BAILEY* (born 9/14/26)
Private Investor; Massachusetts Financial Services Company, former
Chairman and Director (prior to September 30, 1991); Cambridge Bancorp,
Director; Cambridge Trust Company, Director
MARSHALL N. COHAN (born 11/14/26)
Private Investor
Address: 2524 Bedford Mews Drive, Wellington, Florida
LAWRENCE H. COHN, M.D., (born 3/11/37)
Brigham and Women's Hospital, Chief of Cardiac Surgery; Harvard Medical
School, Professor of Surgery
Address: 75 Francis Street, Boston, Massachusetts
THE HON. SIR J. DAVID GIBBONS, KBE (born 6/15/27)
Edmund Gibbons Limited, Chief Executive Officer; Colonial Insurance
Company Ltd., Director and Chairman
Address: 21 Reid Street, Hamilton, Bermuda
ABBY M. O'NEILL (born 4/27/28)
Private Investor; Rockefeller Financial Services, Inc. (investment
advisers), Director
Address: 30 Rockefeller Plaza, Room 5600, New York, New York
WALTER E. ROBB, III (born 8/18/26)
Benchmark Advisors, Inc. (corporate financial consultants), President and
Treasurer; Benchmark Consulting Group, Inc. (office services), President;
CitiFunds and CitiSelect Folios (mutual funds), Trustee
Address: 110 Broad Street, Boston, Massachusetts
ARNOLD D. SCOTT* (born 12/16/42)
Massachusetts Financial Services Company, Senior Executive Vice President
and Secretary
J. DALE SHERRATT (born 9/23/38)
Insight Resources, Inc. (acquisition planning specialists), President;
Wellfleet Investments (investor in health care companies), Managing
General Partner (since 1993)
Address: 294 Washington Street, Boston, Massachusetts
WARD SMITH (born 9/13/30)
NACCO Industries (holding company), Chairman (prior to June 1994);
Sundstrand Corporation (diversified mechanical manufacturer), Director
Address: 36080 Shaker Blvd., Hunting Valley, Ohio
Officers
W. THOMAS LONDON,* Treasurer (born 3/1/44)
Massachusetts Financial Services Company, Senior Vice President
JAMES O. YOST,* Assistant Treasurer (born 6/12/60)
Massachusetts Financial Services Company, Vice President
ELLEN MOYNIHAN,* Assistant Treasurer (born 11/13/57)
Massachusetts Financial Services Company, Vice President (since September
1996); Deloitte & Touch LLP, Senior Manager (prior to September 1996)
MARK E. BRADLEY,* Assistant Treasurer (born 11/23/59)
Massachusetts Financial Services Company, Vice President (since March
1997); Putnam Investments, Vice President (from September 1994 until
March 1997); Ernst & Young LLP, Senior Tax Manager (prior to September
1994)
STEPHEN E. CAVAN,* Secretary and Clerk (born 11/6/53)
Massachusetts Financial Services Company, Senior Vice President, General
Counsel and Assistant Secretary
JAMES R. BORDEWICK, JR.,* Assistant Secretary (born 3/6/59)
Massachusetts Financial Services Company, Senior Vice President and
Associate General Counsel
------------------------------
* "Interested persons" (as defined in the 1940 Act) of the Adviser, whose
address is 500 Boylston Street, Boston, Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain
affiliates of MFS or with certain other funds of which MFS or a
subsidiary is the investment adviser or distributor. Messrs. Shames and
Scott, Directors of MFD, and Mr. Cavan, the Secretary of MFD, hold
similar positions with certain other MFS affiliates. Mr. Bailey is a
Director of Sun Life Assurance Company of Canada (U.S.), a subsidiary of
Sun Life Assurance Company of Canada.
Part I -- A-1
<PAGE>
PART I -- APPENDIX B
TRUSTEE COMPENSATION
The Fund pays the compensation of non-interested Trustees and of Trustees
who are not officers of the Trust, 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. In addition, the
Trust has a retirement plan for these Trustees as described under the
caption "Management of the Fund -- Trustee Retirement Plan" in Part II.
The Retirement Age under the plan is 75.
Trustee Compensation Table
................................................................................
<TABLE>
<CAPTION>
Retirement
Benefit Total
Trustee Accrued Estimated Trustee Fees
Fees as Part of Credited from Fund
from Fund Years of and Fund
Trustee Fund(1) Expense(1) Service(2) Complex(3)
- ------------------------ --------- ------------ -------------- -------------
<S> <C> <C> <C> <C>
Richard B. Bailey $ $ 10 $283,647
Marshall N. Cohan 14 148,067
Dr. Lawrence Cohn 18 123,917
Sir David Gibbons 13 129,842
Abby M. O'Neill 10 129,842
Walter E. Robb, III 14 148,067
Arnold D. Scott N/A 0
Jeffrey L. Shames N/A 0
J. Dale Sherratt 20 184,067
Ward Smith 13 184,067
</TABLE>
--------------
(1) For the fiscal year ending October 31, 1998.
(2) Based upon normal retirement age (75).
(3) Information provided is provided for calendar year 1998. All Trustees
served as Trustees of funds within the MFS fund complex (having
aggregate net assets at December 31, 1998, of approximately $ billion)
except Mr. Bailey, who served as Trustee of funds within the MFS
complex (having aggregate net assets at December 31, 1998 of approximately
$ 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>
$3,150 $473 $ 788 $1,103 $1,575
3,564 535 891 1,247 1,782
3,977 597 994 1,392 1,989
4,391 659 1,098 1,537 2,196
4,805 721 1,201 1,682 2,402
5,218 783 1,305 1,826 2,609
</TABLE>
--------------
(4) Other funds in the MFS Fund complex provide similar retirement benefits
to the Trustees.
Part I -- B-1
<PAGE>
PART I -- APPENDIX C
AFFILIATED SERVICE PROVIDER COMPENSATION
........................................................................ .
The Fund paid compensation to its affiliated service providers over the
specified periods as follows:
<TABLE>
<CAPTION>
Paid to MFS Amount Paid to MFS for Paid To MFSC Amount Aggregate
for Advisory Waived Administrative for Transfer Waived Amount Paid
Fiscal Year Ended Services By MFS Services Agency Services by MFSC To MFS and MFSC
- -------------------- -------------- ------------- ----------------- ----------------- --------- -----------------
<S> <C> <C> <C> <C> <C> <C>
October 31, 1998 $1,115,927 $1,587,648 $ 33,830 $269,845 N/A $1,419,602
October 31, 1997 $ 431,381 799,849 $ 11,935* $145,926 N/A $ 589,242
October 31, 1996 $ 465,666 $ 303,122 N/A $114,755 N/A $ 580,421
</TABLE>
--------------
* From March 1, 1997, the commencement of the Master Administrative
Service Agreement.
Part I -- C-1
<PAGE>
PART I -- APPENDIX D
SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS
Sales Charges
................................................................................
The following sales charges were paid during the specified periods:
<TABLE>
<CAPTION>
Class A Initial Sales Charges: CDSC Paid to MFD on:
Retained Reallowed Class A Class B Class C
Fiscal Year End Total By MFD to Dealers Shares Shares Shares
- --------------------- -------------- ---------- ------------ --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
October 31, 1998 $1,336,719 $236,946 $1,099,773 $2,013 $227,362 $23,376
October 31, 1997 $ 716,916 $119,667 $ 597,249 $5,979 $ 47,900 $56,634
October 31, 1996 N/A N/A N/A 21 28,744 397
</TABLE>
Dealer Reallowances
.............................................................................
As shown above, MFD pays (or "reallows") a portion of the Class A initial
sales charge to dealers. The dealer reallowance as expressed as a
percentage of the Class A shares' offering price is:
<TABLE>
<CAPTION>
Dealer Reallowance as a
Amount of Purchase percent of Offering Price
<S> <C>
Less than $100,000 4.00%
$100,000 but less than $250,000 3.20%
$250,000 but less than $500,000 2.25%
$500,000 but less than $1,000,000 1.70%
$1,000,000 or more None*
</TABLE>
--------------
* A CDSC will apply to such purchase.
Distribution Plan Payments
.............................................................................
During the fiscal year ended October 31, 1998, the Fund made the following
Distribution Plan payments:
<TABLE>
<CAPTION>
Amount of Distribution and Service Fees:
Class of Shares Paid By Fund Retained By MFD Paid To Dealers
- -------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Class A Shares $ 305,910 $29,713 $ 276,197
Class B Shares $1,120,774 $12,608 $1,108,166
Class C Shares $ 356,090 $ 6,861 $ 349,229
</TABLE>
Distribution plan payments retained by MFD are used to compensate MFD for
commissions advanced by MFD to dealers upon sale of fund shares.
Part I -- D-1
<PAGE>
PART I -- APPENDIX E
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Brokerage Commissions
.........................................................................
The following brokerage commissions were paid by the Fund during the
specified time periods:
<TABLE>
<CAPTION>
Brokerage Commissions
Fiscal Year End Paid By Fund
- ---------------------- ----------------------
<S> <C>
October 31, 1998 $ 969
October 31, 1997 $2,711
October 31, 1996 $ 0
</TABLE>
Securities Issued By Regular Broker-Dealers
................................................................................
During the fiscal year ended October 31, 1998, the Fund purchased
securities issued by the following regular broker-dealers of the Fund,
which had the following values as of October 31, 1998:
<TABLE>
<CAPTION>
Value of Securities
Broker-dealer As of October 31, 1998
- --------------------------- ------------------------
<S> <C>
Chase Manhattan Corp. $1,830,978
</TABLE>
Part I -- E-1
<PAGE>
PART I -- APPENDIX F
SHARE OWNERSHIP
Ownership By Trustees and Officers
As of November 30, 1998, the Trustees and officers of the Trust as a group
owned less than 1% of any class of the Fund's shares.
25% or Greater Ownership
The following table identifies those investors who own 25% or more of the
Fund's shares (all share classes taken together) as of November 30, 1998,
and are therefore presumed to control the Fund:
<TABLE>
<CAPTION>
Jurisdiction of Organization
Name and Address of Investor (If Company) Percentage Ownership
- ------------------------------ ----------------------------- ----------------------
<S> <C> <C>
None
</TABLE>
5% or Greater Ownership of Share Class
The following table identifies those investors who own 5% or more of any
class of the Fund's shares as of October 31, 1998:
<TABLE>
<CAPTION>
Name and Address of Investor Ownership Percentage
<S> <C>
.............................................................................
MLPF&S for the Sole Benefit of its Customers 6.60% of Class B Shares
Attn: Fund Administration 97N52
4800 Deer Lake Drive E, 3rd FL
Jacksonville, FL 32246-6484
.............................................................................
MLPF&S for the Sole Benefit of its Customers 18.54% of Class C Shares
Attn: Fund Administration 97952
4800 Deer Lake Drive E, 3rd FL
Jacksonville, FL 32246-6484
.............................................................................
TRS MFS DEF Contribution Plan 99.96% of Class I Shares
c/o Mark Leary 19th FL
Mass Financial Services
500 Boylston Street
Boston, MA 02116-3740
.............................................................................
</TABLE>
Part I -- F-1
<PAGE>
PART I -- APPENDIX G
PERFORMANCE INFORMATION
...........................................................................
All performance quotations are as of October 31, 1998.
<TABLE>
<CAPTION>
Average Annual Actual 30-
Total Returns Day Yield 30-Day Yield Current
---------------------------------------- (Including (Without Any Distribution
1 Year 5 Year Life of Fund* Waivers) Waivers) Rate+
------------- ---------- --------------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Class A Shares, with initial sales charge
(SEC Performance) (6.86)% 4.81% 7.16% 7.83% 6.70% 9.81%
Class A Shares, at a net asset value (2.21)% 5.83% 7.68% N/A N/A N/A
Class B Shares, with CDSC
(SEC Performance) (6.40)% 4.80% 7.95% N/A N/A N/A
Class B Shares, at net asset value (2.84)% 5.09% 7.29% 7.58% 6.39% 9.76%
Class C Shares, with CDSC
(SEC Performance) (3.73)% 5.25% 8.04% N/A N/A N/A
Class C Shares, at net asset value (2.84)% 5.25% 7.38% 7.58% 6.39% 9.79%
Class I Shares, at net asset value (2.00)% 5.90% 8.34% 8.62% 7.42% 10.64%
</TABLE>
--------------
* From commencement of the Fund's investment operations on October 29,
1987.
+ Annualized, based upon the last distribution.
Class A share performance calculated according to Securities and Exchange
Commission (referred to as the SEC) rules (referred to as SEC performance)
takes into account the deduction of the 4.75% maximum sales charge. Class B
SEC performance takes into account the deduction of the applicable
contingent deferred sales charge (referred to as a CDSC), which declines
over six years from 4% to 0%. Class C SEC performance takes into account
the deduction of the 1% CDSC. The fund initially offered class A shares on
October 29, 1987, class B shares on September 7, 1993, class C shares on
September 1, 1994 and Class I shares on January 8, 1997.
Class B and class C share performance include the performance of the fund's
class A shares for periods prior to the offering of class B and class C
shares. Class B and class C share performance generally would have been
lower than class A share performance had class B and class C shares been
offered for the entire period, because the operating expenses (e.g.,
distribution and service fees) attributable to class B and class C shares
are higher than those of class A shares. Class B and class C share SEC
performance has been adjusted to take into account the CDSC applicable to
class B and class C shares, rather than the initial sales charge applicable
to class A shares.
Class I share performance includes the performance of the fund's class A
shares for periods prior to the offering of class I shares. Class I share
performance generally would have been higher than class A share performance
had class I shares been offered for the entire period, because operating
expenses (e.g., distribution and service fees) attributable to class I
shares are lower than those of class A shares. Class I share performance
has been adjusted to take into account the fact that class I shares have no
initial sales charge.
Performance results include any applicable expense subsidies and waivers,
which may cause the results to be more favorable. Current subsidies and
waivers may be discontinued at any time.
Part I -- G-1
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
PART II
Part II of this SAI describes policies and practices that apply to each of the
Funds in the MFS Family of Funds. References in this Part II to a "Fund" means
each Fund in the MFS Family of Funds, unless noted otherwise. References in
this Part II to a "Trust" means the Massachusetts business trust of which the
Fund is a series, or, if the Fund is not a series of a Massachusetts business
trust, references to a "Trust" shall mean the Fund.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
I Management of the Fund ..................................... 1
Trustees/Officers .......................................... 1
Investment Adviser ......................................... 1
Administrator .............................................. 2
Custodian .................................................. 2
Shareholder Servicing Agent ................................ 2
Distributor ................................................ 2
II Principal Share Characteristics ............................ 2
Class A Shares ............................................. 2
Class B Shares, Class C Shares and Class I Shares .......... 2
Waiver of Sales Charges .................................... 3
Dealer Commissions and Concessions ......................... 3
General .................................................... 3
III Distribution Plan .......................................... 3
Features Common to Each Class of Shares .................... 3
Features Unique to Each Class of Shares .................... 4
IV Investment Techniques, Practices and Risks ................. 5
V Net Income and Distributions ............................... 5
Money Market Funds ......................................... 5
Other Funds ................................................ 5
VI Tax Considerations ......................................... 5
Taxation of the Fund ....................................... 5
Taxation of Shareholders ................................... 6
Special Rules for Municipal Fund Distributions ............. 7
VII Portfolio Transactions and Brokerage Commissions ........... 8
VIII Determination of Net Asset Value ........................... 9
Money Market Funds ......................................... 9
Other Funds ................................................ 9
</TABLE>
<PAGE>
TABLE OF CONTENTS (continued)
<TABLE>
<CAPTION>
Page
<S> <C> <C>
IX Performance Information ........................................... 10
Money Market Funds ................................................ 10
Other Funds ....................................................... 10
General ........................................................... 11
MFS Firsts ........................................................ 12
X Shareholder Services .............................................. 13
Investment and Withdrawal Programs ................................ 13
Exchange Privilege ................................................ 15
Tax-Deferred Retirement Plans ..................................... 16
XI Description of Shares, Voting Rights and Liabilities .............. 16
Appendix A -- Waivers of Sales Charges ............................ A-1
Appendix B -- Dealer Commissions and Concessions .................. B-1
Appendix C -- Investment Techniques, Practices and Risks .......... C-1
Appendix D -- Description of Bond Ratings ......................... D-1
</TABLE>
<PAGE>
I MANAGEMENT OF THE FUND I
Trustees/Officers
Board Oversight -- The Board of Trustees which oversees the Fund 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.
Trustee Retirement Plan -- The Trust has a retirement plan for Trustees
who are non-interested Trustees and Trustees who are not officers of the
Trust. Under this plan, a Trustee will retire upon reaching a specified
age (see Part I--"Appendix B") ("Retirement Age") 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
his Retirement Age 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. The
Fund will accrue its allocable portion of compensation expenses under the
retirement plan each year to cover the current year's service and
amortize past service cost.
Indemnification of Trustees and Officers -- The Declaration of Trust of
the Trust provides that the Trust will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with
litigation in which they may be involved because of their offices with
the Trust, unless, as to liabilities of the Trust 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
The Trust has retained Massachusetts Financial Services Company ("MFS" or
the "Adviser") as the Fund's investment adviser. MFS and its predecessor
organizations have a history of money management dating from 1924. MFS is
a subsidiary of Sun Life of Canada (U.S.) Financial Services Holdings,
Inc., which in turn is an indirect wholly owned subsidiary of Sun Life of
Canada (an insurance company).
MFS has retained, on behalf of certain MFS Funds, sub-investment advisers
to assist MFS in the management of the Fund's assets. A description of
these sub-advisers, the services they provide and their compensation is
provided under the caption "Management of the Fund -- Sub-Adviser" in
Part I of this SAI for Funds which use sub-advisers.
Investment Advisory Agreement -- The Adviser manages the Fund pursuant to
an Investment Advisory Agreement (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, as disclosed in the Prospectus under the
heading "Management of the Fund[s]."
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 and effecting its portfolio transactions.
The Trust pays the compensation of the Trustees who are not officers
of MFS and all expenses of the Fund (other than those assumed by MFS)
including but not limited to: advisory and administrative services;
governmental fees; interest charges; taxes; membership dues in the
Investment Company Institute allocable to the Fund; fees and expenses of
independent auditors, of legal counsel, and of any transfer agent,
registrar or dividend disbursing agent of the Fund; expenses of
repurchasing and redeeming shares and servicing shareholder accounts;
expenses of preparing, printing and mailing prospectuses, periodic
reports, notices and proxy statements to shareholders and to governmental
officers and commissions; brokerage and other expenses connected with the
execution, recording and settlement of portfolio security transactions;
insurance premiums; fees and expenses of State Street Bank and Trust
Company, the Fund's custodian, for all services to the Fund, including
safekeeping of funds and securities and maintaining required books and
accounts; expenses of calculating the net asset value of shares of the
Fund; and expenses of shareholder meetings. Expenses relating to the
issuance, registration and qualification of shares of the Fund and the
preparation, printing and mailing of prospectuses are borne by the Fund
except that the 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
between the series in a manner believed by management of the Trust to be
fair and equitable.
The Advisory Agreement has an initial two year term and continues in
effect thereafter only if such continuance is specifically approved at
least annually by the Board of Trustees or by vote of a majority of the
Fund's shares (as defined in "Investment Restrictions" in Part I of this
SAI) 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
Part II -- 1
<PAGE>
defined in "Investment Restrictions" in Part I of this SAI), or by either
party on not more than 60 days' nor less than 30 days' written notice.
The Advisory Agreement provides that if MFS ceases to serve as the
Adviser to the Fund, the Fund will change its name so as to delete the
initials "MFS" and that MFS may render services to others and may permit
other fund clients to use the initials "MFS" in their names. The Advisory
Agreement also provides that neither the Adviser nor its personnel shall
be liable for any error of judgment or mistake of law or for any loss
arising out of any investment or for any act or omission in the execution
and management of the Fund, except for willful misfeasance, bad faith or
gross negligence in the performance of its or their duties or by reason
of reckless disregard of its or their obligations and duties under the
Advisory Agreement.
Administrator
MFS provides the Fund with certain financial, legal, compliance,
shareholder communications and other administrative services pursuant to
a Master Administrative Services Agreement. Under this Agreement, the
Fund pays MFS an administrative fee up to 0.015% per annum of the Fund's
average daily net assets. This fee reimburses MFS for a portion of the
costs it incurs to provide such services.
Custodian
State Street Bank and Trust Company (the "Custodian") is the custodian of
the Fund's assets. The Custodian's responsibilities include safekeeping
and controlling the Fund's cash and securities, handling the receipt and
delivery of securities, determining income and collecting interest and
dividends on the Fund's investments, maintaining books of original entry
for portfolio and fund accounting and other required books and accounts,
and calculating the daily net asset value of each class of shares of the
Fund. The Custodian does not determine the investment policies of the
Fund or decide which securities the Fund will buy or sell. The Fund may,
however, invest in securities of the Custodian and may deal with the
Custodian as principal in securities transactions. The Custodian also
acts as the dividend disbursing agent of the Fund.
Shareholder Servicing Agent
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of MFS, is
the Fund's shareholder servicing agent, pursuant to an Amended and
Restated Shareholder Servicing Agreement (the "Agency Agreement"). The
Shareholder Servicing Agent's responsibilities under the Agency Agreement
include administering and performing transfer agent functions and the
keeping of records in connection with the issuance, transfer and
redemption of each class of shares of the Fund. For these services, MFSC
will receive a fee calculated as a percentage of the average daily net
assets of the Fund at an effective annual rate of up to 0.1125%. In
addition, MFSC will be reimbursed by the Fund for certain expenses
incurred by MFSC on behalf of the Fund. The Custodian has contracted with
MFSC to perform certain dividend disbursing agent functions for the Fund.
Distributor
MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary of MFS,
serves as distributor for the continuous offering of shares of the Fund
pursuant to an Amended and Restated Distribution Agreement (the
"Distribution Agreement"). The Distribution Agreement has an initial two
year term and continues in effect thereafter only if such continuance is
specifically approved at least annually by the Board of Trustees or by
vote of a majority of the Fund's shares (as defined in "Investment
Restrictions" in Part I of this SAI) 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.
II PRINCIPAL SHARE CHARACTERISTICS
Set forth below is a description of Class A, B, C and I shares offered by
the MFS Family of Funds. Some MFS Funds may not offer each class of
shares -- see the Prospectus of the Fund to determine which classes of
shares the Fund offers.
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
"How to Purchase, Exchange and Redeem Shares" 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 and other funds
(as noted under Right of Accumulation) by any person, including members
of a family unit (e.g., husband, wife and minor children) and bona fide
trustees, and also applies to purchases made under the Right of
Accumulation or a Letter of Intent (see "Investment and Withdrawal
Programs" below). A group might qualify to obtain quantity sales charge
discounts (see "Investment and Withdrawal Programs" below). Certain
purchases of Class A shares may be subject to a 1% CDSC instead of an
initial sales charge, as described in the Fund's Prospectus.
Class B Shares, Class C Shares and Class I Shares MFD acts as agent in
selling Class B, Class C and Class I shares of the Fund. The public
offering price of Class B, Class C and Class I shares is their net asset
value next computed after the sale. Class B and C shares are generally
subject to a CDSC, as described in the Fund's Prospectus.
Part II -- 2
<PAGE>
Waiver of Sales Charges
In certain circumstances, the initial sales charge imposed upon purchases
of Class A shares and the CDSC imposed upon redemptions of Class A, B and
C shares are waived. These circumstances are described in Appendix A of
this Part II. 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, because the sales effort, if any, involved in
making such sales is negligible, or in the case of certain CDSC waivers,
because the circumstances surrounding the redemption of Fund shares were
not foreseeable or voluntary.
Dealer Commissions and Concessions
MFD pays commission and provides concessions to dealers that sell Fund
shares. These dealer commissions and concession are described in Appendix
B of this Part II.
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.
III 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 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 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.
In certain circumstances, the fees described below may not be imposed,
are being waived or do not apply to certain MFS Funds. Current
distribution and service fees for each Fund are reflected under the
caption "Expense Summary" in the Prospectus.
Features Common To Each Class of Shares
There are features of the Distribution Plan that are common to each Class
of shares, as described below.
Service Fees -- The Distribution Plan provides that the Fund may pay MFD
a service fee of up to 0.25% of the average daily net assets attributable
to the class of shares to which the Distribution Plan relates (i.e.,
Class A, Class B or Class C shares, as appropriate) (the "Designated
Class") annually in order that MFD may pay expenses on behalf of the Fund
relating to the servicing of shares of the Designated Class. The service
fee is used by MFD to compensate dealers which enter into a sales
agreement with MFD in consideration for all personal services and/or
account maintenance services rendered by the dealer with respect to
shares of the Designated Class owned by investors for whom such dealer is
the dealer or holder of record. MFD may from time to time reduce the
amount of the service fees paid for shares sold prior to a certain date.
Service fees may be reduced for a dealer that is the holder or dealer of
record for an investor who owns shares of the Fund having an aggregate
net asset value at or above a certain dollar level. Dealers may from time
to time be required to meet certain criteria in order to receive service
fees. MFD or its affiliates are entitled to retain all service fees
payable under the Distribution Plan for which there is no dealer of
record or for which qualification standards have not been met as partial
consideration for personal services and/or account maintenance services
performed by MFD or its affiliates to shareholder accounts.
Distribution Fees -- The Distribution Plan provides that the Fund may pay
MFD a distribution fee in addition to the service fee described above
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. 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 expense and equipment. 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 expenses
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.
The Distribution Plan remains in effect from year to year only if its
continuance is specifically approved at least annually by
Part II -- 3
<PAGE>
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" in Part I of this SAI). All agreements relating
to the Distribution Plan entered into between the Fund or MFD and other
organizations must be approved by the Board of Trustees, including a
majority of the Distribution Plan Qualified Trustees. Agreements under
the Distribution Plan must be in writing, will be terminated
automatically if assigned, and may be terminated at any time without
payment of any penalty, by vote of a majority of the Distribution Plan
Qualified Trustees or by vote of the holders of a majority of the
respective class of the Fund's shares. The Distribution Plan may not be
amended to increase materially the amount of permitted distribution
expenses without the approval of a majority of the respective class of
the Fund's shares (as defined in "Investment Restrictions" in Part I of
this SAI) 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.
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). In addition to the initial sales charge, the dealer also generally
receives the ongoing 0.25% per annum service fee, as discussed above.
No service fees will be paid: (i) to any dealer who is the holder or
dealer or 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.
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 (0.25% per annum for certain Funds). As
noted above, MFD may use the distribution fee to cover
distribution-related expenses incurred by it under its distribution
agreement with the Fund, including commissions to dealers and payments to
wholesalers employed by MFD (e.g., MFD pays commissions to dealers with
respect to purchases of $1 million or more and purchases by certain
retirement plans of Class A shares which are sold at net asset value but
which are subject to a 1% CDSC for one year after purchase). 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 (0.50% per annum
for certain Funds), 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. 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.
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.
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).
Class C Shares -- Class C shares are offered at net asset value without
an initial sales charge but subject to a CDSC of 1.00% upon redemption
during the first year. 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
Part II -- 4
<PAGE>
the Distribution Plan, equal, on an annual basis, to 0.75% of the Fund's
average daily net assets attributable to Class C shares.
IV INVESTMENT TECHNIQUES, PRACTICES AND RISKS
Set forth in Appendix C of this Part II is a description of investment
techniques and practices which the MFS Funds may generally use in
pursuing their investment objectives and principal investment policies,
and the risks associated with these investment techniques and practices.
The Fund will engage only in certain of these investment techniques and
practices, as identified in Part I. Investment practices and techniques
that are not identified in Part I do not apply to the Fund.
V NET INCOME AND DISTRIBUTIONS
Money Market Funds
The net income attributable to each MFS Fund that is a money market fund
is determined each day during which the New York Stock Exchange is open
for trading (see "Determination of Net Asset Value" below for a list of
days the Exchange is closed).
For this purpose, the net income attributable to shares of a money
market fund (from the time of the immediately preceding determination
thereof) shall consist of (i) all interest income accrued on the
portfolio assets of the money market fund, (ii) less all actual and
accrued expenses of the money market fund determined in accordance with
generally accepted accounting principles, and (iii) plus or minus net
realized gains and losses and net unrealized appreciation or depreciation
on the assets of the money market fund, if any. Interest income shall
include discount earned (including both original issue and market
discount) on discount paper accrued ratably to the date of maturity.
Since the net income is declared as a dividend each time the net
income is determined, the net asset value per share (i.e., the value of
the net assets of the money market fund divided by the number of shares
outstanding) remains at $1.00 per share immediately after each such
determination and dividend declaration. Any increase in the value of a
shareholder's investment, representing the reinvestment of dividend
income, is reflected by an increase in the number of shares in the
shareholder's account.
It is expected that the shares of the money market fund will have a
positive net income at the time of each determination thereof. If for any
reason the net income determined at any time is a negative amount, which
could occur, for instance, upon default by an issuer of a portfolio
security, the money market fund would first offset the negative amount
with respect to each shareholder account from the dividends declared
during the month with respect to each such account. If and to the extent
that such negative amounts exceeds such declared dividends at the end of
the month (or during the month in the case of an account liquidated in
its entirety), the money market fund could reduce the number of its
outstanding shares by treating each shareholder of the money market fund
as having contributed to its capital that number of full and fractional
shares of the money market fund in the account of such shareholder which
represents its proportion of such excess. Each shareholder of the money
market fund will be deemed to have agreed to such contribution in these
circumstances by its investment in the money market fund. This procedure
would permit the net asset value per share of the money market fund to be
maintained at a constant $1.00 per share.
Other Funds
Each MFS Fund other than the MFS money market funds intends to distribute
to its shareholders dividends equal to all of its net investment income
with such frequency as is disclosed in the Fund's prospectus. These
Funds' net investment income consists of non-capital gain income less
expenses. In addition, these Funds intend to distribute net realized
short- and long-term capital gains, if any, at least annually.
Shareholders will be informed of the tax consequences of such
distributions, including whether any portion represents a return of
capital, after the end of each calendar year.
VI TAX CONSIDERATIONS
The following discussion is a brief summary of some of the important
federal (and, where noted, state) income tax consequences affecting the
Fund and its shareholders. The discussion is very general, and therefore
prospective investors are urged to consult their tax advisors about the
impact an investment in the Fund may have on their own tax situation.
Taxation of The Fund
Federal Taxes -- The Fund (even if it is a fund in a Trust with multiple
series) is treated as a separate entity for federal income tax purposes
under the Internal Revenue Code of 1986, as amended (the "Code"). The
Fund has elected (or in the case of a new Fund, intends to elect) to be,
and intends to qualify to be treated 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 its distributions (as a
percentage of both its overall income and any tax-exempt income), and the
composition of its portfolio assets. As a regulated investment company,
the Fund will not be subject to any federal income or excise taxes on its
net investment income and net realized capital gains that it distributes
to shareholders in accordance with the timing requirements imposed by the
Code. The Fund's foreign-source income, if any, may be subject to foreign
withholding taxes. If the Fund failed to qualify as a "regulated
investment company" in any year, it would incur a regular federal
corporate income tax on all of its taxable income, whether or not
distributed, and Fund distributions would generally be taxable as
ordinary dividend income to the shareholders.
Massachusetts Taxes -- 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.
Part II -- 5
<PAGE>
Taxation of Shareholders
Tax Treatment of Distributions -- Subject to the special rules discussed
below for Municipal Funds, shareholders of the Fund normally will have to
pay federal income tax and any state or local income taxes on the
dividends and capital gain distributions they receive from the Fund. Any
distributions from ordinary income and 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.
Distributions of net capital gain (i.e., the excess of net long-term
capital gain over net short-term capital loss), whether paid in cash or
reinvested in additional shares, are taxable to shareholders as long-term
capital gains for federal income tax purposes without regard to the
length of time the shareholders have held their shares. Any Fund dividend
that is declared in October, November, or December of any calendar year,
payable to shareholders of record in such a month, and paid during 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, other than dividends that are declared by the
Fund on a daily basis, will have the effect of reducing the per share net
asset value of Fund shares by the amount of the distribution.
Shareholders purchasing shares shortly before the record date of any
distribution (other than an exempt-interest dividend) may thus pay the
full price for the shares and then effectively receive a portion of the
purchase price back as a taxable distribution.
Dividends-Received Deduction -- If the Fund receives dividend income from
U.S. corporations, a portion of the Fund's ordinary income dividends is
normally eligible for the dividends-received deduction for corporations
if the recipient otherwise qualifies for that deduction with respect to
its holding of Fund shares. Availability of the deduction for particular
corporate shareholders is subject to certain limitations, and deducted
amounts may be subject to the alternative minimum tax or result in
certain basis adjustments.
Disposition of Shares -- In general, any gain or loss realized upon a
disposition of Fund shares 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 Fund shares 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 Fund shares held for 90 days or less followed by any purchase
(including purchases by exchange or by reinvestment) without payment of
an additional sales charge of Class A shares of the Fund or of any other
shares of an MFS Fund generally sold subject to a sales charge.
Distribution/Accounting Policies -- The Fund's current distribution 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.
Foreign Income Taxes -- Investment income received by the Fund and gains
with respect to foreign securities may be subject to foreign income taxes
withheld at the source. The United States has entered into tax treaties
with many foreign countries that may entitle the Fund to a reduced rate
of tax or an exemption from tax on such income; the Fund intends to
qualify for treaty reduced rates where available. It is 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, it may elect to "pass
through" to its shareholders foreign income taxes paid by it. If the Fund
so elects, shareholders will be required to treat their pro rata portions
of the foreign income taxes paid by the Fund as part of the amounts
distributed to them by it 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 is not eligible, or does not elect, to
"pass through" to its shareholders foreign income taxes it has paid,
shareholders will not be able to claim any deduction or credit for any
part of the foreign taxes paid by the Fund.
U.S. Taxation of Non-U.S. Persons -- Dividends and certain other payments
(but not including distributions of net capital gains) 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 at that rate on taxable
dividends and other payments to Non-U.S. Persons that are subject to such
withholding. The Fund may withhold at a lower rate permitted by an
applicable treaty if the shareholder provides the documentation required
by the Fund. 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.
Backup Withholding -- The Fund is also required in certain circumstances
to apply backup withholding at the rate of 31% on taxable dividends and
capital gain distributions (and redemption proceeds, if applicable) paid
to any non-corporate shareholder (including a Non-U.S. Person) who does
not furnish to the
Part II -- 6
<PAGE>
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.
Foreign Income Taxation of Non-U.S. Persons--Distributions received from
the Fund by Non-U.S. Persons may also be subject to tax under the laws of
their own jurisdictions.
State and Local Income Taxes: U.S. Government Securities -- Dividends
paid by the Fund that are derived from interest on obligations of the
U.S. Government and certain of its agencies and instrumentalities (but
generally not distributions of capital gains realized upon the
disposition of such obligations) may be exempt from state and local
income taxes. The Fund generally intends to advise shareholders of the
extent to which its dividends consist of such interest. Shareholders are
urged to consult their tax advisors regarding the possible exclusion of
such portion of their dividends for state and local income tax purposes.
Certain Specific Investments -- Any investment in zero coupon bonds,
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. To distribute this income (as well as
non-cash income described in the next two paragraphs) 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. Any 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.
Options, Futures Contracts, and Forward Contracts -- The Fund's
transactions in options, Futures Contracts, Forward Contracts, short
sales "against the box," and swaps and related transactions will be
subject to special tax rules that may affect the amount, timing, and
character of Fund income and distributions to shareholders. For example,
certain positions held by the Fund on the last business day of each
taxable year will be marked to market (i.e., treated as if closed out) on
that day, and any gain or loss associated with the positions will be
treated as 60% long-term and 40% short-term capital gain or loss. Certain
positions held by the Fund that substantially diminish its risk of loss
with respect to other positions in its portfolio may constitute
"straddles," and may be subject to special tax rules that would cause
deferral of Fund losses, adjustments in the holding periods of Fund
securities, and conversion of short-term into long-term capital losses.
Certain tax elections exist for straddles that may alter the effects of
these rules. The Fund will limit its activities in options, Futures
Contracts, Forward Contracts short sales "against the box" and swaps and
related transactions to the extent necessary to meet the requirements of
Subchapter M of the Code.
Foreign Investments -- Special tax considerations apply with respect to
foreign investments by the Fund. Foreign exchange gains and losses
realized by the Fund may be treated as ordinary income and loss. Use of
foreign currencies for non-hedging purposes and investment by the Fund in
certain "passive foreign investment companies" may be limited in order to
avoid a tax on the Fund. The Fund may elect to mark to market any
investments in "passive foreign investment companies" on the last day of
each year. This election may cause the Fund to recognize income prior to
the receipt of cash payments with respect to those investments; in order
to distribute this income and avoid a tax on the Fund, the Fund may be
required to liquidate portfolio securities that it might otherwise have
continued to hold, potentially resulting in additional taxable gain or
loss to the Fund.
Special Rules For Municipal Fund Distributions
The following special rules apply to shareholders of funds whose
objective is to invest primarily in obligations that pay interest that is
exempt from federal income tax ("Municipal Funds").
Tax Exempt Distributions -- The portion of a Municipal Fund's
distributions of net investment income that is attributable to interest
from tax-exempt securities will be designated by the Fund as an
"exempt-interest dividend" under the Code and will generally be exempt
from federal income tax in the hands of shareholders so long as at least
50% of the total value of the Fund's assets consists of tax-exempt
securities at the close of each quarter of the Fund's taxable year.
Distributions of tax-exempt interest earned from certain securities may,
however, be treated as an item of tax preference for shareholders under
the federal alternative minimum tax, and all exempt-interest dividends
may increase a corporate shareholder's alternative minimum tax. Except
when the Fund provides actual monthly percentage breakdowns, the
percentage of income designated as tax-exempt will be applied uniformly
to all distributions by the Fund of net investment income made during
each fiscal year of the Fund and may differ from the percentage of
distributions consisting of tax-exempt interest in any particular month.
Shareholders are required to report exempt-interest dividends received
from the Fund on their federal income tax returns.
Taxable Distributions -- A Municipal Fund may also earn some income that
is taxable (including interest from any obligations that lose their
federal tax exemption) and may recognize capital gains and losses as a
result of the disposition of securities and from certain options and
futures transactions. Shareholders normally will have to pay federal
income tax on the non-exempt-interest dividends and capital gain
distributions they receive from the Fund, whether paid in cash or
reinvested in additional shares. However, the Fund does not expect that
the non-tax-exempt portion of its net investment income, if any, will be
substantial. Because the Fund expects to earn primarily tax-exempt
interest income, it is expected that no Fund dividends will qualify for
the dividends-received deduction for corporations.
Part II -- 7
<PAGE>
Consequences of Distributions by a Municipal Fund: Effect of Accrued
Tax-Exempt Income -- Shareholders redeeming shares after tax-exempt
income has been accrued but not yet declared as a dividend should be
aware that a portion of the proceeds realized upon redemption of the
shares will reflect the existence of such accrued tax-exempt income and
that this portion will be subject to tax as a capital gain even though it
would have been tax-exempt had it been declared as a dividend prior to
the redemption. For this reason, if a shareholder wishes to redeem shares
of a Municipal Fund that does not declare dividends on a daily basis, the
shareholder may wish to consider whether he or she could obtain a better
tax result by redeeming immediately after the Fund declares dividends
representing substantially all the ordinary income (including tax-exempt
income) accrued for that month.
Certain Additional Information for Municipal Fund Shareholders -- Interest
on indebtedness incurred by shareholders to purchase or carry Fund shares
will not be deductible for federal income tax purposes. Exempt-interest
dividends are taken into account in calculating the amount of social
security and railroad retirement benefits that may be subject to federal
income tax. Entities or persons who are "substantial users" (or persons
related to "substantial users") of facilities financed by private activity
bonds should consult their tax advisors before purchasing Fund shares.
Consequences of Redemption of Shares -- Any loss realized on a redemption
of Municipal Fund shares held for six months or less will be disallowed
to the extent of any exempt-interest dividends received with respect to
those shares. If not disallowed, any such loss 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.
State and Local Income Taxes: Municipal Obligations -- The exemption of
exempt-interest dividends for federal income tax purposes does not
necessarily result in exemption under the income tax laws of any state or
local taxing authority. Some states do exempt from tax that portion of an
exempt-interest dividend that represents interest received by a regulated
investment company on its holdings of securities issued by that state and
its political subdivisions and instrumentalities. Therefore, the Fund will
report annually to its shareholders the percentage of interest income
earned by it during the preceding year on Municipal Bonds and will
indicate, on a state-by-state basis only, the source of such income.
VII 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 Trust's
Board of Trustees.
The primary consideration in placing portfolio security transactions
is execution at the most favorable prices. The Adviser has complete
freedom as to the markets in and broker-dealers through which it seeks
this result. In the U.S. and in some other countries debt securities are
traded principally in the over-the-counter market on a net basis through
dealers acting for their own account and not as brokers. In other
countries both debt and equity securities are traded on exchanges at
fixed commission rates. The cost of securities purchased from
underwriters includes an underwriter's commission or concession, and the
prices at which securities are purchased and sold from and to dealers
include a dealer's mark-up or mark-down. The Adviser normally seeks to
deal directly with the primary market makers or on major exchanges
unless, in its opinion, better prices are available elsewhere. Subject to
the requirement of seeking execution at the best available price,
securities may, as authorized by the Advisory Agreement, be bought from
or sold to dealers who have furnished statistical, research and other
information or services to the Adviser. At present no arrangements for
the recapture of commission payments are in effect.
Consistent with the foregoing primary consideration, the Conduct Rules
of the National Association of Securities Dealers, Inc. ("NASD") and such
other policies as the Trustees may determine, the Adviser may consider
sales of shares of the Fund and of the other investment company clients
of MFD as a factor in the selection of broker-dealers to execute the
Fund's portfolio transactions.
Under the Advisory Agreement and as permitted by Section 28(e) of the
Securities Exchange Act of 1934, the Adviser may cause the Fund to pay a
broker-dealer which provides brokerage and research services to the
Adviser, an amount of commission for effecting a securities transaction
for the Fund in excess of the amount other broker-dealers would have
charged for the transaction, if the Adviser determines in good faith that
the greater commission is reasonable in relation to the value of the
brokerage and research services provided by the executing broker-dealer
viewed in terms of either a particular transaction or their respective
overall responsibilities to the Fund or to their other clients. Not all
of such services are useful or of value in advising the Fund.
The term "brokerage and research services" includes advice as to the
value of securities, the advisability of investing in, purchasing or
selling securities, and the availability of securities or of purchasers
or sellers of securities; furnishing analyses and reports concerning
issues, industries, securities, economic factors and trends, portfolio
strategy and the performance of accounts; and effecting securities
transactions and performing functions incidental thereto, such as
clearance and settlement.
Although commissions paid on every transaction will, in the judgment
of the Adviser, be reasonable in relation to the value of the brokerage
services provided, commissions exceeding those which another broker might
charge may be paid to broker-dealers who were selected to execute
transactions on behalf of
Part II -- 8
<PAGE>
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 Family of Funds) have directed the Adviser to
allocate a total of $54,160 of commission business from the MFS Family of
Funds to the Pershing Division of Donaldson Lufkin & Jenrette as
consideration for the annual renewal of certain publications provided by
Lipper Analytical Securities Corporation (which provides information
useful to the Trustees in reviewing the relationship between the Fund and
the Adviser).
The Adviser's investment management personnel attempt to evaluate the
quality of Research provided by brokers. The 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 will not be reduced as a consequence
of the Adviser's receipt of brokerage and research service. To the extent
the Fund's portfolio transactions are used to obtain brokerage and
research services, the brokerage commissions paid by the Fund will exceed
those that might otherwise be paid for such portfolio transactions, or
for such portfolio transactions and research, by an amount which cannot
be presently determined. Such services would be useful and of value to
the Adviser in serving both the Fund and other clients and, conversely,
such services obtained by the placement of brokerage business of other
clients would be useful to the Adviser in carrying out its obligations to
the Fund. While such services are not expected to reduce the expenses of
the Adviser, the Adviser would, through use of the services, avoid the
additional expenses which would be incurred if it should attempt to
develop comparable information through its own staff.
In certain instances there may be securities which are suitable for
the Fund's portfolio as well as for that of one or more of the other
clients of the Adviser or any subsidiary of the Adviser. Investment
decisions for the Fund and for such other clients are made with a view to
achieving their respective investment objectives. It may develop that a
particular security is bought or sold for only one client even though it
might be held by, or bought or sold for, other clients. Likewise, a
particular security may be bought for one or more clients when one or
more other clients are selling that same security. Some simultaneous
transactions are inevitable when several clients receive investment
advice from the same investment adviser, particularly when the same
security is suitable for the investment objectives of more than one
client. When two or more clients are simultaneously engaged in the
purchase or sale of the same security, the securities are allocated among
clients in a manner believed by the adviser to be equitable to each. It
is recognized that in some cases this system could have a detrimental
effect on the price or volume of the security as far as the Fund is
concerned. In other cases, however, the Fund believes that its ability to
participate in volume transactions will produce better executions for the
Fund.
VIII DETERMINATION OF NET ASSET VALUE
The net asset value per share of each class of the Fund is determined
each day during which the New York Stock Exchange is open for trading.
(As of the date of this SAI, the Exchange is open for trading every
weekday except for the following holidays (or the days on which they are
observed): New Year's Day; Martin Luther King 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.
Money Market Funds
Portfolio securities of each MFS Fund that is a money market fund are
valued at amortized cost, which the Board of Trustees which oversees the
money market fund has determined in good faith constitutes fair value for
the purposes of complying with the 1940 Act. This valuation method will
continue to be used until such time as the Board of Trustees determines
that it does not constitute fair value for such purposes. Each money
market fund will limit its portfolio to those investments in U.S. dollar-
denominated instruments which its Board of Trustees determines present
minimal credit risks, and which are of high quality as determined by any
major rating service or, in the case of any instrument that is not so
rated, of comparable quality as determined by the Board of Trustees. Each
money market fund has also agreed to maintain a dollar-weighted average
maturity of 90 days or less and to invest only in securities maturing in
13 months or less. The Board of Trustees which oversee each money market
fund has established procedures designed to stabilize its net asset value
per share, as computed for the purposes of sales and redemptions, at
$1.00 per share. If the Board determines that a deviation from the $1.00
per share price may exist which may result in a material dilution or
other unfair result to investors or existing shareholders, it will take
corrective action it regards as necessary and appropriate, which action
could include the sale of instruments prior to maturity (to realize
capital gains or losses); shortening average portfolio maturity;
withholding dividends; or using market quotations for valuation purposes.
Other Funds
The following valuation techniques apply to each MFS Fund that is not a
money market fund.
Part II -- 9
<PAGE>
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
stock market 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
stock market system. Bonds and other fixed income securities (other than
short-term obligations) of U.S. issuers in the Fund's portfolio are
valued on the basis of valuations furnished by a pricing service which
utilizes both dealer-supplied valuations and electronic data processing
techniques which take into account appropriate factors such as
institutional-size trading in similar groups of securities, yield,
quality, coupon rate, maturity, type of issue, trading characteristics
and other market data without exclusive reliance upon quoted prices or
exchange or over-the-counter prices, since such valuations are believed
to reflect more accurately the fair value of such securities. Forward
Contracts will be valued using a pricing model taking into consideration
market data from an external pricing source. Use of the pricing services
has been approved by the Board of Trustees.
All other securities, futures contracts and options in the Fund's
portfolio (other than short-term obligations) for which the principal
market is one or more securities or commodities exchanges (whether
domestic or foreign) will be valued at the last reported sale price or at
the settlement price prior to the determination (or if there has been no
current sale, at the closing bid price) on the primary exchange on which
such securities, futures contracts or options are traded; but if a
securities exchange is not the principal market for securities, such
securities will, if market quotations are readily available, be valued at
current bid prices, unless such securities are reported on the Nasdaq
stock market 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.
IX PERFORMANCE INFORMATION
Money Market Funds
Each MFS Fund that is a money market fund will provide current annualized
and effective annualized yield quotations based on the daily dividends of
shares of the money market fund. These quotations may from time to time
be used in advertisements, shareholder reports or other communications to
shareholders.
Any current yield quotation of a money market fund which is used in
such a manner as to be subject to the provisions of Rule 482(d) under the
1933 Act shall consist of an annualized historical yield, carried at
least to the nearest hundredth of one percent based on a specific seven
calendar day period and shall be calculated by dividing the net change in
the value of an account having a balance of one share of that class at
the beginning of the period by the value of the account at the beginning
of the period and multiplying the quotient by 365/7. For this purpose the
net change in account value would reflect the value of additional shares
purchased with dividends declared on the original share and dividends
declared on both the original share and any such additional shares, but
would not reflect any realized gains or losses from the sale of
securities or any unrealized appreciation or depreciation on portfolio
securities. In addition, any effective yield quotation of a money market
fund so used shall be calculated by compounding the current yield
quotation for such period by multiplying such quotation by 7/365, adding
1 to the product, raising the sum to a power equal to 365/7, and
subtracting 1 from the result. These yield quotations should not be
considered as representative of the yield of a money market fund in the
future since the yield will vary based on the type, quality and
maturities of the securities held in its portfolio, fluctuations in
short-term interest rates and changes in the money market fund's
expenses.
Other Funds
Each MFS Fund that is not a money market fund may quote the following
performance results.
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 any
applicable CDSC 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 any applicable sales charge and/or (iii)
total rates of return which represent aggregate per-
Part II -- 10
<PAGE>
formance over a period or year-by-year performance, and which may or may
not reflect the effect of the maximum or other sales charge or CDSC.
The Fund offers multiple classes of shares which were initially
offered for sale to, and purchased by, the public on different dates (the
class "inception date"). The calculation of total rate of return for a
class of shares which has a later class inception date than another class
of shares of the Fund is based both on (i) the performance of the Fund's
newer class from its inception date and (ii) the performance of the
Fund's oldest class from its inception date up to the class inception
date of the newer class.
As discussed in the Prospectus, the sales charges, expenses and
expense ratios, and therefore the performance, of the Fund's classes of
shares differ. In calculating total rate of return for a newer class of
shares in accordance with certain formulas required by the SEC, the
performance will be adjusted to take into account the fact that the newer
class is subject to a different sales charge than the oldest class (e.g.,
if the newer class is Class A shares, the total rate of return quoted
will reflect the deduction of the initial sales charge applicable to
Class A shares; if the newer class is Class B shares, the total rate of
return quoted will reflect the deduction of the CDSC applicable to Class
B shares). However, the performance will not be adjusted to take into
account the fact that the newer class of shares bears different class
specific expenses than the oldest 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).
Any total rate of return quotation provided by the Fund should not be
considered as representative of the performance of the Fund in the future
since the net asset value of shares of the Fund will vary based not only
on the type, quality and maturities of the securities held in the Fund's
portfolio, but also on changes in the current value of such securities
and on changes in the expenses of the Fund. These factors and possible
differences in the methods used to calculate total rates of return should
be considered when comparing the total rate of return of the Fund to
total rates of return published for other investment companies or other
investment vehicles. Total rate of return reflects the performance of
both principal and income. Current net asset value and account balance
information may be obtained by calling 1-800-MFS-TALK (637-8255).
Yield -- Any yield quotation for a class of shares of the Fund is based
on the annualized net investment income per share of that class for the
30-day period. The yield for each class of the Fund is calculated by
dividing the net investment income allocated to that class earned during
the period by the maximum offering price per share of that class of the
Fund on the last day of the period. The resulting figure is then
annualized. Net investment income per share of a class is determined by
dividing (i) the dividends and interest allocated to that class during
the period, minus accrued expense of that class for the period by (ii)
the average number of shares of the class entitled to receive dividends
during the period multiplied by the maximum offering price per share on
the last day of the period. The Fund's yield calculations assume a
maximum sales charge of 5.75% in the case of Class A shares and no
payment of any CDSC in the case of Class B and Class C shares.
Tax-Equivalent Yield -- The tax-equivalent yield for a class of shares of
a Fund is calculated by determining the rate of return that would have to
be achieved on a fully taxable investment in such shares to produce the
after-tax equivalent of the yield of that class. In calculating
tax-equivalent yield, a Fund assumes certain federal tax brackets for
shareholders and does not take into account state taxes.
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 (i) annualizing the
distributions (excluding short-term capital gains) of the class for a
stated period; (ii) adding any short-term capital gains paid within the
immediately preceding twelve-month period; and (iii) dividing the result
by the maximum offering price or net asset value per share on the last
day of the period. The current distribution rate differs from the yield
computation because it may include distributions to shareholders from
sources other than dividends and interest, such as premium income for
option writing, short-term capital gains and return of invested capital,
and may be calculated over a different period of time. The Fund's current
distribution rate calculation for Class B shares and Class C shares
assumes no CDSC is paid.
General
From time to time the Fund may, as appropriate, quote Fund rankings or
reprint all or a portion of evaluations of fund performance and
operations appearing in various independent publications, including but
not limited to the following: Money, Fortune, U.S. News and World Report,
Kiplinger's Personal Finance, The Wall Street Journal, Barron's,
Investors Business Daily, Newsweek, Financial World, Financial Planning,
Investment Advisor, USA Today, Pensions and Investments, SmartMoney,
Forbes, Global Finance, Registered Representative, Institutional
Investor, the Investment Company Institute, Johnson's Charts,
Morningstar, Lipper Analytical Securities Corporation, CDA Wiesenberger,
Part II -- 11
<PAGE>
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.
The Fund may also use charts, graphs or other presentation formats to
illustrate the historical correlation of its performance to fund
categories established by Morningstar (or other nationally recognized
statistical ratings organizations) and to other MFS Funds.
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); issues regarding
financial and health care management for elderly family members; and
other similar or related matters.
From time to time, the Fund may also advertise annual returns showing
the cumulative value of an initial investment in the Fund in various
amounts over specified periods, with capital gain and dividend
distributions invested in additional shares or taken in cash, and with no
adjustment for any income taxes (if applicable) payable by shareholders.
MFS Firsts
MFS has a long history of innovations.
o 1924 -- Massachusetts Investors Trust is established as the first
open-end mutual fund in America.
o 1924 -- Massachusetts Investors Trust is the first mutual fund to
make full public disclosure of its operations in shareholder
reports.
o 1932 -- One of the first internal research departments is
established to provide in-house analytical capability for an
investment management firm.
o 1933 -- Massachusetts Investors Trust is the first mutual fund to
register under the Securities Act of 1933 ("Truth in Securities Act"
or "Full Disclosure Act").
o 1936 -- Massachusetts Investors Trust is the first mutual fund to
allow shareholders to take capital gain distributions either in
additional shares or in cash.
o 1976 -- MFS[RegTM] Municipal Bond Fund is among the first municipal
bond funds established.
o 1979 -- Spectrum becomes the first combination fixed/ variable
annuity with no initial sales charge.
o 1981 -- MFS[RegTM] Global Governments Fund is established as
America's first globally diversified fixed-income mutual fund.
o 1984 -- MFS[RegTM] Municipal High Income Fund is the first open-end
mutual fund to seek high tax-free income from lower-rated municipal
securities.
o 1986 -- MFS[RegTM] Managed Sectors Fund becomes the first mutual
fund to target and shift investments among industry sectors for
shareholders.
o 1986 -- MFS[RegTM] Municipal Income Trust is the first closed-end,
high-yield municipal bond fund traded on the New York Stock
Exchange.
o 1987 -- MFS[RegTM] Multimarket Income Trust is the first closed-end,
multimarket high income fund listed on the New York Stock Exchange.
o 1989 -- MFS[RegTM] Regatta becomes America's first non-qualified
market value adjusted fixed/variable annuity.
o 1990 -- MFS[RegTM] Global Total Return Fund is the first global
balanced fund.
Part II -- 12
<PAGE>
o 1993 -- MFS[RegTM] Global Growth Fund is the first global emerging
markets fund to offer the expertise of two sub-advisers.
o 1993 -- MFS[RegTM] becomes money manager of MFS[RegTM] Union
Standard[RegTM] Equity Fund, the first fund to invest principally 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.
X 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 programs are described below and, in certain
cases, in the Prospectus. The programs involve no extra charge to
shareholders (other than a sales charge in the case of certain Class A
share purchases) and may be changed or discontinued at any time by a
shareholder or the Fund.
Letter of Intent -- If a shareholder (other than a group purchaser
described below) anticipates purchasing $50,000 or more of Class A shares
of the Fund alone or in combination with shares of any class of 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 MFSC) 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 MFSC 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, MFSC 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 MFSC. By completing and signing the Account Application or separate
Letter of Intent application, the shareholder irrevocably appoints MFSC
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, Class B and Class C shares of that shareholder in the MFS Funds or MFS
Fixed Fund reaches a discount level. See "Purchases" in the Prospectus
for the sales charges on quantity discounts. A shareholder must provide
MFSC (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 MFSC 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 MFSC 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. MFSC 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. MFSC 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 that 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
Part II -- 13
<PAGE>
be subject to any CDSC. Distributions will be invested at the close of
business on the payable date for the distribution. A shareholder
considering the Distribution Investment Program should obtain and read
the prospectus of the other fund and consider the differences in
objectives and policies before making any investment.
Systematic Withdrawal Plan -- A shareholder may direct MFSC to send him
(or anyone he designates) regular periodic payments based upon the value
of his account. Each payment under a Systematic Withdrawal Plan ("SWP")
must be at least $100, except in certain limited circumstances. The
aggregate withdrawals of Class B and Class C shares in any year pursuant
to a SWP generally are limited to 10% of the value of the account at the
time of 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) shares representing
reinvested distributions; (ii) shares representing undistributed capital
gains and income; and (iii) to the extent necessary, shares representing
direct investments subject to the lowest CDSC. 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, MFSC. 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. MFSC 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
MFSC 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 MFSC. 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 (if
available for sale). 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 transfer will
occur after receipt and processing by MFSC 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 the 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
Part II -- 14
<PAGE>
MFSC in proper form (i.e., if in writing -- signed by the record owner(s)
exactly as shares are registered; if by telephone -- proper account
identification is given by the dealer or shareholder of record). Each
Exchange Change Request (other than termination of participation in the
program) must involve at least $50. Generally, if an Exchange Change
Request is received by telephone or in writing before the close of
business on the last business day of a month, the Exchange Change Request
will be effective for the following month's exchange.
A shareholder's right to make additional investments in any of the MFS
Funds, to make exchanges of shares from one MFS Fund to another and to
withdraw from an MFS Fund, as well as a shareholder's other rights and
privileges are not affected by a shareholder's participation in the
Automatic Exchange Plan. The Automatic Exchange Plan is part of the
Exchange Privilege. For additional information regarding the Automatic
Exchange Plan, including the treatment of any CDSC, see "Exchange
Privilege" below.
Reinstatement Privilege -- Shareholders of the Fund and shareholders of
the other MFS Funds (except MFS Money Market Fund, MFS Government Money
Market Fund and holders of Class A shares of MFS Cash Reserve Fund in the
case where shares of such funds are acquired through direct purchase or
reinvested dividends) who have redeemed their shares have a one-time
right to reinvest the redemption proceeds in the same class of shares of
any of the MFS Funds (if shares of the fund are available for sale) at
net asset value (without a sales charge) and, if applicable, with credit
for any CDSC paid. In the case of proceeds reinvested in MFS Money Market
Fund, MFS Government Money Market Fund and Class A shares of MFS Cash
Reserve Fund, the shareholder has the right to exchange the acquired
shares for shares of another MFS Fund at net asset value pursuant to the
exchange privilege described below. Such a reinvestment must be made
within 90 days of the redemption and is limited to the amount of the
redemption proceeds. If the shares credited for any CDSC paid are then
redeemed within six years of the initial purchase in the case of Class B
shares or 12 months of the initial purchase in the case of 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 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 MFSC.
Exchanges Among MFS Funds (excluding exchanges from MFS money market
funds) -- No initial sales charge 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
"How to Purchase, Exchange and Redeem Shares" 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 -- 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 MFSC) or all the shares in the
account. Each exchange involves the redemption of the shares of the Fund
to be exchanged and the purchase of shares of the same class of
Part II -- 15
<PAGE>
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 MFSC 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.
Additional information with respect to any of the MFS Funds, including
a copy of its current prospectus, may be obtained from investment dealers
or MFSC. 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.
Any state income tax advantages for investment in shares of each
state-specific series of MFS Municipal Series Trust may only benefit
residents of such states. Investors should consult with their own tax
advisers to be sure this is an appropriate investment, based on their
residency and each state's income tax laws. The exchange privilege (or
any aspect of it) may be changed or discontinued and is subject to
certain limitations imposed from time to time at the discretion of the
Funds in order to protect the Funds.
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, the following:
o Traditional Individual Retirement Accounts (IRAs) (for individuals
who desire to make limited contributions to a Tax-deferred
retirement program and, if eligible, to receive a federal Income tax
deduction for amounts contributed);
o Roth Individual Retirement Accounts (Roth IRAs) (for individuals who
desire to make limited contributions to a tax-favored retirement
program);
o Simplified Employee Pension (SEP-IRA) Plans;
o Retirement Plans Qualified under Section 401(k) of the Internal
Revenue Code of 1986, as amended (the "Code");
o 403(b) Plans (deferred compensation arrangements for employees of
public School systems and certain non-profit organizations); and
o Certain other qualified pension and profit-sharing plans.
The plan documents provided by MFD designate a trustee or custodian
(unless another trustee or custodian is designated by the individual or
group establishing the plan) and contain specific information about the
plans. Each plan provides that dividends and distributions will be
reinvested automatically. For further details with respect to any plan,
including fees charged by the trustee, custodian or MFD, tax consequences
and redemption information, see the specific documents for that plan.
Plan documents other than those provided by MFD may be used to establish
any of the plans described above. Third party administrative services,
available for some corporate plans, may limit or delay the processing of
transactions.
An investor should consult with his tax adviser before establishing
any of the tax-deferred retirement plans described above.
Class C shares are not currently available for purchase by any
retirement plan qualified under Internal Revenue Code Section 401(a) or
403(b) if the retirement plan and/or the sponsoring organization
subscribe to the MFS FUNDamental 401(k) Plan or another similar Section
401(a) or 403(b) recordkeeping program made available by MFSC.
XI 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
Declaration of Trust further authorizes the Trustees to classify or
reclassify any series of shares into one or more classes. 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. To the extent a shareholder of the Fund owns a controlling
percentage of the Fund's shares, such shareholder may affect the outcome
of such matters to a greater extent than other Fund 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
Part II -- 16
<PAGE>
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" in Part I of this SAI).
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 a 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.
Part II -- 17
<PAGE>
PART II -- 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 CDSC for Class A shares are waived (Section II), and the CDSC for
Class B and Class C shares is waived (Section III). Some of the following
information will not apply to certain funds in the MFS Family of Funds,
depending on which classes of shares are offered by such fund. As used in
this Appendix, the term "dealer" includes any broker, dealer, bank
(including bank trust departments), registered investment adviser,
financial planner and any other financial institutions having a selling
agreement or other similar agreement with MFD.
I WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on
purchases of Class A shares and the CDSC imposed on certain redemptions
of Class A shares and on redemptions of Class B and Class C shares, as
applicable, are waived:
Dividend Reinvestment
o Shares acquired through dividend or capital gain reinvestment; and
o Shares acquired by automatic reinvestment of distributions of
dividends and capital gains of any fund in the MFS Funds pursuant to
the Distribution Investment Program.
Certain Acquisitions/Liquidations
o Shares acquired on account of the acquisition or liquidation of
assets of other investment companies or personal holding companies.
Affiliates of an MFS Fund/Certain Dealers
Shares acquired by:
o Officers, eligible directors, employees (including retired
employees) and agents of MFS, Sun Life or any of their subsidiary
companies;
o Trustees and retired trustees of any investment company for which
MFD serves as distributor;
o Employees, directors, partners, officers and trustees of any
sub-adviser to any MFS Fund;
o Employees or registered representatives of dealers;
o Certain family members of any such individual and their spouses
identified above and certain trusts, pension, profit-sharing or
other retirement plans for the sole benefit of such persons,
provided the shares are not resold except to the MFS Fund which
issued the shares; and
o Institutional Clients of MFS or MFS Institutional Advisors, Inc.
Involuntary Redemptions (CDSC waiver only)
o Shares redeemed at an MFS Fund's direction due to the small size of
a shareholder's account. See "Redemptions and Repurchases -- General
-- Involuntary Redemptions/Small Accounts" in the Prospectus.
Retirement Plans (CDSC waiver only)
Shares redeemed on account of distributions made under the following
circumstances:
o Individual Retirement Accounts ("IRAs")
[arrow] Death or disability of the IRA owner.
o Section 401(a) Plans ("401(a) Plans") and Section 403(b) Employer
Sponsored Plans ("ESP Plans")
[arrow] Death, disability or retirement of 401(a) or ESP Plan
participant;
[arrow] Loan from 401(a) or ESP Plan;
[arrow] Financial hardship (as defined in Treasury Regulation
Section 1.401(k)-1(d)(2), as amended from time to time);
[arrow] Termination of employment of 401(a) or ESP Plan participant
(excluding, however, a partial or other termination of the
Plan);
[arrow] Tax-free return of excess 401(a) or ESP Plan contributions;
[arrow] 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
MFSC (the "MFS Participant Recordkeeping System"); and
[arrow] 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.
[arrow] Shares purchased by certain retirement plans or trust
accounts if: (i) the plan is currently a party to a
retirement plan recordkeeping or administration services
agreement with MFD or one of its affiliates and (ii) the
shares purchased or redeemed represent transfers from or
Part II -- A-1
<PAGE>
transfers to plan investments other than the MFS Funds for
which retirement plan recordkeeping services are provided
under the terms of such agreement.
o Section 403(b) Salary Reduction Only Plans ("SRO Plans")
[arrow] Death or disability of SRO Plan participant.
Certain Transfers of Registration
(CDSC waiver only)
Shares transferred:
o To an IRA rollover account where any sales charges with respect to
the shares being reregistered would have been waived had they been
redeemed; and
o From a single account maintained for a 401(a) Plan to multiple
accounts maintained by MFSC 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 MFSC.
Loan Repayments
o Shares acquired pursuant to repayments by retirement plan
participants of loans from 401(a) or ESP Plans with respect to which
such Plan or its sponsoring organization subscribes to the MFS
FUNDamental 401(k) Program or the MFS Recordkeeper Plus Program (but
not the MFS Recordkeeper Program).
II WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A
shares and the CDSC imposed on certain redemptions of Class A shares are
waived:
Wrap Account and Fund "Supermarket" Investments
o Shares acquired by investments through certain dealers (including
registered investment advisers and financial planners) which have
established certain operational arrangements with MFD which include
a requirement that such shares be sold for the sole benefit of
clients participating in a "wrap" account, mutual fund "supermarket"
account or a similar program under which such clients pay a fee to
such dealer.
Investment by Insurance Company Separate
Accounts
o Shares acquired by insurance company separate accounts.
Retirement Plans
o Administrative Services Arrangements
[arrow] Shares acquired by retirement plans or trust accounts whose
third party administrators or dealers have entered into an
administrative services agreement with MFD or one of its
affiliates to perform certain administrative services,
subject to certain operational and minimum size requirements
specified from time to time by MFD or one or more of its
affiliates.
o Reinvestment of Distributions from Qualified Retirement Plans
[arrow] 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:
o IRAs
[arrow] Distributions made on or after the IRA owner has attained
the age of 59 1/2 years old; and
[arrow] Tax-free returns of excess IRA contributions.
o 401(a) Plans
[arrow] Distributions made on or after the 401(a) Plan participant
has attained the age of 59 1/2 years old; and
[arrow] Certain involuntary redemptions and redemptions in
connection with certain automatic withdrawals from a 401(a)
Plan.
o ESP Plans and SRO Plans
[arrow] Distributions made on or after the ESP or SRO Plan
participant has attained the age of 59 1/2 years old.
o 401(a) Plans and ESP Plans
[arrow] where the retirement plan and/or sponsoring organization
does not subscribe to the MFS Participant Recordkeeping
System; and
[arrow] where the retirement plan and/or sponsoring organization
demonstrates to the satisfaction of, and certifies to, MFSC
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 Family of Funds
and aggregate assets of at least $10 million;
provided, however, that the CDSC will not be waived (i.e., it will be
imposed) (a) with respect to plans which establish an account with MFSC
on or after November 1, 1997, in the event that the plan makes a complete
redemption of all of its shares in the MFS Family of Funds, or (b) with
respect to plans which establish an account with MFSC prior to November
1, 1997, in the event that there is a change in law or regulations which
result in a material adverse change to the tax advantaged nature of the
plan, or in the event that the plan and/or sponsoring organization: (i)
becomes insolvent or bankrupt; (ii) is terminated under ERISA or is
liquidated or dissolved; or (iii) is acquired by, merged into, or
consolidated with any other entity.
Part II -- A-2
<PAGE>
Purchases of at Least $5 Million
(CDSC waiver only)
o Shares acquired of Eligible Funds (as defined below) if the
shareholder's investment equals or exceeds $5 million in one or more
Eligible Funds (the "Initial Purchase") (this waiver applies to the
shares acquired from the Initial Purchase and all shares of Eligible
Funds subsequently acquired by the shareholder); provided that the
dealer through which the Initial Purchase is made enters into an
agreement with MFD to accept delayed payment of commissions with
respect to the Initial Purchase and all subsequent investments by
the shareholder in the Eligible Funds subject to such requirements
as may be established from time to time by MFD (for a schedule of
the amount of commissions paid by MFD to the dealer on such
investments, see "Purchases -- Class A Shares -- Purchases subject
to a CDSC" in the Prospectus). The Eligible Funds are all funds
included in the MFS Family of Funds, except for Massachusetts
Investors Trust, Massachusetts Investors Growth Stock Fund, MFS
Municipal Bond Fund, MFS Municipal Limited Maturity Fund, MFS Money
Market Fund, MFS Government Money Market Fund and MFS Cash Reserve
Fund.
Bank Trust Departments and Law Firms
o Shares acquired by certain bank trust departments or law firms
acting as trustee or manager for trust accounts which have entered
into an administrative services agreement with MFD and are acquiring
such shares for the benefit of their trust account clients.
Investment of Proceeds From Certain Redemptions of Class I Shares
o The initial sales charge imposed on purchases of Class A shares, and
the contingent deferred sales charge imposed on certain redemptions
of Class A shares, are waived with respect to Class A shares
acquired of any of the MFS Funds through the immediate reinvestment
of the proceeds of a redemption of Class I shares of any of the MFS
Funds.
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:
Systematic Withdrawal Plan
o Systematic Withdrawal Plan redemptions with respect to up to 10% per
year (or 15% per year, in the case of accounts registered as IRAs
where the redemption is made pursuant to Section 72(t) of the
Internal Revenue Code of 1986, as amended) of the account value at
the time of establishment.
Death of Owner
o Shares redeemed on account of the death of the account owner if the
shares are held solely in the deceased individual's name or in a
living trust for the benefit of the deceased individual.
Disability of Owner
o Shares redeemed on account of the disability of the account owner if
shares are held either solely or jointly in the disabled
individual's name or in a living trust for the benefit of the
disabled individual (in which case a disability certification form
is required to be submitted to MFSC.).
Retirement Plans
Shares redeemed on account of distributions made under the following
circumstances:
o IRAs, 401(a) Plans, ESP Plans and SRO Plans
[arrow] 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 Code rules.
[arrow] Salary Reduction Simplified Employee Pension Plans ("SAR-SEP
Plans")
[arrow] 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
[arrow] Death or disability of a SAR-SEP Plan participant.
o 401(a) and ESP Plans Only (Class B CDSC Waiver Only)
[arrow] By a retirement plan whose sponsoring organization
subscribes to the MFS Participant Recordkeeping System and
which established an account with MFSC between July 1, 1996
and December 31, 1998; provided, however, that the CDSC will
not be waived (i.e., it will be imposed) in the event that
there is a change in law or regulations which results in a
material adverse change to the tax advantaged nature of the
plan, or in the event that the plan and/or sponsoring
organization: (i) becomes insolvent or bankrupt; (ii) is
terminated under ERISA or is liquidated or dissolved; or
(iii) is acquired by, merged into, or consolidated with any
other entity.
[arrow] By a retirement plan whose sponsoring organization
subscribes to the MFS Recordkeeper Plus product and which
established its account with MFSC on or after January 1,
1999 (provided that the plan establishment paperwork is
received by MFSC in good order on or after November 15,
1998). A plan with a pre-existing account(s) with any
MFS Fund which switches to the MFS Recordkeeper Plus
product will not become eligible for this waiver category.
Part II -- A-3
<PAGE>
PART II -- APPENDIX B
DEALER COMMISSIONS AND CONCESSIONS
This Appendix describes the various commissions paid and concessions made
to dealers by MFD in connection with the sale of Fund shares. As used in
this Appendix, the term "dealer" includes any broker, dealer, bank
(including bank trust departments), registered investment adviser,
financial planner and any other financial institutions having a selling
agreement or other similar agreement with MFD.
CLASS A SHARES
Purchases Subject to an Initial Sales Charge. For purchases of Class A
shares subject to an initial sales charge, MFD reallows a portion of the
initial sales charge to dealers (which are alike for all dealers), as
shown in Appendix D to Part I of this SAI. The difference between the
total amount invested and the sum of (a) the net proceeds to the Fund and
(b) the dealer reallowance, is the amount of the initial sales charge
retained by MFD (as shown in Appendix D to Part I of this SAI). Because
of rounding in the computation of offering price, the portion of the
sales charge retained by MFD 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.
Purchases Subject to a CDSC (but not an Initial Sales Charge). For
purchases of Class A shares subject to a CDSC, MFD pays commissions to
dealers on new investments 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
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).
CLASS B SHARES
For purchases of Class B shares, 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 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).
For purchases of Class B shares by a retirement plan whose sponsoring
organization subscribes to the MFS Participant Recordkeeping System and
which established its account with MFSC between July 1, 1996 and December
31, 1998, 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.
For purchases of Class B shares by a retirement plan whose sponsoring
organization subscribes to the MFS Recordkeeper Plus product and which
has established its account with MFSC on or after January 1, 1999
(provided that the plan establishment paperwork is received by MFSC in
good order on or after November 15, 1998), MFD pays no up front
commissions to dealers, but instead pays an amount to dealers equal to 1%
per annum of the average daily net assets of the Fund attributable to
plan assets, payable at the rate of 0.25% at the end of each calendar
quarter, in arrears. This commission structure is not available with
respect to a plan with a pre-existing account(s) with any MFS Fund which
seeks to switch to the MFS Recordkeeper Plus product.
CLASS C SHARES
For purchases of Class C shares, 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.
ADDITIONAL DEALER COMMISSIONS/
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 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
Funds sold by such dealer during a specified sales period. In addition,
from time to time, MFD, at its expense, may provide additional
commissions, compensation or promotional incentives ("concessions") to
dealers which sell or arrange for the sale of shares of the Fund. Such
concessions provided by MFD may include financial assistance to dealers
in connection with preapproved conferences or seminars, sales or training
programs for invited registered representatives and other employees,
payment for travel expenses,
Part II -- B-1
<PAGE>
including lodging, incurred by registered representatives and other
employees for such seminars or training programs, seminars for the
public, advertising and sales campaigns regarding one or more Funds,
and/or other dealer-sponsored events. From time to time, MFD may make
expense reimbursements for special training of a dealer's registered
representatives and other employees in group meetings or to help pay the
expenses of sales contests. Other concessions may be offered to the
extent not prohibited by state laws or any self-regulatory agency, such
as the NASD.
Part II -- B-2
<PAGE>
PART II -- APPENDIX C
INVESTMENT TECHNIQUES, PRACTICES
AND RISKS
Set forth below is a description of investment techniques and practices
which the MFS Funds may generally use in pursuing their investment
objectives and principal investment policies, and the associated risks
associated with these investment techniques and practices. The Fund will
engage only in certain of these investment techniques and practices, as
identified in Appendix A of the Fund's Prospectus. Investment practices
and techniques that are not identified in Appendix A of the Fund's
Prospectus do not apply to the Fund.
INVESTMENT TECHNIQUES AND PRACTICES
Debt Securities
To the extent the Fund invests in the following types of debt securities,
its net asset value may change as the general levels of interest rates
fluctuate. When interest rates decline, the value of debt securities can
be expected to rise. Conversely, when interest rates rise, the value of
debt securities can be expected to decline. The Fund's investment in debt
securities with longer terms to maturity are subject to greater
volatility than the Fund's shorter-term obligations. Debt securities may
have all types of interest rate payment and reset terms, including fixed
rate, adjustable rate, zero coupon, contingent, deferred, payment in kind
and auction rate features.
Asset-Backed Securities: The Fund may purchase the following types of
asset-backed securities:
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 (such collateral
referred to collectively as "Mortgage Assets"). Unless the context
indicates otherwise, all references herein to CMOs include multiclass
pass-through securities.
Interest is paid or accrues on all classes of the CMOs on a monthly,
quarterly or semi-annual basis. The principal of and interest on the
Mortgage Assets may be allocated among the several classes 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 a CMO in the order of their respective stated maturities or
final distribution dates, so that no payment of principal will be made on
any class of CMOs until all other classes having an earlier stated
maturity or final distribution date have been paid in full. Certain CMOs
may be stripped (securities which provide only the principal or interest
factor of the underlying security). See "Stripped Mortgage-Backed
Securities" below for a discussion of the risks of investing in these
stripped securities and of investing in classes consisting of interest
payments or principal payments.
The Fund may also invest in parallel pay CMOs and Planned Amortization
Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to provide
payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated
maturity date or final distribution date of each class, which, as with
other CMO structures, must be retired by its stated maturity date or
final distribution date but may be retired earlier.
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. These securities present certain risks. For
instance, in the case of credit card receivables, these securities may
not have the benefit of any security interest in the related collateral.
Credit card receivables are generally unsecured and the debtors are
entitled to the protection of a number of state and federal consumer
credit laws, many of which give such debtors the right to set off certain
amounts owed on the credit cards, thereby reducing the balance due. Most
issuers of automobile receivables permit the servicers to retain
possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser
would acquire an interest superior to that of the holders of the related
automobile receivables. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under
state laws, the trustee for the holders of the automobile receivables may
not have a proper security interest in all of the obligations backing
such receivables. Therefore, there is the possibility that recoveries on
repossessed collateral may not, in some cases, be available to support
payments on these securities. The underlying assets (e.g., loans) are
also subject to prepayments which shorten the securities weighted average
life and may lower their return.
Corporate asset-backed securities are backed by a pool of assets
representing the obligations of a number of different parties. To lessen
the effect of failures by obligors on underlying assets to make payments,
the securities may contain elements of credit support which fall into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by
the entity administering the pool of assets, to ensure that the receipt
of payments on the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default ensures payment through
insurance policies or letters of credit obtained by the issuer or sponsor
from third parties. The Fund will not pay any additional or separate fees
for credit support. The degree of credit support provided for each issue
is generally based on historical information respecting the level of
credit risk associated with the underlying assets. Delinquency or loss in
excess of that
Part II -- C-1
<PAGE>
anticipated or failure of the credit support could adversely affect the
return on an investment in such a security.
Mortgage Pass-Through Securities: The Fund may invest in mortgage
pass-through securities. Mortgage pass-through securities are securities
representing interests in "pools" of mortgage loans. Monthly payments of
interest and principal by the individual borrowers on mortgages are
passed through to the holders of the securities (net of fees paid to the
issuer or guarantor of the securities) as the mortgages in the underlying
mortgage pools are paid off. The average lives of mortgage pass-throughs
are variable when issued because their average lives depend on prepayment
rates. The average life of these securities is likely to be substantially
shorter than their stated final maturity as a result of unscheduled
principal prepayment. Prepayments on underlying mortgages result in a
loss of anticipated interest, and all or part of a premium if any has
been paid, and the actual yield (or total return) to the Fund may be
different than the quoted yield on the securities. Mortgage premiums
generally increase with falling interest rates and decrease with rising
interest rates. Like other fixed income securities, when interest rates
rise the value of mortgage pass-through security generally will decline;
however, when interest rates are declining, the value of mortgage
pass-through securities with prepayment features may not increase as much
as that of other fixed-income securities. In the event of an increase in
interest rates which results in a decline in mortgage prepayments, the
anticipated maturity of mortgage pass-through securities held by the Fund
may increase, effectively changing a security which was considered short
or intermediate-term at the time of purchase into a long-term security.
Long-term securities generally fluctuate more widely in response to
changes in interest rates than short or intermediate-term securities.
Payment of principal and interest on some mortgage pass-through
securities (but not the market value of the securities themselves) may be
guaranteed by the full faith and credit of the U.S. Government (in the
case of securities guaranteed by the Government National Mortgage
Association ("GNMA")); or guaranteed by agencies or instrumentalities of
the U.S. Government (such as the Federal National Mortgage Association
"FNMA") or the Federal Home Loan Mortgage Corporation, ("FHLMC") which
are supported only by the discretionary authority of the U.S. Government
to purchase the agency's obligations). Mortgage pass-through securities
may also be issued by non-governmental issuers (such as commercial banks,
savings and loan institutions, private mortgage insurance companies,
mortgage bankers and other secondary market issuers). Some of these
mortgage pass-through securities may be supported by various forms of
insurance or guarantees.
Interests in pools of mortgage-related securities differ from other
forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or
specified call dates. Instead, these securities provide a monthly payment
which consists of both interest and principal payments. In effect, these
payments are a "pass-through" of the monthly payments made by the
individual borrowers on their mortgage loans, net of any fees paid to the
issuer or guarantor of such securities. Additional payments are caused by
prepayments of principal resulting from the sale, refinancing or
foreclosure of the underlying property, net of fees or costs which may be
incurred. Some mortgage pass-through securities (such as securities
issued by the GNMA) are described as "modified pass-through." These
securities entitle the holder to receive all interests and principal
payments owed on the mortgages in the mortgage pool, net of certain fees,
at the scheduled payment dates regardless of whether the mortgagor
actually makes the payment.
The principal governmental guarantor of mortgage pass-through securities
is GNMA. GNMA is a wholly owned U.S. Government corporation within the
Department of Housing and Urban Development. GNMA is authorized to
guarantee, with the full faith and credit of the U.S. Government, the
timely payment of principal and interest on securities issued by
institutions approved by GNMA (such as savings and loan institutions,
commercial banks and mortgage bankers) and backed by pools of Federal
Housing Administration ("FHA")-insured or Veterans Administration
("VA")-guaranteed mortgages. These guarantees, however, do not apply to
the market value or yield of mortgage pass-through securities. GNMA
securities are often purchased at a premium over the maturity value of
the underlying mortgages. This premium is not guaranteed and will be lost
if prepayment occurs.
Government-related guarantors (i.e., whose guarantees are not backed
by the full faith and credit of the U.S. Government) include FNMA and
FHLMC. FNMA is a government-sponsored corporation owned entirely by
private stockholders. It is subject to general regulation by the
Secretary of Housing and Urban Development. FNMA purchases conventional
residential mortgages (i.e., mortgages not insured or guaranteed by any
governmental agency) from a list of approved seller/servicers which
include state and federally chartered savings and loan associations,
mutual savings banks, commercial banks, credit unions and mortgage
bankers. Pass-through securities issued by FNMA are guaranteed as to
timely payment by FNMA of principal and interest.
FHLMC is also a government-sponsored corporation owned by private
stockholders. FHLMC issues Participation Certificates ("PCs") which
represent interests in conventional mortgages (i.e., not federally
insured or guaranteed) for FHLMC's national portfolio. FHLMC guarantees
timely payment of interest and ultimate collection of principal
regardless of the status of the underlying mortgage loans.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers
also create pass through pools of mortgage loans. Such issuers may also
be the originators and/or servicers of the underlying mortgage-related
securities. Pools created by
Part II -- C-2
<PAGE>
such non-governmental issuers generally offer a higher rate of interest
than government and government-related pools because there are no direct
or indirect government or agency guarantees of payments in the former
pools. However, timely payment of interest and principal of mortgage
loans in these pools may be supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance
and letters of credit. The insurance and guarantees are issued by
governmental entities, private insurers and the mortgage poolers. There
can be no assurance that the private insurers or guarantors can meet
their obligations under the insurance policies or guarantee arrangements.
The Fund may also buy mortgage-related securities without insurance or
guarantees.
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 or
instrumentalities of the U.S. Government, or by private originators of,
or investors in, mortgage loans, including savings and loan institutions,
mortgage banks, commercial banks and investment banks.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions from a pool of
mortgage assets. A common type of SMBS will have one class receiving some
of the interest and most of the principal from the Mortgage Assets, while
the other class will receive most of the interest and the remainder of
the principal. In the most extreme case, one class will receive all of
the interest (the interest-only or "I0" class) while the other class will
receive all of the principal (the principal-only or "P0" class). The
yield to maturity on an I0 is extremely sensitive to the rate of
principal payments, including prepayments on the related underlying
Mortgage Assets, and a rapid rate of principal payments may have a
material adverse effect on such security's yield to maturity. 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.
Corporate Securities: The Fund may invest in debt securities, such as
convertible and non-convertible bonds, notes and debentures, issued by
corporations, limited partnerships and other similar entities.
Loans and Other Direct Indebtedness: The Fund may purchase loans and
other direct indebtedness. In purchasing a loan, the Fund acquires some
or all of the interest of a bank or other lending institution in a loan
to a corporate, governmental or other 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
borrowers 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 lenders
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 owned by the company to a
supplier of goods or services. These claims may also be purchased at a
time when the company is in default.
Certain of the loans and the other direct indebtedness acquired by the
Fund may involve revolving credit facilities or other standby financing
commitments which obligate the Fund to pay additional cash on a certain
date or on demand. These commitments may have the effect of requiring the
Fund to increase its investment in a company at a time when the Fund
might not otherwise decide to do so (including at a time when the
company's financial condition makes it unlikely that such amounts will be
repaid). To the extent that the Fund is committed to advance additional
funds, it will at all times hold and maintain in a segregated account
cash or other high grade debt obligations in an amount sufficient to meet
such commitments.
The Fund's ability to receive payment of principal, interest and other
amounts due in connection with these investments will depend primarily on
the financial condition of the borrower. In selecting the loans and other
direct indebtedness which the Fund will purchase, the Adviser will rely
upon its own (and not the original lending institution's) credit analysis
of the borrower. As the Fund may be required to rely upon another lending
institution to collect and pass onto the Fund amounts payable with
respect to the loan and to enforce the Fund's rights under the loan and
other direct indebtedness, an insolvency, bankruptcy or reorganization of
the lending institution may delay or prevent the Fund from receiving such
amounts. In such cases, the Fund will evaluate as well the
creditworthiness of the lending institution and will treat both the
borrower and the lending institution as an "issuer" of the loan for
purposes of certain investment restrictions pertaining to the
diversification of the Fund's portfolio investments. The highly leveraged
nature of many such loans and other direct indebtedness may make such
loans and other direct
Part II -- C-3
<PAGE>
indebtedness especially vulnerable to adverse changes in economic or
market conditions. Investments in such loans and other direct
indebtedness may involve additional risk to the Fund.
Lower Rated Bonds: The Fund may invest in fixed income securities
rated Ba or lower by Moody's or BB or lower by S&P, Fitch or Duff &
Phelps and comparable unrated securities (commonly known as "junk
bonds"). See Appendix D for a description of bond ratings. No minimum
rating standard is required by the Fund. These securities are considered
speculative and, while generally providing greater income than
investments in higher rated securities, will involve greater risk of
principal and income (including the possibility of default or bankruptcy
of the issuers of such securities) and may involve greater volatility of
price (especially during periods of economic uncertainty or change) than
securities in the higher rating categories 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 reflect economic
changes (and the outlook for economic growth), short-term corporate and
industry developments and the market's perception of their credit quality
(especially during times of adverse publicity) to a greater extent than
higher rated securities which react primarily to fluctuations in the
general level of interest rates (although these lower rated fixed income
securities are also affected by changes in interest rates). In the past,
economic downturns or an increase in interest rates have, under certain
circumstances, caused a higher incidence of default by the issuers of
these securities and may do so in the future, especially in the case of
highly leveraged issuers. The prices for these securities may be affected
by legislative and regulatory developments. The market for these lower
rated fixed income securities may be less liquid than the market for
investment grade fixed income securities. Furthermore, the liquidity of
these lower rated securities may be affected by the market's perception
of their credit quality. Therefore, the Adviser's judgment may at times
play a greater role in valuing these securities than in the case of
investment grade fixed income securities, and it also may be more
difficult during times of certain adverse market conditions to sell these
lower rated securities to meet redemption requests or to respond to
changes in the market.
While the Adviser may refer to ratings issued by established credit
rating agencies, it is not the Fund's policy to rely exclusively on
ratings issued by these rating agencies, but rather to supplement such
ratings with the Adviser's own independent and ongoing review of credit
quality. To the extent a Fund invests in these lower rated securities,
the achievement of its investment objectives may be a more dependent on
the Adviser's own credit analysis than in the case of a fund investing in
higher quality fixed income securities. These lower rated securities may
also include zero coupon bonds, deferred interest bonds and PIK bonds.
Municipal Bonds: The Fund may invest in debt securities 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, the interest on which is exempt from federal income
tax ("Municipal Bonds"). Municipal Bonds include debt securities which
pay interest income that is subject to the alternative minimum tax. The
Fund may invest in Municipal Bonds whose issuers pay interest on the
Bonds from revenues from projects such as multifamily housing, nursing
homes, electric utility systems, hospitals or life care facilities.
If a revenue bond is secured by payments generated from a project, and
the revenue bond is also secured by a lien on the real estate comprising
the project, foreclosure by the indenture trustee on the lien for the
benefit of the bondholders creates additional risks associated with
owning real estate, including environmental risks.
Housing revenue bonds typically are issued by a state, county or local
housing authority and are secured only by the revenues of mortgages
originated by the authority using the proceeds of the bond issue. Because
of the impossibility of precisely predicting demand for mortgages from
the proceeds of such an issue, there is a risk that the proceeds of the
issue will be in excess of demand, which would result in early retirement
of the bonds by the issuer. Moreover, such housing revenue bonds depend
for their repayment upon the cash flow from the underlying mortgages,
which cannot be precisely predicted when the bonds are issued. Any
difference in the actual cash flow from such mortgages from the assumed
cash flow could have an adverse impact upon the ability of the issuer to
make scheduled payments of principal and interest on the bonds, or could
result in early retirement of the bonds. Additionally, such bonds depend
in part for scheduled payments of principal and interest upon reserve
funds established from the proceeds of the bonds, assuming certain rates
of return on investment of such reserve funds. If the assumed rates of
return are not realized because of changes in interest rate levels or for
other reasons, the actual cash flow for scheduled payments of principal
and interest on the bonds may be inadequate. The financing of
multi-family housing projects is affected by a variety of factors,
including satisfactory completion of construction within cost
constraints, the achievement and maintenance of a sufficient level of
occupancy, sound management of the developments, timely and adequate
increases in rents to cover increases in operating expenses, including
taxes, utility rates and maintenance costs, changes in applicable laws
and governmental regulations and social and economic trends.
Electric utilities face problems in financing large construction
programs in inflationary periods, cost increases and delay occasioned by
environmental considerations (particularly with respect to nuclear
facilities), difficulty in obtaining fuel at reasonable prices, the cost
of competing fuel sources, difficulty in obtaining sufficient rate
increases and other regulatory problems, the effect of energy
conservation and difficulty of the capital market to absorb utility debt.
Health care facilities include life care facilities, nursing homes and
hospitals. Life care facilities are alternative forms of long-term
housing for the elderly which offer residents the indepen-
Part II -- C-4
<PAGE>
dence of condominium life style and, if needed, the comprehensive care of
nursing home services. Bonds to finance these facilities have been issued
by various state industrial development authorities. Since the bonds are
secured only by the revenues of each facility and not by state or local
government tax payments, they are subject to a wide variety of risks.
Primarily, the projects must maintain adequate occupancy levels to be
able to provide revenues adequate to maintain debt service payments.
Moreover, in the case of life care facilities, since a portion of
housing, medical care and other services may be financed by an initial
deposit, there may be risk if the facility does not maintain adequate
financial reserves to secure estimated actuarial liabilities. The ability
of management to accurately forecast inflationary cost pressures weighs
importantly in this process. The facilities may also be affected by
regulatory cost restrictions applied to health care delivery in general,
particularly state regulations or changes in Medicare and Medicaid
payments or qualifications, or restrictions imposed by medical insurance
companies. They may also face competition from alternative health care or
conventional housing facilities in the private or public sector. Hospital
bond ratings are often based on feasibility studies which contain
projections of expenses, revenues and occupancy levels. A hospital's
gross receipts and net income available to service its debt are
influenced by demand for hospital services, the ability of the hospital
to provide the services required, management capabilities, economic
developments in the service area, efforts by insurers and government
agencies to limit rates and expenses, confidence in the hospital, service
area economic developments, competition, availability and expense of
malpractice insurance, Medicaid and Medicare funding, and possible
federal legislation limiting the rates of increase of hospital charges.
The Fund may invest in municipal lease securities. These are undivided
interests in a portion of an obligation in the from of a lease or
installment purchase which is issued by state and local governments to
acquire equipment and facilities. Municipal leases frequently have
special risks not normally associated with general obligation or revenue
bonds. Leases and installment purchase or conditional sale contracts
(which normally provide for title to the leased asset to pass eventually
to the governmental issuer) have evolved as a means for governmental
issuers to acquire property and equipment without meeting the
constitutional and statutory requirements for the issuance of debt. The
debt-issuance limitations are deemed to be inapplicable because of the
inclusion in many leases or contracts of "non-appropriation" clauses that
provide that the governmental issuer has no obligation to make future
payments under the lease or contract unless money is appropriated for
such purpose by the appropriate legislative body on a yearly or other
periodic basis. Although the obligations will be secured by the leased
equipment or facilities, the disposition of the property in the event of
non-appropriation or foreclosure might, in some cases, prove difficult.
There are, of course, variations in the security of municipal lease
securities, both within a particular classification and between
classifications, depending on numerous factors.
The Fund may also invest in bonds for industrial and other projects,
such as sewage or solid waste disposal or hazardous waste treatment
facilities. Financing for such projects will be subject to inflation and
other general economic factors as well as construction risks including
labor problems, difficulties with construction sites and the ability of
contractors to meet specifications in a timely manner. Because some of
the materials, processes and wastes involved in these projects may
include hazardous components, there are risks associated with their
production, handling and disposal.
Speculative Bonds: The Fund may invest in fixed income and convertible
securities rated Baa by Moody's or BBB by S&P, Fitch or Duff & Phelps and
comparable unrated securities. See Appendix D for a description of bond
ratings. These securities, while normally exhibiting adequate protection
parameters, have speculative characteristics and changes in economic
conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than in the case of
higher grade securities.
U.S. Government Securities: The Fund may invest in U.S. Government
Securities including (i) U.S. Treasury obligations, all of which are
backed by the full faith and credit of the U.S. Government and (ii) U.S.
Government Securities, 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 ("GNMA"); some of which are
backed only by the credit of the issuer itself, e.g., obligations of the
Student Loan Marketing Association; and some of which are supported by
the discretionary authority of the U.S. Government to purchase the
agency's obligations, e.g., obligations of the Federal National Mortgage
Association ("FNMA").
U.S. Government Securities also include interest in trust or other
entities representing interests in obligations that are issued or
guaranteed by the U.S. Government, its agencies, authorities or
instrumentalities.
Variable and Floating Rate Obligations: The Fund may invest in
floating or variable rate securities. Investments in floating or variable
rate securities normally will involve industrial development or revenue
bonds which provide that the rate of interest is set as a specific
percentage of a designated base rate, such as rates on Treasury Bonds or
Bills or the prime rate at a major commercial bank, and that a bondholder
can demand payment of the obligations on behalf of the Fund on short
notice at par plus accrued interest, which amount may be more or less
than the amount the bondholder paid for them. The maturity of floating or
variable rate obligations (including participation interests therein) is
deemed to be the longer of (i) the notice period required before the Fund
is entitled to receive payment of the obligation upon demand or (ii) the
period remaining until the obligation's next interest rate adjustment. If
not redeemed by the Fund through the demand feature, the obligations
mature on a specified date which may range up to thirty years from the
date of issuance.
Part II -- C-5
<PAGE>
Zero Coupon Bonds, Deferred Interest Bonds and PIK Bonds: The Fund may
invest in 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 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 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 than debt obligations which make regular
payments of interest. The Fund will accrue income on such investments for
tax and accounting purposes, which is distributable to shareholders and
which, because no cash is received at the time of accrual, may require
the liquidation of other portfolio securities to satisfy the Fund's
distribution obligations.
Equity Securities
The Fund may invest in all types of equity securities, including the
following: common stocks, preferred stocks and preference stocks;
securities such as bonds, warrants or rights that are convertible into
stocks; and depositary receipts for those securities. These securities
may be listed on securities exchanges, traded in various over-the-counter
markets or have no organized market.
Foreign Securities Exposure
The Fund may invest in various types of foreign securities, or securities
which provide the Fund with exposure to foreign securities or foreign
currencies, as discussed below:
Brady Bonds: The Fund may invest in Brady Bonds, which are securities
created through the exchange of existing commercial bank loans to public
and private entities in certain emerging markets for new bonds in
connection with debt restructurings under a debt restructuring plan
introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady
(the "Brady Plan"). Brady Plan debt restructurings have been implemented
to date in Argentina, Brazil, Bulgaria, Costa Rica, Croatia, Dominican
Republic, Ecuador, Jordan, Mexico, Morocco, Nigeria, Panama, Peru, the
Philippines, Poland, Slovenia, Uruguay and Venezuela. Brady Bonds have
been issued only recently, and for that reason do not have a long payment
history. Brady Bonds may be collateralized or uncollateralized, are
issued in various currencies (but primarily the U.S. dollar) and are
actively traded in over-the-counter secondary markets. U.S.
dollar-denominated, collateralized Brady Bonds, which may be fixed rate
bonds or floating-rate bonds, are generally collateralized in full as to
principal by U.S. Treasury zero coupon bonds having the same maturity as
the bonds. Brady Bonds are often viewed as having three or four valuation
components: the collateralized repayment of principal at final maturity;
the collateralized interest payments; the uncollateralized interest
payments; and any uncollateralized repayment of principal at maturity
(these uncollateralized amounts constituting the "residual risk"). In
light of the residual risk of Brady Bonds and the history of defaults of
countries issuing Brady Bonds with respect to commercial bank loans by
public and private entities, investments in Brady Bonds may be viewed as
speculative.
Depositary Receipts: The Fund may invest in American Depositary Receipts
("ADRs"), Global Depositary Receipts ("GDRs") and other types of
depositary receipts. ADRs are certificates by a U.S. depositary (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. GDRs and
other types of depositary receipts are typically issued by foreign banks
or trust companies and evidence ownership of underlying securities issued
by either a foreign or a U.S. company. Generally, ADRs are in registered
form and are designed for use in U.S. securities markets and GDRs are in
bearer form and are designed for use in foreign securities markets. For
the purposes of the Fund's policy to invest a certain percentage of its
assets in foreign securities, the investments of the Fund in ADRs, GDRs
and other types of depositary receipts are deemed to be investments in
the underlying securities.
ADRs may be sponsored or unsponsored. A sponsored ADR is issued by a
depositary 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 depositary 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 depositary of an ADR agent bank in
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, information available to a U.S. investor will be limited to
the information the foreign issuer is required to disclose in its country
and the market value of an ADR may not reflect undisclosed material
information concerning the issuer of the under-
Part II -- C-6
<PAGE>
lying security. ADRs may also be subject to exchange rate risks if the
underlying foreign securities are denominated in a foreign currency.
Dollar-Denominated Foreign Debt Securities: The Fund may invest in
dollar-denominated foreign debt securities. Investing in
dollar-denominated foreign debt represents a greater degree of risk than
investing in domestic securities, due to less publicly available
information, less securities regulation, war or expropriation. Special
considerations may include higher brokerage costs and thinner trading
markets. Investments in foreign countries could be affected by other
factors including extended settlement periods.
Emerging Markets: The Fund may invest in securities of government,
government-related, supranational and corporate issuers located in
emerging markets. Such investments entail significant risks as described
below.
o Company Debt -- Governments of many emerging market countries have
exercised and continue to exercise substantial influence over many
aspects of the private sector through the ownership or control of
many companies, including some of the largest in any given country.
As a result, government actions in the future could have a
significant effect on economic conditions in emerging markets, which
in turn, may adversely affect companies in the private sector,
general market conditions and prices and yields of certain of the
securities in the Fund's portfolio. Expropriation, confiscatory
taxation, nationalization, political, economic or social instability
or other similar developments have occurred frequently over the
history of certain emerging markets and could adversely affect the
Fund's assets should these conditions recur.
o Default; Legal Recourse -- The Fund may have limited legal recourse
in the event of a default with respect to certain debt obligations
it may hold. If the issuer of a fixed income security owned by the
Fund defaults, the Fund may incur additional expenses to seek
recovery. Debt obligations issued by emerging market governments
differ from debt obligations of private entities; remedies from
defaults on debt obligations issued by emerging market governments,
unlike those on private debt, must be pursued in the courts of the
defaulting party itself. The Fund's ability to enforce its rights
against private issuers may be limited. The ability to attach assets
to enforce a judgment may be limited. Legal recourse is therefore
somewhat diminished. Bankruptcy, moratorium and other similar laws
applicable to private issuers of debt obligations may be
substantially different from those of other countries. The political
context, expressed as an emerging market governmental issuer's
willingness to meet the terms of the debt obligation, for example,
is of considerable importance. In addition, no assurance can be
given that the holders of commercial bank debt may not contest
payments to the holders of debt obligations in the event of default
under commercial bank loan agreements.
o Foreign Currencies -- The securities in which the Fund invests may
be denominated in foreign currencies and international currency
units and the Fund may invest a portion of its assets directly in
foreign currencies. Accordingly, the weakening of these currencies
and units against the U.S. dollar may result in a decline in the
Fund's asset value.
Some emerging market countries also may have managed currencies,
which are not free floating against the U.S. dollar. In addition,
there is risk that certain emerging market countries may restrict
the free conversion of their currencies into other currencies.
Further, certain emerging market currencies may not be
internationally traded. Certain of these currencies have experienced
a steep devaluation relative to the U.S. dollar. Any devaluations in
the currencies in which a Fund's portfolio securities are
denominated may have a detrimental impact on the Fund's net asset
value.
o Inflation -- Many emerging markets have experienced substantial, and
in some periods extremely high, rates of inflation for many years.
Inflation and rapid fluctuations in inflation rates have had and may
continue to have adverse effects on the economies and securities
markets of certain emerging market countries. In an attempt to
control inflation, wage and price controls have been imposed in
certain countries. Of these countries, some, in recent years, have
begun to control inflation through prudent economic policies.
o Liquidity; Trading Volume; Regulatory Oversight -- The securities
markets of emerging market countries are substantially smaller, less
developed, less liquid and more volatile than the major securities
markets in the U.S. Disclosure and regulatory standards are in many
respects less stringent than U.S. standards. Furthermore, there is a
lower level of monitoring and regulation of the markets and the
activities of investors in such markets.
The limited size of many emerging market securities markets and
limited trading volume in the securities of emerging market issuers
compared to volume of trading in the securities of U.S. issuers
could cause prices to be erratic for reasons apart from factors that
affect the soundness and competitiveness of the securities issuers.
For example, limited market size may cause prices to be unduly
influenced by traders who control large positions. Adverse publicity
and investors' perceptions, whether or not based on in-depth
fundamental analysis, may decrease the value and liquidity of
portfolio securities.
The risk also exists that an emergency situation may arise in one or
more emerging markets, as a result of which trading of securities
may cease or may be substantially curtailed and prices for the
Fund's securities in such markets may not be readily available. The
Fund may suspend redemption of its shares for any period during
which an emergency exists, as determined by the Securities and
Exchange Commission (the "SEC"). Accordingly, if the Fund believes
that appropriate circumstances exist, it will promptly apply to the
SEC for a deter-
Part II -- C-7
<PAGE>
mination that an emergency is present. During the period commencing
from the Fund's identification of such condition until the date of
the SEC action, the Fund's securities in the affected markets will
be valued at fair value determined in good faith by or under the
direction of the Board of Trustees.
o Sovereign Debt -- Investment in sovereign debt can involve a high
degree of risk. The governmental entity that controls the repayment
of sovereign debt may not be able or willing to repay the principal
and/or interest when due in accordance with the terms of such debt.
A governmental entity's willingness or ability to repay principal
and interest due in a timely manner may be affected by, among other
factors, its cash flow situation, the extent of its foreign
reserves, the availability of sufficient foreign exchange on the
date a payment is due, the relative size of the debt service burden
to the economy as a whole, the governmental entity's policy towards
the International Monetary Fund and the political constraints to
which a governmental entity may be subject. Governmental entities
may also be dependent on expected disbursements from foreign
governments, multilateral agencies and others abroad to reduce
principal and interest on their debt. The commitment on the part of
these governments, agencies and others to make such disbursements
may be conditioned on a governmental entity's implementation of
economic reforms and/or economic performance and the timely service
of such debtor's obligations. Failure to implement such reforms,
achieve such levels of economic performance or repay principal or
interest when due may result in the cancellation of such third
parties' commitments to lend funds to the governmental entity, which
may further impair such debtor's ability or willingness to service
its debts in a timely manner. Consequently, governmental entities
may default on their sovereign debt. Holders of sovereign debt
(including the Fund) may be requested to participate in the
rescheduling of such debt and to extend further loans to
governmental entities. There is no bankruptcy proceedings by which
sovereign debt on which governmental entities have defaulted may be
collected in whole or in part.
Emerging market governmental issuers are among the largest debtors
to commercial banks, foreign governments, international financial
organizations and other financial institutions. Certain emerging
market governmental issuers have not been able to make payments of
interest on or principal of debt obligations as those payments have
come due. Obligations arising from past restructuring agreements may
affect the economic performance and political and social stability
of those issuers.
The ability of emerging market governmental issuers to make timely
payments on their obligations is likely to be influenced strongly by
the issuer's balance of payments, including export performance, and
its access to international credits and investments. An emerging
market whose exports are concentrated in a few commodities could be
vulnerable to a decline in the international prices of one or more
of those commodities. Increased protectionism on the part of an
emerging market's trading partners could also adversely affect the
country's exports and tarnish its trade account surplus, if any. To
the extent that emerging markets receive payment for their exports
in currencies other than dollars or non-emerging market currencies,
its ability to make debt payments denominated in dollars or
non-emerging market currencies could be affected.
To the extent that an emerging market country cannot generate a
trade surplus, it must depend on continuing loans from foreign
governments, multilateral organizations or private commercial banks,
aid payments from foreign governments and on inflows of foreign
investment. The access of emerging markets to these forms of
external funding may not be certain, and a withdrawal of external
funding could adversely affect the capacity of emerging market
country governmental issuers to make payments on their obligations.
In addition, the cost of servicing emerging market debt obligations
can be affected by a change in international interest rates since
the majority of these obligations carry interest rates that are
adjusted periodically based upon international rates.
Another factor bearing on the ability of emerging market countries
to repay debt obligations is the level of international reserves of
the country. Fluctuations in the level of these reserves affect the
amount of foreign exchange readily available for external debt
payments and thus could have a bearing on the capacity of emerging
market countries to make payments on these debt obligations.
o Withholding -- Income from securities held by the Fund could be
reduced by a withholding tax on the source or other taxes imposed by
the emerging market countries in which the Fund makes its
investments. The Fund's net asset value may also be affected by
changes in the rates or methods of taxation applicable to the Fund
or to entities in which the Fund has invested. The Adviser will
consider the cost of any taxes in determining whether to acquire any
particular investments, but can provide no assurance that the taxes
will not be subject to change.
Foreign Securities: The Fund may invest in dollar-denominated and non
dollar-denominated foreign securities. Investing in securities of foreign
issuers generally involves risks not ordinarily associated with investing
in securities of domestic issuers. These include changes in currency
rates, exchange control regulations, securities settlement practices,
governmental administration or economic or monetary policy (in the United
States or abroad) or circumstances in dealings between nations. Costs may
be incurred in connection with conversions between various currencies.
Special considerations may also include more limited information about
foreign issuers, higher brokerage costs, different accounting standards
and thinner trading markets. Foreign securities markets may also be less
liquid, more volatile and less subject to government supervision than in
the United States. Investments in foreign countries could be affected by
other factors including expropriation, confiscatory taxation
Part II -- C-8
<PAGE>
and potential difficulties in enforcing contractual obligations and could
be subject to extended settlement periods. As a result of its investments
in foreign securities, the Fund may receive interest or dividend payments,
or the proceeds of the sale or redemption of such securities, in the
foreign currencies in which such securities are denominated. Under certain
circumstances, such as where the Adviser believes that the applicable
exchange rate is unfavorable at the time the currencies are received or
the Adviser anticipates, for any other reason, that the exchange rate will
improve, the Fund may hold such currencies for an indefinite period of
time. 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.
Forward Contracts
The Fund may enter into contracts for the purchase or sale of a specific
currency at a future date at a price set at the time the contract is
entered into (a "Forward Contract"), for hedging purposes (e.g., to
protect its current or intended investments from fluctuations in currency
exchange rates) as well as for non-hedging purposes.
A Forward Contract to sell a currency may be entered into where the
Fund seeks to protect against an anticipated increase in the exchange
rate for a specific currency which could reduce the dollar value of
portfolio securities denominated in such currency. Conversely, the Fund
may enter into a Forward Contract to purchase a given currency to protect
against a projected increase in the dollar value of securities
denominated in such currency which the Fund intends to acquire.
If a hedging transaction in Forward Contracts is successful, the
decline in the dollar value of portfolio securities or the increase in
the dollar cost of securities to be acquired may be offset, at least in
part, by profits on the Forward Contract. Nevertheless, by entering into
such Forward Contracts, the Fund may be required to forego all or a
portion of the benefits which otherwise could have been obtained from
favorable movements in exchange rates. The Fund does not presently intend
to hold Forward Contracts entered into until maturity, at which time it
would be required to deliver or accept delivery of the underlying
currency, but will seek in most instances to close out positions in such
Contracts by entering into offsetting transactions, which will serve to
fix the Fund's profit or loss based upon the value of the Contracts at
the time the offsetting transaction is executed.
The Fund will also enter into transactions in Forward Contracts for
other than hedging purposes, which presents greater profit potential but
also involves increased risk. For example, the Fund may purchase a given
foreign currency through a Forward Contract if, in the judgment of the
Adviser, the value of such currency is expected to rise relative to the
U.S. dollar. Conversely, the Fund may sell the currency through a Forward
Contract if the Adviser believes that its value will decline relative to
the dollar.
The Fund will profit if the anticipated movements in foreign currency
exchange rates occur, which will increase its gross income. Where
exchange rates do not move in the direction or to the extent anticipated,
however, the Fund may sustain losses which will reduce its gross income.
Such transactions, therefore, could be considered speculative and could
involve significant risk of loss.
The use by the Fund of Forward Contracts also involves the risks
described under the caption "Special Risk Factors -- Options, Futures,
Forwards, Swaps and Other Derivative Transactions" in this Appendix.
Futures Contracts
The Fund may purchase and sell futures contracts ("Futures Contracts") on
stock indices, foreign currencies, interest rates or interest-rate
related instruments, indices of foreign currencies or commodities. The
Fund may also purchase and sell Futures Contracts on foreign or domestic
fixed income securities or indices of such securities including municipal
bond indices and any other indices of foreign or domestic fixed income
securities that may become available for trading. Such investment
strategies will be used for hedging purposes and for non-hedging
purposes, subject to applicable law.
A Futures Contract is a bilateral agreement providing for the purchase
and sale of a specified type and amount of a financial instrument,
foreign currency or commodity, or for the making and acceptance of a cash
settlement, at a stated time in the future for a fixed price. By its
terms, a Futures Contract provides for a specified settlement month in
which, in the case of the majority of commodities, interest rate and
foreign currency futures contracts, the underlying commodities, fixed
income securities or currency are delivered by the seller and paid for by
the purchaser, or on which, in the case of index futures contracts and
certain interest rate and foreign currency futures contracts, the
difference between the price at which the contract was entered into and
the contract's closing value is settled between the purchaser and seller
in cash. Futures Contracts differ from options in that they are bilateral
agreements, with both the purchaser and the seller equally obligated to
complete the transaction. Futures Contracts call for settlement only on
the expiration date and cannot be "exercised" at any other time during
their term.
The purchase or sale of a Futures Contract differs from the purchase
or sale of a security or the purchase of an option in that no purchase
price is paid or received. Instead, an amount of cash or cash
equivalents, which varies but may be as low as 5% or less of the value of
the contract, must be deposited with the broker as "initial margin."
Subsequent payments to and from the broker, referred to as "variation
margin," are made on a daily basis as the value of the index or
instrument underlying the Futures Contract fluctuates,
Part II -- C-9
<PAGE>
making positions in the Futures Contract more or less valuable -- a
process known as "mark-to-market."
Purchases or sales of stock index futures contracts are used to
attempt to protect the Fund's current or intended stock investments from
broad fluctuations in stock prices. For example, the Fund may sell stock
index futures contracts in anticipation of or during a market decline to
attempt to offset the decrease in market value of the Fund's securities
portfolio that might otherwise result. If such decline occurs, the loss
in value of portfolio securities may be offset, in whole or part, by
gains on the futures position. When the Fund is not fully invested in the
securities market and anticipates a significant market advance, it may
purchase stock index futures contracts in order to gain rapid market
exposure that may, in part or entirely, offset increases in the cost of
securities that the Fund intends to purchase. As such purchases are made,
the corresponding positions in stock index futures contracts will be
closed out. In a substantial majority of these transactions, the Fund
will purchase such securities upon termination of the futures position,
but under unusual market conditions, a long futures position may be
terminated without a related purchase of securities.
Interest rate Futures Contracts may be purchased or sold to attempt to
protect against the effects of interest rate changes on the Fund's
current or intended investments in fixed income securities. For example,
if the Fund owned long-term bonds and interest rates were expected to
increase, the Fund might enter into interest rate futures contracts for
the sale of debt securities. Such a sale would have much the same effect
as selling some of the long-term bonds in the Fund's portfolio. If
interest rates did increase, the value of the debt securities in the
portfolio would decline, but the value of the Fund's interest rate
futures contracts would increase at approximately the same rate, subject
to the correlation risks described below, thereby keeping the net asset
value of the Fund from declining as much as it otherwise would have.
Similarly, if interest rates were expected to decline, interest rate
futures contracts may be purchased to hedge in anticipation of subsequent
purchases of long-term bonds at higher prices. Since the fluctuations in
the value of the interest rate futures contracts should be similar to
that of long-term bonds, the Fund could protect itself against the
effects of the anticipated rise in the value of long-term bonds without
actually buying them until the necessary cash became available or the
market had stabilized. At that time, the interest rate futures contracts
could be liquidated and the Fund's cash reserves could then be used to
buy long-term bonds on the cash market. The Fund could accomplish similar
results by selling bonds with long maturities and investing in bonds with
short maturities when interest rates are expected to increase. However,
since the futures market may be more liquid than the cash market in
certain cases or at certain times, the use of interest rate futures
contracts as a hedging technique may allow the Fund to hedge its interest
rate risk without having to sell its portfolio securities.
The Fund may purchase and sell foreign currency futures contracts for
hedging purposes, to attempt to protect its current or intended
investments from fluctuations in currency exchange rates. Such
fluctuations could reduce the dollar value of portfolio securities
denominated in foreign currencies, or increase the dollar cost of
foreign-denominated securities to be acquired, even if the value of such
securities in the currencies in which they are denominated remains
constant. The Fund may sell futures contracts on a foreign currency, for
example, where it holds securities denominated in such currency and it
anticipates a decline in the value of such currency relative to the
dollar. In the event such decline occurs, the resulting adverse effect on
the value of foreign-denominated securities may be offset, in whole or in
part, by gains on the futures contracts.
Conversely, the Fund could protect against a rise in the dollar cost
of foreign-denominated securities to be acquired by purchasing futures
contracts on the relevant currency, which could offset, in whole or in
part, the increased cost of such securities resulting from a rise in the
dollar value of the underlying currencies. Where the Fund purchases
futures contracts under such circumstances, however, and the prices of
securities to be acquired instead decline, the Fund will sustain losses
on its futures position which could reduce or eliminate the benefits of
the reduced cost of portfolio securities to be acquired.
The use by the Fund of Futures Contracts also involves the risks
described under the caption "Special Risk Factors -- Options, Futures,
Forwards, Swaps and Other Derivative Transactions" in this Appendix.
Indexed Securities
The Fund may purchase securities with principal and/or interest payments
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. The Fund
may also purchase indexed deposits with similar characteristics.
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
Part II -- C-10
<PAGE>
relative to each other. Certain indexed securities may expose the Fund to
the risk of loss of all or a portion of the principal amount of its
investment and/or the interest that might otherwise have been earned on
the amount invested.
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-sponsored entities.
Inverse Floating Rate Obligations
The Fund may invest in so-called "inverse floating rate obligations" or
"residual interest bonds" or other obligations or certificates relating
thereto structured to have similar features. In creating such an
obligation, a municipality issues a certain amount of debt and pays a
fixed interest rate. Half of the debt is issued as variable rate short
term obligations, the interest rate of which is reset at short intervals,
typically 35 days. The other half of the debt is issued as inverse
floating rate obligations, the interest rate of which is calculated based
on the difference between a multiple of (approximately two times) the
interest paid by the issuer and the interest paid on the short-term
obligation. Under usual circumstances, the holder of the inverse floating
rate obligation can generally purchase an equal principal amount of the
short term obligation and link the two obligations in order to create
long-term fixed rate bonds. Because the interest rate on the inverse
floating rate obligation is determined by subtracting the short-term rate
from a fixed amount, the interest rate will decrease as the short-term
rate increases and will increase as the short-term rate decreases. The
magnitude of increases and decreases in the market value of inverse
floating rate obligations may be approximately twice as large as the
comparable change in the market value of an equal principal amount of
long-term bonds which bear interest at the rate paid by the issuer and
have similar credit quality, redemption and maturity provisions.
Investment In Other Investment Companies
The Fund may invest in other investment companies. Such investment may
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.
Lending of Portfolio Securities
The Fund may seek to increase its income by lending portfolio securities.
Such loans will usually be made only to member firms of the New York
Stock Exchange (the "Exchange") (and subsidiaries thereof) and member
banks of the Federal Reserve System, and would be required to be secured
continuously by collateral in cash, an irrevocable letter of credit or
United States ("U.S.") Treasury securities maintained on a current basis
at an amount at least equal to the market value of the securities loaned.
The Fund would have the right to call a loan and obtain the securities
loaned at any time on customary industry settlement notice (which will
not usually exceed five business days). For the duration of a loan, the
Fund would continue to receive the equivalent of the interest or
dividends paid by the issuer on the securities loaned. The Fund would
also receive a fee from the borrower or compensation from the investment
of the collateral, less a fee paid to the borrower (if the collateral is
in the form of cash). The Fund would not, however, have the right to vote
any securities having voting rights during the existence of the loan, but
the Fund 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 can be earned currently from securities
loans of this type justifies the attendant risk.
Leveraging Transactions
The Fund may engage in the types of transactions described below, which
involve "leverage" because in each case the Fund receives cash which it
can invest in portfolio securities and has a future obligation to make a
payment. The use of these transactions by the Fund will generally cause
its net asset value to increase or decrease at a greater rate than would
otherwise be the case. Any investment income or gains earned from the
portfolio securities purchased with the proceeds from these transactions
which is in excess of the expenses associated from these transactions can
be expected to cause the value of the Fund's shares and distributions on
the Fund's shares to rise more quickly than would otherwise be the case.
Conversely, if the investment income or gains earned from the portfolio
securities purchased with proceeds from these transactions fail to cover
the expenses associated with these transactions, the value of the Fund's
shares is likely to decrease more quickly than otherwise would be the
case and distributions thereon will be reduced or eliminated. Hence,
these transactions are speculative, involve leverage and increase the
risk of owning or investing in the shares of the Fund. These transactions
also increase the Fund's expenses because of interest and similar
payments and administrative expenses associated with them. Unless the
appreciation and income on assets purchased with proceeds from these
transactions exceed the costs associated with them, the use of these
transactions by a Fund would diminish the investment performance of the
Fund compared with what it would have been without using these
transactions.
Bank Borrowings: The Fund may borrow money for investment purposes from
banks and invest the proceeds in accordance with its investment
objectives and policies.
Part II -- C-11
<PAGE>
Mortgage "Dollar Roll" Transactions: The Fund may enter into mortgage
"dollar roll" transactions pursuant to which it sells mortgage-backed
securities for delivery in the future and simultaneously contracts to
repurchase substantially similar securities on a specified future date.
During the roll period, the Fund foregoes principal and interest paid on
the mortgage-backed securities. The Fund is compensated for the lost
interest by the difference between the current sales price and the lower
price for the future purchase (often referred to as the "drop") as well
as by the interest earned on, and gains from, the investment of the cash
proceeds of the initial sale. The Fund may also be compensated by receipt
of a commitment fee.
If the income and capital gains from the Fund's investment of the cash
from the initial sale do not exceed the income, capital appreciation and
gain or loss that would have been realized on the securities sold as part
of the dollar roll, the use of this technique will diminish the
investment performance of the Fund compared with what the performance
would have been without the use of the dollar rolls. Dollar roll
transactions involve the risk that the market value of the securities the
Fund is required to purchase may decline below the agreed upon repurchase
price of those securities. If the broker/dealer to whom the Fund sells
securities becomes insolvent, the Fund's right to purchase or repurchase
securities may be restricted. Successful use of mortgage dollar rolls may
depend upon the Adviser's ability to correctly predict interest rates and
prepayments. There is no assurance that dollar rolls can be successfully
employed.
Reverse Repurchase Agreements: The Fund may enter into reverse repurchase
agreements. In a reverse repurchase agreement, the Fund will sell
securities and receive cash proceeds, subject to its agreement to
repurchase the securities at a later date for a fixed price reflecting a
market rate of interest. There is a risk that the counter party to a
reverse repurchase agreement will be unable or unwilling to complete the
transaction as scheduled, which may result in losses to the Fund. The
Fund will invest the proceeds received under a reverse repurchase
agreement in accordance with its investment objective and policies.
Options
The Fund may invest in the following types of options, which involves the
risks described under the caption "Special Risk Factors -- Option,
Futures, Forwards, Swaps and Other Derivative Transactions" in this
Appendix:
Options on Foreign Currencies: The Fund may purchase and write options on
foreign currencies for hedging and non-hedging purposes in a manner
similar to that in which Futures Contracts on foreign currencies, or
Forward Contracts, will be utilized. For example, a decline in the dollar
value of a foreign currency in which portfolio securities are denominated
will reduce the dollar value of such securities, even if their value in
the foreign currency remains constant. In order to protect against such
diminutions in the value of portfolio securities, the Fund may purchase
put options on the foreign currency. If the value of the currency does
decline, the Fund will have the right to sell such currency for a fixed
amount in dollars and will thereby offset, in whole 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 effect of the adverse movements in exchange rates. As in
the case of other types of options, however, the benefit to the Fund
deriving from purchases of foreign currency options will be reduced by
the amount of the premium and related transaction costs. In addition,
where currency exchange rates do not move in the direction or to the
extent anticipated, the Fund could sustain losses on transactions in
foreign currency options which would require it to forego a portion or
all of the benefits of advantageous changes in such rates. The Fund may
write options on foreign currencies for the same types of hedging
purposes. For example, where the Fund anticipates a decline in the dollar
value of foreign-denominated securities due to adverse fluctuations in
exchange rates it could, instead of purchasing a put option, write a call
option on the relevant currency. If the expected decline occurs, the
option will most likely not be exercised, and the diminution in value of
portfolio securities will be offset by the amount of the premium received
less related transaction costs. As in the case of other types of options,
therefore, the writing of Options on Foreign Currencies will constitute
only a partial hedge.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, the
Fund could write a put option on the relevant currency which, if rates
move in the manner projected, will expire unexercised and allow the Fund
to hedge such increased cost up to the amount of the premium. Foreign
currency options written by the Fund will generally be covered in a
manner similar to the covering of other types of options. As in the case
of other types of options, however, the writing of a foreign currency
option will constitute only a partial hedge up to the amount of the
premium, and only if rates move in the expected direction. If this does
not occur, the option may be exercised and the Fund would be required to
purchase or sell the underlying currency at a loss which may not be
offset by the amount of the premium. Through the writing of options on
foreign currencies, the Fund also may be required to forego all or a
portion of the benefits which might otherwise have been obtained from
favorable movements in exchange rates. The use of foreign currency
options for non-hedging purposes, like the use of other types of
derivatives for such purposes, presents greater profit potential but also
significant risk of loss and could be considered speculative.
Options on Futures Contracts: The Fund also may purchase and write
options to buy or sell those Futures Contracts in which it may invest
("Options on Futures Contracts") as described above under "Futures
Contracts." Such investment strategies will be
Part II -- C-12
<PAGE>
used for hedging purposes and for non-hedging purposes, subject to
applicable law.
An Option on a Futures Contract provides the holder with the right to
enter into a "long" position in the underlying Futures Contract, in the
case of a call option, or a "short" position in the underlying Futures
Contract, in the case of a put option, at a fixed exercise price up to a
stated expiration date or, in the case of certain options, on such date.
Upon exercise of the option by the holder, the contract market
clearinghouse establishes a corresponding short position for the writer
of the option, in the case of a call option, or a corresponding long
position in the case of a put option. In the event that an option is
exercised, the parties will be subject to all the risks associated with
the trading of Futures Contracts, such as payment of initial and
variation margin deposits. In addition, the writer of an Option on a
Futures Contract, unlike the holder, is subject to initial and variation
margin requirements on the option position.
A position in an Option on a Futures Contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase
or sale transaction, subject to the availability of a liquid secondary
market, which is the purchase or sale of an option of the same type
(i.e., the same exercise price and expiration date) as the option
previously purchased or sold. The difference between the premiums paid
and received represents the trader's profit or loss on the transaction.
Options on Futures Contracts that are written or purchased by the Fund
on U.S. exchanges are traded on the same contract market as the
underlying Futures Contract, and, like Futures Contracts, are subject to
regulation by the Commodity Futures Trading Commission (the "CFTC") and
the performance guarantee of the exchange clearinghouse. In addition,
Options on Futures Contracts may be traded on foreign exchanges. The Fund
may cover the writing of call Options on Futures Contracts (a) through
purchases of the underlying Futures Contract, (b) through ownership of
the instrument, or instruments included in the index, underlying the
Futures Contract, or (c) through the holding of a call on the same
Futures Contract and in the same principal amount as the call written
where the exercise price of the call held (i) is equal to or less than
the exercise price of the call written or (ii) is greater than the
exercise price of the call written if the Fund owns liquid and
unencumbered assets equal to the difference. The Fund may cover the
writing of put Options on Futures Contracts (a) through sales of the
underlying Futures Contract, (b) through the ownership of liquid and
unencumbered assets 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 (i) is equal to or
greater than the exercise price of the put written or where the exercise
price of the put held (ii) is less than the exercise price of the put
written if the Fund owns liquid and unencumbered assets equal to the
difference. Put and call Options on Futures Contracts may also be covered
in such other manner as may be in accordance with the rules of the
exchange on which the option is traded and applicable laws and
regulations. Upon the exercise of a call Option on a Futures Contract
written by the Fund, the Fund will be required to sell the underlying
Futures Contract which, if the Fund has covered its obligation through
the purchase of such Contract, will serve to liquidate its futures
position. Similarly, where a put Option on a Futures Contract written by
the Fund is exercised, the Fund will be required to purchase the
underlying Futures Contract which, if the Fund has covered its obligation
through the sale of such Contract, will close out its futures position.
The writing of a call option on a Futures Contract for hedging
purposes constitutes a partial hedge against declining prices of the
securities or other instruments required to be delivered under the terms
of the Futures Contract. If the futures price at expiration of the option
is below the exercise price, the Fund will retain the full amount of the
option premium, less related transaction costs, which provides a partial
hedge against any decline that may have occurred in the Fund's portfolio
holdings. The writing of a put option on a Futures Contract constitutes a
partial hedge against increasing prices of the securities or other
instruments required to be delivered under the terms of the Futures
Contract. If the futures price at expiration of the option is higher than
the exercise price, the Fund will retain the full amount of the option
premium which provides a partial hedge against any increase in the price
of securities which the Fund intends to purchase. If a put or call option
the Fund has written is exercised, the Fund will incur a loss which will
be reduced by the amount of the premium it receives. Depending on the
degree of correlation between changes in the value of its portfolio
securities and the changes in the value of its futures positions, the
Fund's losses from existing Options on Futures Contracts may to some
extent be reduced or increased by changes in the value of portfolio
securities.
The Fund may purchase Options on Futures Contracts for hedging
purposes instead of purchasing or selling the underlying Futures
Contracts. For example, where a decrease in the value of portfolio
securities is anticipated as a result of a projected market-wide decline
or changes in interest or exchange rates, the Fund could, in lieu of
selling Futures Contracts, purchase put options thereon. In the event
that such decrease occurs, it may be offset, in whole or in part, by a
profit on the option. Conversely, where it is projected that the value of
securities to be acquired by the Fund will increase prior to acquisition,
due to a market advance or changes in interest or exchange rates, the
Fund could purchase call Options on Futures Contracts than purchasing the
underlying Futures Contracts.
Options on Securities: The Fund may write (sell) covered put and call
options, and purchase put and call options, on securities. Call and put
options written by the Fund may be covered in the manner set forth below.
A call option written by the Fund is "covered" if the Fund owns the
security underlying the call or has an absolute and immediate right to
acquire that security without additional cash consider-
Part II -- C-13
<PAGE>
ation (or for additional cash consideration if the Fund owns liquid and
unencumbered assets equal to the amount of cash consideration) 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 Fund owns liquid and unencumbered assets equal to the
difference. A put option written by the Fund is "covered" if the Fund
owns liquid and unencumbered assets with a value equal to the exercise
price, or else holds a put on the same security and in the same principal
amount as the put written where the exercise price of the put held is
equal to or greater than the exercise price of the put written or where
the exercise price of the put held is less than the exercise price of the
put written if the Fund owns liquid and unencumbered assets equal to the
difference. Put and call options written by the Fund may also be covered
in such other manner as may be in accordance with the requirements of the
exchange on which, or the counterparty with which, the option is traded,
and applicable laws and regulations. If the writer's obligation is not so
covered, it is subject to the risk of the full change in value of the
underlying security from the time the option is written until exercise.
Effecting a closing transaction in the case of a written call option
will permit the Fund to write another call option on the underlying
security with either a different exercise price or expiration date or
both, or in the case of a written put option will permit the Fund to
write another put option to the extent that the Fund owns liquid and
unencumbered assets. Such transactions permit the Fund to generate
additional premium income, which will partially offset declines in the
value of portfolio securities or increases in the cost of securities to
be acquired. Also, effecting a closing transaction will permit the cash
or proceeds from the concurrent sale of any securities subject to the
option to be used for other investments of the Fund, provided that
another option on such security is not written. If the Fund desires to
sell a particular security from its portfolio on which it has written a
call option, it will effect a closing transaction in connection with the
option prior to or concurrent with the sale of the security.
The Fund will realize a profit from a closing transaction if the
premium paid in connection with the closing of an option written by the
Fund is less than the premium received from writing the option, or if the
premium received in connection with the closing of an option purchased by
the Fund is more than the premium paid for the original purchase.
Conversely, the Fund will suffer a loss if the premium paid or received
in connection with a closing transaction is more or less, respectively,
than the premium received or paid in establishing the option position.
Because increases in the market price of a call option will generally
reflect increases in the market price of the underlying security, any
loss resulting from the repurchase of a call option previously written by
the Fund is likely to be offset in whole or in part by appreciation of
the underlying security owned by the Fund.
The Fund may write options in connection with buy-and-write
transactions; that is, the Fund may purchase a security and then write a
call option against that security. The exercise price of the call option
the Fund determines to write will depend upon the expected price movement
of the underlying security. The exercise price of a call option may be
below ("in-the-money"), equal to ("at-the-money") or above
("out-of-the-money") the current value of the underlying security at the
time the option is written. Buy-and-write transactions using in-the-money
call options may be used when it is expected that the price of the
underlying security will decline moderately during the option period.
Buy-and-write transactions using out-of-the-money call options may be
used when it is expected that the premiums received from writing the call
option plus the appreciation in the market price of the underlying
security up to the exercise price will be greater than the appreciation
in the price of the underlying security alone. If the call options are
exercised in such transactions, the Fund's maximum gain will be the
premium received by it for writing the option, adjusted upwards or
downwards by the difference between the Fund's purchase price of the
security and the exercise price, less related transaction costs. If the
options are not exercised and the price of the underlying security
declines, the amount of such decline will be offset in part, or entirely,
by the premium received.
The writing of covered put options is similar in terms of risk/
return characteristics to buy-and-write transactions. If the market price
of the underlying security rises or otherwise is above the exercise
price, the put option will expire worthless and the Fund's gain will be
limited to the premium received, less related transaction costs. If the
market price of the underlying security declines or otherwise is below
the exercise price, the Fund may elect to close the position or retain
the option until it is exercised, at which time the Fund will be required
to take delivery of the security at the exercise price; the Fund's return
will be the premium received from the put option minus the amount by
which the market price of the security is below the exercise price, which
could result in a loss. Out-of-the-money, at-the-money and in-the-money
put options may be used by the Fund in the same market environments that
call options are used in equivalent buy-and-write transactions.
The Fund may also write combinations of put and call options on the
same security, known as "straddles" with the same exercise price and
expiration date. By writing a straddle, the Fund undertakes a
simultaneous obligation to sell and purchase the same security in the
event that one of the options is exercised. If the price of the security
subsequently rises sufficiently above the exercise price to cover the
amount of the premium and transaction costs, the call will likely be
exercised and the Fund will be required to sell the underlying security
at a below market price. This loss may be offset, however, in whole or
part, by the premiums received on the writing of the two options.
Conversely, if the price of the security declines by a sufficient amount,
the put will likely be exercised. The writing of straddles will likely be
effective, therefore, only where the price of the security
Part II -- C-14
<PAGE>
remains stable and neither the call nor the put is exercised. In those
instances where one of the options is exercised, the loss on the purchase
or sale of the underlying security may exceed the amount of the premiums
received.
By writing a call option, the Fund limits its opportunity to profit
from any increase in the market value of the underlying security above
the exercise price of the option. By writing a put option, the Fund
assumes the risk that it may be required to purchase the underlying
security for an exercise price above its then-current market value,
resulting in a capital loss unless the security subsequently appreciates
in value. The writing of options on securities will not be undertaken by
the Fund solely for hedging purposes, and could involve certain risks
which are not present in the case of hedging transactions. Moreover, even
where options are written for hedging purposes, such transactions
constitute only a partial hedge against declines in the value of
portfolio securities or against increases in the value of securities to
be acquired, up to the amount of the premium.
The Fund may also purchase options for hedging purposes or to increase
its return. Put options may be purchased to hedge against a decline in
the value of portfolio securities. If such decline occurs, the put
options will permit the Fund to sell the securities at the exercise
price, or to close out the options at a profit. By using put options in
this way, the Fund will reduce any profit it might otherwise have
realized in the underlying security by the amount of the premium paid for
the put option and by transaction costs.
The Fund may also purchase call options to hedge against an increase
in the price of securities that the Fund anticipates purchasing in the
future. If such increase occurs, the call option will permit the Fund to
purchase the securities at the exercise price, or to close out the
options at a profit. The premium paid for the call option plus any
transaction costs will reduce the benefit, if any, realized by the Fund
upon exercise of the option, and, unless the price of the underlying
security rises sufficiently, the option may expire worthless to the Fund.
Options on Stock Indices: The Fund may write (sell) covered call and put
options and purchase call and put options on stock indices. In contrast
to an option on a security, an option on a stock index provides the
holder with the right but not the obligation to make or receive a cash
settlement upon exercise of the option, rather than the right to purchase
or sell a security. The amount of this settlement is generally equal to
(i) the amount, if any, by which the fixed exercise price of the option
exceeds (in the case of a call) or is below (in the case of a put) the
closing value of the underlying index on the date of exercise, multiplied
by (ii) a fixed "index multiplier." The Fund may cover written 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 if the Fund owns liquid and unencumbered assets equal
to the amount of cash consideration) 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 Fund owns liquid and unencumbered assets equal to the difference. The
Fund may cover put options on stock indices by owning liquid and
unencumbered assets with a value equal to the exercise price, or by
holding a put on the same stock index and in the same principal amount as
the put written where the exercise price of the put held (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 Fund owns liquid and
unencumbered assets equal to the difference. Put and call options on
stock indices may also be covered in such other manner as may be in
accordance with the rules of the exchange on which, or the counterparty
with which, the option is traded and applicable laws and regulations.
The Fund will receive a premium from writing a put or call option,
which increases the Fund's gross income in the event the option expires
unexercised or is closed out at a profit. If the value of an index on
which the Fund has written a call option falls or remains the same, the
Fund will realize a profit in the form of the premium received (less
transaction costs) that could offset all or a portion of any decline in
the value of the securities it owns. If the value of the index rises,
however, the Fund will realize a loss in its call option position, which
will reduce the benefit of any unrealized appreciation in the Fund's
stock investments. By writing a put option, the Fund assumes the risk of
a decline in the index. To the extent that the price changes of
securities owned by the Fund correlate with changes in the value of the
index, writing covered put options on indices will increase the Fund's
losses in the event of a market decline, although such losses will be
offset in part by the premium received for writing the option.
The Fund may also purchase put options on stock indices to hedge its
investments against a decline in value. By purchasing a put option on a
stock index, the Fund will seek to offset a decline in the value of
securities it owns through appreciation of the put option. If the value
of the Fund's investments does not decline as anticipated, or if the
value of the option does not increase, the Fund's loss will be limited to
the premium paid for the option plus related transaction costs. The
success of this strategy will largely depend on the accuracy of the
correlation between the changes in value of the index and the changes in
value of the Fund's security holdings.
The purchase of call options on stock indices may be used by the Fund
to attempt to reduce the risk of missing a broad market
Part II -- C-15
<PAGE>
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 it the
value of the index does not rise. The purchase of call options on stock
indices when the Fund is substantially fully invested is a form of
leverage, up to the amount of the premium and related transaction costs,
and involves risks of loss and of increased volatility similar to those
involved in purchasing calls on securities the Fund owns.
The index underlying a stock index option may be a "broad-based" index,
such as the Standard & Poor's 500 Index or the New York Stock Exchange
Composite Index, the changes in value of which ordinarily will reflect
movements in the stock market in general. In contrast, certain options
may be based on narrower market indices, such as the Standard & Poor's
100 Index, or on indices of securities of particular industry groups,
such as those of oil and gas or technology companies. A stock index
assigns relative values to the stocks included in the index and the index
fluctuates with changes in the market values of the stocks so included.
The composition of the index is changed periodically.
Reset Options: In certain instances, the Fund may purchase or write
options on U.S. Treasury securities which provide for periodic adjustment
of the strike price and may also provide for the periodic adjustment of
the premium during the term of each such option. Like other types of
options, these transactions, which may be referred to as "reset" options
or "adjustable strike" options grant the purchaser the right to purchase
(in the case of a call) or sell (in the case of a put), a specified type
of U.S. Treasury security at any time up to a stated expiration date (or,
in certain instances, on such date). In contrast to other types of
options, however, the price at which the underlying security may be
purchased or sold under a "reset" option is determined at various
intervals during the term of the option, and such price fluctuates from
interval to interval based on changes in the market value of the
underlying security. As a result, the strike price of a "reset" option,
at the time of exercise, may be less advantageous than if the strike
price had been fixed at the initiation of the option. In addition, the
premium paid for the purchase of the option may be determined at the
termination, rather than the initiation, of the option. If the premium
for a reset option written by the Fund is paid at termination, the Fund
assumes the risk that (i) the premium may be less than the premium which
would otherwise have been received at the initiation of the option
because of such factors as the volatility in yield of the underlying
Treasury security over the term of the option and adjustments made to the
strike price of the option, and (ii) the option purchaser may default on
its obligation to pay the premium at the termination of the option.
Conversely, where the Fund purchases a reset option, it could be required
to pay a higher premium than would have been the case at the initiation
of the option.
"Yield Curve" Options: The Fund may also enter into options on the
"spread," or yield differential, between two fixed income securities, in
transactions referred to as "yield curve" options. In contrast to other
types of options, a yield curve option is based on the difference between
the yields of designated securities, rather than the prices of the
individual securities, and is settled through cash payments. Accordingly,
a yield curve option is profitable to the holder if this differential
widens (in the case of a call) or narrows (in the case of a put),
regardless of whether the yields of the underlying securities increase or
decrease.
Yield curve options may be used for the same purposes as other options
on securities. Specifically, the Fund may purchase or write such options
for hedging purposes. For example, the Fund may purchase a call option on
the yield spread between two securities, if it owns one of the securities
and anticipates purchasing the other security and wants to hedge against
an adverse change in the yield spread between the two securities. The
Fund may also purchase or write yield curve options for other than
hedging purposes (i.e., in an effort to increase its current income) if,
in the judgment of the Adviser, the Fund will be able to profit from
movements in the spread between the yields of the underlying securities.
The trading of yield curve options is subject to all of the risks
associated with the trading of other types of options. In addition,
however, such options present risk of loss even if the yield of one of
the underlying securities remains constant, if the spread moves in a
direction or to an extent which was not anticipated. Yield curve options
written by the Fund will be "covered". A call (or put) option is covered
if the Fund holds another call (or put) option on the spread between the
same two securities and owns liquid and unencumbered assets sufficient to
cover the Fund's net liability under the two options. Therefore, the
Fund's liability for such a covered option is generally limited to the
difference between the amount of the Fund's liability under the option
written by the Fund less the value of the option held by the Fund. Yield
curve options may also be covered in such other manner as may be in
accordance with the requirements of the counterparty with which the
option is traded and applicable laws and regulations. Yield curve options
are traded over-the-counter and because they have been only recently
introduced, established trading markets for these securities have not yet
developed.
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 or 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
Government securities.
Part II -- C-16
<PAGE>
The repurchase agreement provides that in the event the seller fails
to pay the amount agreed upon on the agreed upon delivery date or upon
demand, as the case may be, the Fund will have the right to liquidate the
securities. If at the time the Fund is contractually entitled to exercise
its right to liquidate the securities, the seller is subject to a
proceeding under the bankruptcy laws or its assets are otherwise subject
to a stay order, the Fund's exercise of its right to liquidate the
securities may be delayed and result in certain losses and costs to the
Fund. The Fund has adopted and follows procedures which are intended to
minimize the risks of repurchase agreements. For example, the Fund only
enters into repurchase agreements after the Adviser has determined that
the seller is creditworthy, and the Adviser monitors that seller's
creditworthiness on an ongoing basis. Moreover, under such agreements,
the value of the securities (which are marked to market every business
day) is required to be greater than the repurchase price, and the Fund
has the right to make margin calls at any time if the value of the
securities falls below the agreed upon collateral.
Restricted Securities
The Fund may purchase securities that are not registered under the
Securities Act of 1933, as amended ("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") and commercial paper issued under Section 4(2) of the 1933
Act ("4(2) Paper"). A determination is made, based upon a continuing
review of the trading markets for the Rule 144A security or 4(2) Paper,
whether such security is liquid and thus not subject to the Fund's
limitation on investing 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 and 4(2)
Paper. The Board, however, retains oversight of the liquidity
determinations focusing on factors such as valuation, liquidity and
availability of information. Investing in Rule 144A securities could have
the effect of decreasing the level of liquidity in the Fund to the extent
that qualified institutional buyers become for a time uninterested in
purchasing these Rule 144A securities held in the Fund's portfolio.
Subject to the Fund's 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.
Short Sales
The Fund may seek to hedge investments or realize additional gains
through short sales. The Fund may make short sales, which are
transactions in which the Fund sells a security it does not own, in
anticipation of a decline in the market value of that security. To
complete such a transaction, the Fund must borrow the security to make
delivery to the buyer. The Fund then is obligated to replace the security
borrowed by purchasing it at the market price at the time of replacement.
The price at such time may be more or less than the price at which the
security was sold by the Fund. Until the security is replaced, the Fund
is required to repay the lender any dividends or interest which accrue
during the period of the loan. To borrow the security, the Fund also may
be required to pay a premium, which would increase the cost of the
security sold. The net proceeds of the short sale will be retained by the
broker, to the extent necessary to meet margin requirements, until the
short position is closed out. The Fund also will incur transaction costs
in effecting short sales.
The Fund will incur a loss as a result of the short sale if the price
of the security increases between the date of the short sale and the date
on which the Fund replaces the borrowed security. The Fund will realize a
gain if the price of the security declines between those dates. The
amount of any gain will be decreased, and the amount of any loss
increased, by the amount of the premium, dividends or interest the Fund
may be required to pay in connection with a short sale.
Whenever the Fund engages in short sales, it identifies liquid and
unencumbered assets in an amount that, when combined with the amount of
collateral deposited with the broker connection with the short sale,
equals the current market value of the security sold short.
Short Sales Against The Box
The Fund may make short sales "against the box," i.e., when a security
identical to one owned by the Fund is borrowed and sold short. If the
Fund enters into a short sale against the box, it is required to
segregate securities equivalent in kind and amount to the securities sold
short (or securities convertible or exchangeable into such securities)
and is required to hold such securities while the short sale is
outstanding. The Fund will incur transaction costs, including interest,
in connection with opening, maintaining, and closing short sales against
the box.
Short Term Instruments
The Fund may hold cash and invest in cash equivalents, such as short-term
U.S. Government Securities, commercial paper and bank instruments.
Swaps and Related Derivative Instruments
The Fund may enter into interest rate swaps, currency swaps and other
types of available swap agreements, including swaps on securities,
commodities and indices, and related types of derivatives, such as caps,
collars and floors. A swap is an agreement between two parties pursuant
to which each party agrees to make one or more payments to the other on
regularly scheduled dates over a stated term, based on different interest
rates, currency exchange rates, security or commodity prices, the prices
or rates of other types of financial instruments or assets or the levels
of specified indices. Under a typical swap, one party may agree to pay a
fixed rate or a floating rate determined by reference to a specified
instrument, rate or index, multiplied in each case by a specified amount
(the "notional amount"), while the
Part II -- C-17
<PAGE>
other party agrees to pay an amount equal to a different floating rate
multiplied by the same notional amount. On each payment date, the
obligations of parties are netted, with only the net amount paid by one
party to the other. All swap agreements entered into by the Fund with the
same counterparty are generally governed by a single master agreement,
which provides for the netting of all amounts owed by the parties under
the agreement upon the occurrence of an event of default, thereby
reducing the credit risk to which such party is exposed.
Swap agreements are typically individually negotiated and structured
to provide exposure to a variety of different types of investments or
market factors. Swap agreements may be entered into for hedging or
non-hedging purposes and therefore may increase or decrease the Fund's
exposure to the underlying instrument, rate, asset or index. 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 the Adviser determines it is consistent with the Fund's
investment objective and policies.
For example, the Fund may enter into an interest rate swap in order to
protect against declines in the value of fixed income securities held by
the Fund. In such an instance, the Fund would agree with a counterparty
to pay a fixed rate (multiplied by a notional amount) and the
counterparty would agree to pay a floating rate multiplied by the same
notional amount. If interest rates rise, resulting in a diminution in the
value of the Fund's portfolio, the Fund would receive payments under the
swap that would offset, in whole or part, such diminution in value. The
Fund may also enter into swaps to modify its exposure to particular
markets or instruments, such as a currency swap between the dollar and
another currency which would have the effect of increasing or decreasing
the Fund's exposure to each such currency. The Fund might also enter into
a swap on a particular security, or a basket or index of securities, in
order to gain exposure to the underlying security or securities, as an
alternative to purchasing such securities. Such transactions could be
more efficient or less costly in certain instances than an actual
purchase or sale of the securities.
The Fund may enter into other related types of over-the-counter
derivatives, such as "caps", "floors", "collars" and options on swaps, or
"swaptions", for the same types of hedging or non-hedging purposes. Caps
and floors are similar to swaps, except that one party pays a fee at the
time the transaction is entered into and has no further payment
obligations, while the other party is obligated to pay an amount equal to
the amount by which a specified fixed or floating rate exceeds or is
below another rate (multiplied by a notional amount). Caps and floors,
therefore, are also similar to options. A collar is in effect a
combination of a cap and a floor, with payments made only within or
outside a specified range of prices or rates. A swaption is an option to
enter into a swap agreement. Like other types of options, the buyer of a
swaption pays a non-refundable premium for the option and obtains the
right, but not the obligation, to enter into the underlying swap on the
agreed-upon terms.
The Fund will maintain liquid and unencumbered assets to cover its
current obligations under swap and other over-the-counter derivative
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 liquid and unencumbered assets with a daily value at
least equal to the excess, if any, of the Fund's accrued obligations
under the swap agreement over the accrued amount the Fund is entitled to
receive under the agreement. If the Fund enters into a swap agreement on
other than a net basis, it will maintain liquid and unencumbered assets
with a value equal to the full amount of the Fund's accrued obligations
under the agreement.
The most significant factor in the performance of swaps, caps, floors
and collars is the change in the underlying price, rate or index level
that determines the amount of payments to be made under the arrangement.
If the Adviser 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 would decline, 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, but there can be no assurance that it will be able to do
so.
The uses by the Fund of Swaps and related derivative instruments also
involves the risks described under the caption "Special Risk
Factors -- Options, Futures, Forwards, Swaps and Other Derivative
Transactions" in this Appendix.
Temporary Borrowings
The Fund may borrow money for temporary purposes (e.g., to meet
redemption requests or settle outstanding purchases of portfolio
securities).
Temporary Defensive Positions
During periods of unusual market conditions when the Adviser believes
that investing for temporary defensive purposes is appropriate, or in
order to meet anticipated redemption requests, a large portion or all of
the assets of the Fund may be invested in cash (including foreign
currency) or cash equivalents, including, but not limited to, obligations
of banks (including certificates of deposit, bankers' acceptances, time
deposits and repurchase agreements), commercial paper, short-term notes,
U.S. Government Securities and related repurchase agreements.
Part II -- C-18
<PAGE>
Warrants
The Fund may invest in warrants. Warrants are securities that give the
Fund the right to purchase equity securities from the issuer at a
specific price (the "strike price") for a limited period of time. The
strike price of warrants typically is much lower than the current market
price of the underlying securities, yet they are subject to similar price
fluctuations. As a result, warrants may be more volatile investments than
the underlying securities and may offer greater potential for capital
appreciation as well as capital loss. Warrants do not entitle a holder to
dividends or voting rights with respect to the underlying securities and
do not represent any rights in the assets of the issuing company. Also,
the value of the warrant does not necessarily change with the value of
the underlying securities and a warrant ceases to have value if it is not
exercised prior to the expiration date. These factors can make warrants
more speculative than other types of investments.
"When-issued" Securities
The Fund may purchase securities on a "when-issued" or on a "forward
delivery" basis which means that the securities 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. In general, the Fund does
not pay for such securities until received, and does not start earning
interest on the securities until the contractual settlement date. While
awaiting delivery of securities purchased on such bases, a Fund will
identify liquid and unencumbered assets equal to its forward delivery
commitment.
Special Risk Factors -- Options, Futures, Forwards, Swaps and Other
Derivative Transactions Risk of Imperfect Correlation of Hedging
Instruments with the Fund's Portfolio: The Fund's ability effectively to
hedge all or a portion of its portfolio through transactions in
derivatives, including options, Futures Contracts, Options on Futures
Contracts, Forward Contracts, swaps and other types of derivatives depends
on the degree to which price movements in the underlying index or
instrument correlate with price movements in the relevant portion of the
Fund's portfolio. In the case of derivative instruments based on an index,
the portfolio will not duplicate the components of the index, and in the
case of derivative instruments on fixed income securities, the portfolio
securities which are being hedged may not be the same type of obligation
underlying such derivatives. The use of derivatives for "cross hedging"
purposes (such as a transaction in a Forward Contract on one currency to
hedge exposure to a different currency) may involve greater correlation
risks. Consequently, the Fund bears the risk that the price of the
portfolio securities being hedged will not move in the same amount or
direction as the underlying index or obligation.
If the Fund purchases a put option on an index and the index decreases
less than the value of the hedged securities, the Fund would experience a
loss which is not completely offset by the put option. It is also
possible that there may be a negative correlation between the index or
obligation underlying an option or Futures Contract in which the Fund has
a position and the portfolio securities the Fund is attempting to hedge,
which could result in a loss on both the portfolio and the hedging
instrument. It should be noted that stock index futures contracts or
options based upon a narrower index of securities, such as those of a
particular industry group, may present greater risk than options or
futures based on a broad market index. This is due to the fact that a
narrower index is more susceptible to rapid and extreme fluctuations as a
result of changes in the value of a small number of securities.
Nevertheless, where the Fund enters into transactions in options or
futures on narrowly-based indices for hedging purposes, movements in the
value of the index should, if the hedge is successful, correlate closely
with the portion of the Fund's portfolio or the intended acquisitions
being hedged.
The trading of derivatives for hedging purposes entails the additional
risk of imperfect correlation between movements in the price of the
derivative and the price of the underlying index or obligation. The
anticipated spread between the prices may be distorted due to the
differences in the nature of the markets such as differences in margin
requirements, the liquidity of such markets and the participation of
speculators in the derivatives markets. In this regard, trading by
speculators in derivatives has in the past occasionally resulted in
market distortions, which may be difficult or impossible to predict,
particularly near the expiration of such instruments.
The trading of Options on Futures Contracts also entails the risk that
changes in the value of the underlying Futures Contracts will not be
fully reflected in the value of the option. The risk of imperfect
correlation, however, generally tends to diminish as the maturity date of
the Futures Contract or expiration date of the option approaches.
Further, with respect to options on securities, options on stock
indices, options on currencies and Options on Futures Contracts, the Fund
is subject to the risk of market movements between the time that the
option is exercised and the time of performance thereunder. This could
increase the extent of any loss suffered by the Fund in connection with
such transactions.
In writing a covered call option on a security, index or futures
contract, the Fund also incurs the risk that changes in the value of the
instruments used to cover the position will not correlate closely with
changes in the value of the option or underlying index or instrument. For
example, where the Fund covers a call option written on a stock index
through segregation of securities, such securities may not match the
composition of the index, and the Fund may not be fully covered. As a
result, the Fund could be subject to risk of loss in the event of adverse
market movements.
The writing of options on securities, options on stock indices or
Options on Futures Contracts constitutes only a partial hedge against
fluctuations in the value of the Fund's portfolio. When the Fund writes
an option, it will receive premium income in
Part II -- C-19
<PAGE>
return for the holder's purchase of the right to acquire or dispose of
the underlying obligation. In the event that the price of such obligation
does not rise sufficiently above the exercise price of the option, in the
case of a call, or fall below the exercise price, in the case of a put,
the option will not be exercised and the Fund will retain the amount of
the premium, less related transaction costs, which will constitute a
partial hedge against any decline that may have occurred in the Fund's
portfolio holdings or any increase in the cost of the instruments to be
acquired.
Where the price of the underlying obligation moves sufficiently in
favor of the holder to warrant exercise of the option, however, and the
option is exercised, the Fund will incur a loss which may only be
partially offset by the amount of the premium it received. Moreover, by
writing an option, the Fund may be required to forego the benefits which
might otherwise have been obtained from an increase in the value of
portfolio securities or other assets or a decline in the value of
securities or assets to be acquired. In the event of the occurrence of
any of the foregoing adverse market events, the Fund's overall return may
be lower than if it had not engaged in the hedging transactions.
Furthermore, the cost of using these techniques may make it economically
infeasible for the Fund to engage in such transactions.
Risks of Non-Hedging Transactions: The Fund may enter transactions in
derivatives for non-hedging purposes as well as hedging purposes.
Non-hedging transactions in such instru- ments involve greater risks and
may result in losses which may not be offset by increases in the value of
portfolio securities or declines in the cost of securities to be
acquired. The Fund will only write covered options, such that liquid and
unencumbered assets necessary to satisfy an option exercise will be
identified, unless the option is 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. Nevertheless, the method of covering an option employed by
the Fund may not fully protect it against risk of loss and, in any event,
the Fund could suffer losses on the option position which might not be
offset by corresponding portfolio gains. The Fund may also enter into
futures, Forward Contracts or swaps for non-hedging purposes. For
example, the Fund may enter into such a transaction as an alternative to
purchasing or selling the underlying instrument or to obtain desired
exposure to an index or market. In such instances, the Fund will be
exposed to the same economic risks incurred in purchasing or selling the
underlying instrument or instruments. However, transactions in futures,
Forward Contracts or swaps may be leveraged, which could expose the Fund
to greater risk of loss than such purchases or sales. Entering into
transactions in derivatives for other than hedging purposes, therefore,
could expose the Fund to significant risk of loss if the prices, rates or
values of the underlying instruments or indices do not move in the
direction or to the extent anticipated.
With respect to the writing of straddles on securities, the Fund
incurs the risk that the price of the underlying security will not remain
stable, that one of the options written will be exercised and that the
resulting loss will not be offset by the amount of the premiums received.
Such transactions, therefore, create an opportunity for increased return
by providing the Fund with two simultaneous premiums on the same
security, but involve additional risk, since the Fund may have an option
exercised against it regardless of whether the price of the security
increases or decreases.
Risk of a Potential Lack of a Liquid Secondary Market: Prior to exercise
or expiration, a futures or option position can only be terminated by
entering into a closing purchase or sale transaction. This requires a
secondary market for such instruments on the exchange on which the
initial transaction was entered into. While the Fund will enter into
options or futures positions only if there appears to be a liquid
secondary market therefor, there can be no assurance that such a market
will exist for any particular contract at any specific time. In that
event, it may not be possible to close out a position held by the Fund,
and the Fund could be required to purchase or sell the instrument
underlying an option, make or receive a cash settlement or meet ongoing
variation margin requirements. Under such circumstances, if the Fund has
insufficient cash available to meet margin requirements, it will be
necessary to liquidate portfolio securities or other assets at a time
when it is disadvantageous to do so. The inability to close out options
and futures positions, therefore, could have an adverse impact on the
Fund's ability effectively to hedge its portfolio, and could result in
trading losses.
The liquidity of a secondary market in a Futures Contract or option
thereon may be adversely affected by "daily price fluctuation limits,"
established by exchanges, which limit the amount of fluctuation in the
price of a contract during a single trading day. Once the daily limit has
been reached in the contract, no trades may be entered into at a price
beyond the limit, thus preventing the liquidation of open futures or
option positions and requiring traders to make additional margin
deposits. Prices have in the past moved to the daily limit on a number of
consecutive trading days.
The trading of Futures Contracts and options is also subject to the
risk of trading halts, suspensions, exchange or clearinghouse equipment
failures, government intervention, insolvency of a brokerage firm or
clearinghouse or other disruptions of normal trading activity, which
could at times make it difficult or impossible to liquidate existing
positions or to recover excess variation margin payments.
Margin: Because of low initial margin deposits made upon the
establishment of a futures, forward or swap position (certain of which
may require no initial margin deposits) and the writing of an option,
such transactions involve substantial leverage. As a result, relatively
small movements in the price of the contract can result in substantial
unrealized gains or losses. Where the Fund enters into such transactions
for hedging purposes, any losses incurred in connection therewith should,
if the hedging strategy is successful, be offset, in whole or in part, by
increases in the value of securities or other assets held by the Fund or
decreases in the prices of securities or other assets the Fund intends to
acquire. Where the Fund enters into such transactions for other
Part II -- C-20
<PAGE>
than hedging purposes, the margin requirements associated with such
transactions could expose the Fund to greater risk.
Potential Bankruptcy of a Clearinghouse or Broker: When the Fund enters
into transactions in exchange-traded futures or options, it is exposed to
the risk of the potential bankruptcy of the relevant exchange
clearinghouse or the broker through which the Fund has effected the
transaction. In that event, the Fund might not be able to recover amounts
deposited as margin, or amounts owed to the Fund in connection with its
transactions, for an indefinite period of time, and could sustain losses
of a portion or all of such amounts, Moreover, the performance guarantee
of an exchange clearinghouse generally extends only to its members and
the Fund could sustain losses, notwithstanding such guarantee, in the
event of the bankruptcy of its broker.
Trading and Position Limits: The exchanges on which futures and options
are traded may impose limitations governing the maximum number of
positions on the same side of the market and involving the same
underlying instrument which may be held by a single investor, whether
acting alone or in concert with others (regardless of whether such
contracts are held on the same or different exchanges or held or written
in one or more accounts or through one or more brokers). Further, the
CFTC and the various contract markets have established limits referred to
as "speculative position limits" on the maximum net long or net short
position which any person may hold or control in a particular futures or
option contract. An exchange may order the liquidation of positions found
to be in violation of these limits and it may impose other sanctions or
restrictions. The Adviser does not believe that these trading and
position limits will have any adverse impact on the strategies for
hedging the portfolios of the Fund.
Risks of Options on Futures Contracts: The amount of risk the Fund
assumes when it purchases an Option on a Futures Contract is the premium
paid for the option, plus related transaction costs. In order to profit
from an option purchased, however, it may be necessary to exercise the
option and to liquidate the underlying Futures Contract, subject to the
risks of the availability of a liquid offset market described herein. The
writer of an Option on a Futures Contract is subject to the risks of
commodity futures trading, including the requirement of initial and
variation margin payments, as well as the additional risk that movements
in the price of the option may not correlate with movements in the price
of the underlying security, index, currency or Futures Contract.
Risks of Transactions in Foreign Currencies and Over-the-Counter
Derivatives and Other Transactions Not Conducted on U.S.
Exchanges: Transactions in Forward Contracts on foreign currencies, as
well as futures and options on foreign currencies and transactions
executed on foreign exchanges, are subject to all of the correlation,
liquidity and other risks outlined above. In addition, however, such
transactions are subject to the risk of governmental actions affecting
trading in or the prices of currencies underlying such contracts, which
could restrict or eliminate trading and could have a substantial adverse
effect on the value of positions held by the Fund. Further, the value of
such positions could be adversely affected by a number of other complex
political and economic factors applicable to the countries issuing the
underlying currencies.
Further, unlike trading in most other types of instruments, there is
no systematic reporting of last sale information with respect to the
foreign currencies underlying contracts thereon. As a result, the
available information on which trading systems will be based may not be
as complete as the comparable data on which the Fund makes investment and
trading decisions in connection with other transactions. Moreover,
because the foreign currency market is a global, 24-hour market, events
could occur in that market which will not be reflected in the forward,
futures or options market until the following day, thereby making it more
difficult for the Fund to respond to such events in a timely manner.
Settlements of exercises of over-the-counter Forward Contracts or
foreign currency options generally must occur within the country issuing
the underlying currency, which in turn requires traders to accept or make
delivery of such currencies in conformity with any U.S. or foreign
restrictions and regulations regarding the maintenance of foreign banking
relationships, fees, taxes or other charges.
Unlike transactions entered into by the Fund in Futures Contracts and
exchange-traded options, options on foreign currencies, Forward
Contracts, over-the-counter options on securities, swaps and other
over-the-counter derivatives are not traded on contract markets regulated
by the CFTC or (with the exception of certain foreign currency options)
the SEC. To the contrary, such instruments are traded through financial
institutions acting as market-makers, although foreign currency options
are also traded on certain national securities exchanges, such as the
Philadelphia Stock Exchange and the Chicago Board Options Exchange,
subject to SEC regulation. In an over-the-counter trading environment,
many of the protections afforded to exchange participants will not be
available. For example, there are no daily price fluctuation limits, and
adverse market movements could therefore continue to an unlimited extent
over a period of time. Although the purchaser of an option cannot lose
more than the amount of the premium plus related transaction costs, this
entire amount could be lost. Moreover, the option writer and a trader of
Forward Contracts could lose amounts substantially in excess of their
initial investments, due to the margin and collateral requirements
associated with such positions.
In addition, over-the-counter transactions can only be entered into
with a financial institution willing to take the opposite side, as
principal, of the Fund's position unless the institution acts as broker
and is able to find another counterparty willing to enter into the
transaction with the Fund. Where no such counterparty is available, it
will not be possible to enter into a desired transaction. There also may
be no liquid secondary market in the trading of over-the-counter
contracts, and the Fund could be required to retain options purchased or
written, or Forward Contracts or swaps entered into, until exercise,
expiration or maturity. This in turn could limit the Fund's ability to
profit from open positions
Part II -- C-21
<PAGE>
or to reduce losses experienced, and could result in greater losses.
Further, over-the-counter transactions are not subject to the
guarantee of an exchange clearinghouse, and the Fund will therefore be
subject to the risk of default by, or the bankruptcy of, the financial
institution serving as its counterparty. One or more of such institutions
also may decide to discontinue their role as market-makers in a
particular currency or security, thereby restricting the Fund's ability
to enter into desired hedging transactions. The Fund will enter into an
over-the-counter transaction only with parties whose creditworthiness has
been reviewed and found satisfactory by the Adviser.
Options on securities, options on stock indices, Futures Contracts,
Options on Futures Contracts and options on foreign currencies may be
traded on exchanges located in foreign countries. Such transactions may
not be conducted in the same manner as those entered into on U.S.
exchanges, and may be subject to different margin, exercise, settlement
or expiration procedures. As a result, many of the risks of
over-the-counter trading may be present in connection with such
transactions.
Options on foreign currencies traded on national securities exchanges
are within the jurisdiction of the SEC, as are other securities traded on
such exchanges. As a result, many of the protections provided to traders
on organized exchanges will be available with respect to such
transactions. In particular, all foreign currency option positions
entered into on a national securities exchange are cleared and guaranteed
by the Options Clearing Corporation (the "OCC"), thereby reducing the
risk of counterparty default. Further, a liquid secondary market in
options traded on a national securities exchange may be more readily
available than in the over-the-counter market, potentially permitting the
Fund to liquidate open positions at a profit prior to exercise or
expiration, or to limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of the availability of a liquid
secondary market described above, as well as the risks regarding adverse
market movements, margining of options written, the nature of the foreign
currency market, possible intervention by governmental authorities and
the effects of other political and economic events. In addition,
exchange-traded options on foreign currencies involve certain risks not
presented by the over-the-counter market. For example, exercise and
settlement of such options must be made exclusively through the OCC,
which has established banking relationships in applicable foreign
countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures on
exercise and settlement, such as technical changes in the mechanics of
delivery of currency, the fixing of dollar settlement prices or
prohibitions on exercise.
Policies on the Use of Futures and Options on Futures Contracts: In order
to assure that the Fund will not be deemed to be a "commodity pool" for
purposes of the Commodity Exchange Act, regulations of the CFTC require
that the Fund enter into transactions in Futures Contracts, Options on
Futures Contracts and Options on Foreign Currencies traded on a
CFTC-regulated exchange only (i) for bona fide hedging purposes (as
defined in CFTC regulations), or (ii) for non-bona fide hedging purposes,
provided that the aggregate initial margin and premiums required to
establish such non-bona fide hedging positions does not exceed 5% of the
liquidation value of the Fund's assets, after taking into account
unrealized profits and unrealized losses on any such contracts the Fund
has entered into, and excluding, in computing such 5%, the in-the-money
amount with respect to an option that is in-the-money at the time of
purchase.
Part II -- C-22
<PAGE>
PART II -- APPENDIX D
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the
quality of various debt instruments. It should be emphasized, however, that
ratings are not absolute standards of quality. Consequently, debt
instruments with the same maturity, coupon and rating may have different
yields while debt instruments of the same maturity and coupon with
different ratings may have the same yield.
Moody's Investors Service, Inc.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long-term risk 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 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.
Standard & Poor's Ratings Services
AAA: An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
EXTREMELY STRONG.
Part II -- D-1
<PAGE>
AA: An obligation rated AA differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on
the obligation is VERY STRONG.
A: An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
obligations in higher rated categories. However, the obligor's capacity to
meet its financial commitment on the obligation is still STRONG.
BBB: An obligation rated BBB exhibits ADEQUATE protection parameters.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated BB, B, CCC, CC, and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation
and C the highest. While such obligations will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties
or major exposures to adverse conditions.
BB: An obligation rated BB is LESS VULNERABLE to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to the obligor's inadequate capacity to meet its financial commitment
on the obligation.
B: An obligation rated B is MORE VULNERABLE to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet
its financial commitment on the obligation.
CCC: An obligation rated CCC is CURRENTLY VULNERABLE to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation. In the
event of adverse business, financial, or economic conditions the obligor is
not likely to have the capacity to meet its financial commitment on the
obligation.
CC: An obligation rated CC is CURRENTLY HIGHLY VULNERABLE to nonpayment.
C: The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on
this obligation are being continued.
D: An obligation rated D is in payment default. The D rating category is
used when payments on an obligation are not made on the date due even if
the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The D
rating also will be used upon the filing of a bankruptcy petition or the
taking of a similar action if payments on an obligation are jeopardized.
Plus (+) Or Minus (-) The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
r: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk -- such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
Fitch IBCA
AAA: Highest credit quality. AAA ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA: Very high credit quality. AA ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A: High credit quality. A ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher
ratings.
BBB: Good credit quality. BBB ratings indicate that there is currently a
low expectation of credit risk. The capacity for timely payment of
financial commitments is considered adequate, but adverse changes in
circumstances and in economic conditions are more likely to impair this
capacity. This is the lowest investment-grade category.
Speculative Grade
BB: Speculative. BB ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change over
time; however, business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this category are not
investment grade.
Part II -- D-2
<PAGE>
B: Highly speculative. B ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent
upon a sustained, favorable business and economic environment.
CCC, CC, C: High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A CC rating indicates that default of
some kind appears probable. C ratings signal imminent default.
DDD, DD, D: Default. Securities are not meeting current obligations and are
extremely speculative. DDD designates the highest potential for recovery of
amounts outstanding on any securities involved. For U.S. corporates, for
example, DD indicates expected recovery of 50% -- 90% of such outstandings,
and D the lowest recovery potential, i.e. below 50%.
Duff & Phelps Credit Rating Co.
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic
conditions.
A+, A, A-: Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
BBB+, BBB, BBB-: Below-average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may
move up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that obligations will
not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or
into a higher or lower rating grade.
CCC: Well below investment-grade securities. Considerable uncertainty
exists as to timely payment of principal, interest or preferred dividends.
Protection factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD: Defaulted debt-obligations. Issuer failed to meet scheduled principal
and/or interest payments.
DP: Preferred stock with dividend arrearages.
Part II -- D-3
<PAGE>
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617) 954-5000
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
CUSTODIAN AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800) 225-2606
MAILING ADDRESS:
P.O. Box 2281, Boston, MA 02107-9906
INDEPENDENT AUDITORS
Ernst & Young LLP
200 Clarendon Street, Boston, MA 02116
MFS[RegTM] Strategic Income Fund
[MFS LOGO}
500 Boylston Street, Boston, MA 02116 MSG-16-11/98
<PAGE>
MFS[RegTM] GLOBAL GROWTH FUND
M A R C H 1 , 1 9 9 9
[MFS LOGO] Statement of Additional
Information
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, 1999. This SAI should be read in conjunction with the Prospectus. The
Fund's financial statements are incorporated into this SAI by reference to the
Fund's most recent Annual Report to shareholders. A copy of the Annual Report
accompanies this SAI. You may obtain a copy of the Fund's Prospectus and Annual
Report without charge by contacting MFS Service Center, Inc. (see back cover
for address and phone number).
This SAI is divided into two Parts -- Part I and Part II. Part I contains
information that is particular to the Fund, while Part II contains information
that generally applies to each of the funds in the MFS Family of Funds (the
"MFS Funds"). Each Part of the SAI has a variety of appendices which can be
found at the end of Part I and Part II, respectively.
This SAI is NOT a prospectus and is authorized for distribution to prospective
investors only if preceded or accompanied by a current prospectus.
<PAGE>
Statement of Additional Information
PART I
Part I of this SAI contains information that is particular to the Fund.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
I Definitions ............................................................... 1
II Management of the Fund .................................................... 1
The Fund .................................................................. 1
Trustees and Officers -- Identification and Background .................... 1
Trustee Compensation ...................................................... 1
Affiliated Service Provider Compensation .................................. 1
Sub-advisers .............................................................. 1
III Sales Charges and Distribution Plan Payments .............................. 1
Sales Charges ............................................................. 1
Distribution Plan Payments ................................................ 1
IV Portfolio Transactions and Brokerage Commissions .......................... 1
V Share Ownership ........................................................... 1
VI Performance Information ................................................... 1
VII Investment Techniques, Practices, Risks and Restrictions .................. 1
Investment Techniques, Practices and Risks ................................ 1
Investment Restrictions ................................................... 2
VIII Tax Considerations ........................................................ 3
IX Independent Auditors and Financial Statements ............................. 3
Appendix A -- Trustees and Officers -- Identification and Background ...... A-1
Appendix B -- Trustee Compensation ........................................ B-1
Appendix C -- Affiliated Service Provider Compensation .................... C-1
Appendix D -- Sales Charges and Distribution Plan Payments ................ D-1
Appendix E -- Portfolio Transactions and Brokerage Commissions ............ E-1
Appendix F -- Share Ownership ............................................. F-1
Appendix G -- Performance Information ..................................... G-1
</TABLE>
<PAGE>
I DEFINITIONS I
"Fund" -- MFS Global Growth Fund, a series of the Trust.
"Trust" -- MFS Series Trust VIII, a Massachusetts business Trust,
organized on August 3, 1992. On August 24, 1998, the Fund's name was
changed from MFS World Growth Fund to MFS Global Growth Fund.
"MFS" or the "Adviser" -- Massachusetts Financial Services Company, a
Delaware corporation.
"MFD" -- MFS Fund Distributors, Inc., a Delaware corporation.
"MFSC" -- MFS Service Center, Inc., a Delaware corporation.
"Prospectus" -- The Prospectus of the Fund, dated March 1, 1999, as
amended or supplemented from time to time.
II MANAGEMENT OF THE FUND
The Fund
The Fund is a non-diversified series of the Trust. The Trust is an
open-end management investment company.
Trustees and Officers -- Identification and Background
The identification and background of the Trustees and officers of the
Trust are set forth in Appendix A of this Part I.
Trustee Compensation
Compensation paid to the non-interested Trustees and to Trustees who are
not officers of the Trust, for certain specified periods, is set forth in
Appendix B of this Part I.
Affiliated Service Provider Compensation
Compensation paid by the Fund to its affiliated service providers -- to
MFS, for investment advisory and administrative services, and to MFSC,
for transfer agency services -- for certain specified periods is set
forth in Appendix C to this Part I.
MFS has agreed to waive certain Fund expenses, as described in the
"Expenses Summary" of the Prospectus.
Sub-Advisers
MFS has engaged two sub-advisers for the Fund: Foreign & Colonial
Management Limited ("FCM") and Foreign & Colonial Emerging Markets
Limited ("FCEM"). FCM is a wholly owned subsidiary of Hypo Foreign &
Colonial Management (Holdings) Ltd. ("Hypo F&C"). Sixty-five percent of
the outstanding voting securities of Hypo F&C is owned by Hypo (U.K.)
Holdings Ltd., which is a wholly owned subsidiary of HYPO-Bank
(Bayerische Hypotheken-und Wechsel-Bank AG), the oldest publicly listed,
and fifth largest, commercial bank in Germany, founded in 1835. The
remaining 35% of the outstanding voting securities of Hypo F&C is owned
by four closed-end publicly listed investment Trusts managed by FCM
including Foreign & Colonial Investment Trust PLC. 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. The compensation paid to
FCM and FCEM for their advisory services is described in the prospectus.
III SALES CHARGES AND DISTRIBUTION PLAN o
PAYMENTS
Sales Charges
Sales charges paid in connection with the purchase and sale of Fund
shares for certain specified periods are set forth in Appendix D to this
Part I, together with the Fund's schedule of dealer reallowances.
Distribution Plan Payments
Payments made by the Fund under the Distribution Plan for its most recent
fiscal year end are set forth in Appendix D to this Part I.
IV PORTFOLIO TRANSACTIONS AND BROKERAGE
COMMISSIONS
Brokerage commissions paid by the Fund for certain specified periods, and
information concerning purchases by the Fund of securities issued by its
regular broker-dealers for its most recent fiscal year, are set forth in
Appendix E to this Part I.
V SHARE OWNERSHIP
Information concerning the ownership of Fund shares by Trustees and
officers of the Trust as a group, by investors who control the Fund, if
any, and by investors who own 5% or more of any class of Fund shares, if
any, is set forth in Appendix F to this Part I.
VI PERFORMANCE INFORMATION
Performance information, as quoted by the Fund in sales literature and
marketing materials, is set forth in Appendix G to this Part I.
VII INVESTMENT TECHNIQUES, PRACTICES, RISKS
AND RESTRICTIONS
Investment Techniques, Practices and Risks
The investment objective and principal investment policies of the Fund
are described in the Prospectus. In pursuing its investment objective and
principal investment policies, the Fund may engage in a number of
investment techniques and practices, which involve certain risks. These
investment techniques and practices, which may be changed without
shareholder approval unless indicated otherwise, are identified in
Appendix A to the Prospectus, and are more fully described, together with
their associated
Part I -- 1
<PAGE>
risks, in Part II of this SAI. The following percentage limitations apply
to these investment techniques and practices:
o Foreign Securities Exposure may not exceed 100% of the Fund's net
assets
o Lending of Portfolio Securities may not exceed 30% of the Fund's net
assets
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).
Terms used below (such as Options and Futures Contracts) are defined
in Part II of this SAI.
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).
In addition, the Fund has the following nonfundamental policies which may
be changed without shareholder approval. The Fund will not:
(1) invest in illiquid investments, including securities subject to
legal or contractual restrictions on resale or for which there is no
readily available market (e.g., trading in the security is
suspended, or, in the case of unlisted securities, where no market
exists), unless the Board of Trustees has determined that such
securities are liquid based on trading markets for the specific
security, if more than 15% of the Fund's assets (taken at market
value) would be invested in such securities. Repurchase agreements
maturing in more than seven days will be deemed to be illiquid for
purposes of the Fund's limitation on investment in illiquid
securities;
(2) invest more than 5% of the value of the Fund's net assets, valued at
the lower of cost or market, in warrants. Included within such
amount, but not to exceed 2% of the value of the Fund's net assets,
may be warrants which are not listed on the New York or American
Stock Exchange. Warrants acquired by the Fund in units or attached
to securities may be deemed to be without value;
(3) invest for the purpose of exercising control or management;
(4) purchase 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;
(5) 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;
Part I -- 2
<PAGE>
(6) 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;
(7) 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;
(8) 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;
(9) 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; or
(10) invest 25% or more of the market value of its total assets in
securities of issuers in any one industry.
Except with respect to Fundamental Investment Restriction (1) and
non-Fundamental 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.
VIII TAX CONSIDERATIONS
For a discussion of tax considerations, see Part II of this SAI.
IX INDEPENDENT AUDITORS AND FINANCIAL
STATEMENTS
Deloitte & Touche 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 Securities and Exchange
Commission.
The Portfolio of Investments and the Statement of Assets and
Liabilities at October 31, 1998, the Statement of Operations for the year
ended October 31, 1998, the Statement of Changes in Net Assets for the
two years ended October 31, 1998, the Notes to Financial Statements and
the Report of the 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 Deloitte & Touche LLP,
independent auditors, given upon their authority as experts in accounting
and auditing. A copy of the Annual Report accompanies this SAI.
Part I -- 3
<PAGE>
PART I -- APPENDIX A
TRUSTEES AND OFFICERS -- IDENTIFICATION
AND BACKGROUND
The Trustees and officers of the Trust are listed below, together with
their principal occupations during the past five years. (Their titles may
have varied during that period.)
Trustees
JEFFREY L. SHAMES,* (born 6/2/55)
Massachusetts Financial Services Company, Chairman and Chief Executive
Officer
RICHARD B. BAILEY* (born 9/14/26)
Private Investor; Massachusetts Financial Services Company, former
Chairman and Director (prior to September 30, 1991); Cambridge Bancorp,
Director; Cambridge Trust Company, Director
MARSHALL N. COHAN (born 11/14/26)
Private Investor
Address: 2524 Bedford Mews Drive, Wellington, Florida
LAWRENCE H. COHN, M.D., (born 3/11/37)
Brigham and Women's Hospital, Chief of Cardiac Surgery; Harvard Medical
School, Professor of Surgery
Address: 75 Francis Street, Boston, Massachusetts
THE HON. SIR J. DAVID GIBBONS, KBE (born 6/15/27)
Edmund Gibbons Limited, Chief Executive Officer; Colonial Insurance
Company Ltd., Director and Chairman
Address: 21 Reid Street, Hamilton, Bermuda
ABBY M. O'NEILL (born 4/27/28)
Private Investor; Rockefeller Financial Services, Inc. (investment
advisers), Director
Address: 30 Rockefeller Plaza, Room 5600, New York, New York
WALTER E. ROBB, III (born 8/18/26)
Benchmark Advisors, Inc. (corporate financial consultants), President and
Treasurer; Benchmark Consulting Group, Inc. (office services), President;
CitiFunds and CitiSelect Folios (mutual funds), Trustee
Address: 110 Broad Street, Boston, Massachusetts
ARNOLD D. SCOTT* (born 12/16/42)
Massachusetts Financial Services Company, Senior Executive Vice President
and Secretary
J. DALE SHERRATT (born 9/23/38)
Insight Resources, Inc. (acquisition planning specialists), President;
Wellfleet Investments (investor in health care companies), Managing
General Partner (since 1993)
Address: 294 Washington Street, Boston, Massachusetts
WARD SMITH (born 9/13/30)
NACCO Industries (holding company), Chairman (prior to June 1994);
Sundstrand Corporation (diversified mechanical manufacturer), Director
Address: 36080 Shaker Blvd., Hunting Valley, Ohio
Officers
W. THOMAS LONDON,* Treasurer (born 3/1/44)
Massachusetts Financial Services Company, Senior Vice President
JAMES O. YOST,* Assistant Treasurer (born 6/12/60)
Massachusetts Financial Services Company, Vice President
ELLEN MOYNIHAN,* Assistant Treasurer (born 11/13/57)
Massachusetts Financial Services Company, Vice President (since September
1996); Deloitte & Touch LLP, Senior Manager (prior to September 1996)
MARK E. BRADLEY,* Assistant Treasurer (born 11/23/59)
Massachusetts Financial Services Company, Vice President (since March
1997); Putnam Investments, Vice President (from September 1994 until
March 1997); Ernst & Young LLP, Senior Tax Manager (prior to September
1994)
STEPHEN E. CAVAN,* Secretary and Clerk (born 11/6/53)
Massachusetts Financial Services Company, Senior Vice President, General
Counsel and Assistant Secretary
JAMES R. BORDEWICK, JR.,* Assistant Secretary (born 3/6/59)
Massachusetts Financial Services Company, Senior Vice President and
Associate General Counsel
------------------------------
* "Interested persons" (as defined in the 1940 Act) of the Adviser, whose
address is 500 Boylston Street, Boston, Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain
affiliates of MFS or with certain other funds of which MFS or a
subsidiary is the investment adviser or distributor. Messrs. Shames and
Scott, Directors of MFD, and Mr. Cavan, the Secretary of MFD, hold
similar positions with certain other MFS affiliates. Mr. Bailey is a
Director of Sun Life Assurance Company of Canada (U.S.), a subsidiary of
Sun Life Assurance Company of Canada.
Part I -- A-1
<PAGE>
PART I -- APPENDIX B
TRUSTEE COMPENSATION
The Fund pays the compensation of non-interested Trustees and of Trustees
who are not officers of the Trust, 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. In addition, the
Trust has a retirement plan for these Trustees as described under the
caption "Management of the Fund -- Trustee Retirement Plan" in Part II.
The Retirement Age under the plan is 75.
Trustee Compensation Table
.........................................................................
<TABLE>
<CAPTION>
Retirement
Benefit Total
Trustee Accrued Estimated Trustee Fees
Fees as Part of Credited from Fund
from Fund Years of and Fund
Trustee Fund(1) Expense(1) Service(2) Complex(3)
- ------------------------ --------- ------------ -------------- -------------
<S> <C> <C> <C> <C>
Richard B. Bailey $ $ 8 $242,022
Marshall N. Cohan 8 148,067
Dr. Lawrence Cohn 18 123,917
Sir David Gibbons 8 129,842
Abby M. O'Neill 9 129,842
Walter E. Robb, III 8 148,067
Arnold D. Scott N/A 0
Jeffrey L. Shames N/A 0
J. Dale Sherratt 20 184,067
Ward Smith 12 184,067
</TABLE>
--------------
(1) For the fiscal year ending October 31, 1998.
(2) Based upon normal retirement age (75).
(3) Information provided is provided for calendar year 1998. All Trustees
served as Trustees of funds within the MFS fund complex (having
aggregate net assets at December 31, 1998, of approximately $ billion)
except Mr. Bailey, who served as Trustee of funds within the MFS
complex (having aggregate net assets at December, 1998 of approximately
$ 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>
$ 945 $142 $ 236 $ 331 $ 472
1,842 276 460 645 921
2,739 411 685 959 1,369
3,635 545 909 1,272 1,818
4,532 680 1,133 1,586 2,266
5,429 814 1,357 1,900 2,715
</TABLE>
--------------
(4) Other funds in the MFS Fund complex provide similar retirement benefits
to the Trustees.
Part I -- B-1
<PAGE>
PART I -- APPENDIX C
AFFILIATED SERVICE PROVIDER COMPENSATION
..........................................................................
The Fund paid compensation to its affiliated service providers over the
specified periods as follows:
<TABLE>
<CAPTION>
Paid to MFS Amount Paid to MFS for Paid To MFSC Amount Aggregate
for Advisory Waived Administrative for Transfer Waived Amount Paid
Fiscal Year Ended Services By MFS Services Agency Services by MFSC To MFS and MFSC
- --------------------- -------------- -------- ----------------- ----------------- --------- -----------------
<S> <C> <C> <C> <C> <C> <C>
October 31, 1998 $4,889,762 N/A $ 76,885 $626,573 N/A $5,593,220
October 31, 1997 $4,717,882 N/A $ 54,453* $731,223 N/A $5,503,558
October 31, 1996 $4,060,523 N/A N/A $867,009 N/A $4,927,532
</TABLE>
--------------
* From March 1, 1997, the commencement of the Master Administrative
Service Agreement.
Part I -- C-1
<PAGE>
PART I -- APPENDIX D
SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS
Sales Charges
.........................................................................
The following sales charges were paid during the specified periods:
<TABLE>
<CAPTION>
Class A Initial Sales Charges: CDSC Paid to MFD on:
Retained Reallowed Class A Class B Class C
Fiscal Year End Total By MFD to Dealers Shares Shares Shares
- --------------------- ----------- ---------- ------------ --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
October 31, 1998 $411,948 $63,936 $348,012 $3,546 $462,790 $3,665
October 31, 1997 $590,925 $67,149 $523,776 $4,000 $574,458 $4,902
October 31, 1996 $692,329 $80,312 $612,017 $1,528 $538,744 $1,141
</TABLE>
Dealer Reallowances
.........................................................................
As shown above, MFD pays (or "reallows") a portion of the Class A initial
sales charge to dealers. The dealer reallowance as expressed as a
percentage of the Class A shares' offering price is:
<TABLE>
<CAPTION>
Dealer Reallowance as a
Amount of Purchase percent of Offering Price
<S> <C>
Less than $50,000 5.00%
$50,000 but less than $100,000 4.00%
$100,000 but less than $250,000 3.20%
$250,000 but less than $500,000 2.25%
$500,000 but less than $1,000,000 1.70%
$1,000,000 or more None*
</TABLE>
--------------
* A CDSC will apply to such purchase.
Distribution Plan Payments
.........................................................................
During the fiscal year ended October 31, 1998, the Fund made the following
Distribution Plan payments:
<TABLE>
<CAPTION>
Amount of Distribution and Service Fees:
Class of Shares Paid By Fund Retained By MFD Paid To Dealers
- -------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Class A Shares $ 528,201 $ 46,531 $481,670
Class B Shares $3,032,367 $2,298,417 $733,950
Class C Shares $ 225,219 $ 159 $225,060
</TABLE>
Distribution plan payments retained by MFD are used to compensate MFD for
commissions advanced by MFD to dealers upon sale of fund shares.
Part I -- D-1
<PAGE>
PART I -- APPENDIX E
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Brokerage Commissions
.........................................................................
The following brokerage commissions were paid by the Fund during the
specified time periods:
<TABLE>
<CAPTION>
Brokerage Commissions
Fiscal Year End Paid By Fund
- ---------------------- ----------------------
<S> <C>
October 31, 1998 $1,935,958
October 31, 1997 $ 994,847
October 31, 1996 $1,327,540
</TABLE>
Securities Issued By Regular Broker-Dealers
.........................................................................
During the fiscal year ended October 31, 1998, the Fund purchased
securities issued by the following regular broker-dealers of the Fund,
which had the following values as of October 31, 1998:
<TABLE>
<CAPTION>
Value of Securities
Broker-dealer As of October 31, 1998
- ---------------- ------------------------
<S> <C>
</TABLE>
Part I -- E-1
<PAGE>
PART I -- APPENDIX F
SHARE OWNERSHIP
Ownership By Trustees and Officers
As of November 30, 1998, the Trustees and officers of the Trust as a group
owned less than 1% of any class of the Fund's shares.
25% or Greater Ownership
The following table identifies those investors who own 25% or more of the
Fund's shares (all share classes taken together) as of November 30, 1998,
and are therefore presumed to control the Fund:
<TABLE>
<CAPTION>
Jurisdiction of Organization
Name and Address of Investor (If A Company) Percentage Ownership
- ------------------------------ ----------------------------- ----------------------
<S> <C> <C>
None
</TABLE>
5% or Greater Ownership of Share Class
The following table identifies those investors who own 5% or more of any
class of the Fund's shares as of October 31, 1998:
<TABLE>
<CAPTION>
Name and Address of Investor Ownership Percentage
<S> <C>
.............................................................................
MLPF&S for the Sole Benefit of its Customers 7.56% of Class A Shares
Attn: Fund Administration 97GT4
4800 Deer Lake Drive E, 3rd FL
Jacksonville, FL 32246-6484
.............................................................................
MLPF&S for the Sole Benefit of its Customers 15.20% of Class B Shares
Attn: Fund Administration 97N52
4800 Deer Lake Drive E, 3rd FL
Jacksonville, FL 32246-6484
.............................................................................
MLPF&S for the Sole Benefit of its Customers 26.57% of Class C Shares
Attn: Fund Administration 97GT4
4800 Deer Lake Drive E, 3rd FL
Jacksonville, FL 32246-6484
.............................................................................
TRS MFS DEF Contribution Plan 56.51% of Class I Shares
c/o Mark Leary
Massachusetts Financial Services
500 Boylston Street - 19th FL
Boston, MA 02116-3740
.............................................................................
TRS MFS 401(k) Plan 43.49% of Class I Shares
c/o Mark Leary
Massachusetts Financial Services
500 Boylston Street - 19th FL
Boston, MA 02116-3740
.............................................................................
</TABLE>
Part I -- F-1
<PAGE>
PART I -- APPENDIX G
PERFORMANCE INFORMATION
.........................................................................
All performance quotations are as of October 31, 1998.
<TABLE>
<CAPTION>
Average Annual
Total Returns
------------------------------
1 Year Life of Fund*
------------- --------------
<S> <C> <C>
Class A Shares, with initial sales
charge (SEC Performance) (7.62)% 8.69%
Class A Shares, at a net asset value (1.99)% 10.00%
Class B Shares, with CDSC
(SEC Performance) (6.22)% 8.85%
Class B Shares, at net asset value (2.70)% 9.14%
Class C Shares, with CDSC
(SEC Performance) (3.61)% 9.19%
Class C Shares, at net asset value (2.73)% 9.19%
Class I Shares, at net asset value (1.64)% 10.12%
</TABLE>
--------------
* From the commencement of the Fund's investment operations on November
18, 1993.
Class A share performance calculated according to Securities and Exchange
Commission (referred to as the SEC) rules (referred to as SEC performance)
takes into account the deduction of the 5.75% maximum sales charge. Class B
SEC performance takes into account the deduction of the applicable
contingent deferred sales charge (referred to as a CDSC), which declines
over six years from 4% to 0%. Class C SEC performance takes into account
the deduction of the 1% CDSC. The fund initially offered class A and class
B shares on November 18, 1993, Class C shares on January 3, 1994 and Class
I shares on January 2, 1997.
Class C share performance includes the performance of the fund's class B
shares for periods prior to the offering of class C shares. Class C share
performance generally would have been approximately the same as class A
share performance had class C shares been offered for the entire period,
because the operating expenses (e.g., distribution and service fees)
attributable to class C shares are approximately the same as those of class
B shares. Class C share SEC performance has been adjusted to take into
account the CDSC applicable to class C shares, rather than the CDSC
applicable to class B shares.
Class I share performance includes the performance of the fund's class A
shares for periods prior to the offering of class I shares. Class I share
performance generally would have been higher than class A share performance
had class I shares been offered for the entire period, because operating
expenses (e.g., distribution and service fees) attributable to class I
shares are lower than those of class A shares. Class I share performance
has been adjusted to take into account the fact that class I shares have no
initial sales charge.
Performance results include any applicable expense subsidies and waivers,
which may cause the results to be more favorable. Current subsidies and
waivers may be discontinued at any time.
Part I -- G-1
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
PART II
Part II of this SAI describes policies and practices that apply to each of the
Funds in the MFS Family of Funds. References in this Part II to a "Fund" means
each Fund in the MFS Family of Funds, unless noted otherwise. References in
this Part II to a "Trust" means the Massachusetts business trust of which the
Fund is a series, or, if the Fund is not a series of a Massachusetts business
trust, references to a "Trust" shall mean the Fund.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
I Management of the Fund ..................................... 1
Trustees/Officers .......................................... 1
Investment Adviser ......................................... 1
Administrator .............................................. 2
Custodian .................................................. 2
Shareholder Servicing Agent ................................ 2
Distributor ................................................ 2
II Principal Share Characteristics ............................ 2
Class A Shares ............................................. 2
Class B Shares, Class C Shares and Class I Shares .......... 2
Waiver of Sales Charges .................................... 3
Dealer Commissions and Concessions ......................... 3
General .................................................... 3
III Distribution Plan .......................................... 3
Features Common to Each Class of Shares .................... 3
Features Unique to Each Class of Shares .................... 4
IV Investment Techniques, Practices and Risks ................. 5
V Net Income and Distributions ............................... 5
Money Market Funds ......................................... 5
Other Funds ................................................ 5
VI Tax Considerations ......................................... 5
Taxation of the Fund ....................................... 5
Taxation of Shareholders ................................... 6
Special Rules for Municipal Fund Distributions ............. 7
VII Portfolio Transactions and Brokerage Commissions ........... 8
VIII Determination of Net Asset Value ........................... 9
Money Market Funds ......................................... 9
Other Funds ................................................ 9
</TABLE>
<PAGE>
TABLE OF CONTENTS (continued)
<TABLE>
<CAPTION>
Page
<S> <C> <C>
IX Performance Information ........................................... 10
Money Market Funds ................................................ 10
Other Funds ....................................................... 10
General ........................................................... 11
MFS Firsts ........................................................ 12
X Shareholder Services .............................................. 13
Investment and Withdrawal Programs ................................ 13
Exchange Privilege ................................................ 15
Tax-Deferred Retirement Plans ..................................... 16
XI Description of Shares, Voting Rights and Liabilities .............. 16
Appendix A -- Waivers of Sales Charges ............................ A-1
Appendix B -- Dealer Commissions and Concessions .................. B-1
Appendix C -- Investment Techniques, Practices and Risks .......... C-1
Appendix D -- Description of Bond Ratings ......................... D-1
</TABLE>
<PAGE>
MANAGEMENT OF THE FUND I
Trustees/Officers
Board Oversight -- The Board of Trustees which oversees the Fund 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.
Trustee Retirement Plan -- The Trust has a retirement plan for Trustees
who are non-interested Trustees and Trustees who are not officers of the
Trust. Under this plan, a Trustee will retire upon reaching a specified
age (see Part I--"Appendix B") ("Retirement Age") 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
his Retirement Age 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. The
Fund will accrue its allocable portion of compensation expenses under the
retirement plan each year to cover the current year's service and
amortize past service cost.
Indemnification of Trustees and Officers -- The Declaration of Trust of
the Trust provides that the Trust will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with
litigation in which they may be involved because of their offices with
the Trust, unless, as to liabilities of the Trust 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
The Trust has retained Massachusetts Financial Services Company ("MFS" or
the "Adviser") as the Fund's investment adviser. MFS and its predecessor
organizations have a history of money management dating from 1924. MFS is
a subsidiary of Sun Life of Canada (U.S.) Financial Services Holdings,
Inc., which in turn is an indirect wholly owned subsidiary of Sun Life of
Canada (an insurance company).
MFS has retained, on behalf of certain MFS Funds, sub-investment advisers
to assist MFS in the management of the Fund's assets. A description of
these sub-advisers, the services they provide and their compensation is
provided under the caption "Management of the Fund -- Sub-Adviser" in
Part I of this SAI for Funds which use sub-advisers.
Investment Advisory Agreement -- The Adviser manages the Fund pursuant to
an Investment Advisory Agreement (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, as disclosed in the Prospectus under the
heading "Management of the Fund[s]."
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 and effecting its portfolio transactions.
The Trust pays the compensation of the Trustees who are not officers
of MFS and all expenses of the Fund (other than those assumed by MFS)
including but not limited to: advisory and administrative services;
governmental fees; interest charges; taxes; membership dues in the
Investment Company Institute allocable to the Fund; fees and expenses of
independent auditors, of legal counsel, and of any transfer agent,
registrar or dividend disbursing agent of the Fund; expenses of
repurchasing and redeeming shares and servicing shareholder accounts;
expenses of preparing, printing and mailing prospectuses, periodic
reports, notices and proxy statements to shareholders and to governmental
officers and commissions; brokerage and other expenses connected with the
execution, recording and settlement of portfolio security transactions;
insurance premiums; fees and expenses of State Street Bank and Trust
Company, the Fund's custodian, for all services to the Fund, including
safekeeping of funds and securities and maintaining required books and
accounts; expenses of calculating the net asset value of shares of the
Fund; and expenses of shareholder meetings. Expenses relating to the
issuance, registration and qualification of shares of the Fund and the
preparation, printing and mailing of prospectuses are borne by the Fund
except that the 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
between the series in a manner believed by management of the Trust to be
fair and equitable.
The Advisory Agreement has an initial two year term and continues in
effect thereafter only if such continuance is specifically approved at
least annually by the Board of Trustees or by vote of a majority of the
Fund's shares (as defined in "Investment Restrictions" in Part I of this
SAI) 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
Part II -- 1
<PAGE>
defined in "Investment Restrictions" in Part I of this SAI), or by either
party on not more than 60 days' nor less than 30 days' written notice.
The Advisory Agreement provides that if MFS ceases to serve as the
Adviser to the Fund, the Fund will change its name so as to delete the
initials "MFS" and that MFS may render services to others and may permit
other fund clients to use the initials "MFS" in their names. The Advisory
Agreement also provides that neither the Adviser nor its personnel shall
be liable for any error of judgment or mistake of law or for any loss
arising out of any investment or for any act or omission in the execution
and management of the Fund, except for willful misfeasance, bad faith or
gross negligence in the performance of its or their duties or by reason
of reckless disregard of its or their obligations and duties under the
Advisory Agreement.
Administrator
MFS provides the Fund with certain financial, legal, compliance,
shareholder communications and other administrative services pursuant to
a Master Administrative Services Agreement. Under this Agreement, the
Fund pays MFS an administrative fee up to 0.015% per annum of the Fund's
average daily net assets. This fee reimburses MFS for a portion of the
costs it incurs to provide such services.
Custodian
State Street Bank and Trust Company (the "Custodian") is the custodian of
the Fund's assets. The Custodian's responsibilities include safekeeping
and controlling the Fund's cash and securities, handling the receipt and
delivery of securities, determining income and collecting interest and
dividends on the Fund's investments, maintaining books of original entry
for portfolio and fund accounting and other required books and accounts,
and calculating the daily net asset value of each class of shares of the
Fund. The Custodian does not determine the investment policies of the
Fund or decide which securities the Fund will buy or sell. The Fund may,
however, invest in securities of the Custodian and may deal with the
Custodian as principal in securities transactions. The Custodian also
acts as the dividend disbursing agent of the Fund.
Shareholder Servicing Agent
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of MFS, is
the Fund's shareholder servicing agent, pursuant to an Amended and
Restated Shareholder Servicing Agreement (the "Agency Agreement"). The
Shareholder Servicing Agent's responsibilities under the Agency Agreement
include administering and performing transfer agent functions and the
keeping of records in connection with the issuance, transfer and
redemption of each class of shares of the Fund. For these services, MFSC
will receive a fee calculated as a percentage of the average daily net
assets of the Fund at an effective annual rate of up to 0.1125%. In
addition, MFSC will be reimbursed by the Fund for certain expenses
incurred by MFSC on behalf of the Fund. The Custodian has contracted with
MFSC to perform certain dividend disbursing agent functions for the Fund.
Distributor
MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary of MFS,
serves as distributor for the continuous offering of shares of the Fund
pursuant to an Amended and Restated Distribution Agreement (the
"Distribution Agreement"). The Distribution Agreement has an initial two
year term and continues in effect thereafter only if such continuance is
specifically approved at least annually by the Board of Trustees or by
vote of a majority of the Fund's shares (as defined in "Investment
Restrictions" in Part I of this SAI) 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.
II PRINCIPAL SHARE CHARACTERISTICS
Set forth below is a description of Class A, B, C and I shares offered by
the MFS Family of Funds. Some MFS Funds may not offer each class of
shares -- see the Prospectus of the Fund to determine which classes of
shares the Fund offers.
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
"How to Purchase, Exchange and Redeem Shares" 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 and other funds
(as noted under Right of Accumulation) by any person, including members
of a family unit (e.g., husband, wife and minor children) and bona fide
trustees, and also applies to purchases made under the Right of
Accumulation or a Letter of Intent (see "Investment and Withdrawal
Programs" below). A group might qualify to obtain quantity sales charge
discounts (see "Investment and Withdrawal Programs" below). Certain
purchases of Class A shares may be subject to a 1% CDSC instead of an
initial sales charge, as described in the Fund's Prospectus.
Class B Shares, Class C Shares and Class I Shares MFD acts as agent in
selling Class B, Class C and Class I shares of the Fund. The public
offering price of Class B, Class C and Class I shares is their net asset
value next computed after the sale. Class B and C shares are generally
subject to a CDSC, as described in the Fund's Prospectus.
Part II -- 2
<PAGE>
Waiver of Sales Charges
In certain circumstances, the initial sales charge imposed upon purchases
of Class A shares and the CDSC imposed upon redemptions of Class A, B and
C shares are waived. These circumstances are described in Appendix A of
this Part II. 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, because the sales effort, if any, involved in
making such sales is negligible, or in the case of certain CDSC waivers,
because the circumstances surrounding the redemption of Fund shares were
not foreseeable or voluntary.
Dealer Commissions and Concessions
MFD pays commission and provides concessions to dealers that sell Fund
shares. These dealer commissions and concession are described in Appendix
B of this Part II.
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.
III 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 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 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.
In certain circumstances, the fees described below may not be imposed,
are being waived or do not apply to certain MFS Funds. Current
distribution and service fees for each Fund are reflected under the
caption "Expense Summary" in the Prospectus.
Features Common To Each Class of Shares
There are features of the Distribution Plan that are common to each Class
of shares, as described below.
Service Fees -- The Distribution Plan provides that the Fund may pay MFD
a service fee of up to 0.25% of the average daily net assets attributable
to the class of shares to which the Distribution Plan relates (i.e.,
Class A, Class B or Class C shares, as appropriate) (the "Designated
Class") annually in order that MFD may pay expenses on behalf of the Fund
relating to the servicing of shares of the Designated Class. The service
fee is used by MFD to compensate dealers which enter into a sales
agreement with MFD in consideration for all personal services and/or
account maintenance services rendered by the dealer with respect to
shares of the Designated Class owned by investors for whom such dealer is
the dealer or holder of record. MFD may from time to time reduce the
amount of the service fees paid for shares sold prior to a certain date.
Service fees may be reduced for a dealer that is the holder or dealer of
record for an investor who owns shares of the Fund having an aggregate
net asset value at or above a certain dollar level. Dealers may from time
to time be required to meet certain criteria in order to receive service
fees. MFD or its affiliates are entitled to retain all service fees
payable under the Distribution Plan for which there is no dealer of
record or for which qualification standards have not been met as partial
consideration for personal services and/or account maintenance services
performed by MFD or its affiliates to shareholder accounts.
Distribution Fees -- The Distribution Plan provides that the Fund may pay
MFD a distribution fee in addition to the service fee described above
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. 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 expense and equipment. 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 expenses
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.
The Distribution Plan remains in effect from year to year only if its
continuance is specifically approved at least annually by
Part II -- 3
<PAGE>
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" in Part I of this SAI). All agreements relating
to the Distribution Plan entered into between the Fund or MFD and other
organizations must be approved by the Board of Trustees, including a
majority of the Distribution Plan Qualified Trustees. Agreements under
the Distribution Plan must be in writing, will be terminated
automatically if assigned, and may be terminated at any time without
payment of any penalty, by vote of a majority of the Distribution Plan
Qualified Trustees or by vote of the holders of a majority of the
respective class of the Fund's shares. The Distribution Plan may not be
amended to increase materially the amount of permitted distribution
expenses without the approval of a majority of the respective class of
the Fund's shares (as defined in "Investment Restrictions" in Part I of
this SAI) 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.
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). In addition to the initial sales charge, the dealer also generally
receives the ongoing 0.25% per annum service fee, as discussed above.
No service fees will be paid: (i) to any dealer who is the holder or
dealer or 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.
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 (0.25% per annum for certain Funds). As
noted above, MFD may use the distribution fee to cover
distribution-related expenses incurred by it under its distribution
agreement with the Fund, including commissions to dealers and payments to
wholesalers employed by MFD (e.g., MFD pays commissions to dealers with
respect to purchases of $1 million or more and purchases by certain
retirement plans of Class A shares which are sold at net asset value but
which are subject to a 1% CDSC for one year after purchase). 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 (0.50% per annum
for certain Funds), 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. 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.
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.
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).
Class C Shares -- Class C shares are offered at net asset value without
an initial sales charge but subject to a CDSC of 1.00% upon redemption
during the first year. 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
Part II -- 4
<PAGE>
the Distribution Plan, equal, on an annual basis, to 0.75% of the Fund's
average daily net assets attributable to Class C shares.
IV INVESTMENT TECHNIQUES, PRACTICES AND RISKS
Set forth in Appendix C of this Part II is a description of investment
techniques and practices which the MFS Funds may generally use in
pursuing their investment objectives and principal investment policies,
and the risks associated with these investment techniques and practices.
The Fund will engage only in certain of these investment techniques and
practices, as identified in Part I. Investment practices and techniques
that are not identified in Part I do not apply to the Fund.
V NET INCOME AND DISTRIBUTIONS
Money Market Funds
The net income attributable to each MFS Fund that is a money market fund
is determined each day during which the New York Stock Exchange is open
for trading (see "Determination of Net Asset Value" below for a list of
days the Exchange is closed).
For this purpose, the net income attributable to shares of a money
market fund (from the time of the immediately preceding determination
thereof) shall consist of (i) all interest income accrued on the
portfolio assets of the money market fund, (ii) less all actual and
accrued expenses of the money market fund determined in accordance with
generally accepted accounting principles, and (iii) plus or minus net
realized gains and losses and net unrealized appreciation or depreciation
on the assets of the money market fund, if any. Interest income shall
include discount earned (including both original issue and market
discount) on discount paper accrued ratably to the date of maturity.
Since the net income is declared as a dividend each time the net
income is determined, the net asset value per share (i.e., the value of
the net assets of the money market fund divided by the number of shares
outstanding) remains at $1.00 per share immediately after each such
determination and dividend declaration. Any increase in the value of a
shareholder's investment, representing the reinvestment of dividend
income, is reflected by an increase in the number of shares in the
shareholder's account.
It is expected that the shares of the money market fund will have a
positive net income at the time of each determination thereof. If for any
reason the net income determined at any time is a negative amount, which
could occur, for instance, upon default by an issuer of a portfolio
security, the money market fund would first offset the negative amount
with respect to each shareholder account from the dividends declared
during the month with respect to each such account. If and to the extent
that such negative amounts exceeds such declared dividends at the end of
the month (or during the month in the case of an account liquidated in
its entirety), the money market fund could reduce the number of its
outstanding shares by treating each shareholder of the money market fund
as having contributed to its capital that number of full and fractional
shares of the money market fund in the account of such shareholder which
represents its proportion of such excess. Each shareholder of the money
market fund will be deemed to have agreed to such contribution in these
circumstances by its investment in the money market fund. This procedure
would permit the net asset value per share of the money market fund to be
maintained at a constant $1.00 per share.
Other Funds
Each MFS Fund other than the MFS money market funds intends to distribute
to its shareholders dividends equal to all of its net investment income
with such frequency as is disclosed in the Fund's prospectus. These
Funds' net investment income consists of non-capital gain income less
expenses. In addition, these Funds intend to distribute net realized
short- and long-term capital gains, if any, at least annually.
Shareholders will be informed of the tax consequences of such
distributions, including whether any portion represents a return of
capital, after the end of each calendar year.
VI TAX CONSIDERATIONS
The following discussion is a brief summary of some of the important
federal (and, where noted, state) income tax consequences affecting the
Fund and its shareholders. The discussion is very general, and therefore
prospective investors are urged to consult their tax advisors about the
impact an investment in the Fund may have on their own Federal, state and
local taxes.
Taxation of The Fund
Federal Taxes -- The Fund (even if it is a fund in a Trust with multiple
series) is treated as a separate entity for federal income tax purposes
under the Internal Revenue Code of 1986, as amended (the "Code"). The
Fund has elected (or in the case of a new Fund, intends to elect) to be,
and intends to qualify to be treated 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 its distributions (as a
percentage of both its overall income and any tax-exempt income), and the
composition of its portfolio assets. As a regulated investment company,
the Fund will not be subject to any federal income or excise taxes on its
net investment income and net realized capital gains that it distributes
to shareholders in accordance with the timing requirements imposed by the
Code. The Fund's foreign-source income, if any, may be subject to foreign
withholding taxes. If the Fund failed to qualify as a "regulated
investment company" in any year, it would incur a regular federal
corporate income tax on all of its taxable income, whether or not
distributed, and Fund distributions would generally be taxable as
ordinary dividend income to the shareholders.
Massachusetts Taxes -- 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.
Part II -- 5
<PAGE>
Taxation of Shareholders
Tax Treatment of Distributions -- Subject to the special rules discussed
below for Municipal Funds, shareholders of the Fund normally will have to
pay federal income tax and any state or local income taxes on the
dividends and capital gain distributions they receive from the Fund. Any
distributions from ordinary income and 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.
Distributions of net capital gain (i.e., the excess of net long-term
capital gain over net short-term capital loss), whether paid in cash or
reinvested in additional shares, are taxable to shareholders as long-term
capital gains for federal income tax purposes without regard to the
length of time the shareholders have held their shares. Any Fund dividend
that is declared in October, November, or December of any calendar year,
payable to shareholders of record in such a month, and paid during 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, other than dividends that are declared by the
fund on a daily basis will have the effect of reducing the per share net
asset value of Fund shares by the amount of the distribution.
Shareholders purchasing shares shortly before the record date of any
distribution (other than an exempt-interest dividend) may thus pay the
full price for the shares and then effectively receive a portion of the
purchase price back as a taxable distribution.
Dividends-Received Deduction -- If the Fund receives dividend income from
U.S. corporations, a portion of the Fund's ordinary income dividends is
normally eligible for the dividends-received deduction for corporations
if the recipient otherwise qualifies for that deduction with respect to
its holding of Fund shares. Availability of the deduction for particular
corporate shareholders is subject to certain limitations, and deducted
amounts may be subject to the alternative minimum tax or result in
certain basis adjustments.
Disposition of Shares -- In general, any gain or loss realized upon a
disposition of Fund shares 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 Fund shares 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 Fund shares held for 90 days or less followed by any purchase
(including purchases by exchange or by reinvestment) without payment of
an additional sales charge of Class A shares of the Fund or of any other
shares of an MFS Fund generally sold subject to a sales charge.
Distribution/Accounting Policies -- The Fund's current distribution 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.
Foreign Income Taxes -- Investment income received by the Fund and gains
with respect to foreign securities may be subject to foreign income taxes
withheld at the source. The United States has entered into tax treaties
with many foreign countries that may entitle the Fund to a reduced rate
of tax or an exemption from tax on such income; the Fund intends to
qualify for treaty reduced rates where available. It is 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, it may elect to "pass
through" to its shareholders foreign income taxes paid by it. If the Fund
so elects, shareholders will be required to treat their pro rata portions
of the foreign income taxes paid by the Fund as part of the amounts
distributed to them by it 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 is not eligible, or does not elect, to
"pass through" to its shareholders foreign income taxes it has paid,
shareholders will not be able to claim any deduction or credit for any
part of the foreign taxes paid by the Fund.
U.S. Taxation of Non-U.S. Persons -- Dividends and certain other payments
(but not including distributions of net capital gains) 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 at that rate on taxable
dividends and other payments to Non-U.S. Persons that are subject to such
withholding. The Fund may withhold at a lower rate permitted by an
applicable treaty if the shareholder provides the documentation required
by the Fund. 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.
Backup Withholding -- The Fund is also required in certain circumstances
to apply backup withholding at the rate of 31% on taxable dividends and
capital gain distributions (and redemption proceeds, if applicable) paid
to any non-corporate shareholder (including a Non-U.S. Person) who does
not furnish to the
Part II -- 6
<PAGE>
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.
Foreign Income Taxation of Non-U.S. Persons -- Distributions received from
the Fund by Non-U.S. Persons may also be subject to tax under the laws of
their own jurisdictions.
State and Local Income Taxes: U.S. Government Securities -- Dividends
paid by the Fund that are derived from interest on obligations of the
U.S. Government and certain of its agencies and instrumentalities (but
generally not distributions of capital gains realized upon the
disposition of such obligations) may be exempt from state and local
income taxes. The Fund generally intends to advise shareholders of the
extent to which its dividends consist of such interest. Shareholders are
urged to consult their tax advisors regarding the possible exclusion of
such portion of their dividends for state and local income tax purposes.
Certain Specific Investments -- Any investment in zero coupon bonds,
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. To distribute this income (as well as
non-cash income described in the next two paragraphs) 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. Any 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.
Options, Futures Contracts, and Forward Contracts -- The Fund's
transactions in options, Futures Contracts, Forward Contracts, short
sales "against the box," and swaps and related transactions will be
subject to special tax rules that may affect the amount, timing, and
character of Fund income and distributions to shareholders. For example,
certain positions held by the Fund on the last business day of each
taxable year will be marked to market (i.e., treated as if closed out) on
that day, and any gain or loss associated with the positions will be
treated as 60% long-term and 40% short-term capital gain or loss. Certain
positions held by the Fund that substantially diminish its risk of loss
with respect to other positions in its portfolio may constitute
"straddles," and may be subject to special tax rules that would cause
deferral of Fund losses, adjustments in the holding periods of Fund
securities, and conversion of short-term into long-term capital losses.
Certain tax elections exist for straddles that may alter the effects of
these rules. The Fund will limit its activities in options, Futures
Contracts, Forward Contracts short sales "against the box" and swaps and
related transactions to the extent necessary to meet the requirements of
Subchapter M of the Code.
Foreign Investments -- Special tax considerations apply with respect to
foreign investments by the Fund. Foreign exchange gains and losses
realized by the Fund may be treated as ordinary income and loss. Use of
foreign currencies for non-hedging purposes and investment by the Fund in
certain "passive foreign investment companies" may be limited in order to
avoid a tax on the Fund. The Fund may elect to mark to market any
investments in "passive foreign investment companies" on the last day of
each year. This election may cause the Fund to recognize income prior to
the receipt of cash payments with respect to those investments; in order
to distribute this income and avoid a tax on the Fund, the Fund may be
required to liquidate portfolio securities that it might otherwise have
continued to hold, potentially resulting in additional taxable gain or
loss to the Fund.
Special Rules For Municipal Fund Distributions
The following special rules apply to shareholders of funds whose
objective is to invest primarily in obligations that pay interest that is
exempt from federal income tax ("Municipal Funds").
Tax Exempt Distributions -- The portion of a Municipal Fund's
distributions of net investment income that is attributable to interest
from tax-exempt securities will be designated by the Fund as an
"exempt-interest dividend" under the Code and will generally be exempt
from federal income tax in the hands of shareholders so long as at least
50% of the total value of the Fund's assets consists of tax-exempt
securities at the close of each quarter of the Fund's taxable year.
Distributions of tax-exempt interest earned from certain securities may,
however, be treated as an item of tax preference for shareholders under
the federal alternative minimum tax, and all exempt-interest dividends
may increase a corporate shareholder's alternative minimum tax. Except
when the Fund provides actual monthly percentage breakdowns, the
percentage of income designated as tax-exempt will be applied uniformly
to all distributions by the Fund of net investment income made during
each fiscal year of the Fund and may differ from the percentage of
distributions consisting of tax-exempt interest in any particular month.
Shareholders are required to report exempt-interest dividends received
from the Fund on their federal income tax returns.
Taxable Distributions -- A Municipal Fund may also earn some income that
is taxable (including interest from any obligations that lose their
federal tax exemption) and may recognize capital gains and losses as a
result of the disposition of securities and from certain options and
futures transactions. Shareholders normally will have to pay federal
income tax on the non-exempt-interest dividends and capital gain
distributions they receive from the Fund, whether paid in cash or
reinvested in additional shares. However, the Fund does not expect that
the non-tax-exempt portion of its net investment income, if any, will be
substantial. Because the Fund expects to earn primarily tax-exempt
interest income, it is expected that no Fund dividends will qualify for
the dividends-received deduction for corporations.
Part II -- 7
<PAGE>
Consequences of Distributions by a Municipal Fund: Effect of Accrued
Tax-Exempt Income -- Shareholders redeeming shares after tax-exempt
income has been accrued but not yet declared as a dividend should be
aware that a portion of the proceeds realized upon redemption of the
shares will reflect the existence of such accrued tax-exempt income and
that this portion will be subject to tax as a capital gain even though it
would have been tax-exempt had it been declared as a dividend prior to
the redemption. For this reason, if a shareholder wishes to redeem shares
of a Municipal Fund that does not declare dividends on a daily basis, the
shareholder may wish to consider whether he or she could obtain a better
tax result by redeeming immediately after the Fund declares dividends
representing substantially all the ordinary income (including tax-exempt
income) accrued for that month.
Certain Additional Information for Municipal Fund Shareholders -- Interest
on indebtedness incurred by shareholders to purchase or carry Fund shares
will not be deductible for federal income tax purposes. Exempt-interest
dividends are taken into account in calculating the amount of social
security and railroad retirement benefits that may be subject to federal
income tax. Entities or persons who are "substantial users" (or persons
related to "substantial users") of facilities financed by private activity
bonds should consult their tax advisors before purchasing Fund shares.
Consequences of Redemption of Shares -- Any loss realized on a redemption
of Municipal Fund shares held for six months or less will be disallowed
to the extent of any exempt-interest dividends received with respect to
those shares. If not disallowed, any such loss 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.
State and Local Income Taxes: Municipal Obligations -- The exemption of
exempt-interest dividends for federal income tax purposes does not
necessarily result in exemption under the income tax laws of any state or
local taxing authority. Some states do exempt from tax that portion of an
exempt-interest dividend that represents interest received by a regulated
investment company on its holdings of securities issued by that state and
its political subdivisions and instrumentalities. Therefore, the Fund will
report annually to its shareholders the percentage of interest income
earned by it during the preceding year on Municipal Bonds and will
indicate, on a state-by-state basis only, the source of such income.
VII 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 Trust's
Board of Trustees.
The primary consideration in placing portfolio security transactions
is execution at the most favorable prices. The Adviser has complete
freedom as to the markets in and broker-dealers through which it seeks
this result. In the U.S. and in some other countries debt securities are
traded principally in the over-the-counter market on a net basis through
dealers acting for their own account and not as brokers. In other
countries both debt and equity securities are traded on exchanges at
fixed commission rates. The cost of securities purchased from
underwriters includes an underwriter's commission or concession, and the
prices at which securities are purchased and sold from and to dealers
include a dealer's mark-up or mark-down. The Adviser normally seeks to
deal directly with the primary market makers or on major exchanges
unless, in its opinion, better prices are available elsewhere. Subject to
the requirement of seeking execution at the best available price,
securities may, as authorized by the Advisory Agreement, be bought from
or sold to dealers who have furnished statistical, research and other
information or services to the Adviser. At present no arrangements for
the recapture of commission payments are in effect.
Consistent with the foregoing primary consideration, the Conduct Rules
of the National Association of Securities Dealers, Inc. ("NASD") and such
other policies as the Trustees may determine, the Adviser may consider
sales of shares of the Fund and of the other investment company clients
of MFD as a factor in the selection of broker-dealers to execute the
Fund's portfolio transactions.
Under the Advisory Agreement and as permitted by Section 28(e) of the
Securities Exchange Act of 1934, the Adviser may cause the Fund to pay a
broker-dealer which provides brokerage and research services to the
Adviser, an amount of commission for effecting a securities transaction
for the Fund in excess of the amount other broker-dealers would have
charged for the transaction, if the Adviser determines in good faith that
the greater commission is reasonable in relation to the value of the
brokerage and research services provided by the executing broker-dealer
viewed in terms of either a particular transaction or their respective
overall responsibilities to the Fund or to their other clients. Not all
of such services are useful or of value in advising the Fund.
The term "brokerage and research services" includes advice as to the
value of securities, the advisability of investing in, purchasing or
selling securities, and the availability of securities or of purchasers
or sellers of securities; furnishing analyses and reports concerning
issues, industries, securities, economic factors and trends, portfolio
strategy and the performance of accounts; and effecting securities
transactions and performing functions incidental thereto, such as
clearance and settlement.
Although commissions paid on every transaction will, in the judgment
of the Adviser, be reasonable in relation to the value of the brokerage
services provided, commissions exceeding those which another broker might
charge may be paid to broker-dealers who were selected to execute
transactions on behalf of
Part II -- 8
<PAGE>
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 Family of Funds) have directed the Adviser to
allocate a total of $54,160 of commission business from the MFS Family of
Funds to the Pershing Division of Donaldson Lufkin & Jenrette as
consideration for the annual renewal of certain publications provided by
Lipper Analytical Securities Corporation (which provides information
useful to the Trustees in reviewing the relationship between the Fund and
the Adviser).
The Adviser's investment management personnel attempt to evaluate the
quality of Research provided by brokers. The 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 will not be reduced as a consequence
of the Adviser's receipt of brokerage and research service. To the extent
the Fund's portfolio transactions are used to obtain brokerage and
research services, the brokerage commissions paid by the Fund will exceed
those that might otherwise be paid for such portfolio transactions, or
for such portfolio transactions and research, by an amount which cannot
be presently determined. Such services would be useful and of value to
the Adviser in serving both the Fund and other clients and, conversely,
such services obtained by the placement of brokerage business of other
clients would be useful to the Adviser in carrying out its obligations to
the Fund. While such services are not expected to reduce the expenses of
the Adviser, the Adviser would, through use of the services, avoid the
additional expenses which would be incurred if it should attempt to
develop comparable information through its own staff.
In certain instances there may be securities which are suitable for
the Fund's portfolio as well as for that of one or more of the other
clients of the Adviser or any subsidiary of the Adviser. Investment
decisions for the Fund and for such other clients are made with a view to
achieving their respective investment objectives. It may develop that a
particular security is bought or sold for only one client even though it
might be held by, or bought or sold for, other clients. Likewise, a
particular security may be bought for one or more clients when one or
more other clients are selling that same security. Some simultaneous
transactions are inevitable when several clients receive investment
advice from the same investment adviser, particularly when the same
security is suitable for the investment objectives of more than one
client. When two or more clients are simultaneously engaged in the
purchase or sale of the same security, the securities are allocated among
clients in a manner believed by the adviser to be equitable to each. It
is recognized that in some cases this system could have a detrimental
effect on the price or volume of the security as far as the Fund is
concerned. In other cases, however, the Fund believes that its ability to
participate in volume transactions will produce better executions for the
Fund.
VIII DETERMINATION OF NET ASSET VALUE
The net asset value per share of each class of the Fund is determined
each day during which the New York Stock Exchange is open for trading.
(As of the date of this SAI, the Exchange is open for trading every
weekday except for the following holidays (or the days on which they are
observed): New Year's Day; Martin Luther King 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.
Money Market Funds
Portfolio securities of each MFS Fund that is a money market fund are
valued at amortized cost, which the Board of Trustees which oversees the
money market fund has determined in good faith constitutes fair value for
the purposes of complying with the 1940 Act. This valuation method will
continue to be used until such time as the Board of Trustees determines
that it does not constitute fair value for such purposes. Each money
market fund will limit its portfolio to those investments in U.S. dollar-
denominated instruments which its Board of Trustees determines present
minimal credit risks, and which are of high quality as determined by any
major rating service or, in the case of any instrument that is not so
rated, of comparable quality as determined by the Board of Trustees. Each
money market fund has also agreed to maintain a dollar-weighted average
maturity of 90 days or less and to invest only in securities maturing in
13 months or less. The Board of Trustees which oversee each money market
fund has established procedures designed to stabilize its net asset value
per share, as computed for the purposes of sales and redemptions, at
$1.00 per share. If the Board determines that a deviation from the $1.00
per share price may exist which may result in a material dilution or
other unfair result to investors or existing shareholders, it will take
corrective action it regards as necessary and appropriate, which action
could include the sale of instruments prior to maturity (to realize
capital gains or losses); shortening average portfolio maturity;
withholding dividends; or using market quotations for valuation purposes.
Other Funds
The following valuation techniques apply to each MFS Fund that is not a
money market fund.
Part II -- 9
<PAGE>
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
stock market 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
stock market system. Bonds and other fixed income securities (other than
short-term obligations) of U.S. issuers in the Fund's portfolio are
valued on the basis of valuations furnished by a pricing service which
utilizes both dealer-supplied valuations and electronic data processing
techniques which take into account appropriate factors such as
institutional-size trading in similar groups of securities, yield,
quality, coupon rate, maturity, type of issue, trading characteristics
and other market data without exclusive reliance upon quoted prices or
exchange or over-the-counter prices, since such valuations are believed
to reflect more accurately the fair value of such securities. Forward
Contracts will be valued using a pricing model taking into consideration
market data from an external pricing source. Use of the pricing services
has been approved by the Board of Trustees.
All other securities, futures contracts and options in the Fund's
portfolio (other than short-term obligations) for which the principal
market is one or more securities or commodities exchanges (whether
domestic or foreign) will be valued at the last reported sale price or at
the settlement price prior to the determination (or if there has been no
current sale, at the closing bid price) on the primary exchange on which
such securities, futures contracts or options are traded; but if a
securities exchange is not the principal market for securities, such
securities will, if market quotations are readily available, be valued at
current bid prices, unless such securities are reported on the Nasdaq
stock market 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.
IX PERFORMANCE INFORMATION
Money Market Funds
Each MFS Fund that is a money market fund will provide current annualized
and effective annualized yield quotations based on the daily dividends of
shares of the money market fund. These quotations may from time to time
be used in advertisements, shareholder reports or other communications to
shareholders.
Any current yield quotation of a money market fund which is used in
such a manner as to be subject to the provisions of Rule 482(d) under the
1933 Act shall consist of an annualized historical yield, carried at
least to the nearest hundredth of one percent based on a specific seven
calendar day period and shall be calculated by dividing the net change in
the value of an account having a balance of one share of that class at
the beginning of the period by the value of the account at the beginning
of the period and multiplying the quotient by 365/7. For this purpose the
net change in account value would reflect the value of additional shares
purchased with dividends declared on the original share and dividends
declared on both the original share and any such additional shares, but
would not reflect any realized gains or losses from the sale of
securities or any unrealized appreciation or depreciation on portfolio
securities. In addition, any effective yield quotation of a money market
fund so used shall be calculated by compounding the current yield
quotation for such period by multiplying such quotation by 7/365, adding
1 to the product, raising the sum to a power equal to 365/7, and
subtracting 1 from the result. These yield quotations should not be
considered as representative of the yield of a money market fund in the
future since the yield will vary based on the type, quality and
maturities of the securities held in its portfolio, fluctuations in
short-term interest rates and changes in the money market fund's
expenses.
Other Funds
Each MFS Fund that is not a money market fund may quote the following
performance results.
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 any
applicable CDSC 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 any applicable sales charge and/or (iii)
total rates of return which represent aggregate performance over a period
or year-by-year performance, and which may or may not reflect the effect
of the maximum or other sales charge or CDSC.
The Fund offers multiple classes of shares which were initially
offered for sale to, and purchased by, the public on different
Part II -- 10
<PAGE>
dates (the class "inception date"). The calculation of total rate of
return for a class of shares which has a later class inception date than
another class of shares of the Fund is based both on (i) the performance
of the Fund's newer class from its inception date and (ii) the
performance of the Fund's oldest class from its inception date up to the
class inception date of the newer class.
As discussed in the Prospectus, the sales charges, expenses and
expense ratios, and therefore the performance, of the Fund's classes of
shares differ. In calculating total rate of return for a newer class of
shares in accordance with certain formulas required by the SEC, the
performance will be adjusted to take into account the fact that the newer
class is subject to a different sales charge than the oldest class (e.g.,
if the newer class is Class A shares, the total rate of return quoted
will reflect the deduction of the initial sales charge applicable to
Class A shares; if the newer class is Class B shares, the total rate of
return quoted will reflect the deduction of the CDSC applicable to Class
B shares). However, the performance will not be adjusted to take into
account the fact that the newer class of shares bears different class
specific expenses than the oldest 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).
Any total rate of return quotation provided by the Fund should not be
considered as representative of the performance of the Fund in the future
since the net asset value of shares of the Fund will vary based not only
on the type, quality and maturities of the securities held in the Fund's
portfolio, but also on changes in the current value of such securities
and on changes in the expenses of the Fund. These factors and possible
differences in the methods used to calculate total rates of return should
be considered when comparing the total rate of return of the Fund to
total rates of return published for other investment companies or other
investment vehicles. Total rate of return reflects the performance of
both principal and income. Current net asset value and account balance
information may be obtained by calling 1-800-MFS-TALK (637-8255).
Yield -- Any yield quotation for a class of shares of the Fund is based
on the annualized net investment income per share of that class for the
30-day period. The yield for each class of the Fund is calculated by
dividing the net investment income allocated to that class earned during
the period by the maximum offering price per share of that class of the
Fund on the last day of the period. The resulting figure is then
annualized. Net investment income per share of a class is determined by
dividing (i) the dividends and interest allocated to that class during
the period, minus accrued expense of that class for the period by (ii)
the average number of shares of the class entitled to receive dividends
during the period multiplied by the maximum offering price per share on
the last day of the period. The Fund's yield calculations assume a
maximum sales charge of 5.75% in the case of Class A shares and no
payment of any CDSC in the case of Class B and Class C shares.
Tax-Equivalent Yield -- The tax-equivalent yield for a class of shares of
a Fund is calculated by determining the rate of return that would have to
be achieved on a fully taxable investment in such shares to produce the
after-tax equivalent of the yield of that class. In calculating
tax-equivalent yield, a Fund assumes certain federal tax brackets for
shareholders and does not take into account state taxes.
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 (i) annualizing the
distributions (excluding short-term capital gains) of the class for a
stated period; (ii) adding any short-term capital gains paid within the
immediately preceding twelve-month period; and (iii) dividing the result
by the maximum offering price or net asset value per share on the last
day of the period. The current distribution rate differs from the yield
computation because it may include distributions to shareholders from
sources other than dividends and interest, such as premium income for
option writing, short-term capital gains and return of invested capital,
and may be calculated over a different period of time. The Fund's current
distribution rate calculation for Class B shares and Class C shares
assumes no CDSC is paid.
General
From time to time the Fund may, as appropriate, quote Fund rankings or
reprint all or a portion of evaluations of fund performance and
operations appearing in various independent publications, including but
not limited to the following: Money, Fortune, U.S. News and World Report,
Kiplinger's Personal Finance, The Wall Street Journal, Barron's,
Investors Business Daily, Newsweek, Financial World, Financial Planning,
Investment Advisor, USA Today, Pensions and Investments, SmartMoney,
Forbes, Global Finance, Registered Representative, Institutional
Investor, the Investment Company Institute, Johnson's Charts,
Morningstar, Lipper Analytical Securities Corporation, CDA Wiesenberger,
Shearson Lehman and Salomon Bros. Indices, Ibbotson, Business Week, Lowry
Associates, Media General, Investment Company Data, The New York Times,
Your Money, Strangers Investment Advisor, Financial Planning on Wall
Street, Standard and Poor's, Individual Investor, The 100 Best Mutual
Funds You Can Buy, by
Part II -- 11
<PAGE>
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.
The Fund may also use charts, graphs or other presentation formats to
illustrate the historical correlation of its performance to fund
categories established by Morningstar (or other nationally recognized
statistical ratings organizations) and to other MFS Funds.
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); issues regarding
financial and health care management for elderly family members; and
other similar or related matters.
From time to time, the Fund may also advertise annual returns showing
the cumulative value of an initial investment in the Fund in various
amounts over specified periods, with capital gain and dividend
distributions invested in additional shares or taken in cash, and with no
adjustment for any income taxes (if applicable) payable by shareholders.
MFS Firsts
MFS has a long history of innovations.
o 1924 -- Massachusetts Investors Trust is established as the first
open-end mutual fund in America.
o 1924 -- Massachusetts Investors Trust is the first mutual fund to
make full public disclosure of its operations in shareholder
reports.
o 1932 -- One of the first internal research departments is
established to provide in-house analytical capability for an
investment management firm.
o 1933 -- Massachusetts Investors Trust is the first mutual fund to
register under the Securities Act of 1933 ("Truth in Securities Act"
or "Full Disclosure Act").
o 1936 -- Massachusetts Investors Trust is the first mutual fund to
allow shareholders to take capital gain distributions either in
additional shares or in cash.
o 1976 -- MFS[RegTM] Municipal Bond Fund is among the first municipal
bond funds established.
o 1979 -- Spectrum becomes the first combination fixed/ variable
annuity with no initial sales charge.
o 1981 -- MFS[RegTM] Global Governments Fund is established as
America's first globally diversified fixed-income mutual fund.
o 1984 -- MFS[RegTM] Municipal High Income Fund is the first open-end
mutual fund to seek high tax-free income from lower-rated municipal
securities.
o 1986 -- MFS[RegTM] Managed Sectors Fund becomes the first mutual
fund to target and shift investments among industry sectors for
shareholders.
o 1986 -- MFS[RegTM] Municipal Income Trust is the first closed-end,
high-yield municipal bond fund traded on the New York Stock
Exchange.
o 1987 -- MFS[RegTM] Multimarket Income Trust is the first closed-end,
multimarket high income fund listed on the New York Stock Exchange.
o 1989 -- MFS[RegTM] Regatta becomes America's first non-qualified
market value adjusted fixed/variable annuity.
o 1990 -- MFS[RegTM] Global Total Return Fund is the first global
balanced fund.
o 1993 -- MFS[RegTM] Global Growth Fund is the first global emerging
markets fund to offer the expertise of two sub-advisers.
o 1993 -- MFS[RegTM] becomes money manager of MFS[RegTM] Union
Standard[RegTM] Equity Fund, the first fund to invest principally 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.
Part II -- 12
<PAGE>
SHAREHOLDER SERVICES X
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 programs are described below and, in certain
cases, in the Prospectus. The programs involve no extra charge to
shareholders (other than a sales charge in the case of certain Class A
share purchases) and may be changed or discontinued at any time by a
shareholder or the Fund.
Letter of Intent -- If a shareholder (other than a group purchaser
described below) anticipates purchasing $50,000 or more of Class A shares
of the Fund alone or in combination with shares of any class of 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 MFSC) 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 MFSC 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, MFSC 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 MFSC. By completing and signing the Account Application or separate
Letter of Intent application, the shareholder irrevocably appoints MFSC
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, Class B and Class C shares of that shareholder in the MFS Funds or MFS
Fixed Fund reaches a discount level. See "Purchases" in the Prospectus
for the sales charges on quantity discounts. A shareholder must provide
MFSC (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 MFSC 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 MFSC 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. MFSC 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. MFSC 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 that fund are available for sale. Such
investments will be subject to additional purchase minimums.
Distributions will be invested at net asset value (exclusive of any sales
charge) and will not be subject to any CDSC. Distributions will be
invested at the close of business on the payable date for the
distribution. A shareholder considering the Distribution Investment
Program should obtain and read the prospectus of the other fund and
consider the differences in objectives and policies before making any
investment.
Systematic Withdrawal Plan -- A shareholder may direct MFSC 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
Part II -- 13
<PAGE>
$100, except in certain limited circumstances. The aggregate withdrawals
of Class B and Class C shares in any year pursuant to a SWP generally are
limited to 10% of the value of the account at the time of 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) shares representing reinvested distributions; (ii)
shares representing undistributed capital gains and income; and (iii) to
the extent necessary, shares representing direct investments subject to
the lowest CDSC. 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, MFSC. 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. MFSC 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 MFSC 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 MFSC. 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 (if
available for sale). 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 transfer will
occur after receipt and processing by MFSC 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 the 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 MFSC in proper form (i.e., if
in writing -- signed by the record owner(s) exactly as shares are
registered; if by telephone -- proper account identification is given by
the dealer or shareholder of record). Each Exchange Change Request (other
than termination of participation in the program) must involve at least
$50. Generally, if an Exchange Change Request is received by telephone or
in writing before the close of business on the last business day of a
month, the Exchange Change Request will be effective for the following
month's exchange.
Part II -- 14
<PAGE>
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 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 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 MFSC.
Exchanges Among MFS Funds (excluding exchanges from MFS money market
funds) -- No initial sales charge 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
"How to Purchase, Exchange and Redeem Shares" 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 -- 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 MFSC) or all the shares in the
account. Each exchange involves the redemption of the shares of the Fund
to be exchanged and the purchase 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 MFSC 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
Part II -- 15
<PAGE>
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.
Additional information with respect to any of the MFS Funds, including
a copy of its current prospectus, may be obtained from investment dealers
or MFSC. 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.
Any state income tax advantages for investment in shares of each
state-specific series of MFS Municipal Series Trust may only benefit
residents of such states. Investors should consult with their own tax
advisers to be sure this is an appropriate investment, based on their
residency and each state's income tax laws. The exchange privilege (or
any aspect of it) may be changed or discontinued and is subject to
certain limitations imposed from time to time at the discretion of the
Funds in order to protect the Funds.
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, the following:
o Traditional Individual Retirement Accounts (IRAs) (for individuals
who desire to make limited contributions to a Tax-deferred
retirement program and, if eligible, to receive a federal Income tax
deduction for amounts contributed);
o Roth Individual Retirement Accounts (Roth IRAs) (for individuals who
desire to make limited contributions to a tax-favored retirement
program);
o Simplified Employee Pension (SEP-IRA) Plans;
o Retirement Plans Qualified under Section 401(k) of the Internal
Revenue Code of 1986, as amended (the "Code");
o 403(b) Plans (deferred compensation arrangements for employees of
public School systems and certain non-profit organizations); and
o Certain other qualified pension and profit-sharing plans.
The plan documents provided by MFD designate a trustee or custodian
(unless another trustee or custodian is designated by the individual or
group establishing the plan) and contain specific information about the
plans. Each plan provides that dividends and distributions will be
reinvested automatically. For further details with respect to any plan,
including fees charged by the trustee, custodian or MFD, tax consequences
and redemption information, see the specific documents for that plan.
Plan documents other than those provided by MFD may be used to establish
any of the plans described above. Third party administrative services,
available for some corporate plans, may limit or delay the processing of
transactions.
An investor should consult with his tax adviser before establishing
any of the tax-deferred retirement plans described above.
Class C shares are not currently available for purchase by any
retirement plan qualified under Internal Revenue Code Section 401(a) or
403(b) if the retirement plan and/or the sponsoring organization
subscribe to the MFS FUNDamental 401(k) Plan or another similar Section
401(a) or 403(b) recordkeeping program made available by MFSC.
XI 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
Declaration of Trust further authorizes the Trustees to classify or
reclassify any series of shares into one or more classes. 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. To the extent a shareholder of the Fund owns a controlling
percentage of the Fund's shares, such shareholder may affect the outcome
of such matters to a greater extent than other Fund 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" in Part I of this SAI). 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
Part II -- 16
<PAGE>
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 a 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.
Part II -- 17
<PAGE>
PART II -- 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 CDSC for Class A shares are waived (Section II), and the CDSC for
Class B and Class C shares is waived (Section III). Some of the following
information will not apply to certain funds in the MFS Family of Funds,
depending on which classes of shares are offered by such fund. As used in
this Appendix, the term "dealer" includes any broker, dealer, bank
(including bank trust departments), registered investment adviser,
financial planner and any other financial institutions having a selling
agreement or other similar agreement with MFD.
I WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on
purchases of Class A shares and the CDSC imposed on certain redemptions
of Class A shares and on redemptions of Class B and Class C shares, as
applicable, are waived:
Dividend Reinvestment
o Shares acquired through dividend or capital gain reinvestment; and
o Shares acquired by automatic reinvestment of distributions of
dividends and capital gains of any fund in the MFS Funds pursuant to
the Distribution Investment Program.
Certain Acquisitions/Liquidations
o Shares acquired on account of the acquisition or liquidation of
assets of other investment companies or personal holding companies.
Affiliates of an MFS Fund/Certain Dealers
Shares acquired by:
o Officers, eligible directors, employees (including retired
employees) and agents of MFS, Sun Life or any of their subsidiary
companies;
o Trustees and retired trustees of any investment company for which
MFD serves as distributor;
o Employees, directors, partners, officers and trustees of any
sub-adviser to any MFS Fund;
o Employees or registered representatives of dealers;
o Certain family members of any such individual and their spouses
identified above and certain trusts, pension, profit-sharing or
other retirement plans for the sole benefit of such persons,
provided the shares are not resold except to the MFS Fund which
issued the shares; and
o Institutional Clients of MFS or MFS Institutional Advisors, Inc.
Involuntary Redemptions (CDSC waiver only)
o Shares redeemed at an MFS Fund's direction due to the small size of
a shareholder's account. See "Redemptions and Repurchases -- General
-- Involuntary Redemptions/Small Accounts" in the Prospectus.
Retirement Plans (CDSC waiver only)
Shares redeemed on account of distributions made under the following
circumstances:
o Individual Retirement Accounts ("IRAs")
[arrow] Death or disability of the IRA owner.
o Section 401(a) Plans ("401(a) Plans") and Section 403(b) Employer
Sponsored Plans ("ESP Plans")
[arrow] Death, disability or retirement of 401(a) or ESP Plan
participant;
[arrow] Loan from 401(a) or ESP Plan;
[arrow] Financial hardship (as defined in Treasury Regulation
Section 1.401(k)-1(d)(2), as amended from time to time);
[arrow] Termination of employment of 401(a) or ESP Plan participant
(excluding, however, a partial or other termination of the
Plan);
[arrow] Tax-free return of excess 401(a) or ESP Plan contributions;
[arrow] 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 MFSC (the "MFS Participant Recordkeeping
System"); and
[arrow] 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.
[arrow] Shares purchased by certain retirement plans or trust
accounts if: (i) the plan is currently a party to a
retirement plan recordkeeping or administration services
agreement with MFD or one of its affiliates and (ii) the
shares purchased or redeemed represent transfers from or
Part II -- A-1
<PAGE>
transfers to plan investments other than the MFS Funds for
which retirement plan recordkeeping services are provided
under the terms of such agreement.
o Section 403(b) Salary Reduction Only Plans ("SRO Plans")
[arrow] Death or disability of SRO Plan participant.
Certain Transfers of Registration
(CDSC waiver only)
Shares transferred:
o To an IRA rollover account where any sales charges with respect to
the shares being reregistered would have been waived had they been
redeemed; and
o From a single account maintained for a 401(a) Plan to multiple
accounts maintained by MFSC 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 MFSC.
Loan Repayments
o Shares acquired pursuant to repayments by retirement plan
participants of loans from 401(a) or ESP Plans with respect to which
such Plan or its sponsoring organization subscribes to the MFS
FUNDamental 401(k) Program or the MFS Recordkeeper Plus Program (but
not the MFS Recordkeeper Program).
II WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A
shares and the CDSC imposed on certain redemptions of Class A shares are
waived:
Wrap Account and Fund "Supermarket" Investments
o Shares acquired by investments through certain dealers (including
registered investment advisers and financial planners) which have
established certain operational arrangements with MFD which include
a requirement that such shares be sold for the sole benefit of
clients participating in a "wrap" account, mutual fund "supermarket"
account or a similar program under which such clients pay a fee to
such dealer.
Investment by Insurance Company Separate
Accounts
o Shares acquired by insurance company separate accounts.
Retirement Plans
o Administrative Services Arrangements
[arrow] Shares acquired by retirement plans or trust accounts whose
third party administrators or dealers have entered into an
administrative services agreement with MFD or one of its
affiliates to perform certain administrative services,
subject to certain operational and minimum size
requirements specified from time to time by MFD or one
or more of its affiliates.
o Reinvestment of Distributions from Qualified Retirement Plans
[arrow] 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:
o IRAs
[arrow] Distributions made on or after the IRA owner has attained
the age of 59 1/2 years old; and
[arrow] Tax-free returns of excess IRA contributions.
o 401(a) Plans
[arrow] Distributions made on or after the 401(a) Plan participant
has attained the age of 59 1/2 years old; and
[arrow] Certain involuntary redemptions and redemptions in
connection with certain automatic withdrawals from a 401(a)
Plan.
o ESP Plans and SRO Plans
[arrow] Distributions made on or after the ESP or SRO Plan
participant has attained the age of 59 1/2 years old.
o 401(a) Plans and ESP Plans
[arrow] where the retirement plan and/or sponsoring organization
does not subscribe to the MFS Participant Recordkeeping
System; and
[arrow] where the retirement plan and/or sponsoring organization
demonstrates to the satisfaction of, and certifies to, MFSC
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 Family of Funds
and aggregate assets of at least $10 million;
provided, however, that the CDSC will not be waived (i.e., it will be
imposed) (a) with respect to plans which establish an account with MFSC
on or after November 1, 1997, in the event that the plan makes a complete
redemption of all of its shares in the MFS Family of Funds, or (b) with
respect to plans which establish an account with MFSC prior to November
1, 1997, in the event that there is a change in law or regulations which
result in a material adverse change to the tax advantaged nature of the
plan, or in the event that the plan and/or sponsoring organization: (i)
becomes insolvent or bankrupt; (ii) is terminated under ERISA or is
liquidated or dissolved; or (iii) is acquired by, merged into, or
consolidated with any other entity.
Part II -- A-2
<PAGE>
Purchases of at Least $5 Million
(CDSC waiver only)
o Shares acquired of Eligible Funds (as defined below) if the
shareholder's investment equals or exceeds $5 million in one or more
Eligible Funds (the "Initial Purchase") (this waiver applies to the
shares acquired from the Initial Purchase and all shares of Eligible
Funds subsequently acquired by the shareholder); provided that the
dealer through which the Initial Purchase is made enters into an
agreement with MFD to accept delayed payment of commissions with
respect to the Initial Purchase and all subsequent investments by
the shareholder in the Eligible Funds subject to such requirements
as may be established from time to time by MFD (for a schedule of
the amount of commissions paid by MFD to the dealer on such
investments, see "Purchases -- Class A Shares -- Purchases subject
to a CDSC" in the Prospectus). The Eligible Funds are all funds
included in the MFS Family of Funds, except for Massachusetts
Investors Trust, Massachusetts Investors Growth Stock Fund, MFS
Municipal Bond Fund, MFS Municipal Limited Maturity Fund, MFS Money
Market Fund, MFS Government Money Market Fund and MFS Cash Reserve
Fund.
Bank Trust Departments and Law Firms
o Shares acquired by certain bank trust departments or law firms
acting as trustee or manager for trust accounts which have entered
into an administrative services agreement with MFD and are acquiring
such shares for the benefit of their trust account clients.
Investment of Proceeds From Certain Redemptions of Class I Shares
o The initial sales charge imposed on purchases of Class A shares, and
the contingent deferred sales charge imposed on certain redemptions
of Class A shares, are waived with respect to Class A shares
acquired of any of the MFS Funds through the immediate reinvestment
of the proceeds of a redemption of Class I shares of any of the MFS
Funds.
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:
Systematic Withdrawal Plan
o Systematic Withdrawal Plan redemptions with respect to up to 10% per
year (or 15% per year, in the case of accounts registered as IRAs
where the redemption is made pursuant to Section 72(t) of the
Internal Revenue Code of 1986, as amended) of the account value at
the time of establishment.
Death of Owner
o Shares redeemed on account of the death of the account owner if the
shares are held solely in the deceased individual's name or in a
living trust for the benefit of the deceased individual.
Disability of Owner
o Shares redeemed on account of the disability of the account owner if
shares are held either solely or jointly in the disabled
individual's name or in a living trust for the benefit of the
disabled individual (in which case a disability certification form
is required to be submitted to MFSC.).
Retirement Plans
Shares redeemed on account of distributions made under the following
circumstances:
o IRAs, 401(a) Plans, ESP Plans and SRO Plans
[arrow] 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 Code rules.
[arrow] Salary Reduction Simplified Employee Pension Plans ("SAR-SEP
Plans")
[arrow] 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
[arrow] Death or disability of a SAR-SEP Plan participant.
o 401(a) and ESP Plans Only (Class B CDSC Waiver Only)
[arrow] By a retirement plan whose sponsoring organization
subscribes to the MFS Participant Recordkeeping System and
which established an account with MFSC between July 1, 1996
and December 31, 1998; provided, however, that the CDSC will
not be waived (i.e., it will be imposed) in the event that
there is a change in law or regulations which results in a
material adverse change to the tax advantaged nature of the
plan, or in the event that the plan and/or sponsoring
organization: (i) becomes insolvent or bankrupt; (ii) is
terminated under ERISA or is liquidated or dissolved; or
(iii) is acquired by, merged into, or consolidated with
any other entity.
[arrow] By a retirement plan whose sponsoring organization
subscribes to the MFS Recordkeeper Plus product and which
established its account with MFSC on or after January 1,
1999 (provided that the plan establishment paperwork is
received by MFSC in good order on or after November 15,
1998). A plan with a pre-existing account(s) with any
MFS Fund which switches to the MFS Recordkeeper Plus
product will not become eligible for this waiver
category.
Part II -- A-3
<PAGE>
PART II -- APPENDIX B
DEALER COMMISSIONS AND CONCESSIONS
This Appendix describes the various commissions paid and concessions made
to dealers by MFD in connection with the sale of Fund shares. As used in
this Appendix, the term "dealer" includes any broker, dealer, bank
(including bank trust departments), registered investment adviser,
financial planner and any other financial institutions having a selling
agreement or other similar agreement with MFD.
CLASS A SHARES
Purchases Subject to an Initial Sales Charge. For purchases of Class A
shares subject to an initial sales charge, MFD reallows a portion of the
initial sales charge to dealers (which are alike for all dealers), as
shown in Appendix D to Part I of this SAI. The difference between the
total amount invested and the sum of (a) the net proceeds to the Fund and
(b) the dealer reallowance, is the amount of the initial sales charge
retained by MFD (as shown in Appendix D to Part I of this SAI). Because
of rounding in the computation of offering price, the portion of the
sales charge retained by MFD 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.
Purchases Subject to a CDSC (but not an Initial Sales Charge). For
purchases of Class A shares subject to a CDSC, MFD pays commissions to
dealers on new investments 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
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).
CLASS B SHARES
For purchases of Class B shares, 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 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).
For purchases of Class B shares by a retirement plan whose sponsoring
organization subscribes to the MFS Participant Recordkeeping System and
which established its account with MFSC between July 1, 1996 and December
31, 1998, 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.
For purchases of Class B shares by a retirement plan whose sponsoring
organization subscribes to the MFS Recordkeeper Plus product and which
has established its account with MFSC on or after January 1, 1999
(provided that the plan establishment paperwork is received by MFSC in
good order on or after November 15, 1998), MFD pays no up front
commissions to dealers, but instead pays an amount to dealers equal to 1%
per annum of the average daily net assets of the Fund attributable to
plan assets, payable at the rate of 0.25% at the end of each calendar
quarter, in arrears. This commission structure is not available with
respect to a plan with a pre-existing account(s) with any MFS Fund which
seeks to switch to the MFS Recordkeeper Plus product.
CLASS C SHARES
For purchases of Class C shares, 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.
ADDITIONAL DEALER COMMISSIONS/
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 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
Funds sold by such dealer during a specified sales period. In addition,
from time to time, MFD, at its expense, may provide additional
commissions, compensation or promotional incentives ("concessions") to
dealers which sell or arrange for the sale of shares of the Fund. Such
concessions provided by MFD may include financial assistance to dealers
in connection with preapproved conferences or seminars, sales or training
programs for invited registered representatives and other employees,
payment for travel expenses,
Part II -- B-1
<PAGE>
including lodging, incurred by registered representatives and other
employees for such seminars or training programs, seminars for the
public, advertising and sales campaigns regarding one or more Funds,
and/or other dealer-sponsored events. From time to time, MFD may make
expense reimbursements for special training of a dealer's registered
representatives and other employees in group meetings or to help pay the
expenses of sales contests. Other concessions may be offered to the
extent not prohibited by state laws or any self-regulatory agency, such
as the NASD.
Part II -- B-2
<PAGE>
PART II -- APPENDIX C
INVESTMENT TECHNIQUES, PRACTICES
AND RISKS
Set forth below is a description of investment techniques and practices
which the MFS Funds may generally use in pursuing their investment
objectives and principal investment policies, and the associated risks
associated with these investment techniques and practices. The Fund will
engage only in certain of these investment techniques and practices, as
identified in Appendix A of the Fund's Prospectus. Investment practices
and techniques that are not identified in Appendix A of the Fund's
Prospectus do not apply to the Fund.
INVESTMENT TECHNIQUES AND PRACTICES
Debt Securities
To the extent the Fund invests in the following types of debt securities,
its net asset value may change as the general levels of interest rates
fluctuate. When interest rates decline, the value of debt securities can
be expected to rise. Conversely, when interest rates rise, the value of
debt securities can be expected to decline. The Fund's investment in debt
securities with longer terms to maturity are subject to greater
volatility than the Fund's shorter-term obligations. Debt securities may
have all types of interest rate payment and reset terms, including fixed
rate, adjustable rate, zero coupon, contingent, deferred, payment in kind
and auction rate features.
Asset-Backed Securities: The Fund may purchase the following types of
asset-backed securities:
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 (such collateral
referred to collectively as "Mortgage Assets"). Unless the context
indicates otherwise, all references herein to CMOs include multiclass
pass-through securities.
Interest is paid or accrues on all classes of the CMOs on a monthly,
quarterly or semi-annual basis. The principal of and interest on the
Mortgage Assets may be allocated among the several classes 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 a CMO in the order of their respective stated maturities or
final distribution dates, so that no payment of principal will be made on
any class of CMOs until all other classes having an earlier stated
maturity or final distribution date have been paid in full. Certain CMOs
may be stripped (securities which provide only the principal or interest
factor of the underlying security). See "Stripped Mortgage-Backed
Securities" below for a discussion of the risks of investing in these
stripped securities and of investing in classes consisting of interest
payments or principal payments.
The Fund may also invest in parallel pay CMOs and Planned Amortization
Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to provide
payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated
maturity date or final distribution date of each class, which, as with
other CMO structures, must be retired by its stated maturity date or
final distribution date but may be retired earlier.
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. These securities present certain risks. For
instance, in the case of credit card receivables, these securities may
not have the benefit of any security interest in the related collateral.
Credit card receivables are generally unsecured and the debtors are
entitled to the protection of a number of state and federal consumer
credit laws, many of which give such debtors the right to set off certain
amounts owed on the credit cards, thereby reducing the balance due. Most
issuers of automobile receivables permit the servicers to retain
possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser
would acquire an interest superior to that of the holders of the related
automobile receivables. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under
state laws, the trustee for the holders of the automobile receivables may
not have a proper security interest in all of the obligations backing
such receivables. Therefore, there is the possibility that recoveries on
repossessed collateral may not, in some cases, be available to support
payments on these securities. The underlying assets (e.g., loans) are
also subject to prepayments which shorten the securities weighted average
life and may lower their return.
Corporate asset-backed securities are backed by a pool of assets
representing the obligations of a number of different parties. To lessen
the effect of failures by obligors on underlying assets to make payments,
the securities may contain elements of credit support which fall into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by
the entity administering the pool of assets, to ensure that the receipt
of payments on the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default ensures payment through
insurance policies or letters of credit obtained by the issuer or sponsor
from third parties. The Fund will not pay any additional or separate fees
for credit support. The degree of credit support provided for each issue
is generally based on historical information respecting the level of
credit risk associated with the underlying assets. Delinquency or loss in
excess of that
Part II -- C-1
<PAGE>
anticipated or failure of the credit support could adversely affect the
return on an investment in such a security.
Mortgage Pass-Through Securities: The Fund may invest in mortgage
pass-through securities. Mortgage pass-through securities are securities
representing interests in "pools" of mortgage loans. Monthly payments of
interest and principal by the individual borrowers on mortgages are
passed through to the holders of the securities (net of fees paid to the
issuer or guarantor of the securities) as the mortgages in the underlying
mortgage pools are paid off. The average lives of mortgage pass-throughs
are variable when issued because their average lives depend on prepayment
rates. The average life of these securities is likely to be substantially
shorter than their stated final maturity as a result of unscheduled
principal prepayment. Prepayments on underlying mortgages result in a
loss of anticipated interest, and all or part of a premium if any has
been paid, and the actual yield (or total return) to the Fund may be
different than the quoted yield on the securities. Mortgage premiums
generally increase with falling interest rates and decrease with rising
interest rates. Like other fixed income securities, when interest rates
rise the value of mortgage pass-through security generally will decline;
however, when interest rates are declining, the value of mortgage
pass-through securities with prepayment features may not increase as much
as that of other fixed-income securities. In the event of an increase in
interest rates which results in a decline in mortgage prepayments, the
anticipated maturity of mortgage pass-through securities held by the Fund
may increase, effectively changing a security which was considered short
or intermediate-term at the time of purchase into a long-term security.
Long-term securities generally fluctuate more widely in response to
changes in interest rates than short or intermediate-term securities.
Payment of principal and interest on some mortgage pass-through
securities (but not the market value of the securities themselves) may be
guaranteed by the full faith and credit of the U.S. Government (in the
case of securities guaranteed by the Government National Mortgage
Association ("GNMA")); or guaranteed by agencies or instrumentalities of
the U.S. Government (such as the Federal National Mortgage Association
"FNMA") or the Federal Home Loan Mortgage Corporation, ("FHLMC") which
are supported only by the discretionary authority of the U.S. Government
to purchase the agency's obligations). Mortgage pass-through securities
may also be issued by non-governmental issuers (such as commercial banks,
savings and loan institutions, private mortgage insurance companies,
mortgage bankers and other secondary market issuers). Some of these
mortgage pass-through securities may be supported by various forms of
insurance or guarantees.
Interests in pools of mortgage-related securities differ from other
forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or
specified call dates. Instead, these securities provide a monthly payment
which consists of both interest and principal payments. In effect, these
payments are a "pass-through" of the monthly payments made by the
individual borrowers on their mortgage loans, net of any fees paid to the
issuer or guarantor of such securities. Additional payments are caused by
prepayments of principal resulting from the sale, refinancing or
foreclosure of the underlying property, net of fees or costs which may be
incurred. Some mortgage pass-through securities (such as securities
issued by the GNMA) are described as "modified pass-through." These
securities entitle the holder to receive all interests and principal
payments owed on the mortgages in the mortgage pool, net of certain fees,
at the scheduled payment dates regardless of whether the mortgagor
actually makes the payment.
The principal governmental guarantor of mortgage pass-through securities
is GNMA. GNMA is a wholly owned U.S. Government corporation within the
Department of Housing and Urban Development. GNMA is authorized to
guarantee, with the full faith and credit of the U.S. Government, the
timely payment of principal and interest on securities issued by
institutions approved by GNMA (such as savings and loan institutions,
commercial banks and mortgage bankers) and backed by pools of Federal
Housing Administration ("FHA")-insured or Veterans Administration
("VA")-guaranteed mortgages. These guarantees, however, do not apply to
the market value or yield of mortgage pass-through securities. GNMA
securities are often purchased at a premium over the maturity value of
the underlying mortgages. This premium is not guaranteed and will be lost
if prepayment occurs.
Government-related guarantors (i.e., whose guarantees are not backed
by the full faith and credit of the U.S. Government) include FNMA and
FHLMC. FNMA is a government-sponsored corporation owned entirely by
private stockholders. It is subject to general regulation by the
Secretary of Housing and Urban Development. FNMA purchases conventional
residential mortgages (i.e., mortgages not insured or guaranteed by any
governmental agency) from a list of approved seller/servicers which
include state and federally chartered savings and loan associations,
mutual savings banks, commercial banks, credit unions and mortgage
bankers. Pass-through securities issued by FNMA are guaranteed as to
timely payment by FNMA of principal and interest.
FHLMC is also a government-sponsored corporation owned by private
stockholders. FHLMC issues Participation Certificates ("PCs") which
represent interests in conventional mortgages (i.e., not federally
insured or guaranteed) for FHLMC's national portfolio. FHLMC guarantees
timely payment of interest and ultimate collection of principal
regardless of the status of the underlying mortgage loans.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers
also create pass through pools of mortgage loans. Such issuers may also
be the originators and/or servicers of the underlying mortgage-related
securities. Pools created by
Part II -- C-2
<PAGE>
such non-governmental issuers generally offer a higher rate of interest
than government and government-related pools because there are no direct
or indirect government or agency guarantees of payments in the former
pools. However, timely payment of interest and principal of mortgage
loans in these pools may be supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance
and letters of credit. The insurance and guarantees are issued by
governmental entities, private insurers and the mortgage poolers. There
can be no assurance that the private insurers or guarantors can meet
their obligations under the insurance policies or guarantee arrangements.
The Fund may also buy mortgage-related securities without insurance or
guarantees.
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 or
instrumentalities of the U.S. Government, or by private originators of,
or investors in, mortgage loans, including savings and loan institutions,
mortgage banks, commercial banks and investment banks.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions from a pool of
mortgage assets. A common type of SMBS will have one class receiving some
of the interest and most of the principal from the Mortgage Assets, while
the other class will receive most of the interest and the remainder of
the principal. In the most extreme case, one class will receive all of
the interest (the interest-only or "I0" class) while the other class will
receive all of the principal (the principal-only or "P0" class). The
yield to maturity on an I0 is extremely sensitive to the rate of
principal payments, including prepayments on the related underlying
Mortgage Assets, and a rapid rate of principal payments may have a
material adverse effect on such security's yield to maturity. 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.
Corporate Securities: The Fund may invest in debt securities, such as
convertible and non-convertible bonds, notes and debentures, issued by
corporations, limited partnerships and other similar entities.
Loans and Other Direct Indebtedness: The Fund may purchase loans and
other direct indebtedness. In purchasing a loan, the Fund acquires some
or all of the interest of a bank or other lending institution in a loan
to a corporate, governmental or other 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
borrowers 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 lenders
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 owned by the company to a
supplier of goods or services. These claims may also be purchased at a
time when the company is in default.
Certain of the loans and the other direct indebtedness acquired by the
Fund may involve revolving credit facilities or other standby financing
commitments which obligate the Fund to pay additional cash on a certain
date or on demand. These commitments may have the effect of requiring the
Fund to increase its investment in a company at a time when the Fund
might not otherwise decide to do so (including at a time when the
company's financial condition makes it unlikely that such amounts will be
repaid). To the extent that the Fund is committed to advance additional
funds, it will at all times hold and maintain in a segregated account
cash or other high grade debt obligations in an amount sufficient to meet
such commitments.
The Fund's ability to receive payment of principal, interest and other
amounts due in connection with these investments will depend primarily on
the financial condition of the borrower. In selecting the loans and other
direct indebtedness which the Fund will purchase, the Adviser will rely
upon its own (and not the original lending institution's) credit analysis
of the borrower. As the Fund may be required to rely upon another lending
institution to collect and pass onto the Fund amounts payable with
respect to the loan and to enforce the Fund's rights under the loan and
other direct indebtedness, an insolvency, bankruptcy or reorganization of
the lending institution may delay or prevent the Fund from receiving such
amounts. In such cases, the Fund will evaluate as well the
creditworthiness of the lending institution and will treat both the
borrower and the lending institution as an "issuer" of the loan for
purposes of certain investment restrictions pertaining to the
diversification of the Fund's portfolio investments. The highly leveraged
nature of many such loans and other direct indebtedness may make such
loans and other direct
Part II -- C-3
<PAGE>
indebtedness especially vulnerable to adverse changes in economic or
market conditions. Investments in such loans and other direct
indebtedness may involve additional risk to the Fund.
Lower Rated Bonds: The Fund may invest in fixed income securities
rated Ba or lower by Moody's or BB or lower by S&P, Fitch or Duff &
Phelps and comparable unrated securities (commonly known as "junk
bonds"). See Appendix D for a description of bond ratings. No minimum
rating standard is required by the Fund. These securities are considered
speculative and, while generally providing greater income than
investments in higher rated securities, will involve greater risk of
principal and income (including the possibility of default or bankruptcy
of the issuers of such securities) and may involve greater volatility of
price (especially during periods of economic uncertainty or change) than
securities in the higher rating categories 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 reflect economic
changes (and the outlook for economic growth), short-term corporate and
industry developments and the market's perception of their credit quality
(especially during times of adverse publicity) to a greater extent than
higher rated securities which react primarily to fluctuations in the
general level of interest rates (although these lower rated fixed income
securities are also affected by changes in interest rates). In the past,
economic downturns or an increase in interest rates have, under certain
circumstances, caused a higher incidence of default by the issuers of
these securities and may do so in the future, especially in the case of
highly leveraged issuers. The prices for these securities may be affected
by legislative and regulatory developments. The market for these lower
rated fixed income securities may be less liquid than the market for
investment grade fixed income securities. Furthermore, the liquidity of
these lower rated securities may be affected by the market's perception
of their credit quality. Therefore, the Adviser's judgment may at times
play a greater role in valuing these securities than in the case of
investment grade fixed income securities, and it also may be more
difficult during times of certain adverse market conditions to sell these
lower rated securities to meet redemption requests or to respond to
changes in the market.
While the Adviser may refer to ratings issued by established credit
rating agencies, it is not the Fund's policy to rely exclusively on
ratings issued by these rating agencies, but rather to supplement such
ratings with the Adviser's own independent and ongoing review of credit
quality. To the extent a Fund invests in these lower rated securities,
the achievement of its investment objectives may be a more dependent on
the Adviser's own credit analysis than in the case of a fund investing in
higher quality fixed income securities. These lower rated securities may
also include zero coupon bonds, deferred interest bonds and PIK bonds.
Municipal Bonds: The Fund may invest in debt securities 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, the interest on which is exempt from federal income
tax ("Municipal Bonds"). Municipal Bonds include debt securities which
pay interest income that is subject to the alternative minimum tax. The
Fund may invest in Municipal Bonds whose issuers pay interest on the
Bonds from revenues from projects such as multifamily housing, nursing
homes, electric utility systems, hospitals or life care facilities.
If a revenue bond is secured by payments generated from a project, and
the revenue bond is also secured by a lien on the real estate comprising
the project, foreclosure by the indenture trustee on the lien for the
benefit of the bondholders creates additional risks associated with
owning real estate, including environmental risks.
Housing revenue bonds typically are issued by a state, county or local
housing authority and are secured only by the revenues of mortgages
originated by the authority using the proceeds of the bond issue. Because
of the impossibility of precisely predicting demand for mortgages from
the proceeds of such an issue, there is a risk that the proceeds of the
issue will be in excess of demand, which would result in early retirement
of the bonds by the issuer. Moreover, such housing revenue bonds depend
for their repayment upon the cash flow from the underlying mortgages,
which cannot be precisely predicted when the bonds are issued. Any
difference in the actual cash flow from such mortgages from the assumed
cash flow could have an adverse impact upon the ability of the issuer to
make scheduled payments of principal and interest on the bonds, or could
result in early retirement of the bonds. Additionally, such bonds depend
in part for scheduled payments of principal and interest upon reserve
funds established from the proceeds of the bonds, assuming certain rates
of return on investment of such reserve funds. If the assumed rates of
return are not realized because of changes in interest rate levels or for
other reasons, the actual cash flow for scheduled payments of principal
and interest on the bonds may be inadequate. The financing of
multi-family housing projects is affected by a variety of factors,
including satisfactory completion of construction within cost
constraints, the achievement and maintenance of a sufficient level of
occupancy, sound management of the developments, timely and adequate
increases in rents to cover increases in operating expenses, including
taxes, utility rates and maintenance costs, changes in applicable laws
and governmental regulations and social and economic trends.
Electric utilities face problems in financing large construction
programs in inflationary periods, cost increases and delay occasioned by
environmental considerations (particularly with respect to nuclear
facilities), difficulty in obtaining fuel at reasonable prices, the cost
of competing fuel sources, difficulty in obtaining sufficient rate
increases and other regulatory problems, the effect of energy
conservation and difficulty of the capital market to absorb utility debt.
Health care facilities include life care facilities, nursing homes and
hospitals. Life care facilities are alternative forms of long-term
housing for the elderly which offer residents the indepen-
Part II -- C-4
<PAGE>
dence of condominium life style and, if needed, the comprehensive care of
nursing home services. Bonds to finance these facilities have been issued
by various state industrial development authorities. Since the bonds are
secured only by the revenues of each facility and not by state or local
government tax payments, they are subject to a wide variety of risks.
Primarily, the projects must maintain adequate occupancy levels to be
able to provide revenues adequate to maintain debt service payments.
Moreover, in the case of life care facilities, since a portion of
housing, medical care and other services may be financed by an initial
deposit, there may be risk if the facility does not maintain adequate
financial reserves to secure estimated actuarial liabilities. The ability
of management to accurately forecast inflationary cost pressures weighs
importantly in this process. The facilities may also be affected by
regulatory cost restrictions applied to health care delivery in general,
particularly state regulations or changes in Medicare and Medicaid
payments or qualifications, or restrictions imposed by medical insurance
companies. They may also face competition from alternative health care or
conventional housing facilities in the private or public sector. Hospital
bond ratings are often based on feasibility studies which contain
projections of expenses, revenues and occupancy levels. A hospital's
gross receipts and net income available to service its debt are
influenced by demand for hospital services, the ability of the hospital
to provide the services required, management capabilities, economic
developments in the service area, efforts by insurers and government
agencies to limit rates and expenses, confidence in the hospital, service
area economic developments, competition, availability and expense of
malpractice insurance, Medicaid and Medicare funding, and possible
federal legislation limiting the rates of increase of hospital charges.
The Fund may invest in municipal lease securities. These are undivided
interests in a portion of an obligation in the from of a lease or
installment purchase which is issued by state and local governments to
acquire equipment and facilities. Municipal leases frequently have
special risks not normally associated with general obligation or revenue
bonds. Leases and installment purchase or conditional sale contracts
(which normally provide for title to the leased asset to pass eventually
to the governmental issuer) have evolved as a means for governmental
issuers to acquire property and equipment without meeting the
constitutional and statutory requirements for the issuance of debt. The
debt-issuance limitations are deemed to be inapplicable because of the
inclusion in many leases or contracts of "non-appropriation" clauses that
provide that the governmental issuer has no obligation to make future
payments under the lease or contract unless money is appropriated for
such purpose by the appropriate legislative body on a yearly or other
periodic basis. Although the obligations will be secured by the leased
equipment or facilities, the disposition of the property in the event of
non-appropriation or foreclosure might, in some cases, prove difficult.
There are, of course, variations in the security of municipal lease
securities, both within a particular classification and between
classifications, depending on numerous factors.
The Fund may also invest in bonds for industrial and other projects,
such as sewage or solid waste disposal or hazardous waste treatment
facilities. Financing for such projects will be subject to inflation and
other general economic factors as well as construction risks including
labor problems, difficulties with construction sites and the ability of
contractors to meet specifications in a timely manner. Because some of
the materials, processes and wastes involved in these projects may
include hazardous components, there are risks associated with their
production, handling and disposal.
Speculative Bonds: The Fund may invest in fixed income and convertible
securities rated Baa by Moody's or BBB by S&P, Fitch or Duff & Phelps and
comparable unrated securities. See Appendix D for a description of bond
ratings. These securities, while normally exhibiting adequate protection
parameters, have speculative characteristics and changes in economic
conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than in the case of
higher grade securities.
U.S. Government Securities: The Fund may invest in U.S. Government
Securities including (i) U.S. Treasury obligations, all of which are
backed by the full faith and credit of the U.S. Government and (ii) U.S.
Government Securities, 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 ("GNMA"); some of which are
backed only by the credit of the issuer itself, e.g., obligations of the
Student Loan Marketing Association; and some of which are supported by
the discretionary authority of the U.S. Government to purchase the
agency's obligations, e.g., obligations of the Federal National Mortgage
Association ("FNMA").
U.S. Government Securities also include interest in trust or other
entities representing interests in obligations that are issued or
guaranteed by the U.S. Government, its agencies, authorities or
instrumentalities.
Variable and Floating Rate Obligations: The Fund may invest in
floating or variable rate securities. Investments in floating or variable
rate securities normally will involve industrial development or revenue
bonds which provide that the rate of interest is set as a specific
percentage of a designated base rate, such as rates on Treasury Bonds or
Bills or the prime rate at a major commercial bank, and that a bondholder
can demand payment of the obligations on behalf of the Fund on short
notice at par plus accrued interest, which amount may be more or less
than the amount the bondholder paid for them. The maturity of floating or
variable rate obligations (including participation interests therein) is
deemed to be the longer of (i) the notice period required before the Fund
is entitled to receive payment of the obligation upon demand or (ii) the
period remaining until the obligation's next interest rate adjustment. If
not redeemed by the Fund through the demand feature, the obligations
mature on a specified date which may range up to thirty years from the
date of issuance.
Part II -- C-5
<PAGE>
Zero Coupon Bonds, Deferred Interest Bonds and PIK Bonds: The Fund may
invest in 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 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 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 than debt obligations which make regular
payments of interest. The Fund will accrue income on such investments for
tax and accounting purposes, which is distributable to shareholders and
which, because no cash is received at the time of accrual, may require
the liquidation of other portfolio securities to satisfy the Fund's
distribution obligations.
Equity Securities
The Fund may invest in all types of equity securities, including the
following: common stocks, preferred stocks and preference stocks;
securities such as bonds, warrants or rights that are convertible into
stocks; and depositary receipts for those securities. These securities
may be listed on securities exchanges, traded in various over-the-counter
markets or have no organized market.
Foreign Securities Exposure
The Fund may invest in various types of foreign securities, or securities
which provide the Fund with exposure to foreign securities or foreign
currencies, as discussed below:
Brady Bonds: The Fund may invest in Brady Bonds, which are securities
created through the exchange of existing commercial bank loans to public
and private entities in certain emerging markets for new bonds in
connection with debt restructurings under a debt restructuring plan
introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady
(the "Brady Plan"). Brady Plan debt restructurings have been implemented
to date in Argentina, Brazil, Bulgaria, Costa Rica, Croatia, Dominican
Republic, Ecuador, Jordan, Mexico, Morocco, Nigeria, Panama, Peru, the
Philippines, Poland, Slovenia, Uruguay and Venezuela. Brady Bonds have
been issued only recently, and for that reason do not have a long payment
history. Brady Bonds may be collateralized or uncollateralized, are
issued in various currencies (but primarily the U.S. dollar) and are
actively traded in over-the-counter secondary markets. U.S.
dollar-denominated, collateralized Brady Bonds, which may be fixed rate
bonds or floating-rate bonds, are generally collateralized in full as to
principal by U.S. Treasury zero coupon bonds having the same maturity as
the bonds. Brady Bonds are often viewed as having three or four valuation
components: the collateralized repayment of principal at final maturity;
the collateralized interest payments; the uncollateralized interest
payments; and any uncollateralized repayment of principal at maturity
(these uncollateralized amounts constituting the "residual risk"). In
light of the residual risk of Brady Bonds and the history of defaults of
countries issuing Brady Bonds with respect to commercial bank loans by
public and private entities, investments in Brady Bonds may be viewed as
speculative.
Depositary Receipts: The Fund may invest in American Depositary Receipts
("ADRs"), Global Depositary Receipts ("GDRs") and other types of
depositary receipts. ADRs are certificates by a U.S. depositary (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. GDRs and
other types of depositary receipts are typically issued by foreign banks
or trust companies and evidence ownership of underlying securities issued
by either a foreign or a U.S. company. Generally, ADRs are in registered
form and are designed for use in U.S. securities markets and GDRs are in
bearer form and are designed for use in foreign securities markets. For
the purposes of the Fund's policy to invest a certain percentage of its
assets in foreign securities, the investments of the Fund in ADRs, GDRs
and other types of depositary receipts are deemed to be investments in
the underlying securities.
ADRs may be sponsored or unsponsored. A sponsored ADR is issued by a
depositary 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 depositary 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 depositary of an ADR agent bank in
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, information available to a U.S. investor will be limited to
the information the foreign issuer is required to disclose in its country
and the market value of an ADR may not reflect undisclosed material
information concerning the issuer of the under-
Part II -- C-6
<PAGE>
lying security. ADRs may also be subject to exchange rate risks if the
underlying foreign securities are denominated in a foreign currency.
Dollar-Denominated Foreign Debt Securities: The Fund may invest in
dollar-denominated foreign debt securities. Investing in
dollar-denominated foreign debt represents a greater degree of risk than
investing in domestic securities, due to less publicly available
information, less securities regulation, war or expropriation. Special
considerations may include higher brokerage costs and thinner trading
markets. Investments in foreign countries could be affected by other
factors including extended settlement periods.
Emerging Markets: The Fund may invest in securities of government,
government-related, supranational and corporate issuers located in
emerging markets. Such investments entail significant risks as described
below.
o Company Debt -- Governments of many emerging market countries have
exercised and continue to exercise substantial influence over many
aspects of the private sector through the ownership or control of
many companies, including some of the largest in any given country.
As a result, government actions in the future could have a
significant effect on economic conditions in emerging markets, which
in turn, may adversely affect companies in the private sector,
general market conditions and prices and yields of certain of the
securities in the Fund's portfolio. Expropriation, confiscatory
taxation, nationalization, political, economic or social instability
or other similar developments have occurred frequently over the
history of certain emerging markets and could adversely affect the
Fund's assets should these conditions recur.
o Default; Legal Recourse -- The Fund may have limited legal recourse
in the event of a default with respect to certain debt obligations
it may hold. If the issuer of a fixed income security owned by the
Fund defaults, the Fund may incur additional expenses to seek
recovery. Debt obligations issued by emerging market governments
differ from debt obligations of private entities; remedies from
defaults on debt obligations issued by emerging market governments,
unlike those on private debt, must be pursued in the courts of the
defaulting party itself. The Fund's ability to enforce its rights
against private issuers may be limited. The ability to attach assets
to enforce a judgment may be limited. Legal recourse is therefore
somewhat diminished. Bankruptcy, moratorium and other similar laws
applicable to private issuers of debt obligations may be
substantially different from those of other countries. The political
context, expressed as an emerging market governmental issuer's
willingness to meet the terms of the debt obligation, for example,
is of considerable importance. In addition, no assurance can be
given that the holders of commercial bank debt may not contest
payments to the holders of debt obligations in the event of default
under commercial bank loan agreements.
o Foreign Currencies -- The securities in which the Fund invests may
be denominated in foreign currencies and international currency
units and the Fund may invest a portion of its assets directly in
foreign currencies. Accordingly, the weakening of these currencies
and units against the U.S. dollar may result in a decline in the
Fund's asset value.
Some emerging market countries also may have managed currencies,
which are not free floating against the U.S. dollar. In addition,
there is risk that certain emerging market countries may restrict
the free conversion of their currencies into other currencies.
Further, certain emerging market currencies may not be
internationally traded. Certain of these currencies have experienced
a steep devaluation relative to the U.S. dollar. Any devaluations in
the currencies in which a Fund's portfolio securities are
denominated may have a detrimental impact on the Fund's net asset
value.
o Inflation -- Many emerging markets have experienced substantial, and
in some periods extremely high, rates of inflation for many years.
Inflation and rapid fluctuations in inflation rates have had and may
continue to have adverse effects on the economies and securities
markets of certain emerging market countries. In an attempt to
control inflation, wage and price controls have been imposed in
certain countries. Of these countries, some, in recent years, have
begun to control inflation through prudent economic policies.
o Liquidity; Trading Volume; Regulatory Oversight -- The securities
markets of emerging market countries are substantially smaller, less
developed, less liquid and more volatile than the major securities
markets in the U.S. Disclosure and regulatory standards are in many
respects less stringent than U.S. standards. Furthermore, there is a
lower level of monitoring and regulation of the markets and the
activities of investors in such markets.
The limited size of many emerging market securities markets and
limited trading volume in the securities of emerging market issuers
compared to volume of trading in the securities of U.S. issuers
could cause prices to be erratic for reasons apart from factors that
affect the soundness and competitiveness of the securities issuers.
For example, limited market size may cause prices to be unduly
influenced by traders who control large positions. Adverse publicity
and investors' perceptions, whether or not based on in-depth
fundamental analysis, may decrease the value and liquidity of
portfolio securities.
The risk also exists that an emergency situation may arise in one or
more emerging markets, as a result of which trading of securities
may cease or may be substantially curtailed and prices for the
Fund's securities in such markets may not be readily available. The
Fund may suspend redemption of its shares for any period during
which an emergency exists, as determined by the Securities and
Exchange Commission (the "SEC"). Accordingly, if the Fund believes
that appropriate circumstances exist, it will promptly apply to the
SEC for a deter-
Part II -- C-7
<PAGE>
mination that an emergency is present. During the period commencing
from the Fund's identification of such condition until the date of
the SEC action, the Fund's securities in the affected markets will
be valued at fair value determined in good faith by or under the
direction of the Board of Trustees.
o Sovereign Debt -- Investment in sovereign debt can involve a high
degree of risk. The governmental entity that controls the repayment
of sovereign debt may not be able or willing to repay the principal
and/or interest when due in accordance with the terms of such debt.
A governmental entity's willingness or ability to repay principal
and interest due in a timely manner may be affected by, among other
factors, its cash flow situation, the extent of its foreign
reserves, the availability of sufficient foreign exchange on the
date a payment is due, the relative size of the debt service burden
to the economy as a whole, the governmental entity's policy towards
the International Monetary Fund and the political constraints to
which a governmental entity may be subject. Governmental entities
may also be dependent on expected disbursements from foreign
governments, multilateral agencies and others abroad to reduce
principal and interest on their debt. The commitment on the part of
these governments, agencies and others to make such disbursements
may be conditioned on a governmental entity's implementation of
economic reforms and/or economic performance and the timely service
of such debtor's obligations. Failure to implement such reforms,
achieve such levels of economic performance or repay principal or
interest when due may result in the cancellation of such third
parties' commitments to lend funds to the governmental entity, which
may further impair such debtor's ability or willingness to service
its debts in a timely manner. Consequently, governmental entities
may default on their sovereign debt. Holders of sovereign debt
(including the Fund) may be requested to participate in the
rescheduling of such debt and to extend further loans to
governmental entities. There is no bankruptcy proceedings by which
sovereign debt on which governmental entities have defaulted may be
collected in whole or in part.
Emerging market governmental issuers are among the largest debtors
to commercial banks, foreign governments, international financial
organizations and other financial institutions. Certain emerging
market governmental issuers have not been able to make payments of
interest on or principal of debt obligations as those payments have
come due. Obligations arising from past restructuring agreements may
affect the economic performance and political and social stability
of those issuers.
The ability of emerging market governmental issuers to make timely
payments on their obligations is likely to be influenced strongly by
the issuer's balance of payments, including export performance, and
its access to international credits and investments. An emerging
market whose exports are concentrated in a few commodities could be
vulnerable to a decline in the international prices of one or more
of those commodities. Increased protectionism on the part of an
emerging market's trading partners could also adversely affect the
country's exports and tarnish its trade account surplus, if any. To
the extent that emerging markets receive payment for their exports
in currencies other than dollars or non-emerging market currencies,
its ability to make debt payments denominated in dollars or
non-emerging market currencies could be affected.
To the extent that an emerging market country cannot generate a
trade surplus, it must depend on continuing loans from foreign
governments, multilateral organizations or private commercial banks,
aid payments from foreign governments and on inflows of foreign
investment. The access of emerging markets to these forms of
external funding may not be certain, and a withdrawal of external
funding could adversely affect the capacity of emerging market
country governmental issuers to make payments on their obligations.
In addition, the cost of servicing emerging market debt obligations
can be affected by a change in international interest rates since
the majority of these obligations carry interest rates that are
adjusted periodically based upon international rates.
Another factor bearing on the ability of emerging market countries
to repay debt obligations is the level of international reserves of
the country. Fluctuations in the level of these reserves affect the
amount of foreign exchange readily available for external debt
payments and thus could have a bearing on the capacity of emerging
market countries to make payments on these debt obligations.
o Withholding -- Income from securities held by the Fund could be
reduced by a withholding tax on the source or other taxes imposed by
the emerging market countries in which the Fund makes its
investments. The Fund's net asset value may also be affected by
changes in the rates or methods of taxation applicable to the Fund
or to entities in which the Fund has invested. The Adviser will
consider the cost of any taxes in determining whether to acquire any
particular investments, but can provide no assurance that the taxes
will not be subject to change.
Foreign Securities: The Fund may invest in dollar-denominated and non
dollar-denominated foreign securities. Investing in securities of foreign
issuers generally involves risks not ordinarily associated with investing
in securities of domestic issuers. These include changes in currency
rates, exchange control regulations, securities settlement practices,
governmental administration or economic or monetary policy (in the United
States or abroad) or circumstances in dealings between nations. Costs may
be incurred in connection with conversions between various currencies.
Special considerations may also include more limited information about
foreign issuers, higher brokerage costs, different accounting standards
and thinner trading markets. Foreign securities markets may also be less
liquid, more volatile and less subject to government supervision than in
the United States. Investments in foreign countries could be affected by
other factors including expropriation, confiscatory taxation
Part II -- C-8
<PAGE>
and potential difficulties in enforcing contractual obligations and could
be subject to extended settlement periods. As a result of its investments
in foreign securities, the Fund may receive interest or dividend
payments, or the proceeds of the sale or redemption of such securities,
in the foreign currencies in which such securities are denominated. Under
certain circumstances, such as where the Adviser believes that the
applicable exchange rate is unfavorable at the time the currencies are
received or the Adviser anticipates, for any other reason, that the
exchange rate will improve, the Fund may hold such currencies for an
indefinite period of time. 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.
Forward Contracts
The Fund may enter into contracts for the purchase or sale of a specific
currency at a future date at a price set at the time the contract is
entered into (a "Forward Contract"), for hedging purposes (e.g., to
protect its current or intended investments from fluctuations in currency
exchange rates) as well as for non-hedging purposes.
A Forward Contract to sell a currency may be entered into where the
Fund seeks to protect against an anticipated increase in the exchange
rate for a specific currency which could reduce the dollar value of
portfolio securities denominated in such currency. Conversely, the Fund
may enter into a Forward Contract to purchase a given currency to protect
against a projected increase in the dollar value of securities
denominated in such currency which the Fund intends to acquire.
If a hedging transaction in Forward Contracts is successful, the
decline in the dollar value of portfolio securities or the increase in
the dollar cost of securities to be acquired may be offset, at least in
part, by profits on the Forward Contract. Nevertheless, by entering into
such Forward Contracts, the Fund may be required to forego all or a
portion of the benefits which otherwise could have been obtained from
favorable movements in exchange rates. The Fund does not presently intend
to hold Forward Contracts entered into until maturity, at which time it
would be required to deliver or accept delivery of the underlying
currency, but will seek in most instances to close out positions in such
Contracts by entering into offsetting transactions, which will serve to
fix the Fund's profit or loss based upon the value of the Contracts at
the time the offsetting transaction is executed.
The Fund will also enter into transactions in Forward Contracts for
other than hedging purposes, which presents greater profit potential but
also involves increased risk. For example, the Fund may purchase a given
foreign currency through a Forward Contract if, in the judgment of the
Adviser, the value of such currency is expected to rise relative to the
U.S. dollar. Conversely, the Fund may sell the currency through a Forward
Contract if the Adviser believes that its value will decline relative to
the dollar.
The Fund will profit if the anticipated movements in foreign currency
exchange rates occur, which will increase its gross income. Where
exchange rates do not move in the direction or to the extent anticipated,
however, the Fund may sustain losses which will reduce its gross income.
Such transactions, therefore, could be considered speculative and could
involve significant risk of loss.
The use by the Fund of Forward Contracts also involves the risks
described under the caption "Special Risk Factors -- Options, Futures,
Forwards, Swaps and Other Derivative Transactions" in this Appendix.
Futures Contracts
The Fund may purchase and sell futures contracts ("Futures Contracts") on
stock indices, foreign currencies, interest rates or interest-rate
related instruments, indices of foreign currencies or commodities. The
Fund may also purchase and sell Futures Contracts on foreign or domestic
fixed income securities or indices of such securities including municipal
bond indices and any other indices of foreign or domestic fixed income
securities that may become available for trading. Such investment
strategies will be used for hedging purposes and for non-hedging
purposes, subject to applicable law.
A Futures Contract is a bilateral agreement providing for the purchase
and sale of a specified type and amount of a financial instrument,
foreign currency or commodity, or for the making and acceptance of a cash
settlement, at a stated time in the future for a fixed price. By its
terms, a Futures Contract provides for a specified settlement month in
which, in the case of the majority of commodities, interest rate and
foreign currency futures contracts, the underlying commodities, fixed
income securities or currency are delivered by the seller and paid for by
the purchaser, or on which, in the case of index futures contracts and
certain interest rate and foreign currency futures contracts, the
difference between the price at which the contract was entered into and
the contract's closing value is settled between the purchaser and seller
in cash. Futures Contracts differ from options in that they are bilateral
agreements, with both the purchaser and the seller equally obligated to
complete the transaction. Futures Contracts call for settlement only on
the expiration date and cannot be "exercised" at any other time during
their term.
The purchase or sale of a Futures Contract differs from the purchase
or sale of a security or the purchase of an option in that no purchase
price is paid or received. Instead, an amount of cash or cash
equivalents, which varies but may be as low as 5% or less of the value of
the contract, must be deposited with the broker as "initial margin."
Subsequent payments to and from the broker, referred to as "variation
margin," are made on a daily basis as the value of the index or
instrument underlying the Futures Contract fluctuates,
Part II -- C-9
<PAGE>
making positions in the Futures Contract more or less valuable -- a
process known as "mark-to-market."
Purchases or sales of stock index futures contracts are used to
attempt to protect the Fund's current or intended stock investments from
broad fluctuations in stock prices. For example, the Fund may sell stock
index futures contracts in anticipation of or during a market decline to
attempt to offset the decrease in market value of the Fund's securities
portfolio that might otherwise result. If such decline occurs, the loss
in value of portfolio securities may be offset, in whole or part, by
gains on the futures position. When the Fund is not fully invested in the
securities market and anticipates a significant market advance, it may
purchase stock index futures contracts in order to gain rapid market
exposure that may, in part or entirely, offset increases in the cost of
securities that the Fund intends to purchase. As such purchases are made,
the corresponding positions in stock index futures contracts will be
closed out. In a substantial majority of these transactions, the Fund
will purchase such securities upon termination of the futures position,
but under unusual market conditions, a long futures position may be
terminated without a related purchase of securities.
Interest rate Futures Contracts may be purchased or sold to attempt to
protect against the effects of interest rate changes on the Fund's
current or intended investments in fixed income securities. For example,
if the Fund owned long-term bonds and interest rates were expected to
increase, the Fund might enter into interest rate futures contracts for
the sale of debt securities. Such a sale would have much the same effect
as selling some of the long-term bonds in the Fund's portfolio. If
interest rates did increase, the value of the debt securities in the
portfolio would decline, but the value of the Fund's interest rate
futures contracts would increase at approximately the same rate, subject
to the correlation risks described below, thereby keeping the net asset
value of the Fund from declining as much as it otherwise would have.
Similarly, if interest rates were expected to decline, interest rate
futures contracts may be purchased to hedge in anticipation of subsequent
purchases of long-term bonds at higher prices. Since the fluctuations in
the value of the interest rate futures contracts should be similar to
that of long-term bonds, the Fund could protect itself against the
effects of the anticipated rise in the value of long-term bonds without
actually buying them until the necessary cash became available or the
market had stabilized. At that time, the interest rate futures contracts
could be liquidated and the Fund's cash reserves could then be used to
buy long-term bonds on the cash market. The Fund could accomplish similar
results by selling bonds with long maturities and investing in bonds with
short maturities when interest rates are expected to increase. However,
since the futures market may be more liquid than the cash market in
certain cases or at certain times, the use of interest rate futures
contracts as a hedging technique may allow the Fund to hedge its interest
rate risk without having to sell its portfolio securities.
The Fund may purchase and sell foreign currency futures contracts for
hedging purposes, to attempt to protect its current or intended
investments from fluctuations in currency exchange rates. Such
fluctuations could reduce the dollar value of portfolio securities
denominated in foreign currencies, or increase the dollar cost of
foreign-denominated securities to be acquired, even if the value of such
securities in the currencies in which they are denominated remains
constant. The Fund may sell futures contracts on a foreign currency, for
example, where it holds securities denominated in such currency and it
anticipates a decline in the value of such currency relative to the
dollar. In the event such decline occurs, the resulting adverse effect on
the value of foreign-denominated securities may be offset, in whole or in
part, by gains on the futures contracts.
Conversely, the Fund could protect against a rise in the dollar cost
of foreign-denominated securities to be acquired by purchasing futures
contracts on the relevant currency, which could offset, in whole or in
part, the increased cost of such securities resulting from a rise in the
dollar value of the underlying currencies. Where the Fund purchases
futures contracts under such circumstances, however, and the prices of
securities to be acquired instead decline, the Fund will sustain losses
on its futures position which could reduce or eliminate the benefits of
the reduced cost of portfolio securities to be acquired.
The use by the Fund of Futures Contracts also involves the risks
described under the caption "Special Risk Factors -- Options, Futures,
Forwards, Swaps and Other Derivative Transactions" in this Appendix.
Indexed Securities
The Fund may purchase securities with principal and/or interest payments
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. The Fund
may also purchase indexed deposits with similar characteristics.
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
Part II -- C-10
<PAGE>
relative to each other. Certain indexed securities may expose the Fund to
the risk of loss of all or a portion of the principal amount of its
investment and/or the interest that might otherwise have been earned on
the amount invested.
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-sponsored entities.
Inverse Floating Rate Obligations
The Fund may invest in so-called "inverse floating rate obligations" or
"residual interest bonds" or other obligations or certificates relating
thereto structured to have similar features. In creating such an
obligation, a municipality issues a certain amount of debt and pays a
fixed interest rate. Half of the debt is issued as variable rate short
term obligations, the interest rate of which is reset at short intervals,
typically 35 days. The other half of the debt is issued as inverse
floating rate obligations, the interest rate of which is calculated based
on the difference between a multiple of (approximately two times) the
interest paid by the issuer and the interest paid on the short-term
obligation. Under usual circumstances, the holder of the inverse floating
rate obligation can generally purchase an equal principal amount of the
short term obligation and link the two obligations in order to create
long-term fixed rate bonds. Because the interest rate on the inverse
floating rate obligation is determined by subtracting the short-term rate
from a fixed amount, the interest rate will decrease as the short-term
rate increases and will increase as the short-term rate decreases. The
magnitude of increases and decreases in the market value of inverse
floating rate obligations may be approximately twice as large as the
comparable change in the market value of an equal principal amount of
long-term bonds which bear interest at the rate paid by the issuer and
have similar credit quality, redemption and maturity provisions.
Investment In Other Investment Companies
The Fund may invest in other investment companies. Such investment may
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.
Lending of Portfolio Securities
The Fund may seek to increase its income by lending portfolio securities.
Such loans will usually be made only to member firms of the New York
Stock Exchange (the "Exchange") (and subsidiaries thereof) and member
banks of the Federal Reserve System, and would be required to be secured
continuously by collateral in cash, an irrevocable letter of credit or
United States ("U.S.") Treasury securities maintained on a current basis
at an amount at least equal to the market value of the securities loaned.
The Fund would have the right to call a loan and obtain the securities
loaned at any time on customary industry settlement notice (which will
not usually exceed five business days). For the duration of a loan, the
Fund would continue to receive the equivalent of the interest or
dividends paid by the issuer on the securities loaned. The Fund would
also receive a fee from the borrower or compensation from the investment
of the collateral, less a fee paid to the borrower (if the collateral is
in the form of cash). The Fund would not, however, have the right to vote
any securities having voting rights during the existence of the loan, but
the Fund 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 can be earned currently from securities
loans of this type justifies the attendant risk.
Leveraging Transactions
The Fund may engage in the types of transactions described below, which
involve "leverage" because in each case the Fund receives cash which it
can invest in portfolio securities and has a future obligation to make a
payment. The use of these transactions by the Fund will generally cause
its net asset value to increase or decrease at a greater rate than would
otherwise be the case. Any investment income or gains earned from the
portfolio securities purchased with the proceeds from these transactions
which is in excess of the expenses associated from these transactions can
be expected to cause the value of the Fund's shares and distributions on
the Fund's shares to rise more quickly than would otherwise be the case.
Conversely, if the investment income or gains earned from the portfolio
securities purchased with proceeds from these transactions fail to cover
the expenses associated with these transactions, the value of the Fund's
shares is likely to decrease more quickly than otherwise would be the
case and distributions thereon will be reduced or eliminated. Hence,
these transactions are speculative, involve leverage and increase the
risk of owning or investing in the shares of the Fund. These transactions
also increase the Fund's expenses because of interest and similar
payments and administrative expenses associated with them. Unless the
appreciation and income on assets purchased with proceeds from these
transactions exceed the costs associated with them, the use of these
transactions by a Fund would diminish the investment performance of the
Fund compared with what it would have been without using these
transactions.
Bank Borrowings: The Fund may borrow money for investment purposes from
banks and invest the proceeds in accordance with its investment
objectives and policies.
Part II -- C-11
<PAGE>
Mortgage "Dollar Roll" Transactions: The Fund may enter into mortgage
"dollar roll" transactions pursuant to which it sells mortgage-backed
securities for delivery in the future and simultaneously contracts to
repurchase substantially similar securities on a specified future date.
During the roll period, the Fund foregoes principal and interest paid on
the mortgage-backed securities. The Fund is compensated for the lost
interest by the difference between the current sales price and the lower
price for the future purchase (often referred to as the "drop") as well
as by the interest earned on, and gains from, the investment of the cash
proceeds of the initial sale. The Fund may also be compensated by receipt
of a commitment fee.
If the income and capital gains from the Fund's investment of the cash
from the initial sale do not exceed the income, capital appreciation and
gain or loss that would have been realized on the securities sold as part
of the dollar roll, the use of this technique will diminish the
investment performance of the Fund compared with what the performance
would have been without the use of the dollar rolls. Dollar roll
transactions involve the risk that the market value of the securities the
Fund is required to purchase may decline below the agreed upon repurchase
price of those securities. If the broker/dealer to whom the Fund sells
securities becomes insolvent, the Fund's right to purchase or repurchase
securities may be restricted. Successful use of mortgage dollar rolls may
depend upon the Adviser's ability to correctly predict interest rates and
prepayments. There is no assurance that dollar rolls can be successfully
employed.
Reverse Repurchase Agreements: The Fund may enter into reverse repurchase
agreements. In a reverse repurchase agreement, the Fund will sell
securities and receive cash proceeds, subject to its agreement to
repurchase the securities at a later date for a fixed price reflecting a
market rate of interest. There is a risk that the counter party to a
reverse repurchase agreement will be unable or unwilling to complete the
transaction as scheduled, which may result in losses to the Fund. The
Fund will invest the proceeds received under a reverse repurchase
agreement in accordance with its investment objective and policies.
Options
The Fund may invest in the following types of options, which involves the
risks described under the caption "Special Risk Factors -- Option,
Futures, Forwards, Swaps and Other Derivative Transactions" in this
Appendix:
Options on Foreign Currencies: The Fund may purchase and write options on
foreign currencies for hedging and non-hedging purposes in a manner
similar to that in which Futures Contracts on foreign currencies, or
Forward Contracts, will be utilized. For example, a decline in the dollar
value of a foreign currency in which portfolio securities are denominated
will reduce the dollar value of such securities, even if their value in
the foreign currency remains constant. In order to protect against such
diminutions in the value of portfolio securities, the Fund may purchase
put options on the foreign currency. If the value of the currency does
decline, the Fund will have the right to sell such currency for a fixed
amount in dollars and will thereby offset, in whole 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 effect of the adverse movements in exchange rates. As in
the case of other types of options, however, the benefit to the Fund
deriving from purchases of foreign currency options will be reduced by
the amount of the premium and related transaction costs. In addition,
where currency exchange rates do not move in the direction or to the
extent anticipated, the Fund could sustain losses on transactions in
foreign currency options which would require it to forego a portion or
all of the benefits of advantageous changes in such rates. The Fund may
write options on foreign currencies for the same types of hedging
purposes. For example, where the Fund anticipates a decline in the dollar
value of foreign-denominated securities due to adverse fluctuations in
exchange rates it could, instead of purchasing a put option, write a call
option on the relevant currency. If the expected decline occurs, the
option will most likely not be exercised, and the diminution in value of
portfolio securities will be offset by the amount of the premium received
less related transaction costs. As in the case of other types of options,
therefore, the writing of Options on Foreign Currencies will constitute
only a partial hedge.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, the
Fund could write a put option on the relevant currency which, if rates
move in the manner projected, will expire unexercised and allow the Fund
to hedge such increased cost up to the amount of the premium. Foreign
currency options written by the Fund will generally be covered in a
manner similar to the covering of other types of options. As in the case
of other types of options, however, the writing of a foreign currency
option will constitute only a partial hedge up to the amount of the
premium, and only if rates move in the expected direction. If this does
not occur, the option may be exercised and the Fund would be required to
purchase or sell the underlying currency at a loss which may not be
offset by the amount of the premium. Through the writing of options on
foreign currencies, the Fund also may be required to forego all or a
portion of the benefits which might otherwise have been obtained from
favorable movements in exchange rates. The use of foreign currency
options for non-hedging purposes, like the use of other types of
derivatives for such purposes, presents greater profit potential but also
significant risk of loss and could be considered speculative.
Options on Futures Contracts: The Fund also may purchase and write
options to buy or sell those Futures Contracts in which it may invest
("Options on Futures Contracts") as described above under "Futures
Contracts." Such investment strategies will be
Part II -- C-12
<PAGE>
used for hedging purposes and for non-hedging purposes, subject to
applicable law.
An Option on a Futures Contract provides the holder with the right to
enter into a "long" position in the underlying Futures Contract, in the
case of a call option, or a "short" position in the underlying Futures
Contract, in the case of a put option, at a fixed exercise price up to a
stated expiration date or, in the case of certain options, on such date.
Upon exercise of the option by the holder, the contract market
clearinghouse establishes a corresponding short position for the writer
of the option, in the case of a call option, or a corresponding long
position in the case of a put option. In the event that an option is
exercised, the parties will be subject to all the risks associated with
the trading of Futures Contracts, such as payment of initial and
variation margin deposits. In addition, the writer of an Option on a
Futures Contract, unlike the holder, is subject to initial and variation
margin requirements on the option position.
A position in an Option on a Futures Contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase
or sale transaction, subject to the availability of a liquid secondary
market, which is the purchase or sale of an option of the same type
(i.e., the same exercise price and expiration date) as the option
previously purchased or sold. The difference between the premiums paid
and received represents the trader's profit or loss on the transaction.
Options on Futures Contracts that are written or purchased by the Fund
on U.S. exchanges are traded on the same contract market as the
underlying Futures Contract, and, like Futures Contracts, are subject to
regulation by the Commodity Futures Trading Commission (the "CFTC") and
the performance guarantee of the exchange clearinghouse. In addition,
Options on Futures Contracts may be traded on foreign exchanges. The Fund
may cover the writing of call Options on Futures Contracts (a) through
purchases of the underlying Futures Contract, (b) through ownership of
the instrument, or instruments included in the index, underlying the
Futures Contract, or (c) through the holding of a call on the same
Futures Contract and in the same principal amount as the call written
where the exercise price of the call held (i) is equal to or less than
the exercise price of the call written or (ii) is greater than the
exercise price of the call written if the Fund owns liquid and
unencumbered assets equal to the difference. The Fund may cover the
writing of put Options on Futures Contracts (a) through sales of the
underlying Futures Contract, (b) through the ownership of liquid and
unencumbered assets 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 (i) is equal to or
greater than the exercise price of the put written or where the exercise
price of the put held (ii) is less than the exercise price of the put
written if the Fund owns liquid and unencumbered assets equal to the
difference. Put and call Options on Futures Contracts may also be covered
in such other manner as may be in accordance with the rules of the
exchange on which the option is traded and applicable laws and
regulations. Upon the exercise of a call Option on a Futures Contract
written by the Fund, the Fund will be required to sell the underlying
Futures Contract which, if the Fund has covered its obligation through
the purchase of such Contract, will serve to liquidate its futures
position. Similarly, where a put Option on a Futures Contract written by
the Fund is exercised, the Fund will be required to purchase the
underlying Futures Contract which, if the Fund has covered its obligation
through the sale of such Contract, will close out its futures position.
The writing of a call option on a Futures Contract for hedging
purposes constitutes a partial hedge against declining prices of the
securities or other instruments required to be delivered under the terms
of the Futures Contract. If the futures price at expiration of the option
is below the exercise price, the Fund will retain the full amount of the
option premium, less related transaction costs, which provides a partial
hedge against any decline that may have occurred in the Fund's portfolio
holdings. The writing of a put option on a Futures Contract constitutes a
partial hedge against increasing prices of the securities or other
instruments required to be delivered under the terms of the Futures
Contract. If the futures price at expiration of the option is higher than
the exercise price, the Fund will retain the full amount of the option
premium which provides a partial hedge against any increase in the price
of securities which the Fund intends to purchase. If a put or call option
the Fund has written is exercised, the Fund will incur a loss which will
be reduced by the amount of the premium it receives. Depending on the
degree of correlation between changes in the value of its portfolio
securities and the changes in the value of its futures positions, the
Fund's losses from existing Options on Futures Contracts may to some
extent be reduced or increased by changes in the value of portfolio
securities.
The Fund may purchase Options on Futures Contracts for hedging
purposes instead of purchasing or selling the underlying Futures
Contracts. For example, where a decrease in the value of portfolio
securities is anticipated as a result of a projected market-wide decline
or changes in interest or exchange rates, the Fund could, in lieu of
selling Futures Contracts, purchase put options thereon. In the event
that such decrease occurs, it may be offset, in whole or in part, by a
profit on the option. Conversely, where it is projected that the value of
securities to be acquired by the Fund will increase prior to acquisition,
due to a market advance or changes in interest or exchange rates, the
Fund could purchase call Options on Futures Contracts than purchasing the
underlying Futures Contracts.
Options on Securities: The Fund may write (sell) covered put and call
options, and purchase put and call options, on securities. Call and put
options written by the Fund may be covered in the manner set forth below.
A call option written by the Fund is "covered" if the Fund owns the
security underlying the call or has an absolute and immediate right to
acquire that security without additional cash consider-
Part II -- C-13
<PAGE>
ation (or for additional cash consideration if the Fund owns liquid and
unencumbered assets equal to the amount of cash consideration) 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 Fund owns liquid and unencumbered assets equal to the
difference. A put option written by the Fund is "covered" if the Fund
owns liquid and unencumbered assets with a value equal to the exercise
price, or else holds a put on the same security and in the same principal
amount as the put written where the exercise price of the put held is
equal to or greater than the exercise price of the put written or where
the exercise price of the put held is less than the exercise price of the
put written if the Fund owns liquid and unencumbered assets equal to the
difference. Put and call options written by the Fund may also be covered
in such other manner as may be in accordance with the requirements of the
exchange on which, or the counterparty with which, the option is traded,
and applicable laws and regulations. If the writer's obligation is not so
covered, it is subject to the risk of the full change in value of the
underlying security from the time the option is written until exercise.
Effecting a closing transaction in the case of a written call option
will permit the Fund to write another call option on the underlying
security with either a different exercise price or expiration date or
both, or in the case of a written put option will permit the Fund to
write another put option to the extent that the Fund owns liquid and
unencumbered assets. Such transactions permit the Fund to generate
additional premium income, which will partially offset declines in the
value of portfolio securities or increases in the cost of securities to
be acquired. Also, effecting a closing transaction will permit the cash
or proceeds from the concurrent sale of any securities subject to the
option to be used for other investments of the Fund, provided that
another option on such security is not written. If the Fund desires to
sell a particular security from its portfolio on which it has written a
call option, it will effect a closing transaction in connection with the
option prior to or concurrent with the sale of the security.
The Fund will realize a profit from a closing transaction if the
premium paid in connection with the closing of an option written by the
Fund is less than the premium received from writing the option, or if the
premium received in connection with the closing of an option purchased by
the Fund is more than the premium paid for the original purchase.
Conversely, the Fund will suffer a loss if the premium paid or received
in connection with a closing transaction is more or less, respectively,
than the premium received or paid in establishing the option position.
Because increases in the market price of a call option will generally
reflect increases in the market price of the underlying security, any
loss resulting from the repurchase of a call option previously written by
the Fund is likely to be offset in whole or in part by appreciation of
the underlying security owned by the Fund.
The Fund may write options in connection with buy-and-write
transactions; that is, the Fund may purchase a security and then write a
call option against that security. The exercise price of the call option
the Fund determines to write will depend upon the expected price movement
of the underlying security. The exercise price of a call option may be
below ("in-the-money"), equal to ("at-the-money") or above
("out-of-the-money") the current value of the underlying security at the
time the option is written. Buy-and-write transactions using in-the-money
call options may be used when it is expected that the price of the
underlying security will decline moderately during the option period.
Buy-and-write transactions using out-of-the-money call options may be
used when it is expected that the premiums received from writing the call
option plus the appreciation in the market price of the underlying
security up to the exercise price will be greater than the appreciation
in the price of the underlying security alone. If the call options are
exercised in such transactions, the Fund's maximum gain will be the
premium received by it for writing the option, adjusted upwards or
downwards by the difference between the Fund's purchase price of the
security and the exercise price, less related transaction costs. If the
options are not exercised and the price of the underlying security
declines, the amount of such decline will be offset in part, or entirely,
by the premium received.
The writing of covered put options is similar in terms of risk/
return characteristics to buy-and-write transactions. If the market price
of the underlying security rises or otherwise is above the exercise
price, the put option will expire worthless and the Fund's gain will be
limited to the premium received, less related transaction costs. If the
market price of the underlying security declines or otherwise is below
the exercise price, the Fund may elect to close the position or retain
the option until it is exercised, at which time the Fund will be required
to take delivery of the security at the exercise price; the Fund's return
will be the premium received from the put option minus the amount by
which the market price of the security is below the exercise price, which
could result in a loss. Out-of-the-money, at-the-money and in-the-money
put options may be used by the Fund in the same market environments that
call options are used in equivalent buy-and-write transactions.
The Fund may also write combinations of put and call options on the
same security, known as "straddles" with the same exercise price and
expiration date. By writing a straddle, the Fund undertakes a
simultaneous obligation to sell and purchase the same security in the
event that one of the options is exercised. If the price of the security
subsequently rises sufficiently above the exercise price to cover the
amount of the premium and transaction costs, the call will likely be
exercised and the Fund will be required to sell the underlying security
at a below market price. This loss may be offset, however, in whole or
part, by the premiums received on the writing of the two options.
Conversely, if the price of the security declines by a sufficient amount,
the put will likely be exercised. The writing of straddles will likely be
effective, therefore, only where the price of the security
Part II -- C-14
<PAGE>
remains stable and neither the call nor the put is exercised. In those
instances where one of the options is exercised, the loss on the purchase
or sale of the underlying security may exceed the amount of the premiums
received.
By writing a call option, the Fund limits its opportunity to profit
from any increase in the market value of the underlying security above
the exercise price of the option. By writing a put option, the Fund
assumes the risk that it may be required to purchase the underlying
security for an exercise price above its then-current market value,
resulting in a capital loss unless the security subsequently appreciates
in value. The writing of options on securities will not be undertaken by
the Fund solely for hedging purposes, and could involve certain risks
which are not present in the case of hedging transactions. Moreover, even
where options are written for hedging purposes, such transactions
constitute only a partial hedge against declines in the value of
portfolio securities or against increases in the value of securities to
be acquired, up to the amount of the premium.
The Fund may also purchase options for hedging purposes or to increase
its return. Put options may be purchased to hedge against a decline in
the value of portfolio securities. If such decline occurs, the put
options will permit the Fund to sell the securities at the exercise
price, or to close out the options at a profit. By using put options in
this way, the Fund will reduce any profit it might otherwise have
realized in the underlying security by the amount of the premium paid for
the put option and by transaction costs.
The Fund may also purchase call options to hedge against an increase
in the price of securities that the Fund anticipates purchasing in the
future. If such increase occurs, the call option will permit the Fund to
purchase the securities at the exercise price, or to close out the
options at a profit. The premium paid for the call option plus any
transaction costs will reduce the benefit, if any, realized by the Fund
upon exercise of the option, and, unless the price of the underlying
security rises sufficiently, the option may expire worthless to the Fund.
Options on Stock Indices: The Fund may write (sell) covered call and put
options and purchase call and put options on stock indices. In contrast
to an option on a security, an option on a stock index provides the
holder with the right but not the obligation to make or receive a cash
settlement upon exercise of the option, rather than the right to purchase
or sell a security. The amount of this settlement is generally equal to
(i) the amount, if any, by which the fixed exercise price of the option
exceeds (in the case of a call) or is below (in the case of a put) the
closing value of the underlying index on the date of exercise, multiplied
by (ii) a fixed "index multiplier." The Fund may cover written 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 if the Fund owns liquid and unencumbered assets equal
to the amount of cash consideration) 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 Fund owns liquid and unencumbered assets equal to the difference. The
Fund may cover put options on stock indices by owning liquid and
unencumbered assets with a value equal to the exercise price, or by
holding a put on the same stock index and in the same principal amount as
the put written where the exercise price of the put held (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 Fund owns liquid and
unencumbered assets equal to the difference. Put and call options on
stock indices may also be covered in such other manner as may be in
accordance with the rules of the exchange on which, or the counterparty
with which, the option is traded and applicable laws and regulations.
The Fund will receive a premium from writing a put or call option,
which increases the Fund's gross income in the event the option expires
unexercised or is closed out at a profit. If the value of an index on
which the Fund has written a call option falls or remains the same, the
Fund will realize a profit in the form of the premium received (less
transaction costs) that could offset all or a portion of any decline in
the value of the securities it owns. If the value of the index rises,
however, the Fund will realize a loss in its call option position, which
will reduce the benefit of any unrealized appreciation in the Fund's
stock investments. By writing a put option, the Fund assumes the risk of
a decline in the index. To the extent that the price changes of
securities owned by the Fund correlate with changes in the value of the
index, writing covered put options on indices will increase the Fund's
losses in the event of a market decline, although such losses will be
offset in part by the premium received for writing the option.
The Fund may also purchase put options on stock indices to hedge its
investments against a decline in value. By purchasing a put option on a
stock index, the Fund will seek to offset a decline in the value of
securities it owns through appreciation of the put option. If the value
of the Fund's investments does not decline as anticipated, or if the
value of the option does not increase, the Fund's loss will be limited to
the premium paid for the option plus related transaction costs. The
success of this strategy will largely depend on the accuracy of the
correlation between the changes in value of the index and the changes in
value of the Fund's security holdings.
The purchase of call options on stock indices may be used by the Fund
to attempt to reduce the risk of missing a broad market
Part II -- C-15
<PAGE>
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 it the
value of the index does not rise. The purchase of call options on stock
indices when the Fund is substantially fully invested is a form of
leverage, up to the amount of the premium and related transaction costs,
and involves risks of loss and of increased volatility similar to those
involved in purchasing calls on securities the Fund owns.
The index underlying a stock index option may be a "broad-based" index,
such as the Standard & Poor's 500 Index or the New York Stock Exchange
Composite Index, the changes in value of which ordinarily will reflect
movements in the stock market in general. In contrast, certain options
may be based on narrower market indices, such as the Standard & Poor's
100 Index, or on indices of securities of particular industry groups,
such as those of oil and gas or technology companies. A stock index
assigns relative values to the stocks included in the index and the index
fluctuates with changes in the market values of the stocks so included.
The composition of the index is changed periodically.
Reset Options: In certain instances, the Fund may purchase or write
options on U.S. Treasury securities which provide for periodic adjustment
of the strike price and may also provide for the periodic adjustment of
the premium during the term of each such option. Like other types of
options, these transactions, which may be referred to as "reset" options
or "adjustable strike" options grant the purchaser the right to purchase
(in the case of a call) or sell (in the case of a put), a specified type
of U.S. Treasury security at any time up to a stated expiration date (or,
in certain instances, on such date). In contrast to other types of
options, however, the price at which the underlying security may be
purchased or sold under a "reset" option is determined at various
intervals during the term of the option, and such price fluctuates from
interval to interval based on changes in the market value of the
underlying security. As a result, the strike price of a "reset" option,
at the time of exercise, may be less advantageous than if the strike
price had been fixed at the initiation of the option. In addition, the
premium paid for the purchase of the option may be determined at the
termination, rather than the initiation, of the option. If the premium
for a reset option written by the Fund is paid at termination, the Fund
assumes the risk that (i) the premium may be less than the premium which
would otherwise have been received at the initiation of the option
because of such factors as the volatility in yield of the underlying
Treasury security over the term of the option and adjustments made to the
strike price of the option, and (ii) the option purchaser may default on
its obligation to pay the premium at the termination of the option.
Conversely, where the Fund purchases a reset option, it could be required
to pay a higher premium than would have been the case at the initiation
of the option.
"Yield Curve" Options: The Fund may also enter into options on the
"spread," or yield differential, between two fixed income securities, in
transactions referred to as "yield curve" options. In contrast to other
types of options, a yield curve option is based on the difference between
the yields of designated securities, rather than the prices of the
individual securities, and is settled through cash payments. Accordingly,
a yield curve option is profitable to the holder if this differential
widens (in the case of a call) or narrows (in the case of a put),
regardless of whether the yields of the underlying securities increase or
decrease.
Yield curve options may be used for the same purposes as other options
on securities. Specifically, the Fund may purchase or write such options
for hedging purposes. For example, the Fund may purchase a call option on
the yield spread between two securities, if it owns one of the securities
and anticipates purchasing the other security and wants to hedge against
an adverse change in the yield spread between the two securities. The
Fund may also purchase or write yield curve options for other than
hedging purposes (i.e., in an effort to increase its current income) if,
in the judgment of the Adviser, the Fund will be able to profit from
movements in the spread between the yields of the underlying securities.
The trading of yield curve options is subject to all of the risks
associated with the trading of other types of options. In addition,
however, such options present risk of loss even if the yield of one of
the underlying securities remains constant, if the spread moves in a
direction or to an extent which was not anticipated. Yield curve options
written by the Fund will be "covered". A call (or put) option is covered
if the Fund holds another call (or put) option on the spread between the
same two securities and owns liquid and unencumbered assets sufficient to
cover the Fund's net liability under the two options. Therefore, the
Fund's liability for such a covered option is generally limited to the
difference between the amount of the Fund's liability under the option
written by the Fund less the value of the option held by the Fund. Yield
curve options may also be covered in such other manner as may be in
accordance with the requirements of the counterparty with which the
option is traded and applicable laws and regulations. Yield curve options
are traded over-the-counter and because they have been only recently
introduced, established trading markets for these securities have not yet
developed.
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 or 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
Government securities.
Part II -- C-16
<PAGE>
The repurchase agreement provides that in the event the seller fails
to pay the amount agreed upon on the agreed upon delivery date or upon
demand, as the case may be, the Fund will have the right to liquidate the
securities. If at the time the Fund is contractually entitled to exercise
its right to liquidate the securities, the seller is subject to a
proceeding under the bankruptcy laws or its assets are otherwise subject
to a stay order, the Fund's exercise of its right to liquidate the
securities may be delayed and result in certain losses and costs to the
Fund. The Fund has adopted and follows procedures which are intended to
minimize the risks of repurchase agreements. For example, the Fund only
enters into repurchase agreements after the Adviser has determined that
the seller is creditworthy, and the Adviser monitors that seller's
creditworthiness on an ongoing basis. Moreover, under such agreements,
the value of the securities (which are marked to market every business
day) is required to be greater than the repurchase price, and the Fund
has the right to make margin calls at any time if the value of the
securities falls below the agreed upon collateral.
Restricted Securities
The Fund may purchase securities that are not registered under the
Securities Act of 1933, as amended ("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") and commercial paper issued under Section 4(2) of the 1933
Act ("4(2) Paper"). A determination is made, based upon a continuing
review of the trading markets for the Rule 144A security or 4(2) Paper,
whether such security is liquid and thus not subject to the Fund's
limitation on investing 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 and 4(2)
Paper. The Board, however, retains oversight of the liquidity
determinations focusing on factors such as valuation, liquidity and
availability of information. Investing in Rule 144A securities could have
the effect of decreasing the level of liquidity in the Fund to the extent
that qualified institutional buyers become for a time uninterested in
purchasing these Rule 144A securities held in the Fund's portfolio.
Subject to the Fund's 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.
Short Sales
The Fund may seek to hedge investments or realize additional gains
through short sales. The Fund may make short sales, which are
transactions in which the Fund sells a security it does not own, in
anticipation of a decline in the market value of that security. To
complete such a transaction, the Fund must borrow the security to make
delivery to the buyer. The Fund then is obligated to replace the security
borrowed by purchasing it at the market price at the time of replacement.
The price at such time may be more or less than the price at which the
security was sold by the Fund. Until the security is replaced, the Fund
is required to repay the lender any dividends or interest which accrue
during the period of the loan. To borrow the security, the Fund also may
be required to pay a premium, which would increase the cost of the
security sold. The net proceeds of the short sale will be retained by the
broker, to the extent necessary to meet margin requirements, until the
short position is closed out. The Fund also will incur transaction costs
in effecting short sales.
The Fund will incur a loss as a result of the short sale if the price
of the security increases between the date of the short sale and the date
on which the Fund replaces the borrowed security. The Fund will realize a
gain if the price of the security declines between those dates. The
amount of any gain will be decreased, and the amount of any loss
increased, by the amount of the premium, dividends or interest the Fund
may be required to pay in connection with a short sale.
Whenever the Fund engages in short sales, it identifies liquid and
unencumbered assets in an amount that, when combined with the amount of
collateral deposited with the broker connection with the short sale,
equals the current market value of the security sold short.
Short Sales Against The Box
The Fund may make short sales "against the box," i.e., when a security
identical to one owned by the Fund is borrowed and sold short. If the
Fund enters into a short sale against the box, it is required to
segregate securities equivalent in kind and amount to the securities sold
short (or securities convertible or exchangeable into such securities)
and is required to hold such securities while the short sale is
outstanding. The Fund will incur transaction costs, including interest,
in connection with opening, maintaining, and closing short sales against
the box.
Short Term Instruments
The Fund may hold cash and invest in cash equivalents, such as short-term
U.S. Government Securities, commercial paper and bank instruments.
Swaps and Related Derivative Instruments
The Fund may enter into interest rate swaps, currency swaps and other
types of available swap agreements, including swaps on securities,
commodities and indices, and related types of derivatives, such as caps,
collars and floors. A swap is an agreement between two parties pursuant
to which each party agrees to make one or more payments to the other on
regularly scheduled dates over a stated term, based on different interest
rates, currency exchange rates, security or commodity prices, the prices
or rates of other types of financial instruments or assets or the levels
of specified indices. Under a typical swap, one party may agree to pay a
fixed rate or a floating rate determined by reference to a specified
instrument, rate or index, multiplied in each case by a specified amount
(the "notional amount"), while the
Part II -- C-17
<PAGE>
other party agrees to pay an amount equal to a different floating rate
multiplied by the same notional amount. On each payment date, the
obligations of parties are netted, with only the net amount paid by one
party to the other. All swap agreements entered into by the Fund with the
same counterparty are generally governed by a single master agreement,
which provides for the netting of all amounts owed by the parties under
the agreement upon the occurrence of an event of default, thereby
reducing the credit risk to which such party is exposed.
Swap agreements are typically individually negotiated and structured
to provide exposure to a variety of different types of investments or
market factors. Swap agreements may be entered into for hedging or
non-hedging purposes and therefore may increase or decrease the Fund's
exposure to the underlying instrument, rate, asset or index. 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 the Adviser determines it is consistent with the Fund's
investment objective and policies.
For example, the Fund may enter into an interest rate swap in order to
protect against declines in the value of fixed income securities held by
the Fund. In such an instance, the Fund would agree with a counterparty
to pay a fixed rate (multiplied by a notional amount) and the
counterparty would agree to pay a floating rate multiplied by the same
notional amount. If interest rates rise, resulting in a diminution in the
value of the Fund's portfolio, the Fund would receive payments under the
swap that would offset, in whole or part, such diminution in value. The
Fund may also enter into swaps to modify its exposure to particular
markets or instruments, such as a currency swap between the dollar and
another currency which would have the effect of increasing or decreasing
the Fund's exposure to each such currency. The Fund might also enter into
a swap on a particular security, or a basket or index of securities, in
order to gain exposure to the underlying security or securities, as an
alternative to purchasing such securities. Such transactions could be
more efficient or less costly in certain instances than an actual
purchase or sale of the securities.
The Fund may enter into other related types of over-the-counter
derivatives, such as "caps", "floors", "collars" and options on swaps, or
"swaptions", for the same types of hedging or non-hedging purposes. Caps
and floors are similar to swaps, except that one party pays a fee at the
time the transaction is entered into and has no further payment
obligations, while the other party is obligated to pay an amount equal to
the amount by which a specified fixed or floating rate exceeds or is
below another rate (multiplied by a notional amount). Caps and floors,
therefore, are also similar to options. A collar is in effect a
combination of a cap and a floor, with payments made only within or
outside a specified range of prices or rates. A swaption is an option to
enter into a swap agreement. Like other types of options, the buyer of a
swaption pays a non-refundable premium for the option and obtains the
right, but not the obligation, to enter into the underlying swap on the
agreed-upon terms.
The Fund will maintain liquid and unencumbered assets to cover its
current obligations under swap and other over-the-counter derivative
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 liquid and unencumbered assets with a daily value at
least equal to the excess, if any, of the Fund's accrued obligations
under the swap agreement over the accrued amount the Fund is entitled to
receive under the agreement. If the Fund enters into a swap agreement on
other than a net basis, it will maintain liquid and unencumbered assets
with a value equal to the full amount of the Fund's accrued obligations
under the agreement.
The most significant factor in the performance of swaps, caps, floors
and collars is the change in the underlying price, rate or index level
that determines the amount of payments to be made under the arrangement.
If the Adviser 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 would decline, 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, but there can be no assurance that it will be able to do
so.
The uses by the Fund of Swaps and related derivative instruments also
involves the risks described under the caption "Special Risk
Factors -- Options, Futures, Forwards, Swaps and Other Derivative
Transactions" in this Appendix.
Temporary Borrowings
The Fund may borrow money for temporary purposes (e.g., to meet
redemption requests or settle outstanding purchases of portfolio
securities).
Temporary Defensive Positions
During periods of unusual market conditions when the Adviser believes
that investing for temporary defensive purposes is appropriate, or in
order to meet anticipated redemption requests, a large portion or all of
the assets of the Fund may be invested in cash (including foreign
currency) or cash equivalents, including, but not limited to, obligations
of banks (including certificates of deposit, bankers' acceptances, time
deposits and repurchase agreements), commercial paper, short-term notes,
U.S. Government Securities and related repurchase agreements.
Part II -- C-18
<PAGE>
Warrants
The Fund may invest in warrants. Warrants are securities that give the
Fund the right to purchase equity securities from the issuer at a
specific price (the "strike price") for a limited period of time. The
strike price of warrants typically is much lower than the current market
price of the underlying securities, yet they are subject to similar price
fluctuations. As a result, warrants may be more volatile investments than
the underlying securities and may offer greater potential for capital
appreciation as well as capital loss. Warrants do not entitle a holder to
dividends or voting rights with respect to the underlying securities and
do not represent any rights in the assets of the issuing company. Also,
the value of the warrant does not necessarily change with the value of
the underlying securities and a warrant ceases to have value if it is not
exercised prior to the expiration date. These factors can make warrants
more speculative than other types of investments.
"When-issued" Securities
The Fund may purchase securities on a "when-issued" or on a "forward
delivery" basis which means that the securities 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. In general, the Fund does
not pay for such securities until received, and does not start earning
interest on the securities until the contractual settlement date. While
awaiting delivery of securities purchased on such bases, a Fund will
identify liquid and unencumbered assets equal to its forward delivery
commitment.
Special Risk Factors -- Options, Futures, Forwards, Swaps and Other
Derivative Transactions
Risk of Imperfect Correlation of Hedging Instruments with the Fund's
Portfolio: The Fund's ability effectively to hedge all or a portion of
its portfolio through transactions in derivatives, including options,
Futures Contracts, Options on Futures Contracts, Forward Contracts, swaps
and other types of derivatives depends on the degree to which price
movements in the underlying index or instrument correlate with price
movements in the relevant portion of the Fund's portfolio. In the case of
derivative instruments based on an index, the portfolio will not
duplicate the components of the index, and in the case of derivative
instruments on fixed income securities, the portfolio securities which
are being hedged may not be the same type of obligation underlying such
derivatives. The use of derivatives for "cross hedging" purposes (such as
a transaction in a Forward Contract on one currency to hedge exposure to
a different currency) may involve greater correlation risks.
Consequently, the Fund bears the risk that the price of the portfolio
securities being hedged will not move in the same amount or direction as
the underlying index or obligation.
If the Fund purchases a put option on an index and the index decreases
less than the value of the hedged securities, the Fund would experience a
loss which is not completely offset by the put option. It is also
possible that there may be a negative correlation between the index or
obligation underlying an option or Futures Contract in which the Fund has
a position and the portfolio securities the Fund is attempting to hedge,
which could result in a loss on both the portfolio and the hedging
instrument. It should be noted that stock index futures contracts or
options based upon a narrower index of securities, such as those of a
particular industry group, may present greater risk than options or
futures based on a broad market index. This is due to the fact that a
narrower index is more susceptible to rapid and extreme fluctuations as a
result of changes in the value of a small number of securities.
Nevertheless, where the Fund enters into transactions in options or
futures on narrowly-based indices for hedging purposes, movements in the
value of the index should, if the hedge is successful, correlate closely
with the portion of the Fund's portfolio or the intended acquisitions
being hedged.
The trading of derivatives for hedging purposes entails the additional
risk of imperfect correlation between movements in the price of the
derivative and the price of the underlying index or obligation. The
anticipated spread between the prices may be distorted due to the
differences in the nature of the markets such as differences in margin
requirements, the liquidity of such markets and the participation of
speculators in the derivatives markets. In this regard, trading by
speculators in derivatives has in the past occasionally resulted in
market distortions, which may be difficult or impossible to predict,
particularly near the expiration of such instruments.
The trading of Options on Futures Contracts also entails the risk that
changes in the value of the underlying Futures Contracts will not be
fully reflected in the value of the option. The risk of imperfect
correlation, however, generally tends to diminish as the maturity date of
the Futures Contract or expiration date of the option approaches.
Further, with respect to options on securities, options on stock
indices, options on currencies and Options on Futures Contracts, the Fund
is subject to the risk of market movements between the time that the
option is exercised and the time of performance thereunder. This could
increase the extent of any loss suffered by the Fund in connection with
such transactions.
In writing a covered call option on a security, index or futures
contract, the Fund also incurs the risk that changes in the value of the
instruments used to cover the position will not correlate closely with
changes in the value of the option or underlying index or instrument. For
example, where the Fund covers a call option written on a stock index
through segregation of securities, such securities may not match the
composition of the index, and the Fund may not be fully covered. As a
result, the Fund could be subject to risk of loss in the event of adverse
market movements.
The writing of options on securities, options on stock indices or
Options on Futures Contracts constitutes only a partial hedge against
fluctuations in the value of the Fund's portfolio. When the Fund writes
an option, it will receive premium income in
Part II -- C-19
<PAGE>
return for the holder's purchase of the right to acquire or dispose of
the underlying obligation. In the event that the price of such obligation
does not rise sufficiently above the exercise price of the option, in the
case of a call, or fall below the exercise price, in the case of a put,
the option will not be exercised and the Fund will retain the amount of
the premium, less related transaction costs, which will constitute a
partial hedge against any decline that may have occurred in the Fund's
portfolio holdings or any increase in the cost of the instruments to be
acquired.
Where the price of the underlying obligation moves sufficiently in
favor of the holder to warrant exercise of the option, however, and the
option is exercised, the Fund will incur a loss which may only be
partially offset by the amount of the premium it received. Moreover, by
writing an option, the Fund may be required to forego the benefits which
might otherwise have been obtained from an increase in the value of
portfolio securities or other assets or a decline in the value of
securities or assets to be acquired. In the event of the occurrence of
any of the foregoing adverse market events, the Fund's overall return may
be lower than if it had not engaged in the hedging transactions.
Furthermore, the cost of using these techniques may make it economically
infeasible for the Fund to engage in such transactions.
Risks of Non-Hedging Transactions: The Fund may enter transactions in
derivatives for non-hedging purposes as well as hedging purposes.
Non-hedging transactions in such instru- ments involve greater risks and
may result in losses which may not be offset by increases in the value of
portfolio securities or declines in the cost of securities to be
acquired. The Fund will only write covered options, such that liquid and
unencumbered assets necessary to satisfy an option exercise will be
identified, unless the option is 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. Nevertheless, the method of covering an option employed by
the Fund may not fully protect it against risk of loss and, in any event,
the Fund could suffer losses on the option position which might not be
offset by corresponding portfolio gains. The Fund may also enter into
futures, Forward Contracts or swaps for non-hedging purposes. For
example, the Fund may enter into such a transaction as an alternative to
purchasing or selling the underlying instrument or to obtain desired
exposure to an index or market. In such instances, the Fund will be
exposed to the same economic risks incurred in purchasing or selling the
underlying instrument or instruments. However, transactions in futures,
Forward Contracts or swaps may be leveraged, which could expose the Fund
to greater risk of loss than such purchases or sales. Entering into
transactions in derivatives for other than hedging purposes, therefore,
could expose the Fund to significant risk of loss if the prices, rates or
values of the underlying instruments or indices do not move in the
direction or to the extent anticipated.
With respect to the writing of straddles on securities, the Fund
incurs the risk that the price of the underlying security will not remain
stable, that one of the options written will be exercised and that the
resulting loss will not be offset by the amount of the premiums received.
Such transactions, therefore, create an opportunity for increased return
by providing the Fund with two simultaneous premiums on the same
security, but involve additional risk, since the Fund may have an option
exercised against it regardless of whether the price of the security
increases or decreases.
Risk of a Potential Lack of a Liquid Secondary Market: Prior to exercise
or expiration, a futures or option position can only be terminated by
entering into a closing purchase or sale transaction. This requires a
secondary market for such instruments on the exchange on which the
initial transaction was entered into. While the Fund will enter into
options or futures positions only if there appears to be a liquid
secondary market therefor, there can be no assurance that such a market
will exist for any particular contract at any specific time. In that
event, it may not be possible to close out a position held by the Fund,
and the Fund could be required to purchase or sell the instrument
underlying an option, make or receive a cash settlement or meet ongoing
variation margin requirements. Under such circumstances, if the Fund has
insufficient cash available to meet margin requirements, it will be
necessary to liquidate portfolio securities or other assets at a time
when it is disadvantageous to do so. The inability to close out options
and futures positions, therefore, could have an adverse impact on the
Fund's ability effectively to hedge its portfolio, and could result in
trading losses.
The liquidity of a secondary market in a Futures Contract or option
thereon may be adversely affected by "daily price fluctuation limits,"
established by exchanges, which limit the amount of fluctuation in the
price of a contract during a single trading day. Once the daily limit has
been reached in the contract, no trades may be entered into at a price
beyond the limit, thus preventing the liquidation of open futures or
option positions and requiring traders to make additional margin
deposits. Prices have in the past moved to the daily limit on a number of
consecutive trading days.
The trading of Futures Contracts and options is also subject to the
risk of trading halts, suspensions, exchange or clearinghouse equipment
failures, government intervention, insolvency of a brokerage firm or
clearinghouse or other disruptions of normal trading activity, which
could at times make it difficult or impossible to liquidate existing
positions or to recover excess variation margin payments.
Margin: Because of low initial margin deposits made upon the
establishment of a futures, forward or swap position (certain of which
may require no initial margin deposits) and the writing of an option,
such transactions involve substantial leverage. As a result, relatively
small movements in the price of the contract can result in substantial
unrealized gains or losses. Where the Fund enters into such transactions
for hedging purposes, any losses incurred in connection therewith should,
if the hedging strategy is successful, be offset, in whole or in part, by
increases in the value of securities or other assets held by the Fund or
decreases in the prices of securities or other assets the Fund intends to
acquire. Where the Fund enters into such transactions for other
Part II -- C-20
<PAGE>
than hedging purposes, the margin requirements associated with such
transactions could expose the Fund to greater risk.
Potential Bankruptcy of a Clearinghouse or Broker: When the Fund enters
into transactions in exchange-traded futures or options, it is exposed to
the risk of the potential bankruptcy of the relevant exchange
clearinghouse or the broker through which the Fund has effected the
transaction. In that event, the Fund might not be able to recover amounts
deposited as margin, or amounts owed to the Fund in connection with its
transactions, for an indefinite period of time, and could sustain losses
of a portion or all of such amounts, Moreover, the performance guarantee
of an exchange clearinghouse generally extends only to its members and
the Fund could sustain losses, notwithstanding such guarantee, in the
event of the bankruptcy of its broker.
Trading and Position Limits: The exchanges on which futures and options
are traded may impose limitations governing the maximum number of
positions on the same side of the market and involving the same
underlying instrument which may be held by a single investor, whether
acting alone or in concert with others (regardless of whether such
contracts are held on the same or different exchanges or held or written
in one or more accounts or through one or more brokers). Further, the
CFTC and the various contract markets have established limits referred to
as "speculative position limits" on the maximum net long or net short
position which any person may hold or control in a particular futures or
option contract. An exchange may order the liquidation of positions found
to be in violation of these limits and it may impose other sanctions or
restrictions. The Adviser does not believe that these trading and
position limits will have any adverse impact on the strategies for
hedging the portfolios of the Fund.
Risks of Options on Futures Contracts: The amount of risk the Fund
assumes when it purchases an Option on a Futures Contract is the premium
paid for the option, plus related transaction costs. In order to profit
from an option purchased, however, it may be necessary to exercise the
option and to liquidate the underlying Futures Contract, subject to the
risks of the availability of a liquid offset market described herein. The
writer of an Option on a Futures Contract is subject to the risks of
commodity futures trading, including the requirement of initial and
variation margin payments, as well as the additional risk that movements
in the price of the option may not correlate with movements in the price
of the underlying security, index, currency or Futures Contract.
Risks of Transactions in Foreign Currencies and Over-the-Counter
Derivatives and Other Transactions Not Conducted on U.S.
Exchanges: Transactions in Forward Contracts on foreign currencies, as
well as futures and options on foreign currencies and transactions
executed on foreign exchanges, are subject to all of the correlation,
liquidity and other risks outlined above. In addition, however, such
transactions are subject to the risk of governmental actions affecting
trading in or the prices of currencies underlying such contracts, which
could restrict or eliminate trading and could have a substantial adverse
effect on the value of positions held by the Fund. Further, the value of
such positions could be adversely affected by a number of other complex
political and economic factors applicable to the countries issuing the
underlying currencies.
Further, unlike trading in most other types of instruments, there is
no systematic reporting of last sale information with respect to the
foreign currencies underlying contracts thereon. As a result, the
available information on which trading systems will be based may not be
as complete as the comparable data on which the Fund makes investment and
trading decisions in connection with other transactions. Moreover,
because the foreign currency market is a global, 24-hour market, events
could occur in that market which will not be reflected in the forward,
futures or options market until the following day, thereby making it more
difficult for the Fund to respond to such events in a timely manner.
Settlements of exercises of over-the-counter Forward Contracts or
foreign currency options generally must occur within the country issuing
the underlying currency, which in turn requires traders to accept or make
delivery of such currencies in conformity with any U.S. or foreign
restrictions and regulations regarding the maintenance of foreign banking
relationships, fees, taxes or other charges.
Unlike transactions entered into by the Fund in Futures Contracts and
exchange-traded options, options on foreign currencies, Forward
Contracts, over-the-counter options on securities, swaps and other
over-the-counter derivatives are not traded on contract markets regulated
by the CFTC or (with the exception of certain foreign currency options)
the SEC. To the contrary, such instruments are traded through financial
institutions acting as market-makers, although foreign currency options
are also traded on certain national securities exchanges, such as the
Philadelphia Stock Exchange and the Chicago Board Options Exchange,
subject to SEC regulation. In an over-the-counter trading environment,
many of the protections afforded to exchange participants will not be
available. For example, there are no daily price fluctuation limits, and
adverse market movements could therefore continue to an unlimited extent
over a period of time. Although the purchaser of an option cannot lose
more than the amount of the premium plus related transaction costs, this
entire amount could be lost. Moreover, the option writer and a trader of
Forward Contracts could lose amounts substantially in excess of their
initial investments, due to the margin and collateral requirements
associated with such positions.
In addition, over-the-counter transactions can only be entered into
with a financial institution willing to take the opposite side, as
principal, of the Fund's position unless the institution acts as broker
and is able to find another counterparty willing to enter into the
transaction with the Fund. Where no such counterparty is available, it
will not be possible to enter into a desired transaction. There also may
be no liquid secondary market in the trading of over-the-counter
contracts, and the Fund could be required to retain options purchased or
written, or Forward Contracts or swaps entered into, until exercise,
expiration or maturity. This in turn could limit the Fund's ability to
profit from open positions
Part II -- C-21
<PAGE>
or to reduce losses experienced, and could result in greater losses.
Further, over-the-counter transactions are not subject to the
guarantee of an exchange clearinghouse, and the Fund will therefore be
subject to the risk of default by, or the bankruptcy of, the financial
institution serving as its counterparty. One or more of such institutions
also may decide to discontinue their role as market-makers in a
particular currency or security, thereby restricting the Fund's ability
to enter into desired hedging transactions. The Fund will enter into an
over-the-counter transaction only with parties whose creditworthiness has
been reviewed and found satisfactory by the Adviser.
Options on securities, options on stock indices, Futures Contracts,
Options on Futures Contracts and options on foreign currencies may be
traded on exchanges located in foreign countries. Such transactions may
not be conducted in the same manner as those entered into on U.S.
exchanges, and may be subject to different margin, exercise, settlement
or expiration procedures. As a result, many of the risks of
over-the-counter trading may be present in connection with such
transactions.
Options on foreign currencies traded on national securities exchanges
are within the jurisdiction of the SEC, as are other securities traded on
such exchanges. As a result, many of the protections provided to traders
on organized exchanges will be available with respect to such
transactions. In particular, all foreign currency option positions
entered into on a national securities exchange are cleared and guaranteed
by the Options Clearing Corporation (the "OCC"), thereby reducing the
risk of counterparty default. Further, a liquid secondary market in
options traded on a national securities exchange may be more readily
available than in the over-the-counter market, potentially permitting the
Fund to liquidate open positions at a profit prior to exercise or
expiration, or to limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of the availability of a liquid
secondary market described above, as well as the risks regarding adverse
market movements, margining of options written, the nature of the foreign
currency market, possible intervention by governmental authorities and
the effects of other political and economic events. In addition,
exchange-traded options on foreign currencies involve certain risks not
presented by the over-the-counter market. For example, exercise and
settlement of such options must be made exclusively through the OCC,
which has established banking relationships in applicable foreign
countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures on
exercise and settlement, such as technical changes in the mechanics of
delivery of currency, the fixing of dollar settlement prices or
prohibitions on exercise.
Policies on the Use of Futures and Options on Futures Contracts: In order
to assure that the Fund will not be deemed to be a "commodity pool" for
purposes of the Commodity Exchange Act, regulations of the CFTC require
that the Fund enter into transactions in Futures Contracts, Options on
Futures Contracts and Options on Foreign Currencies traded on a
CFTC-regulated exchange only (i) for bona fide hedging purposes (as
defined in CFTC regulations), or (ii) for non-bona fide hedging purposes,
provided that the aggregate initial margin and premiums required to
establish such non-bona fide hedging positions does not exceed 5% of the
liquidation value of the Fund's assets, after taking into account
unrealized profits and unrealized losses on any such contracts the Fund
has entered into, and excluding, in computing such 5%, the in-the-money
amount with respect to an option that is in-the-money at the time of
purchase.
Part II -- C-22
<PAGE>
PART II -- APPENDIX D
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the
quality of various debt instruments. It should be emphasized, however, that
ratings are not absolute standards of quality. Consequently, debt
instruments with the same maturity, coupon and rating may have different
yields while debt instruments of the same maturity and coupon with
different ratings may have the same yield.
Moody's Investors Service, Inc.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long-term risk 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 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.
Standard & Poor's Ratings Services
AAA: An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
EXTREMELY STRONG.
Part II -- D-1
<PAGE>
AA: An obligation rated AA differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on
the obligation is VERY STRONG.
A: An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
obligations in higher rated categories. However, the obligor's capacity to
meet its financial commitment on the obligation is still STRONG.
BBB: An obligation rated BBB exhibits ADEQUATE protection parameters.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated BB, B, CCC, CC, and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation
and C the highest. While such obligations will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties
or major exposures to adverse conditions.
BB: An obligation rated BB is LESS VULNERABLE to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to the obligor's inadequate capacity to meet its financial commitment
on the obligation.
B: An obligation rated B is MORE VULNERABLE to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet
its financial commitment on the obligation.
CCC: An obligation rated CCC is CURRENTLY VULNERABLE to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation. In the
event of adverse business, financial, or economic conditions the obligor is
not likely to have the capacity to meet its financial commitment on the
obligation.
CC: An obligation rated CC is CURRENTLY HIGHLY VULNERABLE to nonpayment.
C: The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on
this obligation are being continued.
D: An obligation rated D is in payment default. The D rating category is
used when payments on an obligation are not made on the date due even if
the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The D
rating also will be used upon the filing of a bankruptcy petition or the
taking of a similar action if payments on an obligation are jeopardized.
Plus (+) Or Minus (-) The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
r: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk -- such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
Fitch IBCA
AAA: Highest credit quality. AAA ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA: Very high credit quality. AA ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A: High credit quality. A ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher
ratings.
BBB: Good credit quality. BBB ratings indicate that there is currently a
low expectation of credit risk. The capacity for timely payment of
financial commitments is considered adequate, but adverse changes in
circumstances and in economic conditions are more likely to impair this
capacity. This is the lowest investment-grade category.
Speculative Grade
BB: Speculative. BB ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change over
time; however, business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this category are not
investment grade.
Part II -- D-2
<PAGE>
B: Highly speculative. B ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent
upon a sustained, favorable business and economic environment.
CCC, CC, C: High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A CC rating indicates that default of
some kind appears probable. C ratings signal imminent default.
DDD, DD, D: Default. Securities are not meeting current obligations and are
extremely speculative. DDD designates the highest potential for recovery of
amounts outstanding on any securities involved. For U.S. corporates, for
example, DD indicates expected recovery of 50% -- 90% of such outstandings,
and D the lowest recovery potential, i.e. below 50%.
Duff & Phelps Credit Rating Co.
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic
conditions.
A+, A, A-: Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
BBB+, BBB, BBB-: Below-average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may
move up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that obligations will
not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or
into a higher or lower rating grade.
CCC: Well below investment-grade securities. Considerable uncertainty
exists as to timely payment of principal, interest or preferred dividends.
Protection factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD: Defaulted debt-obligations. Issuer failed to meet scheduled principal
and/or interest payments.
DP: Preferred stock with dividend arrearages.
Part II -- D-3
<PAGE>
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617) 954-5000
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
CUSTODIAN AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800) 225-2606
MAILING ADDRESS:
P.O. Box 2281, Boston, MA 02107-9906
INDEPENDENT AUDITORS
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
MFS[RegTM] Global Growth Fund
[MFS LOGO]
500 Boylston Street, Boston, MA 02116 MSG-16-11/98
<PAGE>
MFS SERIES TRUST VIII
MFS(R) STRATEGIC INCOME FUND
MFS(R) GLOBAL GROWTH FUND
PART C
Item 23. Financial Statements and Exhibits
- ------- ---------------------------------
MFS Strategic Income Fund
(a) Financial Statements Included in Part A:
For the period from the fiscal year ended October 31, 1994
to October 31, 1998:
Financial Highlights
Financial Statements Included in Part B:
At October 31, 1998:
Portfolio of Investments*
Statement of Assets and Liabilities*
For the year ended October 31, 1998:
Statement of Operations*
For the two years ended October 31, 1998:
Statement of Changes in Net Assets*
MFS Global Growth Fund
(a) Financial Statements Included in Part A:
For the period from commencement of investment operations on
November 18, 1993 to October 31, 1998:
Financial Highlights
<PAGE>
Financial Statements Included in Part B:
At October 31, 1998:
Portfolio of Investments**
Statement of Assets and Liabilities**
For the year ended October 31, 1998:
Statement of Operations**
For the two years ended October 31, 1998:
Statement of Changes in Net Assets**
- -------------------------
* Incorporated herein by reference to the Fund's Annual Report to Shareholders
dated October 31, 1998, to be filed with the SEC on or before
January 11, 1999.
** Incorporated herein by reference to the Fund's Annual Report to Shareholders
dated October 31, 1998, to be filed with the SEC on or before
January 11, 1999.
(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. (9)
(d) Amendment to Declaration of Trust dated August 24, 1998 to
redesignate MFS World Growth Fund as MFS Global Growth Fund;
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
<PAGE>
World Growth Fund and Massachusetts Financial Services
Company. (1)
(c) Sub-Investment Advisory Agreement dated April 1, 1996 by and
between Massachusetts Financial Services Company and Foreign
& Colonial Management Ltd. (9)
(d) Sub-Investment Advisory Agreement dated April 1, 1996 by and
between Massachusetts Financial Services Company and Foreign
& Colonial Emerging Markets Limited. (13)
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
Funds Agreement between MFD and a bank or NASD affiliate, as
amended on April 11, 1997. (10)
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)
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, 1998 to amend fee schedule. (13)
(c) Exchange Privilege Agreement, dated July 30, 1997. (11)
(d) Loan Agreement by and among the Banks named therein, the MFS
Funds named therein, and The First National Bank of Boston,
dated as of February 21, 1995. (4)
(e) Third Amendment dated February 14, 1997 to Loan Agreement
dated February 21, 1995 by and among the Banks named therein
and The First National Bank of Boston. (12)
<PAGE>
(f) Dividend Disbursing Agent Agreement dated May 6, 1991. (1)
(g) Master Administrative Services Agreement dated March 1,
1998, as amended. (14)
10 Consent of Counsel and Opinion, dated February 23, 1998.
(13)
11 (a) Consent of Ernst & Young LLP - MFS Strategic Income
Fund; filed herewith.
(b) Consent of Deloitte & Touche LLP - MFS Global Growth Fund;
filed herewith.
12 Not Applicable.
13 (a) Master Distribution Plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940 effective
January 1, 1997. (8)
(b) Exhibits as revised May 27, 1998 to Master Distribution
Plan pursuant to Rule 12b-1 under the Investment Company
Act of 1940 to replace those exhibits to the Master
Distribution Plan contained in Exhibit 15(a) above. (3).
14 Financial Data Schedules for each Class of each
Series; filed herewith.
15 Plan pursuant to Rule 18f-3(d) under the Investment Company
Act of 1940 as amended and restated May 27, 1998. (5)
Power of Attorney, dated August 11, 1994. (1)
Power of Attorney, dated February 19, 1998. (13)
- -----------------------------
(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 II (File Nos. 33-7637 and
811-4775) Post-Effective Amendment No. 27 filed with the SEC via EDGAR on
May 29, 1998.
(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 II (File Nos. 33-7637 and
811-4775) Post-Effective Amendment No. 27 filed with the SEC via EDGAR on
May 29, 1998.
(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.
<PAGE>
(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.
(9) Incorporated by reference to the Registrant's Post-Effective Amendment No.
13 filed with the SEC via EDGAR on February 27, 1997.
(10) Incorporated by reference to MFS Series Trust III (File Nos. 2-60491 and
811-2794) Post-Effective Amendment No. 24 filed with the SEC via EDGAR on
May 29, 1997.
(11) Incorporated by reference to Massachusetts Investors Growth Stock Fund
(File Nos. 2-14677 and 811-859) Post-Effective No. 64 filed with the SEC on
October 29, 1997.
(12) Incorporated by reference by MFS Series Trust I (File Nos. 33-7638 and
811-4777) Post-Effective Amendment No. 28 filed with the SEC via EDGAR on
June 26, 1997.
(13) Incorporated by reference to the Registrant's Post-Effective Amendment No.
14 filed with the SEC via EDGAR on February 26, 1998.
(14) Incorporated by reference to Massachusetts Investors Growth Stock Fund
(File Nos. 2-14677 and 811-859) Post-Effective Amendment No. 65 filed with
the SEC via EDGAR on March 30, 1998.
Item 24. Persons Controlled by or under Common Control with Registrant
- ------- -------------------------------------------------------------
Not applicable.
Item 25. 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 26. Business and Other Connections of Investment Adviser
- ------- ----------------------------------------------------
MFS serves as investment adviser to the following open-end Funds comprising
the MFS Family of Funds (except the Vertex Funds mentioned below): Massachusetts
Investors Trust, Massachusetts Investors Growth Stock Fund, MFS Growth
Opportunities Fund, MFS Government Securities Fund, MFS Government Limited
Maturity Fund, MFS Series Trust I (which has thirteen series: MFS Managed
Sectors Fund, MFS Cash Reserve Fund, MFS Global Asset Allocation Fund, MFS
Strategic Growth Fund, MFS Research Growth and Income Fund, MFS Core Growth
Fund, MFS Equity Income Fund, MFS Special Opportunities Fund, MFS Convertible
Securities Fund, MFS Blue Chip Fund, MFS New Discovery Fund, MFS Science and
Technology Fund and MFS Research International Fund), MFS Series Trust II (which
has four series: MFS Emerging Growth Fund, MFS Large Cap Growth Fund, MFS
<PAGE>
Intermediate Income Fund and MFS Charter Income Fund), MFS Series Trust III
(which has three series: MFS High Income Fund, MFS Municipal High Income Fund
and MFS High Yield Opportunities Fund), MFS Series Trust IV (which has four
series: MFS Money Market Fund, MFS Government Money Market Fund, MFS Municipal
Bond Fund and MFS Mid Cap Growth Fund), MFS Series Trust V (which has five
series: MFS Total Return Fund, MFS Research Fund, MFS International
Opportunities Fund, MFS International Strategic Growth Fund and MFS
International Value Fund), MFS Series Trust VI (which has three series: MFS
Global Total Return Fund, MFS Utilities Fund and MFS Global Equity Fund), MFS
Series Trust VII (which has two series: MFS Global Governments Fund and MFS
Capital Opportunities Fund), MFS Series Trust VIII (which has two series: MFS
Strategic Income Fund and MFS Global Growth Fund), MFS Series Trust IX (which
has five series: MFS Bond Fund, MFS Limited Maturity Fund, MFS Municipal Limited
Maturity Fund, MFS Research Bond Fund and MFS Intermediate Investment Grade Bond
Fund), MFS Series Trust X (which has seven series: MFS Government Mortgage Fund,
MFS/Foreign & Colonial Emerging Markets Equity Fund, MFS International Growth
Fund, MFS International Growth and Income Fund, MFS Strategic Value Fund, MFS
Small Cap Value Fund and MFS Emerging Markets Debt Fund), MFS Series Trust XI
(which has four series: MFS Union Standard Equity Fund, Vertex All Cap Fund,
Vertex U.S. All Cap Fund and Vertex Contrarian 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 open-end Funds: MFS
Institutional Trust ("MFSIT") (which has ten series) and MFS Variable Insurance
Trust ("MVI") (which has thirteen series). The principal business address of
each of the aforementioned funds is 500 Boylston Street, Boston, Massachusetts
02116.
In addition, MFS serves as investment adviser to the following closed-end
funds: MFS Municipal Income Trust, MFS Multimarket Income Trust, MFS Government
Markets Income Trust, MFS Intermediate Income Trust, MFS Charter Income Trust
and MFS Special Value Trust (the "MFS Closed-End Funds"). The principal business
address of each of the MFS Closed-End Funds is 500 Boylston Street, Boston,
Massachusetts 02116.
Lastly, MFS serves as investment adviser to MFS/Sun Life Series Trust
("MFS/SL") (which has 26 series), Money Market Variable Account, High Yield
Variable Account, Capital Appreciation Variable Account, Government Securities
Variable
<PAGE>
Account, World Governments Variable Account, Total Return Variable Account and
Managed Sectors Variable Account (collectively, the "Accounts"). The principal
business address of MFS/SL is 500 Boylston Street, Boston, Massachusetts 02116.
The principal business address of each of the aforementioned Accounts is One Sun
Life Executive Park, Wellesley Hills, Massachusetts 02181.
Vertex Investment Management, Inc., a Delaware corporation and a wholly
owned subsidiary of MFS, whose principal business address is 500 Boylston
Street, Boston, Massachusetts 02116 ("Vertex"), serves as investment adviser to
Vertex All Cap Fund, Vertex U.S. All Cap Fund and Vertex Contrarian Fund, each a
series of MFS Series Trust XI. The principal business address of the
aforementioned Funds is 500 Boylston Street, Boston, Massachusetts 02116.
MFS International Ltd. ("MIL"), a limited liability company organized under
the laws of Bermuda and a subsidiary of MFS, whose principal business address is
Cedar House, 41 Cedar Avenue, Hamilton HM12 Bermuda, serves as investment
adviser to and distributor for MFS American Funds known as the MFS Funds after
January 1999 (which will have 11 portfolios as of January 1999): U.S. Equity
Fund, U.S. Emerging Growth Fund, U.S. High Yield Bond Fund, U.S. Dollar Reserve
Fund, Charter Income Fund, U.S. Research Fund, U.S. Strategic Growth Fund,
Global Equity Fund, European Equity Fund and European Corporate Bond Fund) (the
"MIL Funds"). The MIL Funds are organized in Luxembourg and qualify as an
undertaking for collective investments in transferable securities (UCITS). The
principal business address of the MIL Funds is 47, Boulevard Royal, L-2449
Luxembourg.
MIL also serves as investment adviser to and distributor for MFS Meridian
U.S. Government Bond Fund, MFS Meridian Charter Income Fund, MFS Meridian Global
Governments Fund, MFS Meridian U.S. Emerging Growth Fund, MFS Meridian Global
Equity Fund, MFS Meridian Limited Maturity Fund, MFS Meridian Global Growth
Fund, MFS Meridian Money Market Fund, MFS Meridian Global Balanced Fund, MFS
Meridian U.S. Equity Fund, MFS Meridian Research Fund, MFS Meridian U.S. High
Yield Fund, MFS Meridian Emerging Markets Debt Fund, MFS Meridian Strategic
Growth Fund and MFS Meridian Global Asset Allocation Fund and the MFS Meridian
Research International 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 Eversheds, Senator House, 85 Queen Victoria Street, London, England
EC4V 4JL, is involved primarily in marketing and investment research activities
with respect to private clients and the MIL Funds and the MFS Meridian Funds.
<PAGE>
MFS Institutional Advisors (Australia) Ltd. ("MFSI-Australia"), a private
limited company organized under the Corporations Law of New South Wales,
Australia whose current address is Level 27, Australia Square, 264 George
Street, Sydney, NSW2000, Australia, is involved primarily in investment
management and distribution of Australian superannuation unit trusts and acts as
an investment adviser to institutional accounts.
MFS Holdings Australia Pty Ltd. ("MFS Holdings Australia"), a private
limited company organized pursuant to the Corporations Law of New South Wales,
Australia whose current address is Level 27, Australia Square, 264 George
Street, Sydney, NSW2000 Australia, and whose function is to serve primarily as a
holding company.
MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary of MFS,
serves as distributor for the MFS Funds, MVI and MFSIT.
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of MFS, serves
as shareholder servicing agent to the MFS Funds, the MFS Closed-End Funds, MFSIT
and MVI.
MFS Institutional Advisors, Inc. ("MFSI"), a wholly owned subsidiary of
MFS, provides investment advice to substantial private clients.
MFS Retirement Services, Inc. ("RSI"), a wholly owned subsidiary of MFS,
markets MFS products to retirement plans and provides administrative and record
keeping services for retirement plans.
Massachusetts Investment Management Co., Ltd. (MIMCO), a wholly owned
subsidiary of MFS, is a corporation incorporated in Japan. MIMCO, whose address
is Kamiyacho-Mori Building, 3-20, Tranomon 4-chome, Minato-ku, Tokyo, Japan, is
involved in investment management activities.
MIMCO
Jeffrey L. Shames, Arnold D. Scott and Mamoru Ogata are Directors, Shaun
Moran is the Representative Director, Joseph W. Dello Russo is the Statutory
Auditor, Robert DiBella is the President and Thomas B. Hastings is the Assistant
Statutory Auditor.
MFS
The Directors of MFS are Jeffrey L. Shames, Arnold D. Scott, John W.
Ballen, Kevin R. Parke, Thomas J. Cashman, Jr., Joseph W. Dello Russo, William
W. Scott, Donald A. Stewart and John D. McNeil. Mr. Shames is the Chairman
<PAGE>
and Chief Executive Officer, Mr. Ballen is President and Chief Investment
Officer, Mr. Arnold Scott is a Senior Executive Vice President and Secretary,
Mr. William Scott, Mr. Cashman, Mr. Dello Russo and Mr. Parke are Executive Vice
Presidents (Mr. Parke is also Chief Equity Officer), Stephen E. Cavan is a
Senior Vice President, General Counsel and an Assistant Secretary, Robert T.
Burns is a Senior Vice President, Associate General Counsel and an Assistant
Secretary of MFS, and Thomas B. Hastings is a Vice President and Treasurer of
MFS.
Massachusetts Investors Trust
Massachusetts Investors Growth Stock Fund
MFS Growth Opportunities Fund
MFS Government Securities Fund
MFS Series Trust I
MFS Series Trust V
MFS Series Trust VI
MFS Series Trust X
MFS Government Limited Maturity Fund
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James
O. Yost, Ellen M. Moynihan and Mark E. Bradley, Vice Presidents of MFS, are the
Assistant Treasurers, James R. Bordewick, Jr., Senior Vice President and
Associate General Counsel of MFS, is the Assistant Secretary.
MFS Series Trust II
Leslie J. Nanberg, Senior Vice President of MFS, is a Vice President,
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O.
Yost, Ellen M. Moynihan and Mark E. Bradley are the Assistant Treasurers, and
James R. Bordewick, Jr. is the Assistant Secretary.
MFS Government Markets Income Trust
MFS Intermediate Income Trust
Leslie J. Nanberg, Senior Vice President of MFS, is a Vice President,
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O.
Yost, Ellen M. Moynihan and Mark E. Bradley are the Assistant Treasurers, and
James R. Bordewick, Jr. is the Assistant Secretary.
MFS Series Trust III
James T. Swanson, Robert J. Manning and Joan S. Batchelder, Senior Vice
Presidents of MFS, and Bernard Scozzafava, Vice President of MFS, are Vice
Presidents, Stephen E. Cavan is the Secretary, W. Thomas London is the
Treasurer,
<PAGE>
James O. Yost, Ellen M. Moynihan and Mark E. Bradley are the Assistant
Treasurers, and James R. Bordewick, Jr. is the Assistant Secretary.
MFS Series Trust IV
MFS Series Trust IX
Robert A. Dennis and Geoffrey L. Kurinsky, Senior Vice Presidents of MFS,
are Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas London is the
Treasurer, James O. Yost, Ellen M. Moynihan and Mark E. Bradley are the
Assistant Treasurers and James R. Bordewick, Jr. is the Assistant Secretary.
MFS Series Trust VII
Leslie J. Nanberg and Stephen C. Bryant, Senior Vice Presidents of MFS, are
Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas London is the
Treasurer, James O. Yost, Ellen M. Moynihan and Mark E. Bradley are the
Assistant Treasurers and James R. Bordewick, Jr. is the Assistant Secretary.
MFS Series Trust VIII
Jeffrey L. Shames, Leslie J. Nanberg and James T. Swanson and John D.
Laupheimer, Jr., a Senior Vice President of MFS, are Vice Presidents, Stephen E.
Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen
M. Moynihan and Mark E. Bradley are the Assistant Treasurers and James R.
Bordewick, Jr. is the Assistant Secretary.
MFS Municipal Series Trust
Robert A. Dennis is Vice President, Geoffrey L. Schechter, Vice President
of MFS, is Vice President, Stephen E. Cavan is the Secretary, W. Thomas London
is the Treasurer, James O. Yost, Ellen M. Moynihan and Mark E. Bradley are the
Assistant Treasurers and James R. Bordewick, Jr. is the Assistant Secretary.
MFS Variable Insurance Trust
MFS Series Trust XI
MFS Institutional Trust
Jeffrey L. Shames is the President and Chairman, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen M. Moynihan
and Mark E. Bradley are the Assistant Treasurers and James R. Bordewick, Jr. is
the Assistant Secretary.
<PAGE>
MFS Municipal Income Trust
Robert J. Manning is Vice President, Stephen E. Cavan is the Secretary, W.
Thomas London is the Treasurer, James O. Yost, Ellen M. Moynihan and Mark E.
Bradley are the Assistant Treasurers and James R. Bordewick, Jr. is the
Assistant Secretary.
MFS Multimarket Income Trust
MFS Charter Income Trust
Leslie J. Nanberg and James T. Swanson are Vice Presidents, Stephen E.
Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen
M. Moynihan and Mark E. Bradley are the Assistant Treasurers and James R.
Bordewick, Jr. is the Assistant Secretary.
MFS Special Value Trust
Robert J. Manning is Vice President, Stephen E. Cavan is the Secretary, W.
Thomas London is the Treasurer, James O. Yost, Ellen M. Moynihan and Mark E.
Bradley are the Assistant Treasurers and James R. Bordewick, Jr. is the
Assistant Secretary.
MFS/Sun Life Series Trust
John D. McNeil, Chairman and Director of Sun Life Assurance Company of
Canada, is the Chairman, Stephen E. Cavan is the Secretary, W. Thomas London is
the Treasurer, James O. Yost, Ellen M. Moynihan and Mark E. Bradley are the
Assistant Treasurers and James R. Bordewick, Jr. is the Assistant Secretary.
Money Market Variable Account
High Yield Variable Account
Capital Appreciation Variable Account
Government Securities Variable Account
Total Return Variable Account
World Governments Variable Account
Managed Sectors Variable Account
John D. McNeil is the Chairman, Stephen E. Cavan is the Secretary, and
James R. Bordewick, Jr. is the Assistant Secretary.
MIL Funds
Richard B. Bailey, John A. Brindle, Richard W. S. Baker, Arnold D. Scott,
Jeffrey L. Shames and William F. Waters are Directors, Stephen E. Cavan is the
<PAGE>
Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen M. Moynihan
and Mark E. Bradley are the Assistant Treasurers and James R. Bordewick, Jr. is
the Assistant Secretary.
MFS Meridian Funds
Richard B. Bailey, John A. Brindle, Richard W. S. Baker, Arnold D. Scott,
Jeffrey L. Shames and William F. Waters are Directors, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James R. Bordewick, Jr. is the
Assistant Secretary and James O. Yost, Ellen M. Moynihan and Mark E. Bradley are
the Assistant Treasurers.
Vertex
Jeffrey L. Shames and Arnold D. Scott are the Directors, Jeffrey L. Shames
is the President, Kevin R. Parke and John W. Ballen are Executive Vice
Presidents, John F. Brennan, Jr., and John D. Laupheimer are Senior Vice
Presidents, Brian E. Stack is a Vice President, Joseph W. Dello Russo is the
Treasurer, Thomas B. Hastings is the Assistant Treasurer, Stephen E. Cavan is
the Secretary and Robert T. Burns is the Assistant Secretary.
MIL
Peter D. Laird is President and a Director, Arnold D. Scott, Jeffrey L.
Shames and Thomas J. Cashman, Jr. are Directors, Stephen E. Cavan is a Director,
Senior Vice President and the Clerk, Robert T. Burns is an Assistant Clerk,
Joseph W. Dello Russo, Executive Vice President and Chief Financial Officer of
MFS, is the Treasurer and Thomas B. Hastings is the Assistant Treasurer.
MIL-UK
Peter D. Laird is President and a Director, Thomas J. Cashman, Arnold D.
Scott and Jeffrey L. Shames are Directors, Stephen E. Cavan is a Director and
the Secretary, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer and Robert T. Burns is the Assistant Secretary.
MFSI - Australia
Thomas J. Cashman, Jr. is President and a Director, Graham E. Lenzer, John
A. Gee and David Adiseshan are Directors, Stephen E. Cavan is the Secretary,
Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the Assistant
Treasurer, and Robert T. Burns is the Assistant Secretary.
<PAGE>
MFS Holdings - Australia
Jeffrey L. Shames is the President and a Director, Arnold D. Scott, Thomas
J. Cashman, Jr., and Graham E. Lenzer are Directors, Stephen E. Cavan is the
Secretary, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer, and Robert T. Burns is the Assistant Secretary.
MFD
Arnold D. Scott and Jeffrey L. Shames are Directors, William W. Scott, Jr.,
an Executive Vice President of MFS, is the President, Stephen E. Cavan is the
Secretary, Robert T. Burns is the Assistant Secretary, Joseph W. Dello Russo is
the Treasurer, and Thomas B. Hastings is the Assistant Treasurer.
MFSC
Arnold D. Scott and Jeffrey L. Shames are Directors, Joseph A. Recomendes,
a Senior Vice President and Chief Information Officer of MFS, is Vice Chairman
and a Director, Janet A. Clifford is the President, Joseph W. Dello Russo is the
Treasurer, Thomas B. Hastings is the Assistant Treasurer, Stephen E. Cavan is
the Secretary, and Robert T. Burns is the Assistant Secretary.
MFSI
Thomas J. Cashman, Jr., Jeffrey L. Shames, and Arnold D. Scott are
Directors, Joseph J. Trainor is the President and a Director, Leslie J. Nanberg
is a Senior Vice President, a Managing Director and a Director, Kevin R. Parke
is the Executive Vice President and a Managing Director, George F. Bennett, Jr.,
John A. Gee, Brianne Grady, Joseph A. Kosciuszek and Joseph J. Trainor are
Senior Vice Presidents and Managing Directors, Joseph W. Dello Russo is the
Treasurer, Thomas B. Hastings is the Assistant Treasurer and Robert T. Burns is
the Secretary.
RSI
Arnold D. Scott is the Chairman and a Director, Martin E. Beaulieu is the
President, William W. Scott, Jr. is a Director, Joseph W. Dello Russo is the
Treasurer, Thomas B. Hastings is the Assistant Treasurer, Stephen E. Cavan is
the Secretary and Robert T. Burns is the Assistant Secretary.
In addition, the following persons, Directors or officers of MFS, have the
affiliations indicated:
<PAGE>
<TABLE>
<S> <C>
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)
</TABLE>
Item 27. Distributors
- ------- ------------
(a) Reference is hereby made to Item 27 above.
(b) Reference is hereby made to Item 27 above; the principal business
address of each of these persons is 500 Boylston Street, Boston,
Massachusetts 02116.
(c) Not applicable.
Item 28. 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
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
</TABLE>
<PAGE>
Item 29. Management Services
- ------- -------------------
Not applicable.
Item 30. Undertakings
- ------- ------------
(a) Not applicable.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of Boston and
The Commonwealth of Massachusetts on the 22nd day of December, 1998.
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 December 22, 1998.
<TABLE>
<CAPTION>
<S> <C>
SIGNATURE TITLE
- --------- -----
STEPHEN E. CAVAN* Principal Executive Officer
- ------------------------------
Stephen E. Cavan
W. THOMAS LONDON* Treasurer (Principal Financial Officer
- ------------------------------ and Principal Accounting Officer)
W. Thomas London
RICHARD B. BAILEY* Trustee
- ------------------------------
Richard B. Bailey
MARSHALL N. COHAN* Trustee
- ------------------------------
Marshall N. Cohan
LAWRENCE H. COHN, M.D.* Trustee
- ------------------------------
Lawrence H. Cohn, M.D.
SIR J. DAVID GIBBONS* Trustee
- ------------------------------
Sir J. David Gibbons
<PAGE>
ABBY M. O'NEILL* Trustee
- ------------------------------
Abby M. O'Neill
WALTER E. ROBB, III* Trustee
- ------------------------------
Walter E. Robb, III
ARNOLD D. SCOTT* Trustee
- ------------------------------
Arnold D. Scott
JEFFREY L. SHAMES* Trustee
- ------------------------------
Jeffrey L. Shames
J. DALE SHERRATT* Trustee
- ------------------------------
J. Dale Sherratt
WARD SMITH* Trustee
- ------------------------------
Ward Smith
</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 (i) 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 and (ii) a Power of Attorney
dated February 19, 1998, incorporated by
reference to Registrant's Post-Effective
Amendment No. 14 filed with the SEC via EDGAR on
February 26, 1998.
<PAGE>
INDEX TO EXHIBITS
-----------------
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO.
- ----------- ---------------------- --------
<S> <C>
1 (d) Amendment to Declaration of Trust dated August 24, 1998
to redesignate MFS World Growth Fund as MFS Global Growth Fund.
11 (a) Consent of Ernst & Young LLP - MFS Strategic Income Fund.
(b) Consent of Deloitte & Touche LLP - MFS Global Growth Fund.
</TABLE>
EXHIBIT NO. 99.1(d)
MFS SERIES TRUST VIII
CERTIFICATION OF AMENDMENT
TO DECLARATION OF TRUST
REDESIGNATION
OF SERIES
Pursuant to Section 6.9 of the Amended and Restated Declaration of Trust
dated February 3, 1995 (the "Declaration"), of MFS Series Trust VIII (the
"Trust"), the Trustees of the Trust hereby redesignate an existing series of
Shares (as defined in the Declaration):
The series designated as MFS World Growth Fund shall be redesignated as
MFS Global Growth Fund.
Pursuant to Section 6.9(i) of the Declaration, this redesignation of series
of Shares shall be effective upon the execution of a majority of the Trustees of
the Trust.
<PAGE>
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 24th day of August, 1998 and further certify, as provided by the
provisions of Section 9.3(d) of the Declaration, that this amendment was duly
adopted by the undersigned in accordance with the second sentence of Section
9.3(a) of the Declaration.
<TABLE>
<S> <C>
RICHARD B. BAILEY WALTER E. ROBB, III
- --------------------------- ---------------------------
Richard B. Bailey Walter E. Robb, III
63 Atlantic Avenue 35 Farm Road
Boston, MA 02110 Sherborn, MA 01770
MARSHALL N. COHAN ARNOLD D. SCOTT
- --------------------------- ---------------------------
Marshall N. Cohan Arnold D. Scott
2524 Bedford Mews Drive 20 Rowes Wharf
Wellington, FL 33414 Boston, MA 02110
LAWRENCE H. COHN JEFFREY L. SHAMES
- --------------------------- ---------------------------
Lawrence H. Cohn Jeffrey L. Shames
45 Singletree Road 38 Lake Avenue
Chestnut Hill, MA 02167 Newton, MA 02159
SIR J. DAVID GIBBONS J. DALE SHERRATT
- --------------------------- ---------------------------
Sir J. David Gibbons J. Dale Sherratt
"Leeward" 86 Farm Road
5 Leeside Drive Sherborn, MA 01770
"Point Shares"
Pembroke, Bermuda HM 05
- --------------------------- ---------------------------
Abby M. O'Neill Ward Smith
200 Sunset Road 36080 Shaker Blvd
Oyster Bay, NY 11771 Hunting Valley, OH 44022
</TABLE>
EXHIBIT NO. 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. 15 to Registration Statement
No. 33-37972 on Form N-1A of our report dated December 9, 1998, on the financial
statements and financial highlights of MFS Strategic Income Fund, a series of
MFS Series Trust VIII, included in the 1998 Annual Report to Shareholders.
ERNST & YOUNG LLP
Ernst & Young LLP
Boston, Massachusetts
December 23, 1998
EXHIBIT NO. 99.11(b)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Post-Effective
Amendment No. 15 to Registration Statement No. 33-37972 of MFS Series Trust VIII
of our report dated December 11, 1998 appearing in the annual report to
shareholders for the year ended October 31, 1998, of MFS Global 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
Deloitte & Touche LLP
Boston, Massachusetts
December 23, 1998
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<TABLE> <S> <C>
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<NAME> MFS SERIES TRUST VIII
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