<PAGE>
PROSPECTUS -- March 1, 1995
Class A Shares of Beneficial Interest
MFS(R) UTILITIES FUND Class B Shares of Beneficial Interest
(A member of the MFS Family of Funds(R)) Class C Shares of Beneficial Interest
- --------------------------------------------------------------------------------
Page
1. Expense Summary........................................................ 2
2. The Fund............................................................... 3
3. Condensed Financial Information........................................ 4
4. Investment Objective and Policies...................................... 5
5. Management of the Fund................................................. 13
6. Information Concerning Shares of the Fund.............................. 14
Purchases........................................................... 14
Exchanges........................................................... 19
Redemptions and Repurchases......................................... 20
Distribution Plans.................................................. 22
Distributions....................................................... 23
Tax Status.......................................................... 23
Net Asset Value..................................................... 24
Description of Shares, Voting Rights and Liabilities................ 24
Performance Information............................................. 25
7. Shareholder Services................................................... 25
Appendix A............................................................. 28
Appendix B............................................................. 29
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
MFS UTILITIES FUND -- 500 Boylston Street, Boston, MA 02116 (617) 954-5000
The investment objective of MFS Utilities Fund (the "Fund") is to seek capital
growth and current income (income above that available from a portfolio invested
entirely in equity securities). The Fund seeks to achieve its objective by
investing at least 65% of its assets under normal market conditions in equity
and debt securities issued by domestic and foreign utility companies (see
"Investment Objective and Policies"). The Fund is a non-diversified series of
MFS Series Trust VI (the "Trust"), an open-end management investment company.
The minimum initial investment generally is $1,000 per account (see "Information
Concerning Shares of the Fund -- Purchases").
The Fund's investment adviser and distributor are Massachusetts Financial
Services Company ("MFS" or the "Adviser") and MFS Fund Distributors, Inc.
("MFD"), respectively, both of which are located at 500 Boylston Street, Boston,
Massachusetts 02116.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
This Prospectus sets forth concisely the information concerning the Trust and
the Fund that a prospective investor ought to know before investing. The Trust,
on behalf of the Fund, has filed with the Securities and Exchange Commission
(the "SEC") a Statement of Additional Information, dated March 1, 1995, which
contains more detailed information about the Trust and the Fund and is
incorporated into this Prospectus by reference. See page 27 for a further
description of the information set forth in the Statement of Additional
Information. A copy of the Statement of Additional Information may be obtained
without charge by contacting the Shareholder Servicing Agent (see back cover for
address and phone number).
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE>
1. EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES: CLASS A CLASS B CLASS C
------- ------- -------
Maximum Initial Sales Charge
Imposed on Purchases of Fund
Shares (as a percentage of
offering price).................... 4.75% 0% 0%
Maximum Contingent Deferred
Sales Charge (as a percentage
of original purchase price or
redemption proceeds, as
applicable)........................ See Below(1) 4.00% 0%
ANNUAL OPERATING EXPENSES OF THE FUND
(AS A PERCENTAGE OF AVERAGE DAILY
NET ASSETS):
Management Fees (after
applicable fee reduction)(2) 0.375% 0.375% 0.375%
Rule 12b-1 Fees 0%(3) 1.00%(4) 1.00%(4)
Other Expenses (after
applicable expense reduction)(5) 0.65% 0.72% 0.65%(6)
Total Operating Expenses (after
applicable expense reduction)(7) 1.025% 2.095% 2.025%
(1) Purchases of $1 million or more are not subject to an initial sales charge;
however, a contingent deferred sales charge ("CDSC") of 1% will be imposed
on such purchases in the event of certain redemption transactions within 12
months following such purchases (see "Purchases").
(2) The Adviser has voluntarily reduced the management fee to 0.375% of average
daily net assets on an annualized basis. This voluntary fee reduction may be
rescinded at any time without notice to shareholders. If the Adviser had not
voluntarily agreed to reduce the management fee, the management fee would
have been 0.70% of the Fund's average daily net assets for the fiscal year
ended October 31, 1994. See "Management of the Fund" in the Prospectus.
(3) The Fund has adopted a Distribution Plan for its Class A shares in
accordance with Rule 12b-1 under the Investment Company Act of 1940, as
amended (the "1940 Act "), which provides that it will pay distribution/
service fees aggregating up to (but not necessarily all of) 0.35% per annum
of the average daily net assets attributable to the Class A shares (see
"Distribution Plans"). Payments will commence under the Class A Distribution
Plan on the date on which the value of the net assets of the Fund
attributable to Class A shares first equal or exceed $50 million. After a
substantial period of time, distribution expenses under this Plan, together
with the initial sales charge, may total more than the maximum sales charge
that would have been permissible if imposed entirely as an initial sales
charge.
(4) The Fund has adopted separate Distribution Plans for its Class B and its
Class C shares in accordance with Rule 12b-1 under the 1940 Act, which
provide that it will pay distribution/service fees aggregating up to (but
not necessarily all of) 1.00% per annum of the average daily net assets
attributable to the Class B shares under the Class B Distribution Plan and
Class C shares under the Class C Distribution Plan (see "Distribution
Plans"). After a substantial period of time, distribution expenses paid
under these Plans, together with any CDSC payable upon redemption of Class B
shares, may total more than the maximum sales charge that would have been
permissible if imposed entirely as an initial sales charge.
(5) The Adviser has voluntarily agreed to pay expenses of each class of the Fund
(except fees paid under the Advisory Agreement and Distribution Plan) that
exceed 0.65%, 0.72% and 0.65% of the Fund's average daily net assets
attributable to Class A, Class B and Class C shares, respectively, on an
annualized basis. Absent this expense arrangement, "Other Expenses" would
have been 0.71%, 0.78% and 0.71% for Class A, Class B and Class C shares,
respectively, of the Fund's average daily net assets attributable to such
shares on an annualized basis.
(6) Except for the shareholder servicing agent fee component, "Other Expenses"
is based on Class A expenses incurred during the fiscal year ended October
31, 1994. The shareholder servicing agent fee component of "Other Expenses"
is a predetermined percentage based upon the Fund's net assets attributable
to each class.
(7) Absent the expense reductions described above, "Total Operating Expenses"
would have been 1.41% for Class A shares, 2.48% for Class B shares, and
2.41% for Class C shares of the Fund's average daily net assets attributable
to such shares on an annualized basis.
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a $1,000
investment in the Fund, assuming (a) 5% annual return and (b) redemption at the
end of each of the time periods indicated (unless otherwise noted):
PERIOD CLASS A CLASS B CLASS C
------ ------- ----------------- -------
(1)
1 year................ $ 53 $ 57 $ 17 $16
3 years............... 65 82 52 50
5 years............... 78 109 89 86
10 years............... 115 166(2) 166(2) 187
(1) Assumes no redemption.
(2) Class B shares convert to Class A shares approximately eight years after
purchase; therefore, years nine and ten reflect Class A expenses.
The purpose of the expense table is to assist investors in understanding the
various costs and expenses that a shareholder of the Fund will bear directly or
indirectly. More complete descriptions of the following Fund expenses are set
forth in the following sections of the Prospectus: (i) varying sales charges on
share purchases -- "Purchases"; (ii) varying CDSCs -- "Purchases"; (iii)
management fees -- "Investment Adviser"; and (iv) Rule 12b- 1 (i.e.,
distribution plan) fees -- "Distribution Plans".
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
2. THE FUND
The Fund is a non-diversified series of the Trust, an open-end management
investment company which was organized as a business trust under the laws of The
Commonwealth of Massachusetts on April 30, 1990. The Trust presently consists of
three series, each of which represents a portfolio with separate investment
policies. Shares of the Fund are continuously sold to the public and the Fund
then uses the proceeds to buy securities for its portfolio. Three classes of
shares of the Fund currently are offered to the general public. Class A shares
are offered at net asset value plus an initial sales charge (or a CDSC in the
case of certain purchases of $1 million or more) and subject to a Distribution
Plan providing for an annual distribution fee and service fee. Class B shares
are offered at net asset value without an initial sales charge but subject to a
CDSC and Distribution Plan providing for an annual distribution fee and service
fee which are greater than the Class A annual distribution fee and service fee;
Class B shares will convert to Class A shares approximately eight years after
purchase. Class C shares are offered at net asset value without an initial sales
charge or a CDSC but subject to a Distribution Plan providing for an annual
distribution fee and service fee which are equal to the Class B annual
distribution fee and service fee. Class C shares do not convert to any other
class of shares of the Fund.
The Trust's Board of Trustees provides broad supervision over the affairs of the
Fund. A majority of the Trustees are not affiliated with the Adviser. The
Adviser is responsible for the management of the Fund's assets and the officers
of the Trust are responsible for the Fund's operations. The Adviser manages the
portfolio from day to day in accordance with the Fund's investment objective and
policies. The selection of investments and the way they are managed depend on
the conditions and trends in the utilities industry and in the economy and the
financial marketplaces of the United States ("U.S.") and various countries of
the world. The Fund also offers to buy back (redeem) its shares from its
shareholders at any time at net asset value less any applicable CDSC.
3. CONDENSED FINANCIAL INFORMATION
The following information should be read in conjunction with the financial
statements included in the Fund's Annual Report to shareholders which are
incorporated by reference into the Statement of Additional Information in
reliance upon the report of Ernst & Young LLP, independent auditors, as experts
in accounting and auditing. From commencement of operations on January 27, 1992
to October 31, 1993, Coopers & Lybrand were the Fund's independent accountants
and were responsible for auditing the Fund's financial statements and issuing
reports for those fiscal years.
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
CLASS A, CLASS B AND CLASS C SHARES
FOR THE PERIOD
FEBRUARY 14,
YEAR YEAR 1992<F4> YEAR PERIOD PERIOD
ENDED ENDED TO ENDED ENDED ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
1994 1993 1992 1994 1993<F5> 1994<F6>
----------- ----------- ----------- ----------- ----------- -----------
CLASS A CLASS A CLASS A CLASS B CLASS B CLASS C
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING
THROUGHOUT THE PERIOD):
Net asset value -- beginning of period $ 7.86 $ 6.68 $ 6.33 $ 7.84 $ 7.83 $ 7.48
------ ------ ------ ------ ------ ------
Income from investment operations -- <F7>
Net investment income<F7> $ 0.33 $ 0.40 $ 0.17 $ 0.25 $ 0.05 $ 0.25
Net realized and unrealized gain (loss)
on investments (0.63) 1.19 0.30 (0.63) 0.01 (0.54)
------ ------ ------ ------ ------ ------
Total from investment operations $(0.30) $ 1.59 $ 0.47 $(0.38) $ 0.06 $(0.29)
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income $(0.35) $(0.38) $(0.12) $(0.27) $(0.05) $(0.20)
From net realized gain on invesments (0.21) (0.03) -- (0.21) -- --
------ ------ ------ ------ ------ ------
Total distributions declared to shareholders $(0.56) $(0.41) $(0.12) $(0.48) $(0.05) $(0.20)
------ ------ ------ ------ ------ ------
Net asset value -- end of period $ 7.00 $ 7.86 $ 6.68 $ 6.98 $ 7.84 $ 6.99
====== ====== ====== ====== ====== ======
TOTAL RETURN<F2> (3.89)% 24.39% 11.02% (4.92)% 0.69% (3.87)%
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA:<F6>
Expenses 0.65 % 0.65% 0.65%<F3> 1.72 % 1.50%<F3> 1.65 %<F3>
Net investment income 4.58 % 4.57% 5.44%<F3> 3.51 % 1.80%<F3> 3.56 %<F3>
Portfolio turnover rate 115 % 119% 63%<F3> 115 % 119%<F3> 115 %<F3>
NET ASSETS -- END OF PERIOD (000 OMITTED) $42,027 $43,423 $12,859 $19,774 $5,412 $2,399
+The investment adviser did not impose a portion of its management fee and
agreed to reduce expenses of the Fund. If these expenses had been incurred
by the Fund, the net investment income per share and the ratios would have been:
Net investment income per share $ 0.28 $ 0.31 $ 0.13 $ 0.20 $ (0.07) $ 0.20
RATIOS (TO AVERAGE DAILY NET ASSETS):
Expenses 1.41 % 1.68% 2.63%<F3> 2.48 % 3.27%<F3> 2.41<F3>%
Net investment income 3.82 % 4.20% 3.46%<F3> 2.74 % 1.53%<F3> 2.80 %<F3>
<FN>
<F1>Not annualized.
<F2>Total returns for Class A shares do not include the applicable sales charge.
If the sales charge had been included, the results would have been lower.
<F3>Annualized.
<F4>For the period from commencement of investment operations, February 14,
1992 to October 31, 1992.
<F5>For the period from the commencement of offering of Class B shares,
September 7, 1993 to October 31, 1993.
<F6>For the period from the commencement of offering of Class C shares,
January 3, 1994 to October 31, 1994.
<F7>Per share data for the period are based on average shares outstanding.
</FN>
</TABLE>
<PAGE>
4. INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE -- The Fund's investment objective is to seek capital
growth and current income (income above that available from a portfolio invested
entirely in equity securities). Any investment involves risk and there can be no
assurance that the Fund will achieve its investment objective.
INVESTMENT POLICIES --
INVESTMENT IN THE UTILITIES INDUSTRY: The Fund will seek to achieve its
objective by investing, under normal circumstances, at least 65% (but up to 100%
at the discretion of the Adviser) of its assets in equity and debt securities of
both domestic and foreign companies in the utilities industry. Equity securities
in which the Fund may invest include common stocks, preferred stocks, securities
convertible into common stocks or preferred stocks, and warrants to purchase
common or preferred stocks. At least 80% of the debt securities held by the Fund
will be rated at the time of investment at least Baa by Moody's Investors
Service, Inc. ("Moody's") or BBB by Standard & Poor's Ratings Group ("S&P") or
by Fitch Investors Service, Inc. ("Fitch") or will be of comparable quality as
determined by the Adviser (see "Risk Factors -- Lower Rated Debt Securities"
below for a discussion of securities rated Baa or BBB and securities rated below
Baa and BBB (commonly referred to as "junk bonds")). The Fund may also invest in
debt and equity securities of issuers in other industries, as discussed below,
although under normal circumstances not more than 35% of the Fund's assets will
be so invested. In addition, the Fund may hold a portion of its assets in cash
and money market instruments.
Companies in the utilities industry include (i) companies engaged in the
manufacture, production, generation, transmission, sale or distribution of
electric, gas or other types of energy, water or other sanitary services and
(ii) companies engaged in telecommunications, including telephone, cellular
telephones, telegraph, satellite, microwave, cable television and other
communications media (but not companies engaged in public broadcasting). The
Adviser deems a particular company to be in the utilities industry if, at the
time of investment, the Adviser determines that at least 50% of the company's
assets or revenues are derived from one or more of those industries.
The portion of the Fund's assets invested in a particular type of utility and in
equity or debt securities will vary in light of changes in interest rates,
market conditions and economic conditions and other factors. The Fund may invest
in foreign securities, including non-dollar denominated securities, although
under normal circumstances it is not expected that more than 35% of the Fund's
assets will be so invested (not including American Depositary Receipts).
Securities that are issued by foreign companies or are denominated in foreign
currencies are subject to the risks outlined below under "Risk Factors --
Foreign Securities." For further information on the principal sectors of the
utilities industry in which the Fund may invest, see Appendix A.
INVESTMENT OUTSIDE THE UTILITIES INDUSTRY: The Fund is permitted to invest
in securities of issuers that are outside the utilities industry, although under
normal circumstances not more than 35% of the Fund's assets will be so invested.
Such investments may include common stocks, debt securities (including municipal
debt securities) and preferred stocks and will be selected to meet the Fund's
investment objective of both capital appreciation and current income. These
securities may be issued by either U.S. or non-U.S. companies. Some of these
issuers may be in industries related to the utilities industry and, therefore,
may be subject to similar risks.
Investments outside the utilities industry may also include securities that are
issued or guaranteed as to principal and interest by the U.S. Government, its
agencies, authorities or instrumentalities ("Government Securities"). Government
Securities include: (1) U.S. Treasury obligations, which differ only in their
interest rates, maturities and times of issuance -- U.S. Treasury bills
(maturities of one year or less), U.S. Treasury notes (maturities of one to 10
years) and U.S. Treasury bonds (generally maturities of greater than 10 years),
all of which are backed by the full faith and credit of the U.S. Government; and
(2) obligations issued or guaranteed by U.S. Government agencies, authorities or
instrumentalities, some of which are backed by the full faith and credit of the
U.S. Treasury, e.g., direct pass-through certificates of the Government
National Mortgage Association ("GNMA"), some of which are supported by the right
of the issuer to borrow from the U.S. Government but are not guaranteed by the
U.S. Government, e.g., obligations of Federal Home Loan Banks, and some of which
are backed only by the credit of the issuer itself, e.g., obligations of the
Student Loan Marketing Association. Government Securities also include interests
in trusts or other entities representing interests in obligations that are
backed by the full faith and credit of the U.S. Government or are issued or
guaranteed by the U.S. Government, its agencies, authorities or
instrumentalities.
The Fund may invest in mortgage pass-through securities that are Government
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 life 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 prepayments. 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 prepayments
generally increase with falling interest rates and decrease with rising interest
rates. Like other fixed income securities, when interest rates rise the value of
a 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. Payment of principal and interest on some mortgage pass-through
securities (but not the market value of the securities themselves) will be
guaranteed by either the full faith and credit of the U.S. Government (in the
case of securities guaranteed by GNMA); or guaranteed by agencies or
instrumentalities of the U.S. Government but not guaranteed by the U.S.
Government (such as the Federal National Mortgage Association ("FNMA") or the
Federal Home Loan Mortgage Corporation ("FHLMC"). See the Statement of
Additional Information for a further discussion of these securities.
When and if available, Government Securities may be purchased at a discount from
face value. However, the Fund does not intend to hold such securities to
maturity for the purpose of achieving potential capital gains, unless current
yields on these securities remain attractive.
Government Securities do not generally involve the credit risks associated with
other types of interest bearing securities, although, as a result, the yields
available from Government Securities are generally lower than the yields
available from corporate interest bearing securities. Like other interest
bearing securities, however, the values of Government Securities change as
interest rates fluctuate as noted under "Risk Factors -- Lower Rated Debt
Securities."
When unfavorable economic or market conditions exist, the Fund may, until
favorable conditions return, invest up to 75% of its assets in cash (or foreign
currency), cash equivalents (such as certificates of deposit, bankers'
acceptances and time deposits), commercial paper, short-term obligations,
repurchase agreements and obligations issued or guaranteed by the U.S. or any
foreign government or any of their agencies, authorities or instrumentalities.
See "Risk Factors" below for further information on investing in the securities
described above as well as the risks associated therewith.
INVESTMENT TECHNIQUES AND ADDITIONAL TYPES OF SECURITIES -- In seeking to
achieve its objective, the Fund may employ the investment techniques noted below
and purchase the securities described below in accordance with the
above-mentioned investment policies.
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements in
order to earn additional income on available cash or as a temporary defensive
measure. Under a repurchase agreement, the Fund acquires securities subject to
the seller's agreement to repurchase at a specified time and price. If the
seller becomes subject to a proceeding under the bankruptcy laws or its assets
are otherwise subject to a stay order, the Fund's right to liquidate the
securities may be restricted (during which time the value of the securities
could decline). As discussed in the Statement of Additional Information, the
Fund has adopted certain procedures intended to minimize any such risk.
LENDING OF SECURITIES: The Fund may seek to increase its income by lending
portfolio securities. Such loans will usually be made to member firms (and
subsidiaries thereof) of the New York Stock Exchange (the "Exchange") and to
member banks of the Federal Reserve System, and would be required to be secured
continuously by collateral in cash, cash equivalents or Government Securities
maintained on a current basis at an amount at least equal to the market value of
the securities loaned. The Fund will continue to collect the equivalent of
interest on the securities loaned and will also receive either interest (through
investment of cash collateral) or a fee (if the collateral is Government
Securities). As with other extensions of credit there are risks of delay in
recovery or even loss of rights in the collateral should the borrower of the
securities fail financially. However, the loans would be made only to entities
deemed by the Adviser 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.
ZERO COUPON BONDS: Debt securities in which the Fund may invest also include
zero coupon bonds. Zero coupon bonds are debt obligations which are issued or
purchased at a significant discount from face value. The discount approximates
the total amount of interest the bonds will accrue and compound over the period
until maturity, at a rate of interest reflecting the market rate of the security
at the time of issuance. Zero coupon bonds do not require the periodic payment
of interest. Such investments benefit the issuer by mitigating its need for cash
to meet debt service, but also require a higher rate of return to attract
investors who are willing to defer receipt of such cash. Such investments may
experience greater volatility in market value due to changes in interest rates
than debt obligations which make regular payments of interest. The Fund will
accrue income on such investments for tax and accounting purposes, which is
distributable to shareholders and which, because no cash is received at the time
of accrual, may require the liquidation of other portfolio securities to satisfy
the Fund's distribution obligations.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES:
The Fund may invest a portion of its assets in collateralized mortgage
obligations ("CMOs") which are debt obligations collateralized by mortgage loans
or mortgage pass-through securities (such collateral is collectively referred to
as "Mortgage Assets"). The Fund may also invest a portion of its assets in
multiclass pass-through securities which are interests in a trust composed of
Mortgage Assets. Payments of principal of and interest on the Mortgage Assets,
and any reinvestment income thereon, provide the funds to pay debt service on
the CMOs or make scheduled distributions on the multiclass pass-through
securities. The Fund may also invest in parallel pay CMOs and Planned
Amortization Class CMOs ("PAC Bonds"). For a further description of CMOs,
multiclass pass-through securities, parallel pay CMOs and PAC Bonds, and the
risks related to transactions therein, see the Statement of Additional
Information.
CORPORATE ASSET-BACKED SECURITIES: The Fund may invest in corporate asset-
backed securities. These securities, issued by trusts and special purpose
corporations, are backed by a pool of assets, such as credit card or automobile
loan receivables, representing the obligations of a number of different parties.
Corporate asset-backed securities present certain risks. For instance, in the
case of credit card receivables, these securities may not have the benefit of
any security interest in the related collateral. Most isssuers 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. Corporate asset-backed securities are often backed by
a pool of assets representing the obligations of a number of different parties.
To lessen the effect of failures by obligors on underlying assets to make
payments, the securities may contain elements of credit support which fall into
two categories: (i) liquidity protection; and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Delinquency or loss in excess
of that anticipated or failure of the credit support could adversely affect the
return on an instrument in such a security.
"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. The Fund does not pay for the
securities until received, and does not start earning interest on the securities
until the contractual settlement date. In order to invest its assets
immediately, while awaiting delivery of securities purchased on such bases, the
Fund will normally invest in cash, short-term money market instruments and high
quality debt securities. Although the Fund does not intend to make such
purchases for speculative purposes, purchases of securities on such bases may
involve more risk than other types of purchases. For additional information
concerning these securities, see the Statement of Additional Information.
INDEXED SECURITIES: The Fund may invest in indexed securities whose value is
linked to foreign currencies, interest rates, commodities, indices, or other
financial indicators. Most indexed securities are short to intermediate term
fixed-income securities whose values at maturity or interest rates rise or fall
according to the change in one or more specified underlying instruments. Indexed
securities may be positively or negatively indexed (i.e., their value may
increase or decrease if the underlying instrument appreciates), and may have
return characteristics similar to direct investments in the underlying
instrument or to one or more options on the underlying instrument. Indexed
securities may be more volatile than the underlying instrument itself.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: The Fund may enter into mortgage
"dollar roll" transactions with selected banks and broker-dealers pursuant to
which the Fund sells mortgage-backed securities for delivery in the future
(generally within 30 days) and simultaneously contracts to repurchase
substantially similar (same type, coupon and maturity) securities on a specified
future date. The Fund will only enter into covered rolls. A "covered roll" is a
specific type of dollar roll for which there is an offsetting cash position or a
cash equivalent security position which matures on or before the forward
settlement date of the dollar roll transaction.
AMERICAN DEPOSITARY RECEIPTS: The Fund may invest in American Depositary
Receipts ("ADRs") which are certificates issued by a U.S. depository (usually a
bank) and represent a specified quantity of shares of an underlying non-U.S.
stock on deposit with a custodian bank as collateral. Because ADRs trade on
United States securities exchanges, the Adviser does not treat them as foreign
securities. However, they are subject to many of the risks of foreign securities
such as changes in exchange rates and more limited information about foreign
issuers (see "Risk Factors" below).
RESTRICTED SECURITIES: The Fund may also purchase securities that are not
registered under the Securities Act of 1933 ("1933 Act") ("restricted
securities"), including those that can be offered and sold to "qualified
institutional buyers" under Rule 144A under the 1933 Act ("Rule 144A
securities"). The Trust's Board of Trustees determines, based upon a continuing
review of the trading markets for a specific Rule 144A security, whether such
security is illiquid and thus subject to a Fund's limitation on investing not
more than 10% of its net assets in illiquid investments, or liquid and thus not
subject to such limitation. The Board of Trustees has adopted guidelines and
delegated to MFS the daily function of determining and monitoring the liquidity
of Rule 144A securities. The Board, however, will retain sufficient oversight
and be ultimately responsible for the determinations. The Board will carefully
monitor the Fund's investments in Rule 144A securities, focusing on such
important factors, among others, as valuation, liquidity and availability of
information. This investment practice could have the effect of increasing the
level of illiquidity in a Fund to the extent that qualified institutional buyers
become for a time uninterested in purchasing Rule 144A securities held in the
Fund's portfolio. Subject to the Fund's 10% limitation on investments in
illiquid investments, the Fund may also invest in restricted securities that may
not be sold under Rule 144A, which presents certain risks. As a result, the Fund
might not be able to sell these securities when the Adviser wishes to do so, or
might have to sell them at less than fair value. In addition, market quotations
are less readily available. Therefore, judgment may at times play a greater role
in valuing these securities than in the case of unrestricted securities.
OPTIONS ON STOCK INDICES: The Fund may write (sell) covered call and put
options and purchase call and put options on domestic and foreign stock indices
("Stock Index Options"). The Fund may write such options for the purpose of
increasing its gross income and protecting its portfolio against declines in the
value of securities it owns or increases in the value of securities to be
acquired. When the Fund writes an option on a stock index, and the value of the
index moves adversely to the holder's position, the option will not be
exercised, and the Fund will either close out the option at a profit or allow it
to expire unexercised. The Fund will thereby retain the amount of the premium,
which will increase its gross income and offset part of the reduced value of
portfolio securities or the increased cost of securities to be acquired. Such
transactions, however, will constitute only partial hedges against adverse price
fluctuations, since any such fluctuations will be offset only to the extent of
the premium received by the Fund for the writing of the option. In addition, if
the value of an underlying index moves adversely to the Fund's option position,
the option may be exercised, and the Fund will experience a loss which may only
be paritally offset by the amount of the premium received.
The Fund may also purchase a Stock Index Option in order to hedge its
investments against a decline in value or to attempt to reduce the risk of
missing a market or industry segment advance. The Fund's possible loss in either
case will be limited to the premium paid for the Stock Index Option, plus
related transaction costs. See "Risk Factors -- Options, Futures Contracts and
Forward Contracts" below and the Statement of Additional Information for further
information on Stock Index Options and the risks associated therewith.
FUTURES CONTRACTS: The Fund may enter into contracts for the purchase or
sale for future delivery of fixed income securities or foreign currencies or
contracts based on indices of foreign currencies or fixed income securities
including municipal bond indices (as such instruments become available for
trading) as well as stock index futures contracts (collectively "Futures
Contracts"). Such transactions may be entered into for hedging purposes, in
order to protect the Fund's current or intended investments from the effects of
changes in interest or exchange rates or declines in the stock market, as well
as for non-hedging purposes to the extent permitted by applicable law. The Fund
will incur brokerage fees when it purchases and sells Futures Contracts, and
will be required to maintain margin deposits. In addition, Futures Contracts
entail risks. Although the Adviser believes that use of such contracts will
benefit the Fund, if its investment judgment about the general direction of
interest, exchange rates or the stock market is incorrect, the Fund's overall
performance may be poorer than if it had not entered into any such contract and
the Fund may realize a loss. The Fund will not enter into any Futures Contract
if immediately thereafter the value of all such Futures Contracts would exceed
50% of the value of its total assets. See "Risk Factors: Options on Futures
Contracts" in the Statement of Additional Information.
OPTIONS ON FUTURES CONTRACTS: The Fund may also purchase and write options
on Futures Contracts ("Options on Futures Contracts") for hedging purposes in
order to protect against declines in the value of portfolio securities or
against increases in the cost of such securities to be acquired, as well as for
non-hedging purposes to the extent permitted by applicable law. Purchases of
Options on Futures Contracts may present less risk in hedging the portfolio of
the Fund than the purchase or sale of the underlying Futures Contracts, since
the potential loss is limited to the amount of the premium paid for the option,
plus related transaction costs. The writing of such options, however, does not
present less risk than the trading of Futures Contracts, and will constitute
only a partial hedge, up to the amount of the premium received, less related
transaction costs. In addition, if an option is exercised, the Fund may suffer a
loss on the transaction. See "Risk Factors: Options on Futures Contracts" in the
Statement of Additional Information.
FORWARD CONTRACTS: The Fund may enter into forward foreign currency exchange
contracts for the purchase or sale of a fixed quantity of a foreign currency at
a future date ("Forward Contracts"). The Fund may enter into Forward Contracts
for hedging purposes as well as for non-hedging purposes (i.e., speculative
purposes). By entering into transactions in Forward Contracts, however, the Fund
may be required to forego the benefits of advantageous changes in exchange rates
and, in the case of Forward Contracts entered into for non-hedging purposes, the
Fund may sustain losses which will reduce its gross income. Such transactions,
therefore, could be considered speculative. Forward Contracts are traded
over-the-counter and not on organized commodities or securities exchanges. As a
result, Forward Contracts operate in a manner distinct from exchange-traded
instruments, and their use involves certain risks beyond those associated with
transactions in Futures Contracts or options traded on exchanges. The Fund may
choose to, or be required to, receive delivery of the foreign currencies
underlying Forward Contracts it has entered into. Under certain circumstances,
such as where the Adviser believes that the applicable exchange rate is
unfavorable at the time the currencies are received or the Adviser anticipates,
for any other reason, that the exchange rate will improve, the Fund may hold
such currencies for an indefinite period of time. The Fund may also enter into a
Forward Contract on one currency to hedge against risk of loss arising from
fluctuations in the value of a second currency (referred to as a "cross hedge")
if, in the judgment of the Adviser, a reasonable degree of correlation can be
expected between movements in the values of the two currencies. The Fund has
established procedures consistent with statements of the SEC and its staff
regarding the use of Forward Contracts by registered investment companies, which
requires use of segregated assets or "cover" in connection with the purchase and
sale of such contracts. See "Investment Objective and Policies -- Foreign
Securities" in the Statement of Additional Information for information on the
risks associated with holding foreign currency. See "Risk Factors" below.
OPTIONS ON FOREIGN CURRENCIES: The Fund may also purchase and write options
on foreign currencies ("Options on Foreign Currencies") for the purpose of
protecting against declines in the dollar value of portfolio securities and
against increases in the dollar cost of securities to be acquired. As in the
case of other types of options, however, the writing of an Option on Foreign
Currency will constitute only a partial hedge, up to the amount of the premium
received, and the Fund may be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The purchase of an
Option on Foreign Currency may constitute an effective hedge against
fluctuations in exchange rates although, in the event of rate movements adverse
to the Fund's position, it may forfeit the entire amount of the premium paid for
the option plus related transaction costs. The Fund may also choose to, or be
required to, receive delivery of the foreign currencies underlying Options on
Foreign Currencies it has entered into. 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. See "Investment Objectives and Policies --
Foreign Securities" in the Statement of Additional Information for information
on the risks associated with holding foreign currency. See "Risk Factors" below.
RISK FACTORS --
UTILITY COMPANIES: Since the Fund's investments are concentrated in utility
securities, the value of the shares of the Fund will be especially affected by
factors peculiar to the utilities industry, and may fluctuate more widely than
the value of shares of a trust that invests in a broader range of industries.
The rates many utility companies may charge their customers are controlled by
governmental regulatory commissions which may result in a delay in the utility
company passing along increases in costs to its customers. Furthermore, there is
no assurance that regulatory authorities will, in the future, grant rate
increases or that such increases will be adequate to permit the payment of
dividends on common stocks. Many utility companies, especially electric and gas
and other energy related utility companies, are subject to various
uncertainties, including: risks of increases in fuel and other operating costs;
the high cost of borrowing to finance capital construction during inflationary
periods; difficulty obtaining adequate returns on invested capital, even if
frequent rate increases are approved by public service commissions; restrictions
on operations and increased costs and delays as a result of environmental and
nuclear safety regulations; securing financing for large construction projects
during an inflationary period; difficulties of the capital markets in absorbing
utility debt and equity securities; difficulty in raising capital in adequate
amounts on reasonable terms in periods of high inflation and unsettled capital
markets; technological innovations which may render existing plants, equipment
or products obsolete; the potential impact of natural or man-made disasters;
difficulties in obtaining natural gas for resale or fuel for electric generation
at reasonable prices; coping with the general effects of energy conservation,
particularly in light of changing policies regarding energy; and special risks
associated with the construction and operation of nuclear power generating
facilities, including technical factors and costs, and the possibility that
federal, state and municipal government authorities may from time to time review
existing requirements and impose additional requirements. Certain utility
companies, especially gas and telephone utility companies, have in recent years
been affected by increased competition, which could adversely affect the
profitability of such utility companies. Furthermore, there are uncertainties
resulting from certain telecommunications companies' diversification into new
domestic and international businesses as well as agreements by many such
companies linking future rate increases to inflation or other factors not
directly related to the active operating profits of the enterprise.
FOREIGN UTILITY COMPANIES: Foreign utility companies are also subject to
regulation, although such regulations may or may not be comparable to those in
the U.S. Foreign utility companies may be more heavily regulated by their
respective governments than utilities in the U.S. and, as in the U.S., generally
are required to seek government approval for rate increases. In addition, since
many foreign utilities use fuel that causes more pollution than those used in
the U.S., such utilities may be required to invest in pollution control
equipment to meet any proposed pollution restrictions. Foreign regulatory
systems vary from country to country and may evolve in ways different from
regulation in the U.S.
FOREIGN SECURITIES: The Fund may invest in foreign securities. Under normal
circumstances, the Fund may invest up to 35% (and expects generally to invest
between 10% to 35%) of its total assets in foreign securities (not including
ADRs). Investing in securities of foreign issuers generally involves risks not
ordinarily associated with investing in securities of domestic issuers. These
include changes in currency rates, exchange control regulations, governmental
administration, economic or monetary policy (in the U.S. or abroad) or
circumstances in dealings between nations. Costs may be incurred in connection
with conversions between various currencies. Special considerations also include
more limited information about foreign issuers, higher brokerage costs,
different accounting standards and thinner trading markets. Foreign securities
markets are generally less liquid, more volatile and less subject to government
supervision than in the U.S. Investments in foreign countries are generally
affected by other factors including expropriation, confiscatory taxation and
potential difficulties in enforcing contractual obligations and are generally
subject to extended settlement periods. The Fund may hold foreign currency
received in connection with investments in foreign securities when, in the
judgment of the Adviser, it would be beneficial to convert such currency into
U.S. dollars at a later date, based on anticipated changes in the relevant
exchange rate. The Fund may also hold foreign currency in anticipation of
purchasing foreign securities. See "Investment Objective, Policies and
Restrictions -- Foreign Securities" in the Statement of Additional Information
for further discussion of foreign securities and the holding of foreign
currency, as well as the associated risks.
LOWER RATED DEBT SECURITIES: Securities rated BBB by S&P or Fitch or Baa by
Moody's (and comparable unrated 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 higher rated securities. If a
security purchased by the Fund is subsequently downgraded to below BBB by S&P or
Fitch or Baa by Moody's (or comparable standards for unrated securities), the
security will be sold only if the Adviser believes it is advantageous to do so.
As indicated above, up to 20% of the debt securities held by the Fund may be
bonds rated Ba or lower by Moody's or BB or lower by S&P or Fitch and comparable
unrated securities (commonly known as "junk bonds"). No minimum rating standard
is required by the Fund. These securities are considered speculative and, while
generally providing greater income than investments in higher rated securities,
will involve greater risk of principal and income (including the possibility of
default or bankruptcy of the issuers of such securities) and may involve greater
volatility of price (especially during periods of economic uncertainty or
change) than securities in the higher rating categories. However, since yields
vary over time, no specific level of income can ever be assured. These lower
rated high yielding fixed income securities generally tend to reflect economic
changes and short-term corporate and industry developments to a greater extent
than higher rated securities which react primarily to fluctuations in the
general level of interest rates. These lower rated fixed income securities are
also affected by changes in interest rates, the market's perception of their
credit quality, and the outlook for economic growth. In the past, economic
downturns or an increase in interest rates have, under certain circumstances,
caused a higher incidence of default by the issuers of these securities and may
do so in the future, especially in the case of highly leveraged issuers. During
certain periods, the higher yields on the Fund's lower rated high yielding fixed
income securities are paid primarily because of the increased risk of loss of
principal and income, arising from such factors as the heightened possibility of
default or bankruptcy of the issuers of such securities. Due to the fixed income
payments of these securities, the Fund may continue to earn the same level of
interest income while its net asset value declines due to portfolio losses,
which could result in an increase in the Fund's yield despite the actual loss of
principal. The market for these lower rated fixed income securities may be less
liquid than the market for investment grade fixed income securities. Therefore,
judgment may at times play a greater role in valuing these securities than in
the case of investment grade fixed income securities. See Appendix B for a
further description of these and other bond ratings and see "Investment
Objective, Policies and Restrictions -- Risk of Investing in Lower Rated Bonds"
in the Statement of Additional Information for further information on these
lower rated securities.
The value of debt securities, including utility debt securities and Government
Securities, generally has an inverse relationship to the movement of interest
rates and, to the extent the Fund invests in debt securities, the value of the
Fund's shares will also have this relationship.
NON-DIVERSIFIED STATUS: The Fund has registered as a "non-diversified"
investment company. As a result, the proportion of its assets that may be
invested in the securities of any one issuer is limited only by the Fund's own
investment restrictions and the diversification requirements of the Internal
Revenue Code of 1986, as amended. Government Securities are not subject to any
investment limitation. Since the Fund may invest a relatively high percentage of
its assets in a limited number of issuers, the Fund will be more susceptible to
any single economic, political or regulatory occurrence and to the financial
conditions of the issuers in which it invests.
OPTIONS, FUTURES CONTRACTS AND FORWARD CONTRACTS: Although the Fund will
enter into certain transactions in Futures Contracts, Options on Futures
Contracts and Options on Foreign Currencies for hedging purposes, such
transactions nevertheless involve certain risks. For example, a lack of
correlation between the instrument or index underlying a Stock Index Option or
Futures Contract and the assets being hedged, or unexpected adverse price
movements, could render the Fund's hedging strategy unsuccessful and could
result in losses. The Fund also may enter into transactions in such instruments
for non-hedging purposes, to the extent permitted by applicable law which
involves greater risk. In particular, such transactions may result in losses for
the Fund which are not offset by gains on other portfolio positions, thereby
reducing gross income. In addition, foreign currency markets may be extremely
volatile from time to time. There also can be no assurance that a liquid
secondary market will exist for any contract purchased or sold, and the Fund may
be required to maintain a position until exercise or expiration, which could
result in losses. The Statement of Additional Information contains a description
of the nature and trading mechanics of Stock Index Options, Futures Contracts,
Options on Futures Contracts, Forward Contracts and Options on Foreign
Currencies, and includes a discussion of the risks related to transactions
therein.
Transactions in Forward Contracts may be entered into only in the over-the-
counter market. Futures Contracts and Options on Futures Contracts may be
entered into on U.S. exchanges regulated by the Commodity Futures Trading
Commission and on foreign exchanges. In addition, the securities underlying
Stock Index Options, Futures Contracts and Options on Futures Contracts traded
by the Fund will include both domestic and foreign securities.
----------------------
Because of the Fund's significant investments in the utilities industry and the
risks discussed above, an investment in shares of the Fund should not be
considered a complete investment program. Each prospective purchaser should take
into account his investment objectives as well as his other investments when
considering the purchase of shares of the Fund.
----------------------
The investment objective and policies described above are not fundamental and
may be changed without shareholder approval. A change in the Fund's investment
objective may result in the Fund having an investment objective different from
the objective which the shareholder considered appropriate at the time of
investment in the Fund.
The Statement of Additional Information includes a discussion of investment
policies and a listing of specific investment restrictions which govern the
Fund's investment policies. The specific investment restrictions listed in the
Statement of Additional Information may not be changed without shareholder
approval (see "Investment Objective, Policies and Restrictions -- Investment
Restrictions" in the Statement of Additional Information).
The Fund's investment limitations, policies and rating standards are adhered to
at the time of purchase or utilization of assets; a subsequent change in
circumstances will not be considered to result in a violation of policy.
PORTFOLIO TRADING -- The portfolio will be managed actively and the selection of
securities modified as the Adviser deems necessary. Although the Fund does not
intend to seek short-term profits, securities in its portfolio will be sold
whenever the Adviser believes it is appropriate to do so without regard to the
length of time the particular asset may have been held. The Fund cannot predict
its annual portfolio turnover rate, but it is anticipated that such turnover
rate will not exceed 200%. A high turnover rate (over 100%) involves greater
expenses, including higher brokerage and transaction costs, to the Fund. The
Fund engages in portfolio trading if it believes a transaction net of costs
(including custodian charges) will help in achieving its investment objective.
For the fiscal year ended October 31, 1994, the portfolio turnover rate was
115%.
The primary consideration in placing portfolio security transactions is
execution at the most favorable prices. Consistent with the forgoing primary
consideration, the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. (the "NASD") and such other policies as the Trustees
may determine, the Adviser may consider sales of shares of the Fund and of the
other investment company clients of MFD, the Fund's distributor, as a factor in
the selection of broker-dealers to execute the Fund's portfolio transactions.
From time to time, the Adviser may direct certain portfolio transactions to
broker-dealer firms which, in turn, have agreed to pay a portion of the Fund's
operating expenses (e.g., fees charged by the custodian of the Fund's assets).
For a further discussion of portfolio trading, see the Statement of Additional
Information.
5. MANAGEMENT OF THE FUND
INVESTMENT ADVISER -- The Adviser manages the Fund pursuant to an Investment
Advisory Agreement, dated September 1, 1993 (the "Advisory Agreement"). The
Adviser provides the Fund with overall investment advisory and administrative
services, as well as general office facilities. Maura A. Shaughnessy, an
Assistant Vice President of the Adviser, has been the Fund's portfolio manager
since 1992. Ms. Shaughnessy has been employed by the Adviser since 1991 and
served as an Equity Analyst at Harvard Management Company prior to that time.
Subject to such policies as the Trustees may determine, the Adviser makes
investment decisions for the Fund. For its services and facilities, the Adviser
is entitled to receive a management fee, computed and paid monthly, in an amount
equal to the sum of 0.375% of the Fund's average daily net assets and 6.25% of
the Fund's gross income (I.E., income other than gains from the sale of
securities, gains from options and futures transactions, premium income from
options written and gains from foreign exchange transactions) of the Fund for
its then-current fiscal year. Commencing March 1, 1995, the Adviser voluntarily
agreed to reduce the management fee to 0.375% of the Fund's average daily net
assets. This voluntary fee reduction may be rescinded at any time without notice
to shareholders as to the fee accruing after the date of such rescission. Prior
to March 1, 1995, the Adviser voluntarily agreed to reduce the management fee to
0% of the Fund's average daily net assets. The Adviser has also voluntarily
agreed to pay expenses of each class of the Fund (except fees paid under the
Advisory Agreement and Distribution Plans) that exceed 0.65%, 0.72% and 0.65% of
the Fund's average daily net assets attributable to Class A, Class B and Class C
shares, respectively, on an annualized basis. This temporary expense reduction
may be rescinded at any time by the Adviser without notice to shareholders as to
expenses accruing after the date of such rescission.
For the Fund's fiscal year ended October 31, 1994, MFS voluntarily reduced its
management fee to $0. If MFS had not reduced its management fee, MFS would have
received management fees of $416,085 (of which $222,761 would have been based on
average daily net assets and $193,324 on gross income), equivalent to 0.70% of
the Fund's average daily net assets.
MFS also serves as investment adviser to each of the other funds in the MFS
Family of Funds (the "MFS Funds") and to MFS(R) Municipal Income Trust, MFS
Multimarket Income Trust, MFS Government Markets Income Trust, MFS Intermediate
Income Trust, MFS Charter Income Trust, MFS Special Value Trust, MFS
Institutional Trust, MFS Union Standard Trust, MFS Variable Insurance Trust,
MFS/Sun Life Series Trust, Sun Growth Variable Annuity Fund, Inc. and seven
variable accounts, each of which is a registered investment company established
by Sun Life Assurance Company of Canada (U.S.) ("Sun Life of Canada (U.S.)") in
connection with the sale of Compass-2 and Compass-3 combination fixed/variable
annuity contracts. MFS and its wholly-owned subsidiary, MFS Asset Management,
Inc., provide investment advice to substantial private clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the U.S., Massachusetts Investors Trust.
Net assets under the management of the MFS organization were approximately $33.4
billion on behalf of approximately 1.6 million investor accounts as of January
31, 1995. As of such date, the MFS organization managed approximately $10.8
billion of assets invested in equity securities and approximately $18.7 billion
of assets invested in fixed income securities. Approximately $3.1 billion of the
assets managed by MFS are invested in securities of foreign issuers. MFS is a
subsidiary of Sun Life Assurance Company of Canada (U.S.) ("Sun Life of Canada
(U.S.)"), which in turn is a subsidiary of Sun Life Assurance Company of Canada
("Sun Life"). The Directors of MFS are A. Keith Brodkin, Jeffrey L. Shames,
Arnold D. Scott, John D. McNeil and John R. Gardner. Mr. Brodkin is the Chairman
of MFS, Mr. Shames is the President of MFS and Mr. Scott is a Senior Executive
Vice President and the Secretary of MFS. Messrs. McNeil and Gardner are the
Chairman and the President, respectively, of Sun Life. Sun Life, a mutual life
insurance company, is one of the largest international life insurance companies
and has been operating in the U.S. since 1895, establishing a headquarters
office here in 1973. The executive officers of MFS report to the Chairman of Sun
Life.
A. Keith Brodkin, the Chairman and a Director of MFS, is also the Chairman,
President and Trustee of the Trust. W. Thomas London, Stephen E. Cavan, James O.
Yost and James R. Bordewick, Jr., all of whom are officers of MFS, are officers
of the Trust.
DISTRIBUTOR -- MFD, a wholly-owned subsidiary of MFS, is the distributor of
shares of the Fund and also serves as distributor for each of the other MFS
Funds.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. (the "Shareholder
Servicing Agent"), a wholly owned subsidiary of MFS, performs transfer agency,
certain dividend disbursing agency and other services for the Fund.
6. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Shares of the Fund may be purchased at the public offering price through any
securities dealer, certain banks and other financial institutions having selling
agreements with MFD. Non-securities dealer financial institutions will receive
transaction fees that are the same as commission fees to dealers. Securities
dealers and other financial institutions may also charge their customers fees
relating to investments in the Fund.
The Fund offers three classes of shares which bear sales charges and
distribution fees in different forms and amounts:
CLASS A SHARES. Class A shares are offered at net asset value plus an initial
sales charge (or CDSC in the case of certain purchases of $1 million or more) as
follows:
DEALER
SALES CHARGE* ALLOWANCE
AS PERCENTAGE OF: AS A
----------------------------- PERCENTAGE
NET OF
OFFERING AMOUNT OFFERING
AMOUNT OF PURCHASE PRICE INVESTED PRICE
Less than $100,000..................... 4.75% 4.99% 4.00%
$100,000 but less than $250,000........ 4.00 4.17 3.20
$250,000 but less than $500,000........ 2.95 3.04 2.25
$500,000 but less than $1,000,000...... 2.20% 2.25% 1.70%
$1,000,000 or more..................... None** None** See Below**
- ------------------
*Because of rounding in the calculation of offering price, actual sales
charges may be more or less than those calculated using the percentages
above.
**A CDSC may apply in certain circumstances. MFD will pay a commission on
purchases of $1 million or more.
No sales charge is payable at the time of purchase of Class A shares on
investments of $1 million or more. However, a CDSC shall be imposed on such
investments in the event of a share redemption within 12 months following the
share purchase, at the rate of 1% of the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares.
In determining whether a CDSC on Class A shares is payable, and, if so, the
amount of the charge, it is assumed that shares not subject to the CDSC are the
first redeemed followed by other shares held for the longest period of time. All
investments made during a calendar month, regardless of when during the month
the investment occurred, will age one month on the last day of the month and
each subsequent month. Except as noted below, the CDSC on Class A shares will be
waived in the case of: (i) exchanges (except that if the shares acquired by
exchange were then redeemed within 12 months of the initial purchase (other than
in connection with subsequent exchanges to other MFS Funds), the charge would
not be waived); (ii) distributions to participants from a retirement plan
qualified under sections 401(a) or 401(k) of the Internal Revenue Code of 1986,
as amended (the "Code") (a "Retirement Plan"), due to: (a) a loan from the plan
(repayments of loans, however, will constitute new sales for purposes of
assessing the CDSC); (b) "financial hardship" of the participant in the plan, as
that term is defined in Treasury Regulation Section 1.401(k)-1(d)(2), as amended
from time to time; or (c) the death of a participant in such a plan; (iii)
distributions from a 403(b) plan or an Individual Retirement Account ("IRA") due
to death, disability or attainment of age 59 1/2; (iv) tax-free returns of
excess contributions to an IRA; (v) distributions by other employee benefit
plans to pay benefits; and (vi) certain involuntary redemptions and redemptions
in connection with certain automatic withdrawals from a qualified retirement
plan. The CDSC on Class A shares will not be waived, however, if the Retirement
Plan withdraws from the Fund except if that Retirement Plan has invested its
assets in Class A shares of one or more of the MFS Funds for more than 10 years
from the later to occur of (i) January 1, 1993 or (ii) the date such Retirement
Plan first invests its assets in Class A shares of one or more of the MFS Funds,
the CDSC on Class A shares will be waived in the case of a redemption of all of
the Retirement Plan's shares (including shares of any other class) in all MFS
Funds (i.e., all the assets of the Retirement Plan invested in the MFS Funds are
withdrawn), unless, immediately prior to the redemption, the aggregate amount
invested by the Retirement Plan in Class A shares of the MFS Funds (excluding
the reinvestment of distributions) during the prior four-year period equals 50%
or more of the total value of the Retirement Plan's assets in the MFS Funds, in
which case the CDSC will not be waived. The CDSC on Class A shares will be
waived upon redemption by a Retirement Plan where the redemption proceeds are
used to pay expenses of the Retirement Plan or certain expenses of participants
under the Retirement Plan (e.g. participant account fees), provided that the
Retirement Plan's sponsor subscribes to the MFS Fundamental 401(k) Plan(sm) or
another similar recordkeeping system made available by the Shareholder Servicing
Agent. The CDSC on Class A shares will be waived upon the transfer of
registration from shares held by a Retirement Plan through a single account
maintained by the Shareholder Servicing Agent to multiple Class A share accounts
maintained by the Shareholder Servicing Agent on behalf of individual
participants in the Retirement Plan, provided that the Retirement Plan's sponsor
subscribes to the MFS Fundamental 401(k) Plan (sm) or another similar
recordkeeping system made available by the Shareholder Servicing Agent. Any
applicable CDSC will be deferred upon an exchange of Class A shares of the Fund
for units of participation of the MFS Fixed Fund (a bank collective investment
fund) (the "Units"), and the CDSC will be deducted from the redemption proceeds
when such Units are subsequently redeemed (assuming the CDSC is then payable).
No CDSC will be assessed upon an exchange of Units for Class A shares of the
Fund. For purposes of calculating the CDSC payable upon redemption of Class A
shares of the Fund or Units acquired pursuant to one or more exchanges, the
period during which the Units are held will be aggregated with the period during
which the Class A shares are held. MFD shall receive all CDSCs.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price, as shown in the above table. In the case of
the maximum sales charge, the dealer retains 4% and MFD retains approximately
3/4 of 1% of the public offering price. The sales charge may vary depending on
the number of shares of the Fund as well as certain MFS Funds and other funds
owned or being purchased, the existence of an agreement to purchase additional
shares during a 13-month period (or a 36-month period for purchases of $1
million or more) or other special purchase programs. A description of the Right
of Accumulation, Letter of Intent and Group Purchases privileges by which the
sales charge may be reduced is set forth in the Statement of Additional
Information. In addition, MFD will pay commissions to dealers who initiate and
are responsible for purchases of $1 million or more as follows: 1.00% on sales
up to $5 million, plus 0.25% on the amount in excess of $5 million. Purchases of
$1 million or more for each shareholder account will be aggregated over a
12-month period (commencing from the date of the first such purchase) for
purposes of determining the level of commissions to be paid during that period
with respect to such account.
Class A shares of the Fund may be sold at their net asset value to the officers
of the Trust, to any of the subsidiary companies of Sun Life, to eligible
Directors, officers, employees (including retired employees) and agents of MFS,
Sun Life or any of their subsidiary companies, to any trust, pension,
profit-sharing or any other benefit plan for such persons, to any trustees and
retired trustees of any investment company for which MFD serves as distributor
or principal underwriter, and to certain family members of such individuals and
their spouses, provided such shares will not be resold except to the Fund. Class
A shares of the Fund may be sold at net asset value to any employee, partner,
officer or trustee of any sub-adviser to any MFS Fund and to certain family
members of such individuals and their spouses, or to any trust, pension,
profit-sharing or other Retirement Plan for the sole benefit of such employee or
representative, provided such shares will not be resold except to the Fund.
Class A shares of the Fund may also be sold at their net asset value to any
employee or registered representative of any dealer or other financial
institution which has a sales agreement with MFD or its affiliates, to certain
family members of such employees or representatives and their spouses, or to any
trust, pension, profit-sharing or other Retirement Plan for the sole benefit of
such employee or representative, as well as to clients of MFS Asset Management,
Inc. Class A shares may be sold at net asset value, subject to appropriate
documentation, through a dealer where the amount invested represents redemption
proceeds from a registered open-end management investment company not
distributed or managed by MFD or its affiliates if: (i) the redeemed shares were
subject to an initial sales charge or a deferred sales charge (whether or not
actually imposed); (ii) such redemption has occurred no more than 90 days prior
to the purchase of Class A shares of the Fund; and (iii) the Fund, MFD or its
affiliates have not agreed with such company or its affiliates, formally or
informally, to sell Class A shares at net asset value or provide any other
incentive with respect to such redemption and sale. Class A shares of the Fund
may also be sold at net asset value where the amount invested represents
redemption proceeds from MFS Fixed Fund. In addition, Class A shares of the Fund
may be sold at net asset value in connection with the acquisition or liquidation
of the assets of other investment companies. Insurance company separate accounts
may also purchase Class A shares of the Fund at their net asset value. Class A
shares of the Fund may be purchased at net asset value by Retirement Plans whose
third party administrators have entered into an administrative services
agreement with MFD or one or more of its affiliates to perform certain
administrative services, subject to certain operational requirements specified
from time to time by MFD or one of more of its affiliates. Class A shares of the
Fund may be purchased at net asset value through certain broker-dealers and
other financial institutions which have entered into an agreement with MFD,
which includes a requirement that such shares be sold for the benefit of clients
participating in a "wrap account" or a similar program under which such clients
pay a fee to such broker-dealer or other financial institution.
Class A shares of the Fund may be purchased at net asset value by Retirement
Plans qualified under Section 401(k) of the Code through certain broker- dealers
and other financial institutions which have entered into an agreement with MFD
which includes certain minimum size qualifications for such Retirement Plans and
provides that the broker-dealer or other financial institution will perform
certain administrative services with respect to the plan's account.
Class A shares of the Fund may be purchased at net asset value by certain
retirement plans subject to the Employee Retirement Income Security Act of 1974,
as amended, subject to the following:
(i) the sponsoring organization must demonstrate to the satisfaction of MFD
that either (a) the employer has at least 25 employees or (b) the aggregate
purchases by the Retirement Plan of Class A shares of the MFS Funds will be
in an amount of at least $250,000 within a reasonable period of time, as
determined by MFD in its sole direction; and
(ii) a CDSC of 1% will be imposed on such purchases in the event of certain
redemption transactions within 12 months following such purchases.
Dealers who initiate and are responsible for purchases of Class A shares of the
Fund in this manner will be paid a commission by MFD, as follows: 1.00% on sales
up to $5 million, plus 0.25% on the amount in excess of $5 million; provided,
however, that MFD may pay a commission, on sales in excess of $5 million to
certain retirement plans, of 1.00% to certain dealers which, at MFD's
invitation, enter into an agreement with MFD in which the dealer agrees to
return any commission paid to it on the sale (or on a pro rata portion thereof)
if the shareholder redeems his or her shares within a period of time after
purchase as specified by MFD. Purchases of $1 million or more for each
shareholder account will be aggregated over a 12-month period (commencing from
the date of the first such purchase) for purposes of determining the level of
commissions to be paid during that period with respect to such account. Class A
shares of the Fund may be sold at net asset value through the automatic
reinvestment of Class A and Class B distributions which constitute required
withdrawals from qualified retirement plans. Furthermore, Class A shares of the
Fund may be sold at net asset value through the automatic reinvestment of
distributions of dividends and capital gains of Class A shares of other MFS
Funds pursuant to the Distribution Investment Program (see "Shareholder
Services" in the Statement of Additional Information).
CLASS B SHARES: Class B shares are offered at net asset value without an initial
sales charge but subject to a CDSC as follows:
YEAR OF CONTINGENT
REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
-------------- --------------
First.................................. 4%*
Second................................. 4%
Third.................................. 3%
Fourth................................. 3%
Fifth.................................. 2%
Sixth.................................. 1%
Seventh and following.................. 0%
*Class B shares purchased from January 1, 1993 through August 31, 1993 will be
subject to a CDSC of 5% in the event of a redemption within the first year
after purchase.
For Class B shares purchased prior to January 1, 1993, the Fund imposes a CDSC
as a percentage of redemption proceeds as follows:
YEAR OF CONTINGENT
REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
-------------- --------------
First.................................. 6%
Second................................. 5%
Third.................................. 4%
Fourth................................. 3%
Fifth.................................. 2%
Sixth.................................. 1%
Seventh and following.................. 0%
No CDSC is paid upon an exchange of shares. For purposes of calculating the CDSC
upon redemption of shares acquired in an exchange, the purchase of shares
acquired in one or more exchanges is deemed to have occurred at the time of the
original purchase of the exchanged shares. See "Redemptions and Repurchases --
Contingent Deferred Sales Charge" for further discussion of the CDSC.
The CDSC on Class B shares will be waived upon the death or disability (as
defined in section 72(m)(7) of the Code) of any investor, provided the account
is registered (i) in the case of a deceased individual, solely in the deceased
individual's name, (ii) in the case of a disabled individual, solely or jointly
in the disabled individual's name or (iii) in the name of a living trust for the
benefit of the deceased or disabled individual. The CDSC on Class B shares will
also be waived in the case of redemptions of shares of the Fund pursuant to a
systematic withdrawal plan. In addition, the CDSC on Class B shares will be
waived in the case of distributions from an IRA, SAR-SEP or any other retirement
plan qualified under section 401(a) or 403(b) of the Code due to death or
disability, or in the case of required minimum distributions from any such
retirement plan due to attainment of age 7012. The CDSC on Class B shares will
be waived in the case of distributions from a retirement plan qualified under
Sections 401(a) or 401(k) of the Code due to (i) returns of excess contribution
to the plan, (ii) retirement of a participant in the plan, (iii) a borrowing
from the plan (repayments of borrowings, however, will constitute new sales for
purposes of assessing the CDSC), (iv) "financial hardship" of the participant in
the plan, as that term is defined in Treasury Regulation Section 1.
401(k)-1(d)(2), as amended from time to time, and (v) termination of employment
of the participant in the plan (excluding, however, a partial or other
termination of the plan). The CDSC on Class B shares will also be waived upon
redemptions by (i) officers of the Trust, (ii) any of the subsidiary companies
of Sun Life, (iii) eligible Directors, officers, employees (including retired
and former employees) and agents of MFS, Sun Life or any of their subsidiary
companies, (iv) any trust, pension, profit-sharing or any other benefit plan for
such persons, (v) any trustees and retired trustees of any investment company
for which MFD serves as distributor or principal underwriter, and (vi) certain
family members of such individuals and their spouses, provided in each case that
the shares will not be resold except to the Fund. The CDSC on Class B shares
will also be waived in the case of redemptions by any employee or registered
representative of any dealer or other financial institution which has a sales
agreement with MFD, by certain family members of any such employee or
representative and their spouses, by any trust, pension, profit-sharing or other
retirement plan for the sole benefit of such employee or representative and by
clients of MFS Asset Management, Inc. A retirement plan qualified under Section
401(a) of the Code (a "Retirement Plan") that has invested its assets in Class B
shares of one or more of the MFS Funds Family of Funds (the "MFS Funds") for
more than 10 years from the later to occur of (i) January 1, 1993 or (ii) the
date the Retirement Plan first invests its assets in Class B shares of one or
more of the funds in the MFS Funds, will have the CDSC on Class B shares waived
in the case of a redemption of all the Retirement Plan's shares (including any
shares of any other class) in all MFS Funds (i.e., all the assets of the
Retirement Plan invested in the MFS Funds are withdrawn), except that if,
immediately prior to the redemption, the aggregate amount invested by the
Retirement Plan in Class B shares of the MFS Funds (excluding the reinvestment
of distributions) during the prior four year period equals 50% or more of the
total value of the Retirement Plan's assets in the MFS Funds, then the CDSC will
not be waived. The CDSC on Class B shares will be waived upon redemption by a
Retirement Plan where the redemption proceeds are used to pay expenses of the
Retirement Plan or certain expenses of participants under the Retirement Plan
(e.g., participant account fees), provided that the Retirement Plan's sponsor
subscribes to the MFS Fundamental 401(k) Plan(sm) or another similar
recordkeeping system made available by the Shareholder Servicing Agent. The CDSC
on Class B shares will be waived upon the transfer of registration from shares
held by a Retirement Plan through a single account maintained by the Shareholder
Servicing Agent to multiple Class A share accounts maintained by the Shareholder
Servicing Agent on behalf of individual participants in the Retirement Plan,
provided that the Retirement Plan's sponsor subscribes to the MFS Fundamental
401(k) Plan (sm) or another similar recordkeeping system made available by the
Shareholder Servicing Agent. The CDSC on Class B shares may also be waived in
connection with the acquisition or liquidation of the assets of other investment
companies or personal holding companies.
CONVERSION OF CLASS B SHARES. Class B shares of the Fund will convert to Class A
shares of the Fund approximately eight years after the purchase date. Shares
purchased through the reinvestment of distributions paid in respect of Class B
shares will be treated as Class B shares for purposes of the payment of the
distribution and service fees under the Distribution Plan applicable to Class B
shares. However, for purposes of conversion to Class A shares, all shares in a
shareholder's account that were purchased through the reinvestment of dividends
and distributions paid in respect of Class B shares (and which have not
converted to Class A shares as provided in the following sentence) will be held
in a separate sub-account. Each time any Class B shares in the shareholder's
account (other than those in the sub-account) convert to Class A shares, a
portion of the Class B shares then in the sub-account will also convert to Class
A shares. The portion will be determined by the ratio that the shareholder's
Class B shares not acquired through reinvestment of dividends and distributions
that are converting to Class A shares bear to the shareholder's total Class B
shares not acquired through such reinvestment. The conversion of Class B shares
to Class A shares is subject to the continuing availability of a ruling from the
Internal Revenue Service or an opinion of counsel that such conversion will not
constitute a taxable event for Federal tax purposes. There can be no assurance
that such ruling or opinion will be available, and the conversion of Class B
shares to Class A shares will not occur if such ruling or opinion is not
available. In such event, Class B shares would continue to be subject to higher
expenses than Class A shares for an indefinite period.
CLASS C SHARES: Class C shares are offered at net asset value without an initial
sales charge or a CDSC. Class C shares do not convert to any other class of
shares of the Fund. The maximum investment in Class C shares that may be made is
$5,000,000 per transaction.
Class C shares are not currently available for purchase by any retirement plan
qualified under section 401(a) or 403(b) of the Code if the retirement plan
and/or the sponsoring organization subscribe to the MFS FUNDamental 401(k) Plan
or another similar 401(a) or 403(b) recordkeeping program made available by the
Shareholder Servicing Agent.
GENERAL: Except as described below, the minimum initial investment is $1,000 per
account and the minimum additional investment is $50 per account. Accounts being
established for monthly automatic investments and under payroll savings programs
and tax-deferred retirement programs (other than IRAs) involving the submission
of investments by means of group remittal statements are subject to a $50
minimum on initial and additional investments per account. The minimum initial
investment for IRAs is $250 per account and the minimum additional investment is
$50 per account. Accounts being established for participation in the Automatic
Exchange Plan are subject to a $50 minimum on initial and additional investments
per account. There are also other limited exceptions to these minimums for
certain tax-deferred retirement programs. Any minimums may be changed at any
time at the discretion of MFD. The Fund reserves the right to cease offering its
shares for sale at any time.
For shareholders who elect to participate in certain investment programs
(e.g., the automatic investment plan) or other shareholder services, MFD or
its affiliates may either (i) give a gift of nominal value, such as a hand-
held calculator, or (ii) make a nominal charitable contribution on their
behalf.
A shareholder whose shares are held in the name of, or controlled by, an
investment dealer might not receive many of the privileges and services from the
Fund (such as Right of Accumulation, Letter of Intent and certain recordkeeping
services) that the Fund ordinarily provides.
Purchases and exchanges should be made for investment purposes only. The Fund
and MFD each reserve the right to reject any specific purchase order or to
restrict purchases by a particular purchaser (or group of related purchasers).
The Fund or MFD may reject or restrict any purchases by a particular purchaser
or group, for example, when such purchase is contrary to the best interests of
the Fund's other shareholders or otherwise would disrupt the management of the
Fund.
MFD may enter into an agreement with shareholders who intend to make exchanges
among certain classes of certain MFS Funds (as determined by MFD) which follow a
timing pattern, and with individuals or entities acting on shareholders' behalf
(collectively, "market timers"), setting forth the terms, procedures and
restrictions with respect to such exchanges. In the absence of such an
agreement, it is the policy of the Fund and MFD to reject or restrict purchases
by market timers if (i) more than two exchange purchases are effected in a timed
account in the same calendar quarter or (ii) a purchase would result in shares
being held in timed accounts by market timers representing more than (x) one
percent of the Fund's net assets or (y) specified dollar amounts in the case of
certain MFS Funds which may include the Fund and which may change from time to
time. The Fund and MFD each reserve the right to request market timers to redeem
their shares at net asset value, less any applicable CDSC, if either of these
restrictions is violated.
Securities dealers and other financial institutions may receive different
compensation with respect to sales of Class A, Class B and Class C shares. In
some instances, promotional incentives to dealers may be offered only to certain
dealers who have sold or may sell significant amounts of Fund shares. From time
to time, MFD may pay dealers 100% of the applicable sales charge on sales of
Class A shares of certain specified MFS Funds sold by such dealer during a
specified sales period. In addition, MFD or its affiliates may, from time to
time, pay dealers an additional commission equal to 0.50% of the net asset value
of all of the Class B shares of certain specified MFS Funds sold by such dealer
during a specified sales period. In addition, from time to time MFD, at its
expense, may provide additional commissions, compensation or promotional
incentives ("concessions") to dealers which sell shares of the Fund. The staff
of the SEC has indicated that dealers who receive more than 90% of the sales
charge may be considered underwriters. Such concessions provided by MFD may
include financial assistance to dealers in connection with preapproved
conferences or seminars, sales or training programs for invited registered
representatives, payment for travel expenses, including lodging, incurred by
registered representatives and members of their families or other invited guests
to various locations for such seminars or training programs, seminars for the
public, advertising and sales campaigns regarding one or more MFS Funds, and/or
other dealer-sponsored events. In some instances, these concessions may be
offered to dealers or only to certain dealers who have sold or may sell, during
specified periods, certain minimum amounts of shares of the Fund. From time to
time, MFD may make expense reimbursements for special training of a dealer's
registered representatives in group meetings or to help pay the expenses of
sales contests. Other concessions may be offered to the extent not prohibited by
the laws of any state or any self-regulatory agency, such as the NASD.
The Glass-Steagall Act prohibits national banks from engaging in the business of
underwriting, selling or distributing securities. Although the scope of the
prohibition has not been clearly defined, MFD believes that such Act should not
preclude banks from entering into agency agreements with MFD (as described
above). If, however, a bank were prohibited from so acting, the Trustees would
consider what actions, if any, would be necessary to continue to provide
efficient and effective shareholder services. It is not expected that
shareholders would suffer any adverse financial consequences as a result of
these occurrences. In addition, state securities laws on this issue may differ
from the interpretation of federal law expressed herein and banks and financial
institutions may be required to register as broker-dealers pursuant to state
law.
EXCHANGES
Subject to the requirements set forth below, some or all of the shares in an
account with the Fund for which payment has been received by the Fund (i.e., an
established account) may be exchanged for shares of the same class of any of the
other MFS Funds, if available for sale, at net asset value. In addition, Class C
shares may be exchanged for shares of the MFS Money Market Fund at net asset
value. Shares of one class may not be exchanged for shares of any other class.
Exchanges will be made only after instructions in writing or by telephone (an
"Exchange Request") are received for an established account by the Shareholder
Servicing Agent in proper form (i.e., if in writing - signed by the record
owner(s) exactly as the shares are registered; if by telephone - proper account
identification is given by the dealer or shareholder of record); and each
exchange must involve either shares having an aggregate value of at least $1,000
or all shares in an established account (except that the minimum is $50 for
accounts of retirement plan participants whose sponsoring organizations
subscribe to the MFS FUNDamental 401(k) Plan or another similar 401(k)
recordkeeping system made available by the Shareholder Servicing Agent) or all
the shares in the account. If the Exchange Request is received by the
Shareholder Servicing Agent in writing or by telephone on any business day prior
to the close of regular trading on the Exchange, the exchange usually will occur
on that day if all the requirements set forth above have been complied with at
that time. No more than five exchanges may be made in any one Exchange Request
by telephone. Additional information concerning this exchange privilege and
prospectuses for any of the other MFS Funds may be obtained from investment
dealers or the Shareholder Servicing Agent. A shareholder should read the
prospectus of the other MFS Funds and consider the differences in objectives and
policies before making any exchange. For federal and (generally) state income
tax purposes, an exchange is treated as a sale of the shares exchanged and,
therefore, an exchange could result in a gain or loss to the shareholder making
the exchange. Exchanges by telephone are automatically available to most
non-retirement plan accounts and certain retirement plan accounts. For further
information regarding exchanges by telephone, see "Redemptions By Telephone."
The exchange privilege (or any part of it) may be changed or discontinued and is
subject to certain limitations, including certain restrictions on purchases by
market timers. Special procedures, privileges and restrictions with respect to
exchanges may apply to market timers who enter into an agreement with MFD, as
set forth in such agreement (see "Purchases" above).
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the amount in his account on
any date on which the Fund is open for business by redeeming shares at their net
asset value or by selling such shares to the Fund through a dealer (a
repurchase). Since the net asset value of shares of the account fluctuate,
redemptions or repurchases, which are taxable transactions, are likely to result
in gains or losses to the shareholder. When a shareholder withdraws an amount
from his account, the shareholder is deemed to have tendered for redemption a
sufficient number of full and fractional shares in his account to cover the
amount withdrawn. The proceeds of a redemption or repurchase will normally be
available within seven days, except that for shares purchased, or received in
exchange for shares purchased, by check (including certified checks or cashier's
checks), payment of redemption proceeds may be delayed for 15 days from the
purchase date in an effort to assure that such check has cleared. Payment of
redemption proceeds may be delayed for up to seven days from the redemption date
if the Fund determines that such a delay would be in the best interest of all
its shareholders.
A. REDEMPTION BY MAIL -- Each shareholder has the right to redeem all or any
portion of the shares in his account by mailing or delivering to the Shareholder
Servicing Agent (see back cover for address) a stock power with a written
request for redemption or a letter of instruction, together with his share
certificates (if any were issued), all in "good order" for transfer. "Good
order" generally means that a stock power, written request for redemption,
letter of instruction or certificate must be endorsed by the record owner(s)
exactly as the shares are registered and the signature(s) must be guaranteed in
the manner set forth below under the caption "Signature Guarantee." In addition,
in some cases, "good order" may require the furnishing of additional documents.
The Shareholder Servicing Agent may make certain DE MINIMIS exceptions to the
above requirements for redemption. Within seven days after receipt of a
redemption request by the Shareholder Servicing Agent in "good order," the Fund
will make payment in cash of the net asset value of the shares next determined
after such redemption request was received, reduced by the amount of any
applicable CDSC described above and the amount of any income tax required to be
withheld, except during any period in which the right of redemption is suspended
or date of payment is postponed because the Exchange is closed or trading on the
Exchange is restricted, or, to the extent otherwise permitted by the 1940 Act,
if an emergency exists.
B. REDEMPTION BY TELEPHONE -- Each shareholder may redeem an amount from his
account by telephoning toll-free at (800) 225-2606. Shareholders wishing to
avail themselves of this telephone redemption privilege must so elect on their
Account Application, designate thereon a commercial bank and account number to
receive the proceeds of such redemption, and sign the Account Application Form
with the signature(s) guaranteed in the manner set forth below under the caption
"Signature Guarantee." The proceeds of such a redemption, reduced by the amount
of any applicable CDSC described above and the amount of any income tax required
to be withheld, are mailed by check to the designated account, without charge.
As a special service, investors may arrange to have proceeds in excess of $1,000
wired in federal funds to the designated account. If a telephone redemption
request is received by the Shareholder Servicing Agent by the close of regular
trading on the Exchange on any business day, shares will be redeemed at the
closing net asset value of the Fund on that day. Subject to the conditions
described in this section, proceeds of a redemption are normally mailed or wired
on the next business day following the date of receipt of the order for
redemption. The Shareholder Servicing Agent will not be responsible for any
losses resulting from unauthorized telephone transactions if it follows
reasonable procedures designed to verify the identity of the caller. The
Shareholder Servicing Agent will request personal or other information from the
caller, and will normally also record calls. Shareholders should verify the
accuracy of confirmation statements immediately after their receipt.
C. REPURCHASE THROUGH A DEALER -- If a shareholder desires to sell his shares at
their net asset value through his securities dealer (a repurchase), the
shareholder can place a repurchase order with his dealer, who may charge the
shareholder a fee. IF THE DEALER RECEIVES THE SHAREHOLDER'S ORDER PRIOR TO THE
CLOSE OF REGULAR TRADING ON THE EXCHANGE AND COMMUNICATES IT TO MFD ON THE SAME
DAY BEFORE MFD CLOSES FOR BUSINESS, THE SHAREHOLDER WILL RECEIVE THE NET ASSET
VALUE CALCULATED ON THAT DAY.
GENERAL: Shareholders of the Fund who have redeemed their shares have a one-
time right to reinvest the redemption proceeds in the same class of shares of
any of the MFS Funds (if shares of such Fund are available for sale) at net
asset value (with a credit for any CDSC paid) within 90 days of the redemption
pursuant to the Reinstatement Privilege. If the shares credited for any CDSC
paid are then redeemed within six years of the initial purchase in the case of
Class B shares, or within 12 months of the initial purchase for certain Class A
share purchases, a CDSC will be imposed upon redemption. Such purchases under
the Reinstatement Privilege are subject to all limitations in the Statement of
Additional Information regarding this privilege.
Subject to the Fund's compliance with applicable regulations, the Fund has
reserved the right to pay the redemption or repurchase price of shares of the
Fund, either totally or partially, by a distribution in kind of securities
(instead of cash) from the Fund's portfolio. The securities distributed in such
a distribution would be valued at the same amount as that assigned to them in
calculating the net asset value for the shares being sold. If a shareholder
received a distribution in kind, the shareholders could incur transaction
charges when converting the securities to cash.
Due to the relatively high cost of maintaining small accounts, the Fund reserves
the right to redeem shares in any account for their then-current value (which
will be promptly paid to the shareholder) if at any time the total investment in
such account drops below $500 because of redemptions, except in the case of
accounts established for monthly automatic investments, certain payroll savings
programs, Automatic Exchange Plan accounts and tax- deferred retirement plans,
for which there is a lower minimum investment requirement (see "Purchases").
Shareholders will be notified that the value of their account is less than the
minimum investment requirement and allowed 60 days to make an additional
investment before the redemption is processed. No CDSC will be imposed on such
involuntary redemptions.
SIGNATURE GUARANTEE: In order to protect shareholders against fraud to the
greatest extent possible, the Fund requires in certain instances as indicated
above that the shareholder's signature be guaranteed. In these cases the
shareholder's signature must be guaranteed by an eligible bank, broker, dealer,
credit union, national securities exchange, registered securities association,
clearing agency or savings association. Signature guarantees shall be accepted
in accordance with policies established by the Shareholder Servicing Agent.
CONTINGENT DEFERRED SALES CHARGE -- Investments ("Direct Purchases") in Class A
or B shares will be subject to a CDSC for a period of 12 months (in the case of
purchases of $1 million or more of Class A shares) or six years (in the case of
purchases of Class B shares). Purchases of Class A shares made during a calendar
month, regardless of when during the month the investment occurred, will age one
month on the last day of the month and each subsequent month. Class B shares
purchased on or after January 1, 1993 will be aggregated on a calendar month
basis -- all transactions made during a calendar month, regardless of when
during the month they have occurred, will age one year at the close of business
on the last day of such month in the following calendar year and each subsequent
year. For Class B shares of the Fund purchased prior to January 1, 1993,
transactions will be aggregated on a calendar year basis - - all transactions
made during a calendar year, regardless of when during the year they have
occurred, will age one year at the close of business on December 31 of that year
and each subsequent year. At the time of a redemption, the amount by which the
value of a shareholder's account represented by Direct Purchases exceeds the sum
of six calendar year aggregations (12 months in the case of purchases of $1
million or more of Class A shares) of Direct Purchases may be redeemed without
charge ("Free Amount"). Moreover, no CDSC is ever assessed on additional shares
acquired through the automatic reinvestment of dividends or capital gain
distributions ("Reinvested Shares").
Therefore, at the time of redemption of shares of a particular class, (i) any
Free Amount is not subject to the CDSC, and (ii) the amount of the redemption
equal to the then-current value of Reinvested Shares is not subject to the CDSC,
but (iii) any amount of the redemption in excess of the aggregate of the
then-current value of Reinvested Shares and the Free Amount is subject to a
CDSC. The CDSC will first be applied against the amount of Direct Purchases
which will result in any such charge being imposed at the lowest possible rate.
The CDSC to be imposed upon redemptions of shares will be calculated as set
forth in "Purchases" above.
The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except that, with respect to transfers of registration to an IRA
rollover account, the CDSC will be waived if the shares being reregistered would
have been eligible for a CDSC waiver had they been redeemed.
DISTRIBUTION PLANS
The Trustees have adopted separate distribution plans for Class A, Class B and
Class C shares pursuant to Section 12(b) of the 1940 Act and Rule 12b-1
thereunder (the "Rule"), after having concluded that there is a reasonable
likelihood that the plans would benefit the Fund and its shareholders.
CLASS A DISTRIBUTION PLAN. The Class A Distribution Plan provides that the
Fund will pay MFD a distribution/service fee aggregating up to (but not
necessarily all of) 0.35% of the average daily net assets attributable to Class
A shares annually in order that MFD may pay expenses on behalf of the Fund
related to the distribution and servicing of Class A shares. The expenses to be
paid by MFD on behalf of the Fund include a service fee to securities dealers
which enter into a sales agreement with MFD of up to 0.25% of the Fund's average
daily net assets attributable to Class A shares that are owned by investors for
whom such securities dealer is the holder or dealer of record. This fee is
intended to be partial consideration for all personal services and/or account
maintenance services rendered by the dealer with respect to Class A shares. MFD
may from time to time reduce the amount of the service fee paid for shares sold
prior to a certain date. MFD will also retain a distribution fee of 0.10% of the
Fund's average daily net assets attributable to Class A shares as partial
consideration for services performed and expenses incurred in the performance of
MFD's obligations under its distribution agreement with the Fund. In addition,
to the extent that the aggregate of the foregoing fees does not exceed 0.35% per
annum of the average daily net assets of the Fund attributable to Class A
shares, the Fund is permitted to pay other distribution-related expenses.
Payments will commence under the Plan on the date on which the Fund's net assets
attributable to Class A shares first equal or exceed $50 million. Fees payable
under the Class A Distribution Plan are charged to, and therefore reduce, income
allocated to Class A shares. Service fees may be reduced for a securities dealer
that is the holder or dealer of record for an investor who owns shares of the
Fund having a net asset value at or above a certain dollar level. Dealers may
from time to time be required to meet certain criteria in order to receive
service fees. MFD or its affiliates are entitled to retain all service fees
payable under the Class A Distribution Plan for which there is no dealer of
record or for which qualification standards have not been met as partial
consideration for personal services and/or account maintenance services
performed by MFD or its affiliates for shareholder accounts. Certain banks and
other financial institutions that have agency agreements with MFD will receive
service fees that are the same as service fees to dealers.
CLASS B DISTRIBUTION PLAN. The Class B Distribution Plan provides that the
Fund will pay MFD a daily distribution fee equal on an annual basis to 0.75% of
the Fund's average daily net assets attributable to Class B shares and will pay
MFD a service fee of up to 0.25% of the Fund's average daily net assets
attributable to Class B shares (which MFD will in turn pay to securities dealers
which enter into a sales agreement with MFD at a rate of up to 0.25% per annum
of the Fund's average daily net assets attributable to Class B shares owned by
investors for whom that securities dealer is the holder or dealer of record).
This service fee is intended to be additional consideration for all personal
services and/or account maintenance services rendered by the dealer with respect
to Class B shares. Fees payable under the Class B Distribution Plan are charged
to, and therefore reduce, income allocated to Class B shares. The Class B
Distribution Plan also provides that MFD will receive all CDSCs attributable to
Class B shares (see "Redemptions and Repurchases" above), which do not reduce
the distribution fee. MFD will pay commissions to dealers of 3.75% of the
purchase price of Class B shares purchased through dealers. MFD will also
advance to dealers the first year service fee at a rate equal to 0.25% of the
purchase price of such shares and, as compensation therefor, MFD may retain the
service fee paid by the Fund with respect to such shares for the first year
after purchase. Therefore, the total amount paid to a dealer upon the sale of
shares is 4.00% of the purchase price of the shares (commission rate of 3.75%
plus service fee equal to 0.25% of the purchase price). Dealers will become
eligible for additional service fees with respect to such shares commencing in
the thirteenth month following the purchase. Except in the case of the 0.25% per
annum first year service fee, service fee payments on the Fund's Class B
Distribution Plan are currently suspended. This suspension may be rescinded at
any time without notice to shareholders. Dealers may from time to time be
required to meet certain criteria in order to receive service fees. MFD or its
affiliates are entitled to retain all service fees payable under the Class B
Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by MFD or its affiliates
for shareholder accounts. The purpose of the distribution payments to MFD under
the Class B Distribution Plan is to compensate MFD for its distribution services
to the Fund. Since MFD's compensation is not directly tied to its expenses, the
amount of compensation received by MFD during any year may be more or less than
its actual expenses. For this reason, this type of distribution fee arrangement
is characterized by the staff of the SEC as being of the "compensation" variety.
However, the Fund is not liable for any expenses incurred by MFD in excess of
the amount of compensation it receives. The expenses incurred by MFD, including
commissions to dealers, are likely to be greater than the distribution fees for
the next several years, but thereafter such expenses may be less than the amount
of the distribution fees. Certain banks and other financial institutions that
have agency agreements with MFD will receive agency transaction and service fees
that are the same as commissions and service fees to dealers.
CLASS C DISTRIBUTION PLAN. The Class C Distribution Plan provides that the
Fund will pay MFD a distribution fee of up to 0.75% per annum of the Fund's
average daily net assets attributable to Class C shares and will pay MFD a
service fee of up to 0.25% per annum of the Fund's average daily net assets
attributable to Class C shares (which MFD in turn pays to securities dealers
which enter into a sales agreement with MFD at a rate of up to 0.25% per annum
of the Fund's daily net assets attributable to Class C shares owned by investors
for whom that securities dealer is the holder or dealer of record). The
distribution/service fees attributable to Class C shares are designed to permit
an investor to purchase such shares through a broker-dealer without the
assessment of an initial sales charge or a CDSC while allowing MFD to compensate
broker-dealers in connection with the sale of such shares. The service fee is
intended to be additional consideration for all personal services and/or account
maintenance services rendered with respect to Class C shares. MFD or its
affiliates are entitled to retain all service fees payable under the Class C
Distribution Plan with respect to accounts for which there is no dealer of
record as partial consideration for personal services and/or account maintenance
services performed by MFD or its affiliates for shareholder accounts. The
purpose of the distribution payments to MFD under the Class C Distribution Plan
is to compensate MFD for its distribution services to the Fund. Distribution
payments under the Plan will be used by MFD to pay securities dealers a
distribution fee in an amount equal on an annual basis to 0.75% of the Fund's
average daily net assets attributable to Class C shares owned by investors for
whom that securities dealer is the holder or dealer of record. (Therefore, the
total amount of distribution/service fees paid to a dealer on an annual basis is
1.00% of the Fund's average daily net assets attributable to Class C shares
owned by investors for whom the securities dealer is the holder or dealer of
record.) MFD also pays expenses of printing prospectuses and reports used for
sales purposes, expenses with respect to the preparation and printing of sales
literature and other distribution related expenses, including, without
limitation, the compensation of personnel and all costs of travel, office
expense and equipment. Since MFD's compensation is not directly tied to its
expenses, the amount of compensation received by MFD during any year may be more
or less than its actual expenses. For this reason, this type of distribution fee
arrangement is characterized by the staff of the SEC as being of the
"compensation" variety. However, the Fund is not liable for any expenses
incurred by MFD in excess of the amount of compensation it receives. Certain
banks and other financial institutions that have agency agreements with MFD will
receive agency transaction and service fees that are the same as distribution
fees and service fees to dealers. Fees payable under the Class C Distribution
Plan are charged to, and therefore reduce, income allocated to Class C shares.
DISTRIBUTIONS
The Fund intends to declare daily and pay to its shareholders substantially all
of its net investment income as dividends on a monthly basis. Dividends are
generally distributed on the first business day of the following month. The Fund
may make one or more distributions during the calendar year to its shareholders
from any long-term capital gains, and may also make one or more distributions to
its shareholders from short-term capital gains. Shareholders may elect to
receive dividends and capital gain distributions in either cash or additional
shares of the same class with respect to which a distribution is made (see "Tax
Status" and "Shareholder Services -- Distribution Options" below). Distributions
paid by the Fund with respect to Class A shares will generally be greater than
those paid with respect to Class B and Class C shares because expenses
attributable to Class B and Class C shares will generally be higher.
TAX STATUS
The Fund is treated as an entity separate from the other series of the Trust for
federal income tax purposes. In order to minimize the taxes the Fund would
otherwise be required to pay, the Fund intends to qualify each year as a
"regulated investment company" under Subchapter M of the Code, and to make
distributions to its shareholders in accordance with the timing requirements
imposed by the Code. It is expected that the Fund will not be required to pay
entity level federal income or excise taxes, although foreign-source income
received by the Fund may be subject to foreign withholding taxes. Shareholders
of the Fund normally will have to pay federal income taxes (and any state or
local taxes) on the dividends and capital gain distributions they receive from
the Fund, whether paid in cash or additional shares. A portion of the dividends
received from the Fund (but none of the Fund's capital gain distributions) may
qualify for the dividends-received deduction for corporations.
A statement setting forth the federal income tax status of all dividends and
distributions for that year, including the portion taxable as ordinary income,
the portion taxable as long-term capital gain, the portion, if any, representing
a return of capital (which is free of current taxes but results in a basis
reduction) and the amount, if any, of federal income tax withheld will be sent
to each shareholder promptly after the end of such year.
Fund distributions will reduce the Fund's net asset value per share.
Shareholders who buy shares just before the Fund makes a distribution of net
capital gains or net short-term capital gains may thus pay the full price for
the shares and then effectively receive a portion of the purchase price back as
a taxable distribution.
The Fund intends to withhold U.S. federal income tax at a rate of 30% on
dividends and certain other payments that are subject to such withholding and
that are made to persons who are neither citizens nor residents of the U.S.,
regardless of whether a lower rate may be permitted under an applicable law or
treaty. The Fund is also required in certain circumstances to apply backup
withholding of 31% on 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. However,
backup withholding will not be applied to payments which have had 30%
withholding taken. Prospective shareholders should read the Account Application
for information regarding backup withholding of federal income tax and should
consult their own tax advisers as to the tax consequences of an investment in
the Fund.
NET ASSET VALUE
The net asset value per share of each class of the Fund is determined each day
during which the Exchange is open for trading. This determination is made once
each day as of the close of regular trading on the Exchange by deducting the
amount of the liabilities attributable to the class from the value of the Fund's
assets attributable to the class and dividing the difference by the number of
shares of the class outstanding. Assets in the Fund's portfolio are valued on
the basis of their current values or otherwise at their fair values, as
described in the Statement of Additional Information. All investments and assets
are expressed in U.S. dollars based upon current currency exchange rates. The
net asset value per share of each class of shares is effective for orders
received by the dealer prior to its calculation and received by MFD prior to the
close of that business day.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund, one of three series of the Trust, has three classes of shares,
entitled Class A, Class B and Class C Shares of Beneficial Interest (without par
value). The Trust has reserved the right to create and issue additional classes
and series of shares, in which case each class of shares of a series would
participate equally in the earnings, dividends and assets attributable to that
class of that particular series. Shareholders are entitled to one vote for each
share held and shares of each series would be entitled to vote separately to
approve investment advisory agreements or changes in investment restrictions,
but shares of all series would vote together in the election of Trustees or
selection of accountants. Additionally, each class of shares of a series will
vote separately on any material increases in the fees under its Distribution
Plan or on any other matter that affects solely that class of shares, but will
otherwise vote together with all other classes of shares of the series on all
other matters. The Trust does not intend to hold annual shareholder meetings.
The Declaration of Trust provides that a Trustee may be removed from office in
certain instances (see "Description of Shares, Voting Rights and Liabilities" in
the Statement of Additional Information).
Each share of a class of the Fund represents an equal proportionate interest in
the Fund with each other class share, subject to the liabilities of that
particular class. Shares have no pre-emptive or conversion rights (except as set
forth above in "Purchases -- Conversion of Class B Shares"). Shares are fully
paid and non-assessable. Should the Fund be liquidated, shareholders of each
class are entitled to share PRO RATA in the net assets attributable to that
class available for distribution to shareholders. Shares will remain on deposit
with the Shareholder Servicing Agent and certificates will not be issued except
in connection with pledges and assignments and in certain other limited
circumstances.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the risk of a shareholder incurring financial loss on account of
shareholder liability would be limited to circumstances in which both inadequate
insurance (e.g., fidelity bonding and omissions insurance) existed and the Trust
itself was unable to meet its obligations.
PERFORMANCE INFORMATION
From time to time, the Fund will provide yield, current distribution rate and
total rate of return quotations for each class of shares and may also quote fund
rankings in the relevant fund category from various sources, such as Lipper
Analytical Services, Inc., Morningstar, Inc. and Wiesenberger Investment
Companies Service. Yield quotations are based on the annualized net investment
income per class share over a 30-day period stated as a percent of the maximum
public offering price on the last day of that period. Yield calculations for
Class B shares assume no CDSC is paid. The current distribution rate for each
class is generally based upon the total amount of dividends per share paid by
the Fund to shareholders of that class during the past 12 months and is computed
by dividing the amount of such dividends by the maximum public offering price of
that class at the end of such period. Current distribution rate calculations for
Class B shares assume no CDSC is paid. The current distribution rate differs
from the yield calculation because it may include distributions to shareholders
from sources other than dividends and interest, such as premium income from
option writing, short-term capital gains, and return of invested capital, and is
calculated over a different period of time. Total rate of return quotations will
reflect the average annual percentage change over stated periods in the value of
an investment in each class of shares of the Fund made at the maximum public
offering price of shares of that class and with all distributions reinvested and
which, if quoted for periods of six years or less, will give effect to the
imposition of the CDSC assessed upon redemptions of the Fund's Class B shares.
Such total rate of return quotations may be accompanied by quotations which do
not reflect the reduction in value of the initial investment due to the sales
charge or the deduction of a CDSC, and which will thus be higher. All
performance quotations are based on historical performance and are not intended
to indicate future performance. Yield reflects only net portfolio income as of a
stated period of time and current distribution rate reflects only the rate of
distributions paid by the Fund over a stated period of time, while total rate of
return reflects all components of investment return over a stated period of
time. The Fund's quotations may from time to time be used in advertisements,
shareholder reports or other communications to shareholders. For a discussion of
the manner in which the Fund will calculate its yield, current distribution rate
and total rate of return, see the Statement of Additional Information. For
further information about the Fund's performance for the fiscal year ended
October 31, 1994, please see the Fund's Annual Report. A copy of the Annual
Report may be obtained by contacting the Shareholder Servicing Agent (see back
cover for address and phone number). In addition to information provided in
shareholder reports, the Fund may, in its discretion, from time to time, make a
list of all or a portion of its holdings available to investors upon request.
7. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described below
or concerning other aspects of the Fund, should contact the Shareholder
Servicing Agent (see back cover for address and phone number).
ACCOUNT AND CONFIRMATION STATEMENTS -- Each shareholder will receive
confirmation statements showing the transaction activity in his account. At the
end of each calendar year, each shareholder will receive income tax information
regarding reportable dividends and capital gain distributions for that year (see
"Tax Status").
DISTRIBUTION OPTIONS -- The following options are available to all accounts
(except Systematic Withdrawal Plan accounts) and may be changed as often as
desired by notifying the Shareholder Servicing Agent:
-- Dividends and capital gain distributions reinvested in additional shares.
This option will be assigned if no other option is specified;
-- Dividends in cash; capital gain distributions reinvested in additional
shares;
-- Dividends and capital gain distributions in cash.
Reinvestments (net of any tax withholding) will be made in additional full and
fractional shares of the same class of shares at the net asset value in effect
at the close of business on the last business day of the month. Dividends and
capital gain distributions in amounts less than $10 will automatically be
reinvested in additional shares of the Fund. If a shareholder has elected to
receive dividends and/or capital gain distributions in cash and the postal or
other delivery service is unable to deliver checks to the shareholder's address
of record, such shareholder's distribution option will automatically be
converted to having all dividends and other distributions reinvested in
additional shares. Any request to change a distribution option must be received
by the Shareholder Servicing Agent by the record date for a dividend or
distribution in order to be effective for that dividend or distribution. No
interest will accrue on amounts represented by uncashed distribution or
redemption checks.
INVESTMENT AND WITHDRAWAL PROGRAMS -- For the convenience of shareholders, the
Fund makes available the following programs designed to enable shareholders to
add to their investment in an account with the Fund or withdraw from it with a
minimum of paper work. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or the Fund.
LETTER OF INTENT: If a shareholder (other than a group purchaser as
described in the Statement of Additional Information) anticipates purchasing
$100,000 or more of Class A shares of the Fund alone or in combination with
shares of Class B or Class C of the Fund or any of the classes of other MFS
Funds or MFS Fixed Fund (a bank collective investment fund) within a 13-month
period (or a 36-month period for purchases of $1 million or more), the
shareholder may obtain such shares at the same reduced sales charge as though
the total quantity were invested in one lump sum, subject to escrow agreements
and the appointment of an attorney for redemptions from the escrow amount if the
intended purchases are not completed, by completing the Letter of Intent section
of the Account Application.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on 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 (a bank collective
investment fund) reaches a discount level.
DISTRIBUTION INVESTMENT PROGRAM: Shares of a particular class of the Fund
may be sold at net asset value (and without any applicable CDSC) through the
automatic reinvestment of dividend and capital gain distributions from the same
class of other MFS Funds. Furthermore, distributions made by the Fund may be
automatically invested at net asset value (and without any applicable CDSC) in
shares of the same class of another MFS Fund, if shares of such Fund are
available for sale.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder
Servicing Agent to send him (or anyone he designates) regular periodic payments,
as designated on the Account Application and based upon the value of his
account. Each payment under a Systematic Withdrawal Plan (a "SWP") must be at
least $100, except in certain limited circumstances. The aggregate withdrawals
of Class B shares in any year pursuant to a SWP will not be subject to a CDSC
and are generally limited to 10% of the value of the account at the time of the
establishment of the SWP. The CDSC will not be waived in the case of SWP
redemptions of Class A shares which are subject to a CDSC.
DOLLAR COST AVERAGING PROGRAMS --
AUTOMATIC INVESTMENT PLAN: Cash investments of $50 or more may be made
through a shareholder's checking account twice monthly, monthly or quarterly.
Required forms are available from the Shareholder Servicing Agent or investment
dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may exchange their shares for the same class of shares of
the other MFS Funds under the Automatic Exchange Plan provided such shares are
available for sale. The Automatic Exchange Plan provides for automatic monthly
or quarterly exchanges of funds from the shareholder's account in such Fund for
investment in the same class of shares of other MFS Funds selected by the
shareholder. Under the Automatic Exchange Plan, exchanges of at least $50 each
may be made to up to four different funds. A shareholder should consider the
objectives and policies of a fund and review its prospectus before electing to
exchange money into such fund through the Automatic Exchange Plan. No
transaction fee is imposed in connection with exchange transactions under the
Automatic Exchange Plan. However, exchanges of shares of MFS Money Market Fund,
MFS Government Money Market Fund or Class A shares of MFS Cash Reserve Fund will
be subject to any applicable sales charge. For federal and (generally) state
income tax purposes an exchange is treated as a sale of the shares exchanged
and, therefore, could result in a capital gain or loss to the shareholder making
the exchange. See the Statement of Additional Information for further
information concerning the Automatic Exchange Plan. Investors should consult
their tax advisers for information regarding the potential capital gain and loss
consequences of transactions under the Automatic Exchange Plan.
Because a dollar cost averaging program involves periodic purchases of shares
regardless of fluctuating share offering prices, a shareholder should consider
his financial ability to continue his purchases through periods of low price
levels. Maintaining a dollar cost averaging program concurrently with a
withdrawal program could be disadvantageous because of the sales charges
included in share purchases in the case of Class A shares, and because of the
assessment of the CDSC for certain share redemptions in the case of Class A
shares.
TAX-DEFERRED RETIREMENT PLANS -- Except as noted under "Purchases -- Class C
Shares," shares of the Fund may be purchased by all types of tax-deferred
retirement plans, including IRAs, SEP-IRA plans, 401(k) plans, 403(b) plans and
other corporate pension and profit-sharing plans. Investors should consult with
their tax adviser before establishing any of the tax-deferred retirement plans
described above.
-----------------------------
The Fund's Statement of Additional Information, dated March 1, 1995, contains
more detailed information about the Trust and the Fund, including information
related to: (i) investment policies and restrictions, including the purchase and
sale of Stock Index Options, Futures Contracts, Options on Futures Contracts,
Forward Contracts and Options on Foreign Currencies; (ii) the Trustees, officers
and investment adviser; (iii) portfolio trading; (iv) the Fund's shares,
including rights and liabilities of shareholders; (v) tax status of dividends
and distributions; (vi) the Distribution Plans; and (vii) various services and
privileges provided by the Fund for the benefit of its shareholders, including
additional information with respect to the exchange privilege.
<PAGE>
APPENDIX A
PRINCIPAL SECTORS OF THE UTILITIES INDUSTRY
The principal sectors of the utility industry in which the Fund may invest are
discussed below.
ELECTRIC -- The electric utility industry consists of companies that are engaged
principally in the generation, transmission and sale of electric energy,
although many also provide other energy-related services. Domestic electric
utility companies, in general, recently have been favorably affected by lower
fuel and financing costs and the full or near completion of major construction
programs. In addition, many of these companies recently have generated cash
flows in excess of current operating expenses and construction expenditures,
permitting some degree of diversification into unregulated businesses. Some
electric utilities have also taken advantage of the right to sell power outside
of their traditional geographic areas. Electric utility companies historically
have been subject to the risks associated with increases in fuel and other
operating costs, high interest costs on borrowings needed for capital
construction programs, costs associated with compliance with environmental and
safety regulations and changes in the regulatory climate.
In the U.S., the construction and operation of nuclear power facilities is
subject to increased scrutiny by, and evolving regulations of, the Nuclear
Regulatory Commission and state agencies having comparable jurisdiction.
Increased scrutiny might result in higher operating costs and higher capital
expenditures, with the risk that the regulators may disallow inclusion of these
costs in rate authorizations or the risk that a company may not be permitted to
operate or complete construction of a facility. In addition, operators of
nuclear power plants may be subject to significant costs for disposal of nuclear
fuel and for the de-commissioning of such plants.
TELECOMMUNICATIONS -- The telephone industry is large and highly concentrated.
Companies that distribute telephone services and provide access to the telephone
networks comprise the greatest portion of this segment. Telephone companies in
the U.S. are still experiencing the effects of the breakup of American Telephone
& Telegraph Company, which occurred in 1984. Since 1984, companies engaged in
telephone communication services have expanded their non- regulated activities
into other businesses, including cellular telephone services, data processing,
equipment retailing, computer software and hardware services, and financial
services. This expansion has provided significant opportunities for certain
telephone companies to increase their earnings and dividends at faster rates
than had been allowed in traditionally regulated businesses. Increasing
competition, technological innovations and other structural changes, however,
could adversely affect the profitability of such utilities.
GAS -- Gas transmission companies and gas distribution companies are also
undergoing significant changes. In the U.S., interstate transmission companies
are regulated by the Federal Energy Regulatory Commission, which is reducing its
regulation of the industry. Many companies have diversified into oil and gas
exploration and development, making returns more sensitive to energy prices. In
the recent decade, gas utility companies have been adversely affected by
disruptions in the oil industry and have also been affected by increased
concentration and competition. In the opinion of the Adviser, however,
environmental considerations could improve the gas industry outlook in the
future. For example, natural gas is the cleanest of the hydrocarbon fuels, and
this may result in incremental shifts in fuel consumption toward natural gas and
away from oil and coal.
WATER -- Water supply utilities are companies that collect, purify, distribute
and sell water. In the U.S. and around the world, the industry is highly
fragmented because most of the supplies are owned by local authorities.
Companies in this industry are generally mature and are experiencing little or
no per capita volume growth.
------------------------------------
There can be no assurance that the positive developments noted above, including
those relating to changing regulation, will occur or that risk factors other
than those noted above will not develop in the future.
<PAGE>
APPENDIX B
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the quality
of various debt instruments. It should be emphasized, however, that ratings are
not absolute standards of quality. Consequently, debt instruments with the same
maturity, coupon and rating may have different yields while debt instruments of
the same maturity and coupon with different ratings may have the same yield.
MOODY'S INVESTORS SERVICE, INC.
AAA: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
BAA: Bonds which are rated Baa are considered as medium grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
CA: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of over attaining any
real investment standing.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has
been suspended or withdrawn, it may be for reasons unrelated to the quality of
the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated
as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not published
in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
STANDARD & POOR'S RATING GROUP
AAA: Debt rated "AAA" has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A: Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated "BBB" is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, AND C: Debt rated "BB", "B", "CCC", "CC", and "C" is regarded,
on balance, as predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligation.
"BB" indicates the lowest degree of speculation and "C" the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposure to adverse conditions.
BB: Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
B: Debt rated "B" has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The "B" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "BB" or "BB-"
rating.
CCC: Debt rating "CCC" has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.
CC: The rating "CC" is typically applied to debt subordinated to senior debt
which is assigned an actual or implied "CCC" rating.
C: The rating "C" is typically applied to debt subordinated to senior debt which
is assigned an actual or implied "CCC-" debt rating. The "C" rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI: The rating"CI" is reserved for income bonds on which no interest is being
paid.
D: Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The "D" rating also will be used upon
filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
NR: Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
FITCH INVESTORS SERVICE, INC.
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA". Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated "F-l +".
A: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin safety
and the need for reasonable business and economic activity throughout the life
of the issue.
CCC: Bonds have certain identifiable characteristics which if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC: Bonds are minimally protect. Default in payment of interest and/or principal
seems probable over time.
C: Bonds are in imminent default in payment of interest or principal. PLUS (+)
MINUS (-): Plus and minus signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus and minus signs,
however, are not used in the "AAA" category.
NR: Indicates that Fitch does not rate the specific issue.
CONDITIONAL: A conditional rating is premised on the successful completion of a
project or the occurrence of a specific event.
SUSPENDED: A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
WITHDRAWN: A rating will be withdrawn when an issue matures or is called or
refinanced and at Fitch's discretion when an issuer fails to furnish proper and
timely information.
FITCHALERT: Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the likely direction
of such change. These are designated as "Positive", indicating a potential
upgrade, "Negative", for potential downgrade, or "Evolving", where ratings may
be lowered, FitchAlert is relatively short-term, and should be resolved within
12 months.
<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 Accountants
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116
MFS
THE FIRST NAME IN MUTUAL FUNDS
MFS UTILITIES FUND
500 Boylston Street
Boston, MA 02116
MUF-1 3/95/73.5M 35/235/335
MFS
THE FIRST NAME IN MUTUAL FUNDS
MFS UTILITIES FUND
Prospectus
March 1, 1995
<PAGE>
MFS(R) UTILITIES FUND
(A SERIES OF MFS SERIES TRUST VI)
SUPPLEMENT TO BE AFFIXED TO THE CURRENT
PROSPECTUS FOR DISTRIBUTION IN MISSOURI
The Fund engages in portfolio trading if it believes a transaction net of costs
(including custodian charges) will help in achieving its investment objective. A
high turnover rate involves greater expenses, including higher brokerage and
transactions costs, to the Fund. Dividends from ordinary income and
distributions from net short-term capital gains (whether received in cash or
reinvested in additional shares) are taxable to the Fund's shareholders as
ordinary income for federal income tax purposes.
THE DATE OF THIS SUPPLEMENT IS MARCH 1, 1995.
MVF-16MO-3/95/6.5M
<PAGE>
STATEMENT OF
MFS(R) UTILITIES FUND ADDITIONAL INFORMATION
(A member of the MFS Family of Funds(R)) March 1, 1995
- --------------------------------------------------------------------------------
Page
1. Definitions......................................................... 2
2. Investment Objective, Policies and Restrictions..................... 2
3. Management of the Fund.............................................. 11
Trustees......................................................... 11
Officers......................................................... 11
Investment Adviser............................................... 11
Custodian........................................................ 12
Shareholder Servicing Agent...................................... 13
Distributor...................................................... 13
4. Portfolio Transactions and Brokerage Commissions.................... 14
5. Shareholder Services................................................ 15
Investment and Withdrawal Programs............................... 15
Exchange Privilege............................................... 16
Tax-Deferred Retirement Plans.................................... 17
6. Tax Status.......................................................... 17
7. Determination of Net Asset Value and Performance.................... 19
8. Description of Shares, Voting Rights and Liabilities................ 21
9. Distribution Plans.................................................. 21
10. Independent Auditors and Financial Statements....................... 23
MFS UTILITIES FUND
A Series of MFS Series Trust VI
500 Boylston Street, Boston, Massachusetts 02116
(617) 954-5000
This Statement of Additional Information sets forth information which may be of
interest to investors but which is not necessarily included in the Fund's
Prospectus, dated March 1, 1995. This Statement of Additional Information should
be read in conjunction with the Prospectus, a copy of which may be obtained
without charge by contacting the Shareholder Servicing Agent (see last page for
address and phone number).
This Statement of Additional Information is NOT a prospectus and is authorized
for distribution to prospective investors only if preceded or accompanied by a
current prospectus.
<PAGE>
1. DEFINITIONS
"Fund" -- MFS(R) Utilities Fund, a non-diversified series of
MFS Series Trust VI, a Massachusetts business trust
(the "Trust"), formerly known as MFS Worldwide Total
Return Fund, until its name was changed on June 29,
1993. Prior to August 3, 1992, the Trust was known as
MFS Worldwide Total Return Trust. The Fund was a
separate open-end, non-diversified management
company, organized as a Massachusetts business trust
in 1991 and known as MFS Utilities Trust prior to
August 3, 1992. The Fund became a series of the Trust
on September 7, 1993.
"MFS" or the "Adviser" -- Massachusetts Financial Services Company, a Delaware
corporation.
"MFD" -- MFS Fund Distributors, Inc., a Delaware corporation.
"Prospectus" -- The Prospectus, dated March 1, 1995, of the Fund.
2. INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS INVESTMENT OBJECTIVE. The
Fund's investment objective is to seek capital growth and current income (income
above that available from a portfolio invested entirely in equity securities).
Any investment involves risk and there can be no assurance that the Fund will
achieve its investment objective.
INVESTMENT POLICIES. The Fund seeks to achieve its investment objective by
investing at least 65% of its assets, under normal market conditions, in equity
and debt securities issued by domestic and foreign utility companies as well as
by investing in certain other securities. The Prospectus contains a discussion
of the various types of securities in which the Fund may invest and certain
risks involved in such investments. Some of these policies and the risks
associated therewith are discussed below.
NON-DIVERSIFIED STATUS: The Fund has registered as a "non-diversified"
investment company so that the proportion of its assets that may be invested in
the securities of any one issuer is limited only by the Fund's own investment
restrictions and the diversification requirements of the Internal Revenue Code
of 1986, as amended (the "Code"). U.S. Government securities, which are
generally considered free of credit risk and are assured as to payment of
principal and interest if held to maturity, are not subject to any investment
limitation. (A "diversified" investment company would be required under the
Investment Company Act of 1940 (the "1940 Act") to maintain at least 75% of its
assets in cash (including foreign currencies), cash items, U.S. Government
securities and other securities, limited per issuer to blocks of less than 5% of
the investment company's total assets.) The portfolio will be managed actively
and the selection of securities modified as the Adviser deems necessary.
MORTGAGE PASS-THROUGH SECURITIES: The Fund may invest in mortgage pass-through
securities as described in the Prospectus. 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.
The principal governmental guarantor of mortgage pass-through securities is the
Government National Mortgage Association ("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 (the "FHA")-insured or Veterans Administration (the
"VA")-guaranteed mortgages. These guarantees, however, do not apply to the
market value or yield of mortgage pass-though 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., those whose guarantees are not backed by
the full faith and credit of the U.S. Government) include the Federal National
Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation
("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 was created by Congress in 1970 as a corporate instrumentality of the U.S.
Government for the purpose of increasing the availability of mortgage credit for
residential housing. FHLMC issues Participation Certificates ("PCs") which
represent interests in conventional mortgages (i.e., not federally insured or
guaranteed) from FHLMC's national portfolio. FHLMC guarantees timely payment of
interest and ultimate collection of principal regardless of the status of the
underlying mortgage loans.
FOREIGN SECURITIES: The Fund may invest up to 35% (and expects generally to
invest between 10% to 35%) of its total assets in foreign securities (not
including American Depositary Receipts). Investing in foreign securities
generally represents a greater degree of risk than investing in domestic
securities, due to possible exchange rate fluctuations, less publicly available
information, more volatile markets, less securities regulation, less favorable
tax provisions, war or expropriation. As a result of its investments in foreign
securities, the Fund may receive interest or dividend payments, or the proceeds
of the sale or redemption of such securities, in the foreign currencies in which
such securities are denominated. Under certain circumstances, such as where the
Adviser believes that the applicable exchange rate is unfavorable at the time
the currencies are received or the Adviser anticipates, for any other reason,
that the exchange rate will improve, the Fund may hold such currencies for an
indefinite period of time. While the holding of currencies will permit the Fund
to take advantage of favorable movements in the applicable exchange rate, such
strategy also exposes the Fund to risk of loss if exchange rates move in a
direction adverse to the Fund's position. Such losses could reduce any profits
or increase any losses sustained by the Fund from the sale or redemption of
securities and could reduce the dollar value of interest or dividend payments
received.
AMERICAN DEPOSITARY RECEIPTS: The Fund may invest in American Depositary
Receipts ("ADRs") which are certificates issued by a U.S. depository (usually a
bank) and represent a specified quantity of shares of an underlying non-U.S.
stock on deposit with a custodian bank as collateral. ADRs may be sponsored or
unsponsored. A sponsored ADR is issued by a depository which has an exclusive
relationship with the issuer of the underlying security. An unsponsored ADR may
be issued by any number of U.S. depositories. The Fund may invest in either type
of ADR. Although the U.S. investor holds a substitute receipt of ownership
rather than direct stock certificates, the use of the depository receipts in the
United States can reduce costs and delays as well as potential currency exchange
and other difficulties. The Fund may purchase securities in local markets and
direct delivery of these ordinary shares to the local depository of an ADR agent
bank in the foreign country. Simultaneously, the ADR agents create a certificate
which settles at the Fund's custodian in five days. The Fund may also execute
trades on the U.S. markets using existing ADRs. A foreign issuer of the security
underlying an ADR is generally not subject to the same reporting requirements in
the United States as a domestic issuer. Accordingly, the information available
to a U.S. investor will be limited to the information the foreign issuer is
required to disclose in its own country and the market value of an ADR may not
reflect undisclosed material information concerning the issuer of the underlying
security. ADRs may also be subject to exchange rate risks if the underlying
foreign securities are denominated in foreign currency.
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements with
sellers who are member firms (or subsidiaries thereof) of the New York Stock
Exchange (the "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 U.S. Government securities.
The repurchase agreement provides that in the event the seller fails to pay the
price agreed upon on the agreed upon delivery date or upon demand, as the case
may be, the Fund will have the right to liquidate the securities. If at the time
the Fund is contractually entitled to exercise its right to liquidate the
securities, the seller is subject to a proceeding under the bankruptcy laws or
its assets are otherwise subject to a stay order, the Fund's exercise of its
right to liquidate the securities may be delayed and result in certain losses
and costs to the Fund. The Fund has adopted and follows procedures which are
intended to minimize the risks of repurchase agreements. For example, the Fund
only enters into repurchase agreements after the Adviser has determined that the
seller is creditworthy, and the Adviser monitors that seller's creditworthiness
on an ongoing basis. Moreover, under such agreements, the value of the
securities (which are marked to market every business day) is required to be
greater than the repurchase price, and the Fund has the right to make margin
calls at any time if the value of the securities falls below the agreed upon
margin.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES: The
Fund may invest a portion of its assets in collateralized mortgage obligations
("CMOs") which are debt obligations collateralized by mortgage loans or mortgage
pass-through securities. Typically, CMOs are collateralized by certificates
issued by the GNMA, FNMA or the FHLMC but may also be collateralized by whole
loans or private mortgage pass-through securities (such collateral collectively
hereinafter referred to as "Mortgage Assets"). The Fund may also invest a
portion of its assets in multiclass pass-through securities which are interests
in a trust composed of Mortgage Assets. The Fund may invest in CMOs and
multiclass pass-through securities which are issued by the U.S. Government, its
agencies, authorities or instrumentalities or private originators of, or
investors in, mortgage loans, including savings and loan associations, mortgage
banks, commercial banks, investment banks and special purpose subsidiaries of
the foregoing. Unless the context indicates otherwise, all references herein to
CMOs include multiclass pass-through securities. Payments of principal of and
interest on the Mortgage Assets, and any reinvestment income thereon, provide
the funds to pay debt service on the CMOs or make scheduled distributions on the
multiclass pass-through securities.
In a CMO, a series of bonds or certificates is usually issued in multiple
classes with different maturities. Each class of CMOs, often referred to as a
"tranche," is issued at a specific fixed or floating coupon rate and has a
stated maturity or final distribution date. Principal prepayments on the
Mortgage Assets may cause the CMOs to be retired substantially earlier than
their stated maturities or final distribution dates resulting in a loss of all
or part of the premium if any has been paid. Certain classes of CMO's have
priority over others with respect to the receipt of prepayments on the
mortgages. Therefore, depending on the type of CMOs in which the Fund invests,
the investment may be subject to a greater or lesser risk of prepayment than
other types of mortgage-related securities. Interest is paid or accrued on all
classes of the CMOs on a monthly, quarterly or semiannual basis. The principal
of and interest on the Mortgage Assets may be allocated among the several
classes of a series of a CMO in innumerable ways. In a common structure,
payments of principal, including any principal prepayments, on the Mortgage
Assets are applied to the classes of the series of a CMO in the order of their
respective stated maturities or final distribution dates, so that no payment of
principal will be made on any class of CMOs until all other classes having an
earlier stated maturity or final distribution date have been paid in full.
The Fund may also invest in parallel pay CMOs and Planned Amortization Class
CMOs ("PAC Bonds"). Parallel pay CMOs are structured to provide payments of
principal on each payment date to more than one class. These simultaneous
payments are taken into account in calculating the stated maturity date or final
distribution date of each class, which, as with other CMO structures, must be
retired by its stated maturity date or final distribution date but may be
retired earlier. PAC Bonds generally require payments of a specified amount of
principal on each payment date. PAC Bonds are always parallel pay CMOs with the
required principal payment on such securities having the highest priority after
interest has been paid to all classes.
CORPORATE ASSET-BACKED SECURITIES: The Fund may invest in corporate asset-
backed securities. These securities, issued by trusts and special purpose
corporations, are backed by a pool of assets, such as credit card and automobile
loan receivables, representing the obligations of a number of different parties.
Corporate asset-backed securities present certain risks. For instance, in the
case of credit card receivables, these securities may not have the benefit of
any security interest in the related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the servicers to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore, there is
the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities.
Corporate asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection; and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provisions of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
resulting from ultimate default ensures payment through insurance policies or
letters of credit obtained by the issuer or sponsor from third parties. The Fund
will not pay any additional or separate fees for credit support. The degree of
credit support provided for each issue is generally based on historical
information respecting the level of credit risk associated with the underlying
assets. Delinquency or loss in excess of that anticipated or failure of the
credit support could adversely affect the return on an instrument in such a
security.
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
banks of the Federal Reserve System and member firms (or subsidiaries thereof)
of the Exchange, and would be required to be secured continuously by collateral
in cash, cash equivalents or U.S. Government securities maintained on a current
basis in an amount at least equal to the market value of the securities loaned.
The Fund would have the right to call a loan and obtain the securities loaned at
any time on customary industry settlement notice (which will usually not exceed
five days). For the duration of a loan, the Fund would continue to receive the
equivalent of the interest or dividends paid by the issuer on the securities
loaned and would also receive compensation from the investment of the
collateral. The Fund would not, however, have the right to vote any securities
having voting rights during the existence of the loan, but would call the loan
in anticipation of an important vote to be taken among holders of the securities
or of the giving or withholding of their consent on a material matter affecting
the investment. As with other extensions of credit there are risks of delay in
recovery or even loss of rights in the collateral should the borrower of the
securities fail financially. However, the loans would be made only to entities
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.
"WHEN-ISSUED" SECURITIES: The Fund may purchase debt securities on a "when-
issued" or on a "forward delivery" basis. The commitment to purchase an
obligation for which payment will be made on a future date may be deemed a
separate security. The Fund does not pay for these securities until received,
and does not start earning interest on them until the contractual settlement
date. When the Fund commits to purchase these securities on a "when-issued" or
"forward delivery" basis, it will set up procedures consistent with the General
Statement of Policy of the Securities and Exchange Commission (the "SEC")
concerning such purchases. Since that policy currently recommends that an amount
of the Fund's assets equal to the amount of the purchase be held aside or
segregated to be used to pay for the commitment, the Fund will always have cash,
short-term money market instruments or high quality debt securities sufficient
to cover any commitments or to limit any potential risk. Although the Fund does
not intend to make such purchases for speculative purposes and intends to adhere
to the provisions of the SEC policy, purchases of securities on such bases may
involve more risk than other types of purchases. For example, the Fund may have
to sell assets which have been set aside in order to meet redemptions. Also, if
the Fund determines it is necessary to sell the "when-issued" or "forward
delivery" securities before delivery, the Fund may incur a loss because of
market fluctuations since the time the commitment to purchase such securities
was made.
INDEXED SECURITIES: The Fund may purchase securities whose prices are indexed to
the prices of other securities, securities indices, currencies, precious metals
or other commodities, or other financial indicators. Indexed securities
typically, but not always, are debt securities or deposits whose value at
maturity or coupon rate is determined by reference to a specific instrument or
statistic. Gold-indexed securities, for example, typically provide for a
maturity value that depends on the price of gold, resulting in a security whose
price tends to rise and fall together with gold prices. Currency-indexed
securities typically are short-term to intermediate-term debt securities whose
maturity values or interest rates are determined by reference to the values of
one or more specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities of equivalent issuers. Currency-indexed securities
may be positively or negatively indexed; that is, their maturity value may
increase when the specified currency value increases, resulting in a security
that performs similarly to a foreign-denominated instrument, or their maturity
value may decline when foreign currencies increase, resulting in a security
whose price characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
government agencies.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: As described in the Prospectus, the Fund
may enter into mortgage "dollar roll" transactions pursuant to which it sells
mortgage-backed securities for delivery in the future and simultaneously
contracts to repurchase substantially similar securities on a specified future
date. During the roll period, the Fund foregoes principal and interest paid on
the mortgage-backed securities. The Fund is compensated for the lost interest by
the difference between the current sales price and the lower price for the
future purchase (often referred to as the "drop") as well as by the interest
earned on the cash proceeds of the initial sale. The Fund may also be
compensated by receipt of a commitment fee.
RISKS OF INVESTING IN LOWER RATED BONDS: As noted in the Prospectus, up to 20%
of the debt securities held by the Fund may be bonds rated Ba or lower by
Moody's Investors Service, Inc. ("Moody's") or BB or lower by Standard & Poor's
Ratings Group ("S&P") or Fitch Investors Service, Inc. ("Fitch") and comparable
unrated securities (commonly known as "junk bonds"). No minimum rating standard
is required by the Fund. These securities are considered speculative and, while
generally providing greater income than investments in higher rated securities,
will involve greater risk of principal and income (including the possibility of
default or bankruptcy of the issuers of such securities) and may involve greater
volatility of price (especially during periods of economic uncertainty or
change) than securities in the higher rating categories 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. For
example, federal rules require that savings and loan associations gradually
reduce their holdings of high-yield securities. An effect of such legislation
may be to depress the prices of outstanding lower rated high yielding fixed
income securities. The market for these lower rated fixed income securities may
be less liquid than the market for investment grade fixed income securities.
Furthermore, the liquidity of these lower rated securities may be affected by
the market's perception of their credit quality. Therefore, the Adviser's
judgment may at times play a greater role in valuing these securities than in
the case of investment grade fixed income securities, and it also may be more
difficult during times of certain adverse market conditions to sell these lower
rated securities to meet redemption requests or to respond to changes in the
market.
While the Adviser may refer to ratings issued by established credit rating
agencies, it is not the Fund's policy to rely exclusively on ratings issued by
these rating agencies, but rather to supplement such ratings with the Adviser's
own independent and ongoing review of credit quality. To the extent the Fund
invests in these lower rated securities, the achievement of its investment
objective may be more dependent on the Adviser's own credit analysis than in the
case of a fund investing in higher quality fixed income securities. These lower
rated securities may also include zero coupon bonds which are described in the
Prospectus.
OPTIONS ON STOCK INDICES: The Fund may write (sell) covered call and put options
and purchase call and put options on stock indices for the purpose of increasing
its gross income and to protect its portfolio against declines in the value of
securities it owns or increases in the value of securities to be acquired.
The Fund may cover call options on stock indices by owning securities whose
price changes, in the opinion of the Adviser, are expected to be similar to
those of the index, or by having an absolute and immediate right to acquire such
securities without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion or
exchange of other securities in its portfolio. Nevertheless, 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. A Fund may also cover call options
on stock indices by holding a call on the same index and in the same principal
amount as the call written where the exercise price of the call held (a) is
equal to or less than the exercise price of the call written or (b) is greater
than the exercise price of the call written if the difference is maintained by
the Fund in cash, or high grade government securities in a segregated account
with its custodian. The Fund may cover put options on stock indices by
maintaining cash, or high grade government securities with a value equal to the
exercise price in a segregated account with its custodian, or else 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 difference is maintained by the Fund in cash or high grade
government securities in a segregated account with its custodian. Put and call
options on stock indices 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, they are 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 a 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 purchase of call options on stock indices may be used by the Fund to attempt
to reduce the risk of missing a broad market advance, or an advance in an
industry or market segment, at a time when the Fund holds uninvested cash or
short-term debt securities awaiting investment. When purchasing call options for
this purpose, the Fund will also bear the risk of losing all or a portion of the
premium paid, and related transaction costs, if the value of the index does not
rise. The purchase of call options on stock indices when the Fund is
substantially fully invested is a form of leverage, up to the amount of the
premium and related transaction costs, and involves risks of loss and of
increased volatility similar to those involved in purchasing calls on securities
the Fund owns.
The Fund also may 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
correlation between the changes in value of the index and the changes in value
of the Fund's security holdings.
Stock Index Options, and stock index futures contracts, described below, provide
for the making and acceptance of a cash settlement based on changes in the value
of the underlying index, rather than delivery of an underlying security. The
index underlying a Stock Index Option is typically a broad-based index, such as
the Standard & Poor's 500 Index, designed to measure movements in the equity
market as a whole. In the event that Stock Index Options, or stock index futures
contracts, are introduced on indices of utility securities, the Fund would
likely trade such instruments for the same purposes described herein.
FUTURES CONTRACTS: The Fund may enter into contracts for the purchase or sale
for future delivery of fixed income securities or foreign currencies (or
contracts based on indices of foreign currencies or fixed income securities,
including municipal bond indices, as such instruments become available for
trading) as well as stock index futures contracts (collectively "Futures
Contracts"). This investment technique is designed to hedge (i.e., to protect)
against anticipated future changes in interest or exchange rates or declines in
the stock market which otherwise might adversely affect the value of the Fund's
portfolio securities or adversely affect the prices of long-term bonds or other
securities which the Fund intends to purchase at a later date. Such transactions
may also be entered into for non-hedging purposes, to the extent permitted by
applicable law, which involves greater risks.
THE FOLLOWING DISCUSSION APPLIES TO FUTURES CONTRACTS OTHER THAN STOCK INDEX
FUTURES CONTRACTS.
A "sale" of a Futures Contract means a contractual obligation to deliver the
securities or foreign currency called for by the contract at a fixed price at a
specified time in the future. A "purchase" of a Futures Contract means a
contractual obligation to acquire the securities or foreign currency at a fixed
price at a specified time in the future. While Futures Contracts provide for the
delivery of securities or currencies, such deliveries are very seldom made.
Generally, a Futures Contract is terminated by entering into an offsetting
transaction. The Fund will incur brokerage fees when it purchases and sells
Futures Contracts. At the time such a purchase or sale is made, the Fund must
allocate cash or securities as a margin deposit ("initial deposit"). It is
expected that the initial deposit will vary but may be as low as 5% or less of
the value of the contract. The Futures Contract is valued daily thereafter and
the payment of "variation margin" may be required to be paid or received, so
that each day the Fund may provide or receive cash that reflects the decline or
increase in the value of the contract.
The purpose of the purchase or sale of a Futures Contract, in the case of a
portfolio holding long-term debt securities, is to protect the Fund from
fluctuations in interest rates without actually buying or selling long-term debt
securities. For example, if the Fund owned long-term bonds and interest rates
were expected to increase, the Fund might enter into Futures Contracts for the
sale of debt securities. If interest rates did increase, the value of the debt
securities in the portfolio would decline, but the value of the Fund's Futures
Contracts should increase at approximately the same rate, thereby keeping the
net asset value of the Fund from declining as much as it otherwise would have.
The Fund could accomplish similar results by selling bonds with long maturities
and investing in bonds with short maturities when interest rates are expected to
increase or by buying bonds with long maturities and selling bonds with short
maturities when interest rates are expected to decline. However, since the
futures market is more liquid than the cash market, the use of Futures Contracts
as an investment technique allows the Fund to maintain a defensive position
without having to sell its portfolio securities.
Similarly, when it is expected that interest rates may decline, Futures
Contracts may be purchased to hedge against anticipated purchases of long-term
bonds at higher prices. Since the fluctuations in the value of Futures Contracts
should be similar to that of long-term bonds, the Fund could take advantage of
the anticipated rise in the value of long-term bonds without actually buying
them until the market had stabilized. At that time, the Futures Contracts could
be liquidated and the Fund could buy long-term bonds on the cash market.
Purchases of Futures Contracts would be particularly appropriate when the cash
flow from the sale of new shares of the Fund could have the effect of diluting
dividend earnings. To the extent the Fund enters into Futures Contracts for this
purpose, the assets in the segregated asset account maintained to cover the
Fund's obligations with respect to such Futures Contracts will consist of cash,
cash equivalents or high quality debt securities from the portfolio of the Fund
in an amount equal to the difference between the fluctuating market value of
such Futures Contracts and the aggregate value of the initial and variation
margin payments made by the Fund with respect to such Futures Contracts, thereby
assuring that the transactions are unleveraged.
Futures Contracts on foreign currencies may be used in a similar manner, in
order to protect against declines in the dollar value of portfolio securities
denominated in foreign currencies, or increases in the dollar value of
securities to be acquired.
A Futures Contract on an index of fixed income securities provides for the
making and acceptance of a cash settlement based on changes in value of the
underlying index. The index underlying such a Futures Contract will generally be
a broad based index of fixed income securities designed to reflect movements in
the relevant market as a whole.
STOCK INDEX FUTURES CONTRACTS. The Fund may enter into stock index Futures
Contracts in order to protect the Fund's current or intended stock investments
from broad fluctuations in stock prices. For example, the Fund may sell Futures
Contracts in anticipation of or during a decline in market prices to attempt to
offset the decrease in market value of the Fund's securities portfolio that
might otherwise result. If such market decline occurs, the loss in value of
portfolio securities may be offset, in whole or in part, by gains on the futures
position. When the Fund is not fully invested in the securities market and
anticipates a significant market advance, it may purchase Futures Contracts in
order to gain rapid market exposure that may, in part or in whole, offset
increases in the cost of securities that the Fund intends to purchase. As such
acquisitions are made, the corresponding positions in Futures Contracts will be
closed out. In a substantial majority of these transactions, the Fund will
purchase such securities upon the termination of the futures position, but under
unusual market conditions, a long futures position may be terminated without a
related purchase of securities. The trading of stock index Futures Contracts is
also subject to the initial deposit and margin requirements described above. The
Fund may also enter into transactions in Futures Contracts for non-hedging
purposes to the extent permitted by applicable law.
OPTIONS ON FUTURES CONTRACTS: The Fund may write and purchase options to buy or
sell Futures Contracts ("Options on Futures Contracts"). The writing of a call
Option on a Futures Contract may constitute a partial hedge against declining
prices of the security or currency underlying the Futures Contract or the
securities or currency comprising the index underlying the Futures Contract. If
the futures price at expiration of the option is below the exercise price, the
Fund will retain the full amount of the option premium, less related transaction
costs, which provides a partial hedge against any decline that may have occurred
in the Fund's portfolio holdings. The writing of a put Option on a Futures
Contract may constitute a partial hedge against increasing prices of the
security or currency underlying the Futures Contract or the securities or
currency comprising the index underlying the Futures Contract. If the futures
price at expiration of the option is higher than the exercise price, the Fund
will retain the full amount of the option premium, less related transaction
costs, which provides a partial hedge against any increase in the price of
securities which the Fund intends to purchase. If a put or call option the Fund
has written is exercised, the Fund will incur a loss which will be reduced by
the amount of the premium it receives. Depending on the degree of correlation
between changes in the value of its portfolio securities and changes in the
value of its futures positions, the Fund's losses from existing Options on
Futures Contracts may to some extent be reduced or increased by changes in the
value of portfolio securities. Such transactions may also be entered into for
non-hedging purposes to the extent permitted by applicable law, which involves
greater risks.
The Fund may purchase Options on Futures Contracts for hedging purposes as an
alternative to purchasing or selling the underlying Futures Contracts. For
example, where a decrease in the value of portfolio securities is anticipated as
a result of a projected market-wide decline, a rise in interest rates or a
decline in the dollar value of foreign currencies in which portfolio securities
are denominated, the Fund may, in lieu of selling Futures Contracts, purchase
put options thereon. In the event that such decrease in portfolio value occurs,
it may be offset, in whole or part, by a profit on the option. Conversely, where
it is projected that the value of securities to be acquired by the Fund will
increase prior to acquisition, due to a market advance, or a decline in interest
rates or a rise in the dollar value of foreign currencies in which securities to
be acquired are denominated, the Fund may purchase call Options on Futures
Contracts, rather than purchasing the underlying Futures Contracts. As in the
case of options, the writing of Options on Futures Contracts may require the
Fund to forgo all or a portion of the benefits of favorable movements in the
price of portfolio securities, and the purchase of Options on Futures Contracts
may require the Fund to forgo all or a portion of such benefits up to the amount
of the premium paid and related transaction costs. The Fund may also enter into
transactions in Options on Futures Contracts for non-hedging purposes, to the
extent permitted by applicable law.
The Fund may cover the writing of call Options on Futures Contracts (a) through
purchases of the underlying Futures Contract, (b) through ownership of the
instrument, or instruments included in the index, underlying the Futures
Contract or (c) through the holding of a call on the same Futures Contract and
in the same principal amount as the call written where the exercise price of the
call held (i) is equal to or less than the exercise price of the call written or
(ii) is greater than the exercise price of the call written if the difference is
maintained by the Fund in cash, short-term money market instruments or high
quality debt securities in a segregated account with its custodian. The Fund may
cover the writing of put Options on Futures Contracts (a) through sales of the
underlying Futures Contract, (b) through segregation of cash, short-term money
market instruments or high quality debt securities in an amount equal to the
value of the security or index underlying the Futures Contract, or (c) through
the holding of a put on the same Futures Contract and in the same principal
amount as the put written where the exercise price of the put held is equal to
or greater than the exercise price of the put written, or is less than the
exercise price of the put written if the difference is maintained by the Fund in
cash, short-term money market instruments or high quality debt securities in a
segregated account with its custodian. Put and call Options on Futures Contracts
may also be covered in such other manner as may be in accordance with the rules
of the exchange on which the option is traded and applicable laws and
regulations. Upon the exercise of a call Option on a Futures Contract written by
the Fund, the Fund will be required to sell the underlying Futures Contract
which, since 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 Futures Contract, will close out
its futures position. An Option on a Futures Contract is traded on the same
contract market as the underlying Futures Contact, subject to regulation by the
Commodity Futures Trading Commission ("CFTC") and the performance guarantee of
the exchange clearing house. Options on Futures Contracts, as noted in the
Prospectus, are also traded on foreign exchanges.
FORWARD CONTRACTS: The Fund may enter into forward foreign currency exchange
contracts for the purchase or sale of a specific currency at a future date at a
price set at the time of the contract (a "Forward Contract"). The Fund may enter
into Forward Contracts for hedging purposes as well as for non-hedging purposes.
The Fund may also enter into Forward Contracts for "crosshedging" as noted in
the Prospectus. Transactions in Forward Contracts entered into for hedging
purposes will include forward purchases or sales of foreign currencies for the
purpose of protecting the dollar value of securities denominated in a foreign
currency or protecting the dollar equivalent of interest or dividends to be paid
on such securities. By entering into such transactions, however, the Fund may be
required to forgo the benefits of advantageous changes in exchange rates. The
Fund may also enter into transactions in Forward Contracts for other than
hedging purposes which present greater profit potential but also involve
increased risk. For example, if the Adviser believes that the value of a
particular foreign currency will increase or decrease relative to the value of
the U.S. dollar, the Fund may purchase or sell such currency, respectively,
through a Forward Contract. If the expected changes in the value of the currency
occur, the Fund will realize profits which will increase its gross income. Where
exchange rates do not move in the direction or to the extent anticipated,
however, the Fund may sustain losses which will reduce its gross income. Such
transactions, therefore, could be considered speculative.
The Fund has established procedures consistent with statements by the SEC and
its staff regarding the use of Forward Contracts by registered investment
companies, which require the use of segregated assets or "cover" in connection
with the purchase and sale of such contracts. In those instances in which the
Fund satisfies this requirement through segregation of assets, it will maintain,
in a segregated account, cash, cash equivalents or high grade debt securities,
which will be marked to market on a daily basis, in an amount equal to the value
of its commitments under Forward Contracts.
OPTIONS ON FOREIGN CURRENCIES: The Fund may purchase and write put and call
options on foreign currencies ("Options on Foreign Currencies") for the purpose
of protecting against declines in the dollar value of foreign portfolio
securities and against increases in the dollar cost of foreign securities to be
acquired. For example, a decline in the dollar value of a foreign currency in
which portfolio securities are denominated will reduce the dollar value of such
securities, even if their value in the foreign currency remains constant. In
order to protect against such diminutions in the value of portfolio securities,
the Fund may purchase put Options on the Foreign Currency. If the value of the
currency did decline, the Fund would have the right to sell such currency for a
fixed amount in dollars and would thereby offset, in whole or in part, the
adverse effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby increasing the cost of such
securities, the Fund may purchase call options thereon. The purchase of such
options could offset, at least partially, the effects of the adverse movements
in exchange rates. As in the case of other types of options, however, the
benefit to the Fund deriving from purchases of Options on Foreign Currencies
would be reduced by the amount of the premium and related transaction costs. In
addition, where currency exchange rates do not move in the direction or to the
extent anticipated, the Fund could sustain losses on transactions in Options on
Foreign Currencies 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 may, instead of purchasing a put option, write a call option on the relevant
currency. If the expected decline occurred, the option would most likely not be
exercised, and the diminution in value of portfolio securities would be offset
by the amount of the premium received less related transaction costs. As in the
case of other types of options, therefore, the writing of Options on Foreign
Currencies will constitute only a partial hedge.
RISK FACTORS: IMPERFECT CORRELATION OF HEDGING INSTRUMENTS WITH THE FUND'S
PORTFOLIO -- The Fund's ability effectively to hedge all or a portion of its
portfolio through transactions in options, Futures Contracts, and Forward
Contracts will depend on the degree to which price movements in the underlying
index or instrument correlate with price movements in the relevant portion of
the Fund's portfolio. If the values of the portfolio securities being hedged do
not move in the same amount or direction as the instruments underlying options,
Futures Contracts or Forward Contracts traded, the Fund's hedging strategy may
not be successful and the Fund could sustain losses on its hedging strategy
which would not be offset by gains on its portfolio. It is also possible that
there may be a negative correlation between the instrument underlying an option,
Futures Contract or Forward Contract traded and the portfolio securities being
hedged, which could result in losses both on the hedging transaction and the
portfolio securities. In such instances, the Fund's overall return could be less
than if the hedging transaction had not been undertaken. In the case of Futures
and options, the portfolio securities which are being hedged may not be the same
type of obligation underlying such contract. As a result, the correlation
probably will not be exact. Consequently, the Fund bears the risk that the price
of the portfolio securities being hedged will not move in the same amount or
direction as the underlying index or obligation.
It should be noted that 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 Contracts based on a broad market index,
because 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. The
correlation between prices of securities and prices of options, Futures
Contracts or Forward Contracts may be distorted due to differences in the nature
of the markets, such as differences in margin requirements, the liquidity of
such markets and the participation of speculators in the option, Futures
Contract and Forward Contract markets. Due to the possibility of distortion, a
correct forecast of general interest rate trends by the Adviser may still not
result in a successful transaction.
The trading of Options on Futures Contracts also entails the risk that changes
in the value of the underlying Futures Contract will not be fully reflected in
the value of the option. The risk of imperfect correlation, however, generally
tends to diminish as the maturity or termination date of the option, Futures
Contract or Forward Contract approaches. In addition, where the Fund enters into
Forward Contracts as a "cross hedge" (i.e., the purchase or sale of a Forward
Contract on one currency to hedge against risk of loss arising from changes in
value of a second currency), the Fund incurs the risk of imperfect correlation
between changes in the values of the two currencies which would result in
losses. It should also be noted that the Fund may purchase and sell options,
Futures Contracts, Options on Futures Contracts and Forward Contracts not only
for hedging purposes, but also for non-hedging purposes, including for the
purpose of increasing its return on portfolio securities. As a result, in the
event of adverse market movements, the Fund might be subject to losses, which
would not be offset by increases in the value of portfolio securities or
declines in the cost of securities to be acquired. In addition, 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 trading of
options, Futures Contracts and Forward Contracts also entails the risk that, if
the Adviser's judgment as to the general direction of the stock market or
interest or exchange rates is incorrect, the Fund's overall performance may be
poorer than if it had not entered into any such contract. For example, if the
Fund has hedged against the possibility of an increase in interest rates, and
rates instead decline, the Fund will lose part or all of the benefit of the
increased value of the securities being hedged, and may be required to meet
ongoing daily variation margin payments.
As a result, the Fund will incur the risk that losses on such transactions will
not be offset by corresponding increases in the value of portfolio securities or
decreases in the cost of securities to be acquired.
RISK FACTORS: POTENTIAL LACK OF A LIQUID SECONDARY MARKET -- Prior to exercise
or expiration, a position in an exchange-traded Stock Index Option, Futures
Contract, Option on a Futures Contract or Option on a Foreign Currency can only
be terminated by entering into a closing purchase or sale transaction, which
requires a secondary market for such instruments on the exchange on which the
initial transaction was entered into. If no such market exists, it may not be
possible to close out a position, and the Fund could be required to purchase or
sell the underlying instrument or meet ongoing variation margin requirements.
The inability to close out option or futures positions also could have an
adverse effect on the Fund's ability to hedge its portfolio effectively.
The liquidity of a secondary market in an option or Futures Contract may be
adversely affected by "daily price fluctuation limits" established by the
exchanges, which limit the amount of fluctuation in the price of a contract
during a single trading day and prohibit trading beyond such limits once they
have been reached. Such limits could prevent the Fund from liquidating open
positions, which could render its hedging strategy unsuccessful and result in
trading losses. The exchanges on which options and Futures Contracts are traded
have also established a number of limitations governing the maximum number of
positions which may be traded by a trader, whether acting alone or in concert
with others. Further, the purchase and sale of exchange-traded options and
Futures Contracts is subject to the risk of trading halts, suspensions, exchange
or clearing corporation equipment failures, government intervention, insolvency
of a brokerage firm, intervening broker or clearing corporation or other
disruptions of normal trading activity, which could make it difficult or
impossible to liquidate existing positions or to recover excess variation margin
payments.
RISK FACTORS: OPTIONS ON FUTURES CONTRACTS -- In order to profit from the
purchase of an Option on a Futures Contract, it may be necessary to exercise the
Option and liquidate the underlying Futures Contract, subject to all of the
risks of futures trading. The writer of an Option on a Futures Contract is
subject to the risks of futures trading, including the requirement of initial
and variation margin deposits.
ADDITIONAL RISKS OF TRANSACTIONS RELATED TO FOREIGN CURRENCIES AND TRANSACTIONS
NOT CONDUCTED ON U.S. EXCHANGES -- The available information on which the Fund
will make trading decisions concerning transactions related to foreign
currencies or foreign securities may not be as complete as the comparable data
on which the Fund makes investment and trading decisions in connection with
other transactions. Moreover, because the foreign currency market is a global,
24-hour market, and the markets for foreign securities as well as markets in
foreign countries may be operating during non-business hours in the U.S., events
could occur in such markets which would not be reflected until the following
day, thereby rendering it more difficult for the Fund to respond in a timely
manner.
In addition, over-the-counter transactions can only be entered into with a
financial institution willing to take the opposite side, as principal, of the
Fund's position, unless the institution acts as broker and is able to find
another counter-party willing to enter into the transaction with the Fund. This
could make it difficult or impossible to enter into a desired transaction or
liquidate open positions, and could therefore result in trading losses. Further,
over-the-counter transactions are not subject to the performance guarantee of an
exchange clearing house and the Fund will therefore be subject to the risk of
default by, or the bankruptcy of, a financial institution or other
counter-party.
Transactions on exchanges located in foreign countries may not be conducted in
the same manner as those entered into on U.S. exchanges, and may be subject to
different margin, exercise, settlement or expiration procedures.
As a result, many of the risks of over-the-counter trading may be present in
connection with such transactions. Moreover, the SEC or CFTC have jurisdiction
over the trading in the U.S. of many types of over-the-counter and foreign
instruments, and such agencies could adopt regulations or interpretations which
would make it difficult or impossible for the Fund to enter into the trading
strategies identified herein or to liquidate existing positions.
RESTRICTIONS ON THE USE OF OPTIONS AND FUTURES: In order to assure that the Fund
will not be deemed to be a "commodity pool" for purposes of the Commodity
Exchange Act, regulations of the CFTC require that the Fund enter into
transactions in Futures Contracts and Options on Futures Contracts only (i) for
BONA FIDE hedging purposes (as defined in CFTC regulations), or (ii) for
non-hedging purposes, provided that the aggregate initial margin and premiums on
such non-hedging positions does not exceed 5% of the liquidation value of the
Fund's assets. In addition, the Fund must comply with the requirements of
various state securities laws in connection with such transactions.
The Fund has adopted the additional policy that it will not enter into a Futures
Contract if, immediately thereafter, the value of securities and other
obligations underlying all such Futures Contracts would exceed 50% of the value
of the Fund's total assets.
When the Fund purchases a Futures Contract, an amount of cash, cash equivalents
or high quality debt securities will be deposited in a segregated account with
the Fund's custodian so that the amount so segregated will at all times equal
the value of the Futures Contract, thereby insuring that the use of such Futures
Contract is unleveraged.
PORTFOLIO TURNOVER: Although the Fund does not intend to seek short-term
profits, securities in its portfolio will be sold whenever the Adviser believes
it is appropriate to do so without regard to the length of time the particular
asset may have been held. A high turnover rate involves greater expenses,
including higher brokerage and transactions costs, to the Fund. The Fund engages
in portfolio trading if it believes a transaction net of costs (including
custodian charges) will help in achieving its investment objective (see
"Portfolio Transactions and Brokerage Commissions" below).
The investment objective and policies described above are not fundamental and
may be changed without shareholder approval.
INVESTMENT RESTRICTIONS. The Fund has adopted the following restrictions which
cannot be changed without the approval of the holders of a majority of the
Fund's shares (which, as used in this Statement of Additional Information, means
the lesser of (i) more than 50% of the outstanding shares of the Trust (or a
class or series, as applicable) or (ii) 67% or more of the outstanding shares of
the Trust (or a class or series, as applicable) present at a meeting at which
holders of more than 50% of the outstanding shares of the Trust (or a class or
series, as applicable) are represented in person or by proxy):
The Fund may not:
(1) Borrow amounts in excess of 33 1/3% of its gross assets, and then
only as a temporary measure for extraordinary or emergency purposes, or
pledge, mortgage or hypothecate its assets (taken at market value) to an
extent greater than 33 1/3% of its gross assets, in each case taken at the
lower of cost or market value and subject to a 300% asset coverage
requirement (for the purpose of this restriction, collateral arrangements
with respect to options, Futures Contracts, Options on Futures Contracts,
Forward Contracts and Options on Foreign Currencies and payments of initial
and variation margin in connection therewith are not considered a pledge of
assets); while such 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) 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) Invest 25% or more of the market value of its total assets in
securities of issuers in any one industry (excluding obligations of the U.S.
Government and repurchase agreements collateralized by obligations of the
U.S. Government), except that the Fund will invest at least 25% of its total
assets in the utilities industry;
(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 foreign currencies, Forward Contracts, Futures Contracts,
options, Options on Futures Contracts and Options on Foreign Currencies) in
the ordinary course of its business. The Fund reserves the freedom of action
to hold and to sell real estate and commodities acquired as a result of the
ownership of securities;
(5) Make loans to other persons except through the lending of its
portfolio securities and except through repurchase agreements. For these
purposes the purchase of commercial paper or all or a portion of an issue of
debt securities shall not be considered the making of a loan;
(6) Invest for the purpose of exercising control or management;
(7) 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 transactions and except that the Fund may make
margin deposits in connection with Futures Contracts, Options on Futures
Contracts, Forward Contracts, options and Options on Foreign Currencies;
(8) 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;
(9) Invest in illiquid investments, including securities which are
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, market makers do not exist or will
not entertain bids or offers), unless the Board of Trustees has determined
that such securities are liquid based upon trading markets for the specific
security, if more than 10% of the Fund's assets (taken at market value)
would be invested in such securities.
Except with respect to Investment Restriction (1), these investment restrictions
are adhered to at the time of purchase or utilization of assets; a subsequent
change in circumstances will not be considered to result in a violation of
policy.
OTHER INVESTMENT POLICIES. The Fund has also adopted the following additional
investment policies that may be required by various laws and administrative
positions. These investment policies are not fundamental and may be changed by
the Fund without approval of its shareholders.
(a) 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; (b) during the coming year, (i) less than 5% of the Fund's assets
will be used to engage in short sales permitted by Investment Restriction (8)
and (ii) purchases of warrants will not exceed 5% of the Fund's net assets
(included within that amount, but not exceeding 2% of the Fund's net assets, may
be warrants not listed on the New York or American Stock Exchange); (c) the Fund
will not invest more than 5% of its total assets in companies which, including
their respective predecessors, have a record of less than three years'
continuous operation; (d) the Fund will not purchase or retain in its portfolio
any securities issued by an issuer any of whose officers, directors, trustees or
security holders is an officer or Trustee of the Fund, or is a partner, officer,
Director or Trustee of the Adviser, if after the purchase of the securities of
such issuer by the Fund one or more of such persons owns beneficially more than
1/2 of 1% of the shares or securities, or both, of such issuer, and such persons
owning more than 1/2 of 1% of such shares or securities together own
beneficially more than 5% of such shares or securities, or both; (e) the Fund
will not write, purchase or sell any put or call option or any combination
thereof, provided that this shall not prevent the Fund from writing, purchasing
and selling puts, calls or combinations thereof with respect to securities
(including yields on securities), indexes of securities, foreign currencies and
Futures Contracts; (f) the Fund may not purchase voting securities of any issuer
if such purchase, at the time thereof, would cause more than 10% of the
outstanding voting securities of such issuer to be held by the Fund (for this
purpose, all indebtedness of an issuer shall be deemed a single class and all
preferred stock of an issuer shall be deemed a single class); (g) the Fund will
not purchase securities issued by any closed-end investment company except by
purchase in the open market where no commission or profit to a sponsor or dealer
results from such purchase other than the customary broker's commission, or
except when such purchase, though not made in the open market, is part of a plan
of merger or consolidation; provided, however, that the Fund shall not purchase
such securities if such purchase at the time thereof would cause more than 10%
of its total assets (taken at market value) to be invested in the securities of
such issuers, or more than 3% of the total outstanding voting securities of any
closed-end investment company to be held by the Fund. The Fund shall not
purchase securities issued by any open-end investment company; (h) the Fund will
only borrow amounts from banks and then only has permitted by Investment
Restriction (1); and (i) the Board of Trustees will determine a security is
liquid based upon trading markets for the specific security as stated in
Investment Restriction No. 9 only if the security is a Rule 144A restricted
security.
3. MANAGEMENT OF THE FUND
The Board of Trustees provides broad supervision over the affairs of the Fund.
The Adviser is responsible for the investment management of the Fund's assets,
and the officers of the Trust are responsible for its operations. The Trustees
and officers are listed below, together with their principal occupations during
the past five years. (Their titles may have varied during that period.)
TRUSTEES
A. KEITH BRODKIN,* Chairman and President
Massachusetts Financial Services Company, Chairman
RICHARD B. BAILEY*
Private Investor; Massachusetts Financial Services Company, former Chairman
(until September 30, 1991)
MARSHALL N. COHAN
Private Investor
Address: 2524 Bedford Mews Drive, Wellington, Florida
LAWRENCE H. COHN, M.D.
Brigham and Women's Hospital, Chief of Cardiac Surgery; Harvard Medical School,
Professor of Surgery
Address: 75 Francis Street, Boston, Massachusetts
THE HON. SIR J. DAVID GIBBONS, KBE
Edmund Gibbons Limited, Chief Executive Officer; The Bank of N.T. Butterfield &
Son Ltd., Chairman
Address: 21 Reid Street, Hamilton, Bermuda
ABBY M. O'NEILL
Private Investor; Rockefeller Financial Services, Inc. (investment advisers),
Director
Address: 30 Rockefeller Plaza, Room 5600, New York, New York
WALTER E. ROBB, III
Benchmark Advisors, Inc. (corporate financial consultants), President and
Treasurer
Address: 110 Broad Street, Boston, Massachusetts
ARNOLD D. SCOTT*
Massachusetts Financial Services Company, Senior Executive Vice President and
Secretary
JEFFREY L. SHAMES*
Massachusetts Financial Services Company, President
J. DALE SHERRATT
Insight Resources, Inc. (acquisition planning specialists), President (since
January, 1990); The Kendall Company (health care products), Chairman and Chief
Executive Officer (prior to January, 1990); Colgate-Palmolive Company, Senior
Executive Vice President (prior to January, 1990)
Address: One Liberty Square, 10th Floor, Boston, Massachusetts
WARD SMITH
NACCO Industries (holding company), Chairman (prior to June 1994); Sundstrand
Corporation (diversified mechanical manufacturer), Director; Society
Corporation (bank holding company), Director (prior to April, 1992); Society
National Bank (commercial bank), Director (1986 to April, 1992)
Address: 5875 Landerbrook Drive, Mayfield Heights, Ohio
OFFICERS
A. KEITH BRODKIN,* President
Massachusetts Financial Services Company, Chairman
W. THOMAS LONDON,* Treasurer
Massachusetts Financial Services Company, Senior Vice President and Assistant
Treasurer
STEPHEN E. CAVAN,* Secretary and Clerk
Massachusetts Financial Services Company, Senior Vice President, General Counsel
and Assistant Secretary
JAMES O. YOST,* Assistant Treasurer
Massachusetts Financial Services Company, Vice President
JAMES R. BORDEWICK, JR.,* Assistant Secretary Massachusetts
Financial Services Company, Vice President and Associate General Counsel (since
September 1990); associated with a major law firm (prior to August, 1990)
_______________
*"Interested persons" (as defined in the 1940 Act) of the Adviser, whose address
is 500 Boylston Street, Boston, Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain MFS affiliates
or with certain other funds of which MFS or a subsidiary is the investment
adviser or distributor. Mr. Brodkin, the Chairman of MFD, Messrs. Shames and
Scott, Directors of MFD, and Mr. Cavan, the Secretaryretary of MFD, hold similar
positions with certain other MFS affiliates. Mr. Bailey is a Director of Sun
Life Assurance Company of Canada (U.S.) ("Sun Life of Canada (U.S.)"), the
corporate parent of MFS.
The Trust has adopted a retirement plan for non-interested Trustees and Mr.
Bailey. Under this plan, a Trustee will retire upon reaching age 72 and if the
Trustee has completed at least five years of service, he would be entitled to
annual payments during his lifetime of up to 50% of such Trustee's average
annual compensation (based on the three years prior to his retirement) depending
on his length of service. A Trustee may also retire prior to age 72 and receive
reduced payments if he has completed at least five years of service. Under the
plan, a Trustee (or his beneficiaries) will also receive benefits for a period
of time in the event the Trustee is disabled or dies. These benefits will also
be based on the Trustee's average annual compensation and length of service.
There is no retirement plan provided by the Trust for any interested Trustee,
except Mr. Bailey. The Fund will accrue its allocable share of compensation
expenses each year to cover current year's service and amortize past service
cost.
As of November 30, 1994, the Trustees and officers as a group, owned less than
1% of the outstanding shares of the Fund.
The Declaration of Trust provides that the Trust will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the Trust, unless as
to liability to 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
MFS and its predecessor organizations have a history of money management dating
from 1924. MFS is a subsidiary of Sun Life of Canada (U.S.), which is a
subsidiary of Sun Life Assurance Company of Canada ("Sun Life").
The Adviser manages the Fund pursuant to an Investment Advisory Agreement, dated
September 1, 1993 (the "Advisory Agreement"). The Adviser provides the Fund with
overall investment advisory and administrative services, as well as general
office facilities. Subject to such policies as the Trustees may determine, the
Adviser makes investment decisions for the Fund. For its services and
facilities, the Adviser is entitled to receive a management fee, computed and
paid monthly, in an amount equal to the sum of 0.375% of the Fund's average
daily net assets and 6.25% of the Fund's gross income (i.e., income other than
gains from the sale of securities, gains from options and futures transactions,
premium income from options written and gains from foreign exchange
transactions) of the Fund for its then-current fiscal year. The Adviser has
voluntarily agreed that the management fee will not exceed 0% of the Fund's
average daily net assets. This voluntary fee reduction may be rescinded at any
time without notice to shareholders as to fees accruing after the date of such
rescission. The Adviser has also voluntarily agreed to pay expenses of the Fund
(except fees paid under the Advisory Agreement and Distribution Plan) that
exceed 0.65%, 0.72% and 0.65% of the Fund's average daily net assets
attributable to Class A, Class B and Class C shares, respectively, on an
annualized basis. This temporary expense reduction may be rescinded at any time
by the Adviser without notice to shareholders as to expenses accruing after the
date of such rescission.
For the Fund's fiscal year ended October 31, 1994, MFS voluntarily reduced its
management fee to $0. If MFS had not reduced its management fee, MFS would have
received management fees of $416,085 of which $222,761 would have been based on
daily net assets and $193,324 on gross income, equivalent to .70% of the Fund's
net assets on an annualized basis.
For the Fund's fiscal year ended October 31, 1993, MFS voluntarily reduced its
management fee to $0. If MFS had not reduced its management fee, MFS would have
received management fees of $190,472 of which $96,807 would have been based on
average daily net assets and $93,665 on gross income, equivalent to 0.74% of the
Fund's net assets on an annualized basis.
For the period from the commencement of operations on January 22, 1992 to the
end of the fiscal year, October 31, 1992, MFS voluntarily reduced its management
fee to $0. If MFS had not reduced its management fee, MFS would have received
management fees under a prior investment advisory agreement of $30,940 (of which
$15,193 would have been based on average daily net assets and $15,747 on gross
income), equivalent to 0.75% of the Fund's net assets on an annualized basis.
In order to comply with the expense limitations of certain state securities
commissions, the Adviser will reduce its management fee or otherwise reimburse
the Fund for any expenses, exclusive of interest, taxes and brokerage
commissions, incurred by the Fund in any fiscal year to the extent such expenses
exceed the most restrictive of such state expense limitations. The Adviser will
make appropriate adjustments to such reimbursements in response to any amendment
or rescission of the various state requirements.
The Fund pays the compensation of the Trustees who are not officers of MFS (who
will each receive from $1,250 to $2,600 annually, depending on attendance at
meetings, plus fees for meetings of special committees, such as the Audit
Committee) and all the Fund's expenses (other than those assumed by MFS or MFD,
the Fund's principal underwriter), including: governmental fees; interest
charges; taxes; membership dues in the Investment Company Institute allocable to
the Fund; fees and expenses of independent auditors, of legal counsel, and of
any transfer agent, registrar or dividend disbursing agent of the Fund; expenses
of repurchasing and redeeming shares; expenses of preparing, printing and
mailing share certificates, shareholder reports, notices, proxy statements and
reports to governmental officers and commissions; brokerage and other expenses
connected with the execution, recording and settlement of portfolio security
transactions; insurance premiums; fees and expenses of State Street Bank and
Trust Company, the Fund's Custodian, for all services to the Fund, including
safekeeping of funds and securities and maintaining required books and accounts;
expenses of calculating the net asset value of shares of the Fund; and expenses
of shareholder meetings. Expenses relating to the issuance, registration and
qualification of shares of the Fund and the preparation, printing and mailing of
prospectuses for such purposes are borne by the Fund except that the Fund's
Distribution Agreement with MFD requires MFD to pay for prospectuses that are to
be used for sales purposes. For a list of the Fund's expenses, including the
compensation paid to Trustees who are not officers of MFS, for the fiscal year
ended October 31, 1994, see the "Statement of Operations" in the Fund's Annual
Report incorporated by reference into this Statement of Additional Information.
Payment by the Fund of brokerage commissions for brokerage and research services
of value to the Adviser in serving its clients is discussed under the caption
"Portfolio Transactions and Brokerage Commissions" below.
MFS pays the compensation of the Trust's officers and of any Trustee who is an
officer of MFS. The Adviser also furnishes at its own expense all necessary
administrative services, including office space, equipment, clerical personnel,
investment advisory facilities, and all executive and supervisory personnel
necessary for managing the Fund's investments, effecting its portfolio
transactions, and, in general, administering its affairs.
The Advisory Agreement will remain in effect until August 1, 1995 and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Fund's shares (as defined in "Investment Restrictions") and, in either case, by
a majority of the Trustees who are not parties to the Advisory Agreement or
interested persons of any such party. The Advisory Agreement terminates
automatically if it is assigned and may be terminated without penalty by vote of
a majority of the Fund's shares (as defined in "Investment Restrictions") or by
either party on not more than 60 days' nor less than 30 days' written notice.
The Advisory Agreement provides that if MFS ceases to serve as the Adviser to
the Fund, the Fund will change its name so as to delete the initials "MFS" and
that MFS may render services to others and may permit other fund clients to use
the term "MFS" in their names. The Advisory Agreement also provides that neither
the Adviser nor its personnel shall be liable for any error of judgment or
mistake of law or for any loss arising out of any investment or for any act or
omission in the execution and management of the Fund, except for willful
misfeasance, bad faith or gross negligence in the performance of its or their
duties or by reason of reckless disregard of its or their obligations and duties
under the Advisory Agreement.
CUSTODIAN
State Street Bank and Trust Company (the "Custodian") is the custodian of the
Fund's assets. The Custodian's responsibilities include safekeeping and
controlling the Fund's cash and securities, handling the receipt and delivery of
securities, determining income and collecting interest and dividends on the
Fund's investments, maintaining books of original entry for portfolio and fund
accounting and other required books and accounts, and calculating the daily net
asset value of each class of shares of the Fund. The Custodian does not
determine the investment policies of the Fund or decide which securities the
Fund will buy or sell. The Fund may, however, invest in securities of the
Custodian and may deal with the Custodian as principal in securities
transactions. The Trustees have reviewed and approved as in the best interests
of the Fund and the shareholders subcustodial arrangements with the Chase
Manhattan Bank, N.A. for securities of the Fund held outside the United States.
The Custodian also acts as the dividend disbursing agent of the Fund. The
Custodian has contracted with the Adviser for the Adviser to perform certain
accounting functions related to options transactions for which the Adviser
receives remuneration on a cost basis.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (the "Shareholder Servicing Agent"), a wholly-owned
subsidiary of MFS, is the Fund's shareholder servicing agent, pursuant to a
Shareholder Servicing Agreement, dated December 11, 1991 (the "Agency
Agreement") with the Fund. The Shareholder Servicing Agent's responsibilities
under the Agency Agreement include administering and performing transfer agent
functions and the keeping of records in connection with the issuance, transfer
and redemption of each class of shares of the Fund. For these services, the
Shareholder Servicing Agent will receive a fee based on the net assets of each
class of shares of the Fund, computed and paid monthly. In addition, the
Shareholder Servicing Agent will be reimbursed by the Fund for certain expenses
incurred by the Shareholder Servicing Agent on behalf of the Fund. For the
fiscal year ended October 31, 1994, the Fund paid the Shareholder Servicing
Agent $98,743 under the Agency Agreement. State Street Bank and Trust Company,
the dividend and distribution disbursing agent of the Fund, has contracted with
the Shareholder Servicing Agent to perform certain dividend and distribution
disbursing functions for the Fund.
DISTRIBUTOR
MFD, a wholly-owned subsidiary of MFS, serves as distributor for the continuous
offering of shares of the Fund pursuant to a Distribution Agreement, dated
January 1, 1995 (the "Distribution Agreement"). Prior to January 1, 1995, MFS
Financial Services, Inc. ("FSI"), another wholly-owned subsidiary of MFS, was
the Fund's distributor. Where this SAI refers to MFD in relation to the receipt
or payment of money with respect to a period or periods prior to January 1,
1995, such reference shall be deemed to include FSI, as the predecessor in
interest to MFD.
CLASS A SHARES: MFD acts as agent in selling Class A shares of the Fund to
dealers. The public offering price of 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 Class A shares of the
Fund is calculated by dividing the net asset value of a Class A share by the
difference (expressed as a decimal) between 100% and the sales charge percentage
of offering price applicable to the purchase (see "Purchases" in the
Prospectus). The sales charge scale set forth in the Prospectus applies to
purchases of Class A shares of the Fund alone or in combination with shares of
all classes of certain other funds in the MFS Family of Funds (the "MFS Funds")
and other funds (as noted under Right of Accumulation) by any person, including
members of a family unit (e.g., husband, wife and minor children) and bona fide
trustees, and also applies to purchases made under the Right of Accumulation or
a Letter of Intent (see "Investment and Withdrawal Programs" below). A group
might qualify to obtain quantity sales charge discounts (see "Shareholder
Services -- Investment and Withdrawal Programs" below).
Class A shares of the Fund may be sold at their net asset value to certain
persons and in certain instances as described in the Prospectus. Such sales are
made without a sales charge to promote good will with employees and others with
whom MFS, MFD and/or the Fund have business relationships, and because the sales
effort, if any, involved in making such sales is negligible.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price of the Class A shares. Dealer allowances
expressed as a percentage of offering price for all offering prices are set
forth in the Prospectus (see "Purchases" in the Prospectus). The difference
between the total amount invested and the sum of (a) the net proceeds to the
Fund and (b) the dealer commission, is the commission paid to the distributor.
Because of rounding in the computation of offering price, the portion of the
sales charge paid to the distributor may vary and the total sales charge may be
more or less than the sales charge calculated using the sales charge expressed
as a percentage of offering price or as a percentage of the net amount invested
as listed in the Prospectus. In the case of the maximum sales charge the dealer
retains 4% and MFD retains approximately 3/4 of 1% of the public offering price.
MFD also pays a commission to dealers who initiate and are responsible for
purchases of $1 million or more as described in the Prospectus.
CLASS B AND CLASS C SHARES: MFD acts as agent in selling Class B and Class C
shares of the Fund to dealers. The public offering price of Class B and Class C
shares is their net asset value next computed after the sale (see "Purchases" in
the Prospectus).
GENERAL: Neither MFD nor dealers are permitted to delay placing orders to
benefit themselves by a price change. On occasion, MFD may obtain brokers loans
from various banks, including the custodian banks for the MFS Funds, to
facilitate the settlement of sales of shares of the Fund to dealers. MFD may
benefit from its temporary holding of funds paid to it by investment dealers for
the purchase of Fund shares.
During the Fund's fiscal year ended October 31, 1994, gross sales charges on
sales of Class A shares of the Fund amounted to $376,781, of which $64,642 was
retained by MFD and $312,139 by dealers and certain banks and other financial
institutions; the Fund received $11,364,968, representing the aggregate net
asset value of such shares. During the Fund's fiscal year ended October 31,
1993, gross sales charges on sales of Class A shares of the Fund amounted to
$925,217, of which $154,399 was retained by MFD and $770,818 by dealers and
certain banks and other financial institutions; the Fund received $22,563,670,
representing the aggregate net asset value of such shares. During the period
from the commencement of operations on February 14, 1992 to the end of the
fiscal year, October 31, 1992, gross sales charges on sales of Class A shares of
the Fund amounted to $509,606, of which $82,893 was retained by MFD and $426,713
by dealers and certain banks and other financial institutions; the Fund received
$11,198,967, representing the aggregate net asset value of such shares.
During the Fund's fiscal year ended October 31, 1994, the CDSC imposed on
redemption of Class B shares was $45,345. During the period from September 7,
1993 to October 31, 1993, the CDSC imposed on redemption of Class B shares was
$0.
The Distribution Agreement will remain in effect until August 1, 1995, and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Fund's shares (as defined in "Investment Restrictions") and in either case, by a
majority of the Trustees who are not parties to the Distribution Agreement or
interested persons of any such party. The Distribution Agreement terminates
automatically if it is assigned and may be terminated without penalty by either
party on not more than 60 days' nor less than 30 days' notice.
4. PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are made by
persons affiliated with the Adviser. Any such person may serve other clients of
the Adviser, or any subsidiary of the Adviser in a similar capacity. Changes in
the Fund's investments are reviewed by the Board of Trustees.
The primary consideration in placing portfolio security transactions is
execution at the most favorable prices. The Adviser has complete freedom as to
the markets in and broker-dealers through which it seeks this result. In the
U.S. and in some other countries debt securities are traded principally in the
over-the-counter market on a net basis through dealers acting for their own
account and not as brokers. In other countries both debt and equity securities
are traded on exchanges at fixed commission rates. The cost of securities
purchased from underwriters includes an underwriter's commission or concession,
and the prices at which securities are purchased and sold from and to dealers
include a dealer's mark-up or mark-down. The Adviser normally seeks to deal
directly with the primary market makers or on major exchanges unless, in its
opinion, better prices are available elsewhere. Subject to the requirement of
seeking execution at the best available price, securities transactions may, as
authorized by the Advisory Agreement, be bought from or sold to dealers who have
furnished statistical, research and other information or services to the
Adviser. At present no arrangements for the recapture of commission payments are
in effect.
Consistent with the foregoing primary consideration, the Rules of Fair Practice
of the NASD and such other policies as the Trustees may determine, the Adviser
may consider sales of shares of the Fund and of the other investment company
clients of MFD as a factor in the selection of broker-dealers to execute the
Fund's portfolio transactions.
Under the Advisory Agreement and as permitted by Section 28(e) of the Securities
Exchange Act of 1934, the Adviser may cause the Fund to pay a broker-dealer
which provides brokerage and research services to the Adviser an amount of
commission for effecting a securities transaction for the Fund in excess of the
amount other broker-dealers would have charged for the transaction if the
Adviser determines in good faith that the greater commission is reasonable in
relation to the value of the brokerage and research services provided by the
executing broker-dealer viewed in terms of either a particular transaction or
their respective overall responsibilities to the Fund or to their other clients.
Not all of such services are useful or of value in advising the Fund.
The term "brokerage and research services" includes advice as to the value of
securities, the advisability of investing in, purchasing or selling securities,
and the availability of securities or of purchasers or sellers of securities;
furnishing analyses and reports concerning issues, industries, securities,
economic factors and trends, portfolio strategy and the performance of accounts;
and effecting securities transactions and performing functions incidental
thereto, such as clearance and settlement.
Although commissions paid on every transaction will, in the judgment of the
Adviser, be reasonable in relation to the value of the brokerage services
provided, commissions exceeding those which another broker might charge may be
paid to broker-dealers who were selected to execute transactions on behalf of
the Fund and the Adviser's other clients in part for providing advice as to the
availability of securities or of purchasers or sellers of securities and
services in effecting securities transactions and performing functions
incidental thereto, such as clearance and settlement.
Broker-dealers may be willing to furnish statistical, research and other factual
information or services ("Research") to the Adviser for no consideration other
than brokerage or underwriting commissions. Securities may be bought or sold
through such broker-dealers, but at present, unless otherwise directed by the
Fund, a commission higher than one charged elsewhere will not be paid to such a
firm solely because it provided such Research. The Trustees (together with the
Trustees of the other MFS Funds) have directed the Adviser to allocate a total
of $20,000 of commission business from the MFS Funds to the Pershing Division of
Donaldson Lufkin & Jenrette as consideration for the annual renewal of the
Lipper Directors' Analytical Data Service (which provides information useful to
the Trustees in reviewing the relationship between the Fund and the Adviser).
The Adviser's investment management personnel attempt to evaluate the quality of
Research provided by brokers. Results of this effort are sometimes used by the
Adviser as a consideration in the selection of brokers to execute portfolio
transactions. However, the Adviser is unable to quantify the amount of
commissions set forth below which were paid as a result of such Research because
a substantial number of transactions were effected through brokers which provide
Research but which were selected principally because of their execution
capabilities.
The management fee that the Fund pays to the Adviser will not be reduced as a
consequence of the Adviser's receipt of brokerage and research services. To the
extent the Fund's portfolio transactions are used to obtain 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. During
the Fund's fiscal year ended October 31, 1994, the Fund paid brokerage
commissions of $165,973, on total transactions of $12,770,044.
During the Fund's fiscal year ended October 31, 1993, the Fund paid brokerage
commissions of $62,297, on total transactions of $90,155,650. During the period
from the commencement of operations on February 14, 1992 to the end of the
fiscal year, October 31, 1992, the Fund paid brokerage commissions of $10,598 on
total transactions of $19,631,053.
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 to be equitable to
each. It is recognized that in some cases this system could have a detrimental
effect on the price or volume of the security as far as the Fund is concerned.
In other cases, however, the Fund believes that its ability to participate in
volume transactions will produce better executions for the Fund.
5. SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS -- The Fund makes available the following
programs designed to enable shareholders to add to their investment or withdraw
from it with a minimum of paper work. These are described below and, in certain
cases, in the Prospectus. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or the Fund.
LETTER OF INTENT: If a shareholder (other than a group purchaser described
below) anticipates purchasing $100,000 or more of Class A shares of the Fund
alone or in combination with shares of Class B or Class C of the Fund or any of
the classes of other MFS Funds or MFS Fixed Fund (a bank collective investment
fund) within a 13-month period (or 36-month period, in the case of purchases of
$1 million or more), the shareholder may obtain Class A shares of the Fund at
the same reduced sales charge as though the total quantity were invested in one
lump sum by completing the Letter of Intent section of the Fund's Account
Application or filing a separate Letter of Intent application (available from
the Shareholder Servicing Agent) within 90 days of the commencement of
purchases. Subject to acceptance by MFD and the conditions mentioned below, each
purchase will be made at a public offering price applicable to a single
transaction of the dollar amount specified in the Letter of Intent application.
The shareholder or his dealer must inform MFD that the Letter of Intent is in
effect each time shares are purchased. The shareholder makes no commitment to
purchase additional shares, but if his purchases within 13 months (or 36 months,
in the case of purchases of $1 million or more) plus the value of shares
credited toward completion of the Letter of Intent do not total the sum
specified, he will pay the increased amount of the sales charge as described
below. Instructions for issuance of shares in the name of a person other than
the person signing the Letter of Intent application must be accompanied by a
written statement from the dealer stating that the shares were paid for by the
person signing such Letter. Neither income dividends nor capital gain
distributions taken in additional shares will apply toward the completion of the
Letter of Intent. Dividends and distributions of other MFS Funds automatically
reinvested in shares of the Fund at net asset value pursuant to the Distribution
Investment Program will also not apply toward completion of the Letter of
Intent.
Out of the shareholder's initial purchase (or subsequent purchases if
necessary), 5% of the dollar amount specified in the Letter of Intent
application shall be held in escrow by the Shareholder Servicing Agent in the
form of shares registered in the shareholder's name. All income dividends and
capital gain distributions on escrowed shares will be paid to the shareholder or
to his order. When the minimum investment so specified is completed (either
prior to or by the end of the 13-month or 36-month period, as applicable), the
shareholder will be notified and the escrowed shares will be released.
If the intended investment is not completed, the Shareholder Servicing Agent
will redeem an appropriate number of the escrowed shares in order to realize
such difference. Shares remaining after any such redemption will be released by
the Shareholder Servicing Agent. By completing and signing the Account
Application or separate Letter of Intent application, the shareholder
irrevocably appoints the Shareholder Servicing Agent his attorney to surrender
for redemption any or all escrowed shares with full power of substitution in the
premises.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on the purchase of Class A shares when his new investment, together
with the current offering price value of all holdings of all classes of shares
of that shareholder in the MFS Funds or MFS Fixed Fund (a bank collective
investment fund) reaches a discount level. See "Purchases" in the Prospectus for
the sales charges on quantity discounts. For example, if a shareholder owns
shares valued at $75,000 and purchases an additional $25,000 of Class A shares
of the Fund, the sales charge for the $25,000 purchase would be at the rate of
4.00% (the rate applicable to single transactions of $100,000). A shareholder
must provide the Shareholder Servicing Agent (or his investment dealer must
provide MFD) with information to verify that the quantity sales charge discount
is applicable at the time the investment is made.
DISTRIBUTION INVESTMENT PROGRAM: Distributions of dividends and capital gains
made by the Fund with respect to a particular class of shares may be
automatically invested in shares of the same class of one of the other MFS
Funds, if shares of the fund are available for sale. Such investments will be
subject to additional purchase minimums. Distributions will be invested at net
asset value (exclusive of any sales charge) and not subject to any CDSC.
Distributions will be invested at the close of business on the payable date for
the distribution. A shareholder considering the Distribution Investment Program
should obtain and read the prospectus of the other fund and consider the
differences in objectives and policies before making any investment.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder Servicing
Agent to send him (or anyone he designates) regular periodic payments, as
designated on the Account Application and based upon the value of his account.
Each payment under a Systematic Withdrawal Plan (a "SWP") must be at least $100,
except in certain limited circumstances. The aggregate withdrawals of Class B
shares in any year pursuant to a SWP generally are limited to 10% of the value
of the account at the time of establishment of the SWP. SWP payments are drawn
from the proceeds of share redemptions (which would be a return of principal
and, if reflecting a gain, would be taxable). Redemptions of Class B shares will
be made in the following order: (i) any "Reinvested Shares"; (ii) to the extent
necessary, any "Free Amount"; and (iii) to the extent necessary, the "Direct
Purchase" subject to the lowest CDSC (as such terms are defined in "Contingent
Deferred Sales Charge" in the Prospectus). The CDSC will be waived in the case
of redemptions of Class B shares pursuant to a SWP but will not be waived in the
case of SWP redemptions of Class A shares which are subject to a CDSC. To the
extent that redemptions for such periodic withdrawals exceed dividend income
reinvested in the account, such redemptions will reduce and may eventually
exhaust the number of shares in the shareholder's account. All dividend and
capital gain distributions for an account with a SWP will be reinvested in
additional full and fractional shares of the Fund at the net asset value in
effect at the close of business on the record date for such distributions. To
initiate this service, shares having an aggregate value of at least $10,000
either must be held on deposit by, or certificates for such shares must be
deposited with, the Shareholder Servicing Agent. With respect to Class A shares,
maintaining a withdrawal plan concurrently with an investment program would be
disadvantageous because of the sales charges included in share purchases in the
case of Class A shares, and because of the assessment of the CDSC (on certain
share redemptions in the case of Class A shares). The shareholder, by written
instruction to the Shareholder Servicing Agent, may deposit into the account
additional shares of the Fund, change the payee or change the dollar amount of
each payment. The Shareholder Servicing Agent may charge the account for
services rendered and expenses incurred beyond those normally assumed by the
Fund with respect to the liquidation of shares. No charge is currently assessed
against the account, but one could be instituted by the Shareholder Servicing
Agent on 60 days' notice in writing to the shareholder in the event that the
Fund ceases to assume the cost of these services. The Fund may terminate any SWP
for an account if the value of the account falls below $5,000 as a result of
share redemptions (other than as a result of a SWP) or an exchange of shares of
the Fund for shares of another MFS Fund. Any SWP may be terminated at any time
by either the shareholder or the Fund.
INVEST BY MAIL: Additional investments of $50 or more may be made at any time
by mailing a check payable to the Fund directly to the Shareholder Servicing
Agent. The shareholder's account number and the name of his investment dealer
must be included with each investment.
GROUP PURCHASES: A bona fide group and all its members may be treated as a
single purchaser and, under the Right of Accumulation (but not a Letter of
Intent), obtain quantity sales charge discounts on the purchase of Class A
shares if the group (1) gives its endorsement or authorization to the investment
program so it may be used by the investment dealer to facilitate solicitation of
the membership, thus effecting economies of sales effort; (2) has been in
existence for at least six months and has a legitimate purpose other than to
purchase mutual fund shares at a discount; (3) is not a group of individuals
whose sole organizational nexus is as credit cardholders of a company,
policyholders of an insurance company, customers of a bank or broker-dealer,
clients of an investment adviser or other similar groups; and (4) agrees to
provide certification of membership of those members investing money in the MFS
Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may exchange their shares for the same class of shares of
the other MFS Funds under the Automatic Exchange Plan. The Automatic Exchange
Plan provides for automatic exchanges of funds from the shareholder's account in
an MFS Fund for investment in the same class of shares of other MFS Funds
selected by the shareholder. Under the Automatic Exchange Plan, exchanges of at
least $50 each may be made to up to four different funds effective on the
seventh day of each month or of every third month, depending whether monthly or
quarterly exchanges are elected by the shareholder. If the seventh day of the
month is not a business day, the transaction will be processed on the next
business day. Generally, the initial exchange will occur after receipt and
processing by the Shareholder Servicing Agent of an application in good order.
Exchanges will continue to be made from a shareholder's account in any MFS Fund,
as long as the balance of the account is sufficient to complete the transfers.
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 a transfer is scheduled, such funds may not be available for
transfer 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 from either of MFS Money Market
Fund, MFS Government Money Market Fund and Class A shares of MFS Cash Reserve
Fund will be subject to any applicable sales charge. Changes in amounts to be
exchanged to each fund, the funds to which exchanges are to be made and the
timing of exchanges (monthly or quarterly), or termination of a shareholder's
participation in the Automatic Exchange Plan will be made after instructions in
writing or by telephone (an "Exchange Change Request") are received by the
Shareholder Servicing Agent in proper form (i.e., if in writing -- signed by the
record owner(s) exactly as shares are registered; if by telephone -- proper
account identification is given by the dealer or shareholder of record). Each
Exchange Change Request (other than termination of participation in the program)
must involve at least $50. Generally, if an Exchange Change Request is received
by telephone or in writing before the close of business on the last business day
of a month, the Exchange Change Request will be effective for the following
month's exchange.
A shareholder's right to make additional investments in any of the MFS Funds, to
make exchanges of shares from one MFS Fund to another and to withdraw from an
MFS Fund, as well as a shareholder's other rights and privileges are not
affected by a shareholder's participation in the Automatic Exchange Plan.
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 the
shares are acquired through direct purchase or reinvested dividends) who have
redeemed their shares have a one-time right to reinvest the redemption proceeds
in shares of any of the MFS Funds (if shares of the fund are available for sale)
at net asset value (without a sales charge) and, if applicable, with credit for
any CDSC paid. In the case of proceeds reinvested in shares of MFS Money Market
Fund, MFS Government Money Market Fund and Class A shares of MFS Cash Reserve
Fund, the shareholder has the right to exchange the acquired shares for shares
of another MFS Fund at net asset value pursuant to the exchange privilege
described below. Such a reinvestment must be made within 90 days of the
redemption and is limited to the amount of the redemption proceeds. If the
shares credited for any CDSC paid are then redeemed within six years of the
initial purchase in the case of Class B shares or 12 months of the initial
purchase in the case of certain Class A shares, a CDSC will be imposed upon
redemption. Although redemptions and repurchases of shares are taxable events, a
reinvestment within a certain period of time in the same fund may be considered
a "wash sale" and may result in the inability to recognize currently all or a
portion of 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 in an account with the Fund for which payment has been received by
the Fund (i.e., an established account) may be exchanged for shares of the same
class of any of the other MFS Funds (if available for sale) at their net asset
value. In addition, Class C shares may be exchanged for shares of MFS Money
Market Fund at net asset value. Exchanges will be made only after instructions
in writing or by telephone (an "Exchange Request") for an established account
are received by the Shareholder Servicing Agent.
Each Exchange Request must be in proper form (i.e., if in writing -- signed by
the record owner(s) exactly as the shares are registered; if by telephone --
proper account identification is given by the dealer or shareholder of record),
and each exchange must involve either shares having an aggregate value of at
least $1,000 or all the shares in the account (except that the minimum is $50
for accounts of retirement plan participants whose sponsoring organizations
subscribe to the MFS FUNDamental 401(k) Plan or another similar 401(k)
recordkeeping system made available by the Shareholder Servicing Agent). Each
exchange involves the redemption of the shares of the Fund to be exchanged and
the purchase at net asset value (i.e., without a sales charge) of shares of the
same class of another MFS Fund. Any gain or loss on the redemption of the shares
exchanged is reportable on the shareholder's federal income tax return, unless
such shares were and the shares received in the exchange are held in a
tax-deferred retirement plan or other tax-exempt account. No more than five
exchanges may be made in any one Exchange Request by telephone. If an Exchange
Request is received by the Shareholder Servicing Agent prior to the close of
regular trading on the Exchange, the exchange usually will occur on that day if
all the restrictions set forth above have been complied with at that time.
However, payment of the redemption proceeds by the Fund, and thus the purchase
of shares of another MFS Fund, may be delayed for up to seven days if the Fund
determines that such a delay would be in the best interest of all its
shareholders. Investment dealers which have satisfied criteria established by
MFD may also communicate a shareholder's Exchange Request to the Shareholder
Servicing Agent by facsimile subject to the restrictions and requirements set
forth above.
No CDSC is imposed on exchanges among the MFS Funds, although liability for the
CDSC is carried forward to the exchanged shares. For purposes of calculating the
CDSC upon redemption of shares acquired in an exchange, the purchase of shares
acquired in one or more exchanges is deemed to have occurred at the time of the
original purchase of the exchanged shares.
Additional information with respect to any of the MFS Funds, including a copy of
its current prospectus, may be obtained from investment dealers or the
Shareholder Servicing Agent. A shareholder considering an exchange should obtain
and read the prospectus of the other MFS Fund and consider the differences in
objectives and policies before making any exchange. Shareholders of the other
MFS Funds (except holders of shares of MFS Money Market Fund, MFS Government
Money Market Fund and Class A shares of MFS Cash Reserve Fund acquired through
direct purchase or dividends reinvested prior to June 1, 1992) have the right to
exchange their shares for shares of the Fund, subject to the conditions, if any,
set forth in their respective prospectuses. In addition, unitholders of the MFS
Fixed Fund (a bank collective investment fund) have the right to exchange their
units (except units acquired through direct purchases) for shares of the Fund,
subject to the conditions, if any, imposed upon such unitholders by the MFS
Fixed Fund.
Any state income tax advantages for investment in shares of each state-specific
series of MFS Municipal Series Trust may only benefit residents of such states.
Investors should consult with their own tax advisers to be sure this is an
appropriate investment based on their residency and each state's income tax
laws.
The exchange privilege (or any aspect of it) may be changed or discontinued and
is subject to certain limitations, including certain restrictions on purchases
by market timer accounts (see "Purchases" in the Prospectus).
TAX-DEFERRED RETIREMENT PLANS -- Except as noted below, shares of the Fund may
be purchased by all types of tax-deferred retirement plans. MFD makes available
through investment dealers plans and/or custody agreements for the following:
Individual Retirement Accounts ("IRAs") (for individuals and their non-
employed spouses who desire to make limited contributions to a tax-deferred
retirement program and, if eligible, to receive a federal income tax deduction
for amounts contributed);
Simplified Employee Pension (SEP-IRA) Plans;
Retirement Plans Qualified under Section 401(k) of the Code, as amended;
403(b) Plans (deferred compensation arrangements for employees of public
school systems and certain non-profit organizations); and
Certain other qualified pension and profit-sharing plans.
The plan documents provided by MFD designate a trustee or custodian (unless
another trustee or custodian is designated by the individual or group
establishing the plan) and contain specific information about the plans. Each
plan provides that dividends and distributions will be reinvested automatically.
For further details with respect to any plan, including fees charged by the
trustee, custodian or MFD, tax consequences and redemption information, see the
specific documents for that plan. Plan documents other than those provided by
MFD may be used to establish any of the plans described above. Third party
administrative services, available for some corporate plans, may limit or delay
the processing of transactions.
Investors should consult with their tax adviser before establishing any of the
tax-deferred retirement plans described above.
Class C shares are not currently available for purchase by any retirement plan
qualified under section 401(a) or 403(b) of the Code if the retirement plan
and/or the sponsoring organization subscribe to the MFS FUNDamental 401(k) Plan
or another similar 401(a) or 403(b) recordkeeping program made available by the
Shareholder Servicing Agent.
6. TAX STATUS
The Fund has elected to be treated and intends to qualify each year as a
"regulated investment company" under Subchapter M of the Code, by meeting all
applicable requirements of Subchapter M including requirements as to the nature
of the Fund's gross income, the amount of Fund distributions, and the
composition and holding period of the Fund's portfolio assets. Because the Fund
intends to distribute all of its net investment income and net realized capital
gains to shareholders in accordance with the timing requirements imposed by the
Code, it is not expected that the Fund will be required to pay any federal
income or excise taxes, although the Fund's foreign-source income may be subject
to foreign withholding taxes. If the Fund should fail to qualify as a "regulated
investment company" in any year, the Fund would incur a regular corporate
federal income tax upon its taxable income and Fund distributions would
generally be taxable as ordinary dividend income to the shareholders.
Shareholders of the Fund normally will have to pay federal income taxes, and any
state or local taxes, on the dividends and capital gain distributions they
receive from the Fund. Dividends from income, including certain foreign currency
gains and any distributions from net short-term capital gains (whether received
in cash or reinvested in additional shares) are taxable to shareholders as
ordinary income for federal income tax purposes. A portion of the Fund's
ordinary income dividends (but none of its capital gains) is eligible for the
dividends-received deduction for corporations if the recipient otherwise
qualifies for that deduction with respect to its holding of Fund shares.
Availability of the deduction for particular corporate shareholders is subject
to certain limitations, and deducted amounts may be subject to the alternative
minimum tax or result in certain basis adjustments. Distributions of net capital
gains (i.e., the excess of the net long-term capital gains over the short-term
capital losses), whether received in cash or invested in additional shares, are
taxable to the Fund's shareholders as long-term capital gains for federal income
tax purposes regardless of how long they have owned shares in the Fund. Fund
dividends declared in October, November or December and paid the following
January will be taxable to shareholders as if received on December 31 of the
year in which they are declared.
Any dividend or distribution of net capital gains or net short-term capital
gains will have the effect of reducing the per share net asset value of shares
in the Fund by the amount of the dividend or distribution. Shareholders
purchasing shares shortly before the record date of any such distribution may
thus pay the full price for the shares and then effectively receive a portion of
the purchase price back as a taxable distribution.
In general, any gain or loss realized upon a taxable disposition of shares of
the Fund by a shareholder that holds such shares as a capital asset will be
treated as long-term capital gain or loss if the shares have been held for more
than 12 months and otherwise as a short-term capital gain or loss. However, any
loss realized upon a disposition of shares in the Fund held for six months or
less will be treated as a long-term capital loss to the extent of any
distributions of net capital gain made with respect to those shares. Any loss
realized upon a redemption of shares may also be disallowed under rules relating
to wash sales. Gain may be increased (or loss reduced) upon a redemption of
Class A shares of the Fund within ninety days after their purchase followed by
any purchase (including purchases by exchange or by reinvestment) of the Fund or
of another MFS Fund (or any other shares of an MFS Fund generally sold subject
to a sales charge) without payment of an additional sales charge of Class A
shares.
The Fund's transactions in options, Futures Contracts and Forward Contracts will
be subject to special tax rules that may affect the amount, timing and character
of Fund income and distributions to shareholders. For example, certain positions
held by the Fund on the last business day of each taxable year will be marked to
market (i.e., treated as if closed out) on such day, and any gain or loss
associated with such positions will be treated as 60% long-term and 40%
short-term capital gain or loss. Certain positions held by the Fund that
substantially diminish its risk of loss with respect to other positions in its
portfolio may constitute "straddles," and may be subject to special tax rules
that would cause deferral of Fund losses, adjustments in the holding periods of
Fund securities, and conversion of short-term into long-term capital losses.
Certain tax elections exist for straddles that may alter the effects of these
rules. The Fund will limit its activities in options, Futures Contracts and
Forward Contracts to the extent necessary to meet the requirements of Subchapter
M of the Code.
The Fund's current dividend and accounting policies will affect the amount,
timing, and character of distributions to shareholders and may, under certain
circumstances, make an economic return of capital taxable to shareholders. The
Fund's investment in zero coupon securities and certain securities purchased at
a market discount will cause it to realize income prior to the receipt of cash
payments with respect to those securities. In order to distribute this income
and avoid a tax on the Fund, the Fund may be required to liquidate portfolio
securities that it might otherwise have continued to hold, potentially resulting
in additional taxable gain or loss to the Fund.
An investment in residual interests of a CMO that has elected to be treated as a
real estate mortgage investment conduit, or "REMIC", can create complex tax
problems, especially if the Fund has state or local governments or other
tax-exempt organizations as shareholders.
Special tax considerations apply with respect to foreign investments of the
Fund. Foreign exchange gains and losses realized by the Fund will generally be
treated as ordinary income or losses. The holding of foreign currencies for
nonhedging purposes and investment by the Fund in certain "passive foreign
investment companies" may be limited in order to avoid a tax on the Fund.
Investment income received by the Fund from sources within foreign countries may
be subject to foreign income taxes withheld at the source; the Fund does not
expect to be able to pass through to shareholders foreign tax credits and
deductions with respect to such foreign taxes. The United States has entered
into tax treaties with many foreign countries that may entitle the Fund to a
reduced rate of tax or an exemption from tax on such income; the Fund intends to
qualify for treaty reduced rates where available. It is impossible to determine
the effective rate of foreign tax in advance since the amount of the Fund's
assets to be invested within various countries is not known.
Dividends and certain other payments to persons who are not citizens or
residents of the United States or U.S. entities ("Non-U.S. Persons") are
generally subject to U.S. tax withholding at a rate of 30%. The Fund intends to
withhold U.S. federal income tax at the rate of 30% on taxable dividends and
other payments to Non-U.S. Persons that are subject to such withholding,
regardless of whether a lower treaty rate may be permitted. Any amounts
overwithheld may be recovered by such persons by filing a claim for refund with
the U.S. Internal Revenue Service within the time period appropriate to such
claims.
The Fund is also required in certain circumstances to apply backup withholding
of 31% on taxable dividends and redemption proceeds paid to any shareholder who
does not furnish to the Fund certain information and certifications or who is
otherwise subject to backup withholding. Backup withholding will not, however,
be applied to payments that have been subject to 30% withholding. Distributions
received from the Fund by Non-U.S. Persons may also be subject to tax under the
laws of their own jurisdiction.
As long as it qualifies as a regulated investment company under the Code, the
Fund will not be required to pay Massachusetts income or excise taxes.
Distributions of the Fund that are derived from interest on obligations of the
U.S. Government and certain of its agencies and instrumentalities (but generally
not from capital gains realized upon the disposition of such obligations) may be
exempt from state and local taxes in certain states. The Fund intends to advise
shareholders of the extent, if any, to which its distributions consist of such
interest. Shareholders are urged to consult their tax advisers regarding the
possible exclusion of such portion of their dividends for state and local income
tax purposes as well as regarding the tax consequences of an investment in the
Fund.
7. DETERMINATION OF NET ASSET VALUE AND PERFORMANCE
NET ASSET VALUE: The net asset value per share of each class of the Fund is
determined each day during which the Exchange is open for trading. (As of the
date of this Statement of Additional Information, the Exchange is open for
trading every weekday except for the following holidays or the days on which
they are observed: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
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 each class
from the value of the assets attributable to the class and dividing the
difference by the number of shares of the class outstanding. Equity securities
in the Fund's portfolio are valued at the last sale price on the exchange on
which they are primarily traded or on the NASDAQ system for unlisted national
market issues, at the last quoted bid price for securities in which there were
no sales during the day or for unlisted securities not reported on the NASDAQ
system. Bonds and other fixed income securities (other than short-term
obligations, but including listed issues) 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 the fair value of such securities.
Forward Contracts will be valued using a pricing model taking into consideration
market data from an external pricing source. Use of the pricing services has
been approved by the Board of Trustees. All other securities, futures contracts
and options in the Fund's portfolio (other than short-term obligations) for
which the principal market is one or more securities or commodities exchanges
(whether domestic or foreign) will be valued at the last reported sale price or
at the settlement price prior to the determination (or if there has been no
current sale, at the closing bid price) on the primary exchange on which such
securities, futures contracts or options are traded; but if a securities
exchange is not the principal market for securities, such securities will, if
market quotations are readily available, be valued at current bid prices, unless
such securities are reported on the NASDAQ system, in which case they are valued
at the last sale price or, if no sales occurred during the day, at the last
quoted bid price. Short-term obligations with remaining maturities in excess of
60 days will be valued upon dealer supplied valuations. Other short-term
obligations in the Fund's portfolio are valued at amortized cost, which
constitutes fair value as determined by the Board of Trustees. 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 the Exchange. Occasionally, events affecting
the values of such securities may occur between the times at which they are
determined and the close of 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.
The Trustees annually review the appropriateness of the time of day as of which
the net asset value is computed.
PERFORMANCE INFORMATION
TOTAL RATE OF RETURN: The Fund will calculate its total rate of return for each
class of shares for certain periods by determining the average annual compounded
rates of return over those periods that would cause an investment of $1,000
(made with all distributions reinvested and reflecting the CDSC or the maximum
public offering price) to reach the value of that investment at the end of the
periods. The Fund may also calculate (i) a total rate of return, which is not
reduced by the CDSC (4% maximum for Class B shares) and therefore may result in
a higher rate of return, (ii) a total rate of return assuming an initial account
value of $1,000, which will result in a higher rate of return with respect to
Class A shares since the value of the initial account will not be reduced by the
maximum sales charge (currently 4.75% for Class A shares) and/or (iii) total
rates of return which represent aggregate performance over a period or
year-by-year performance, and which may or may not reflect the effect of the
maximum or other sales charge or CDSC. The average annual total rate of return
for Class A shares for the one-year ended October 31, 1994 and for the period
from February 14, 1992 (commencement of investment operations) to October 31,
1994 was -8.42% and 7.89% (including the effect of the sales charge) and -3.89%
and 9.80% (without the effect of the sales charge). The Fund's average total
rate of return for Class B shares, for the one year period ended October 31,
1994 and for the period from September 7, 1993 (commencement of offering of this
class of shares) to October 31, 1994 was -8.47% and -6.82% (including the effect
of the CDSC) and -4.92% and -3.74% (without the effect of the CDSC). The Fund's
aggregate total rate of return for Class C from January 3, 1994 (commencement of
offering of this class of shares) to October 31, 1994 was -3.87%. The figures
presented for Class C are not calculated on an annualized basis. The aggregate
total rate of return represents a limited time frame and like the total rates of
return presented above for Class A and B shares may not be indicative of future
performance.
PERFORMANCE RESULTS: The performance results below, based on an assumed initial
investment of $10,000 in Class A shares, cover the period from February 14, 1992
(commencement of investment operations) through December 31, 1994. It has been
assumed that dividends and capital gain distributions were reinvested in
additional shares. These performance results, as well as any total rate of
return or yield quotation provided by the Fund, should not be considered as
representative of the performance of the Fund in the future since the net asset
value and public offering price of shares of the Fund will vary based not only
on the type, quality and maturities of the securities held in the Fund's
portfolio, but also on changes in the current value of such securities and on
changes in the expenses of the Fund. These factors and possible differences in
the methods used to calculate yields and total rates of return should be
considered when comparing the yield and total rate of return of the Fund to
yields and total rates of return published for other investment companies or
other investment vehicles. Total rate of return reflects the performance of both
principal and income whereas yield reflects only net portfolio income. Current
net asset value and account balance information may be obtained by calling
1-800-MFS-TALK (637-8255).
MFS UTILITIES FUND
----------------------------------------------------------------
VALUE OF
VALUE OF REINVESTED VALUE OF
YEAR ENDED INITIAL $10,000 CAPITAL GAINS REINVESTED TOTAL
DECEMBER 31 INVESTMENT DISTRIBUTION DIVIDENDS VALUE
- --------------------------------------------------------------------------------
12/31/92 $10,287 $ 42 $ 326 $10,655
12/31/93 11,389 112 1,236 12,737
12/31/94 10,332 102 1,672 12,106
*Fund commenced investment operations on February 6, 1992.
EXPLANATORY NOTES: The results assume that the initial $10,000 investment on
February 14, 1992 has been reduced by the current maximum applicable sales
charge of 4.75%. No adjustment has been made for any income taxes payable by
shareholders.
YIELD: Any yield quotation of a class of shares of the Fund is based on the
annualized net investment income per share allocated to that class of the Fund
over a 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 public offering price per share of that class of the Fund
on the last day of that period. The resulting figure is then annualized. Net
investment income per share of a class is determined by dividing (i) the
dividends and interest allocated to that class during the period, minus accrued
expenses 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 public offering price per share on the last day of the period. The
Fund's yield calculations for Class A shares assume a maximum sales charge of
4.75%. The Fund's yield calculation for Class B shares assumes no CDSC is paid.
The yield calculation for Class A shares of the Fund for the 30-day period ended
October 31, 1994 was 3.33%, taking into account certain fee waivers; without
these waivers, the yield would have been 2.78%. The yield calculation for Class
B shares for the 30-day period ended October 31, 1994 was 2.42%, taking into
account certain fee waivers; without these waivers, the yield would have been
1.85%. The yield calculation for Class C shares for the 30-day period ended
October 31, 1994 was 2.48% taking into account certain fee waivers; without
these waivers, the yield would have been 1.91%.
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 computed by
dividing the total amount of dividends per share paid by the Fund to
shareholders of that class during the past twelve months by the maximum public
offering price of that class at the end of such period. Under certain
circumstances, such as when there has been a change in the amount of dividend
payout, or a fundamental change in investment policies, it might be appropriate
to annualize the dividends paid over the period such policies were in effect,
rather than using the dividends during the past twelve months. The current
distribution rate differs from the yield computation because it may include
distributions to shareholders from sources other than dividends and interest,
such as premium income for option writing, short-term capital gains and return
of invested capital, and is calculated over a different period of time. The
Fund's current distribution rate calculation for Class A shares assumes a
maximum sales charge of 4.75%. The Fund's current distribution rate calculation
for Class B shares assumes no CDSC is paid. The current distribution rate for
Class A shares of the Fund for the twelve-month period ended on October 31, 1994
was 4.71%. The current distribution rate for Class B shares of the Fund for the
twelve-month period ended October 31, 1994 was 3.87%. The current distribution
rate for Class C shares of the Fund based on the annualization of the last
dividend paid during the last fiscal year was 3.55%.
From time to time each Fund may, as appropriate, quote Fund rankings or reprint
all or a portion of evaluations of fund performance and operations appearing in
various independent publications, including but not limited to the following:
Money, Fortune, U.S. News and World Report, Kiplinger's Personal Finance, The
Wall Street Journal, Barron's, Investors Business Daily, Newsweek, Financial
World, Financial Planning, Investment Advisor, USA Today, Pensions and
Investments, SmartMoney, Forbes, Global Finance, Registered Representative,
Institutional Investor, the Investment Company Institute, Johnson's Charts,
Morningstar, Lipper Analytical Services, Inc., CDA Wiesenberger, Shearson Lehman
and Salomon Bros. Indices, Ibbotson, Business Week, Lowry Associates, Media
General, Investment Company Data, The New York Times, Your Money, Strangers
Investment Advisor, Financial Planning on Wall Street, Standard and Poor's,
Individual Investor, The 100 Best Mutual Funds You Can Buy, by Gordon K.
Williamson, Consumer Price Index, and Sanford C. Bernstein & Co. Fund
performance may also be compared to the performance of other mutual funds
tracked by financial or business publications or periodicals.
The Fund may also quote evaluations mentioned in independent radio or television
broadcasts.
From time to time the Fund may use charts and graphs to illustrate the past
performance of various indices such as those mentioned above and illustrations
using hypothetical rates of return to illustrate the effects of compounding and
tax-deferral. The Fund may advertise examples of the effects of periodic
investment plans, including the principle of dollar cost averaging. In such a
program, an investor invests a fixed dollar amount in a fund at periodic
intervals, thereby purchasing fewer shares when prices are high and more shares
when prices are low. While such a strategy does not assure a profit or guard
against a loss in a declining market, the investor's average cost per share can
be lower than if fixed numbers of shares are purchased at the same intervals.
MFS FIRSTS: MFS has a long history of innovations.
-- 1924 -- Massachusetts Investors Trust is established as the first mutual
fund in America.
-- 1924 -- Massachusetts Investors Trust is the first mutual fund to make
full public disclosure of its operations in shareholder reports.
-- 1932 -- One of the first internal research departments is established to
provide in-house analytical capability for an investment management firm.
-- 1933 -- Massachusetts Investors Trust is the first mutual fund to register
under the Securities Act of 1933 ("Truth in Securities Act" or "Full
Disclosure Act").
-- 1936 -- Massachusetts Investors Trust is the first mutual fund to let
shareholders take capital gain distributions either in additional shares
or in cash.
-- 1976 -- MFS(R) Municipal Bond Fund is among the first municipal bond funds
established.
-- 1979 -- Spectrum becomes the first combination fixed/variable annuity with
no initial sales charge.
-- 1981 -- MFS(R) World Governments Fund is established as America's first
globally diversified fixed-income mutual fund.
-- 1984 -- MFS(R) Municipal High Income Fund is the first mutual fund to seek
high tax-free income from lower-rated municipal securities.
-- 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual fund to
target and shift investments among industry sectors for shareholders.
-- 1986 -- MFS(R) Municipal Income Trust is the first closed-end, high-yield
municipal bond fund traded on the New York Stock Exchange.
-- 1987 -- MFS(R) Multimarket Income Trust is the first closed-end,
multimarket high income fund listed on the New York Stock Exchange.
-- 1989 -- MFS(R) Regatta becomes America's first non-qualified market-value-
adjusted fixed/variable annuity.
-- 1990 -- MFS(R) World Total Return Fund is the first global balanced fund.
-- 1993 -- MFS World Growth Fund is the first global emerging markets fund to
offer the expertise of two sub-advisers.
-- 1993 -- MFS becomes money manager of MFS Union Standard Trust, the first
trust to invest in companies deemed to be union-friendly by an Advisory
Board of senior labor officials, senior managers of companies with
significant labor contracts, academics and other national labor leaders or
experts.
8. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional Shares of Beneficial Interest (without par value) of one or
more separate series and to divide or combine the shares of any series into a
greater or lesser number of shares without thereby changing the proportionate
beneficial interests in that series. The Trustees have currently authorized
shares of the Fund and two other series. The Declaration of Trust further
authorizes the Trustees to classify or reclassify any series of shares into one
or more classes. Pursuant thereto, the Trustees have authorized the issuance of
three classes of shares of each of the Trust's three series, Class A shares,
Class B and Class C shares. Each share of a class of the Fund represents an
equal proportionate interest in the assets of the Fund allocable to that class.
Upon liquidation of the Fund, shareholders of each class are entitled to share
pro rata in the net assets of the Fund allocable to such class available for
distribution to shareholders. The Trust reserves the right to create and issue
additional series or classes of shares, in which case the shares of each class
of a series would participate equally in the earnings, dividends and assets
allocable to that class of the particular series.
Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to meetings of shareholders.
Although Trustees are not elected annually by the shareholders, shareholders
have under certain circumstances the right to remove one or more Trustees in
accordance with the provisions of Section 16(c) of the 1940 Act. No material
amendment may be made to the Declaration of Trust without the affirmative vote
of a majority of the Trust's outstanding shares. Shares have no pre-emptive or
conversion rights (except as described in "Purchases -- Conversion of Class B
Shares" in the Prospectus). Shares are fully paid and non-assessable. The Trust
may enter into a merger or consolidation, or sell all or substantially all of
its assets (or all or substantially all of the assets belonging to any series of
the Trust), if approved by the vote of the holders of two-thirds of the Trust's
outstanding shares voting as a single class, or of the affected series of the
Trust, as the case may be, except that if the Trustees of the Trust recommend
such merger, consolidation or sale, the approval by vote of the holders of a
majority of the Trust's or the affected series' outstanding shares (as defined
in "Investment Restrictions") will be sufficient. The Trust or any series of the
Trust may also be terminated (i) upon liquidation and distribution of its
assets, if approved by the vote of the holders of two-thirds of its outstanding
shares, or (ii) by the Trustees by written notice to the shareholders of the
Trust or the affected series. If not so terminated, the Trust will continue
indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Trust and provides for indemnification
and reimbursement of expenses out of Trust property for any shareholder held
personally liable for the obligations of the Trust. The Declaration of Trust
also provides that 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.
9. DISTRIBUTION PLANS
The Trustees have adopted a Distribution Plan for each of Class A, Class B and
Class C shares (the "Distribution Plans") 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 each Distribution Plan would benefit the Fund and
the respective class of shareholders. The Distribution Plans are designed to
promote sales, thereby increasing the net assets of the Fund. Such an increase
may reduce the expense ratio to the extent the Fund's fixed costs are spread
over a larger net asset base. Also, an increase in net assets may lessen the
adverse effects that could result were the Fund required to liquidate portfolio
securities to meet redemptions. There is, however, no assurance that the net
assets of the Fund will increase or that the other benefits referred to above
will be realized.
CLASS A DISTRIBUTION PLAN: The Distribution Plan relating to Class A shares (the
"Class A Distribution Plan") provides that the Fund will pay MFD up to (but not
necessarily all of) an aggregate of 0.35% of the average daily net assets
attributable to the Class A shares annually in order that MFD may pay expenses
on behalf of the Fund related to the distribution and servicing of its Class A
shares. The expenses to be paid by MFD on behalf of the Fund include a service
fee to securities dealers which enter into a sales agreement with MFD of up to
0.25% of the portion of the Fund's average daily net assets attributable to the
Class A shares owned by investors for whom that securities dealer is the holder
or dealer of record. These payments are partial consideration for personal
services and/or account maintenance performed by such dealers with respect to
Class A shares. MFD may from time to time reduce the amount of the service fee
paid for shares sold prior to a certain date. MFD may also retain a distribution
fee of 0.10% of the Fund's average daily net assets attributable to Class A
shares as partial consideration for services performed and expenses incurred in
the performance of MFD's obligations as to Class A shares under the Distribution
Agreement with the Fund. MFD, however, currently is waiving this 0.10%
distribution fee and will not accept payment of this fee in the future unless it
first obtains the approval of the Board of Trustees. Any remaining funds may be
used to pay for other distribution related expenses as described in the
Prospectus. Service fees may be reduced for a securities dealer that is the
holder or dealer of record for an investor who owns shares of the Fund having an
aggregate net asset value at or above a certain dollar level. No service fee
will be paid (i) to any securities dealer who is the holder or dealer of record
for investors who own shares having an aggregate net asset value less than
$750,000, or such other amount as may be determined from time to time by MFD
(MFD, however, may waive this minimum amount requirement from time to time if
the dealer satisfies certain criteria), or (ii) to any insurance company which
has entered into an agreement with the Fund and MFD that permits such insurance
company to purchase shares from the Fund at their net asset value in connection
with annuity agreements issued in connection with the insurance company's
separate accounts. Dealers may from time to time be required to meet certain
other criteria in order to receive service fees. MFD or its affiliates are
entitled to retain all service fees payable under the Class A Distribution Plan
for which there is no dealer of record or for which qualification standards have
not been met as partial consideration for personal services and/or account
maintenance services performed by MFD or its affiliates for shareholder
accounts. Certain banks and other financial institutions that have agency
agreements will MFD will receive agency transaction and service fees that are
the same as commissions and service fees to dealers. Such payments will commence
under the Plan on the date on which the value of the Fund's net assets
attributable to Class A shares first equals or exceeds $50 million.
CLASS B RULE DISTRIBUTION PLAN: The Class B Distribution Plan relating to Class
B shares (the "Class B Distribution Plan") provides that the Fund shall pay MFD,
as the Fund's distributor for its Class B shares, a daily distribution fee equal
on an annual basis to 0.75% of the Fund's average daily net assets attributable
to Class B shares and will pay MFD a service fee of up to 0.25% of the Fund's
average daily net assets attributable to Class B shares (which MFD will in turn
pay to securities dealers which enter into a sales agreement with MFD at a rate
of up to 0.25% per annum of the Fund's average daily net assets attributable to
Class B shares owned by investors for whom that securities dealer is the holder
or dealer of record). This service fee is intended to be additional
consideration for all personal services and/or account maintenance services
rendered by the dealer with respect to Class B shares. MFD will advance to
dealers the first-year service fee at a rate equal to 0.25% of the amount
invested. As compensation therefor, MFD may retain the service fee paid by the
Fund with respect to such shares for the first year after purchase. Dealers will
become eligible for additional service fees with respect to such shares
commencing in the thirteenth month following purchase.Except in the case of the
first year service fee, no service fee will be paid to any securities dealer who
is the holder or dealer or record for investors who own shares having an
aggregate net asset value less than $750,000, or such other amount as may be
determined from time to time by MFD. MFD, however, may waive this minimum amount
requirement from time to time if the dealer satisfies certain criteria. Dealers
may from time to time be required to meet certain other criteria in order to
receive service fees. MFD or its affiliates are entitled to retain all service
fees payable under the Class B Distribution Plan for which there is no dealer or
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 affiliates for shareholder accounts.
The purpose of distribution payments to MFD under the Class B Distribution Plan
is to compensate MFD for its distribution services to the Fund. MFD pays
commissions to dealers as well as expenses of printing prospectuses and reports
used for sales purposes, expenses with respect to the preparation and printing
of sales literature and other distribution related expenses, including, without
limitation, the cost necessary to provide distribution-related services, or
personnel, travel office expenses and equipment. The Class B Distribution Plan
also provides that MFD will receive all CDSCs attributable to Class B shares
(see "Distribution Plans" and "Purchases" in the Propectus).
For the Fund's fiscal year ended October 31, 1994, the Fund incurred expenses of
$144,832 (equal to 1.00% of the average daily net assets attributable to Class B
shares), relating to the distribution and servicing of its Class B shares of
which MFD retained $698 and securities dealers and certain banks and other
financial institutions received $144,134.
CLASS C DISTRIBUTION PLAN: The Distribution Plan relating to Class C shares (the
"Class C Distribution Plan") provides that the Fund will pay MFD a distribution
fee of up to 0.75% per annum of the Fund's average daily net assets attributable
to Class C shares and will annually pay MFD a service fee of up to 0.25% per
annum of the Fund's average daily net assets attibutable to Class C shares
(which MFD will in turn pay to securities dealers which enter into a sales
agreement with MFD at a rate of up to 0.25% per annum of the Fund's daily net
assets attributable to Class C shares owned by investors for whom that
securities dealer is the holder or dealer of record).
The distribution/service fees attributable to Class C shares are designed to
permit an investor to purchase such shares through a broker-dealer without the
assessment of an initial sales charge or a CDSC while allowing MFD to compensate
broker-dealers in connection with the sale of such shares.
The service fee is intended to be additional consideration for all personal
services and/or account maintenance services rendered by the dealer with respect
to Class C shares. MFD or its affiliates are entitled to retain all service fees
payable under the Class C Distribution Plan with respect to accounts for which
there is no dealer of record as partial consideration for personal services
and/or account maintenance services performed by MFD or its affiliates for
shareholder accounts.
The purpose of the distribution payments to MFD under the Class C Distribution
Plan is to compensate MFD for its distribution services to the Fund.
Distribution payments under the Plan will be used by MFD to pay securities
dealers a distribution fee in an amount equal on an annual basis to 0.75% of the
Fund's average daily net assets attributable to Class C shares owned by
investors for whom securities dealer is the holder or dealer of
record.(Therefore, the total amount of distribution/service fees paid to a
dealer on an annual basis is 1.00% of the Fund's average daily net assets
attributable to Class C shares owned by investors for whom the securities dealer
is the holder or dealer of record.) MFD also pays expenses of printing
prospectuses and reports used for sales purposes, expenses with respect to the
preparation and printing of sales literature and other distribution-related
expenses, including, without limitation, the compensation of personnel and all
costs of travel, office expense and equipment. Since MFD's compensation is not
directly tied to its expenses, the amount of compensation received by MFD during
any year may be more or less than its actual expenses. For this reason, this
type of distribution fee arrangement is characterized by the staff of the SEC as
being of the "compensation" variety. However, the Fund is not liable for any
expenses incurred by MFD in excess of the amount of compensation it receives.
Certain banks and other financial institutions that have agency agreements with
MFD will receive agency transaction and service fees that are the same as
distribution and service fees to dealers. Fees payable under the Class C
Distribution Plan are charged to, and therefore reduce, income allocated to
Class C shares.
For the period January 3, 1994 to October 31, 1994, the Fund incurred expenses
of $12,649 (equal to 1.0% of its average daily net assets attributable to Class
C shares on an annualized basis) relating to the distribution and servicing of
Class C shares, all of which was paid to securities dealers of the Fund and
certain banks and other financial institutions.
GENERAL: Each of the Distribution Plans will remain in effect until August 1,
1995, and will continue in effect thereafter only if such continuance is
specifically approved at least annually by vote of both the Trustees and a
majority of the Trustees who are not "interested persons" or financially
interested parties to such Plan ("Distribution Plan Qualified Trustees"). Each
of the Distribution Plans also requires that the Fund and MFD each shall provide
to the Trustees, and the Trustees shall review, at least quarterly, a written
report of the amounts expended (and purposes therefor) under such Plan. Each of
the Distribution Plans may be terminated at any time by vote of a majority of
the Distribution Plan Qualified Trustees or by vote of the holders of a majority
of the respective class of the Fund's shares (as defined in "Investment
Restrictions"). All agreements relating to any of the Distribution Plans entered
into between the Fund or MFD and other organizations must be approved by the
Board of Trustees, including a majority of the Distribution Plan Qualified
Trustees. Agreements under any of the Distribution Plans must be in writing,
will be terminated automatically if assigned, and may be terminated at any time
without payment of any penalty, by vote of a majority of the Distribution Plan
Qualified Trustees or by vote of the holders of a majority of the respective
class of the Fund's shares. None of the Distribution Plans may be amended to
increase materially the amount of permitted distribution expenses without the
approval of a majority of the respective class of the Fund's shares (as defined
in "Investment Restrictions") or may be materially amended in any case without a
vote of the Trustees and a majority of the Distribution Plan Qualified Trustees.
The selection and nomination of Distribution Plan Qualified Trustees shall be
committed to the discretion of the non-interested Trustees then in office. No
Trustee who is not an "interested person" has any financial interest in any of
the Distribution Plans or in any related agreement.
10. INDEPENDENT AUDITORS AND FINANCIALSTATEMENTS
Ernst & Young LLP were the Fund's independent auditors, providing audit
services, tax return preparation, and assistance and consultation with respect
to the preparation of filings with the SEC for the fiscal year ended October 31,
1994.
The financial statements of the Fund, including the Portfolio of Investments and
Statement of Assets and Liabilities at October 31, 1994, and the Statement of
Operations, Statement of Changes in Net Assets and Financial Highlights for the
year then ended, each of which is included in the Annual Report to Shareholders
of the Fund, have been audited by Ernst & Young LLP, independent auditors, as
set forth in their report therein. Such financial statements are incorporated by
reference into this Statement of Additional Information in reliance upon the
report of Ernst & Young LLP given upon their authority as experts in accounting
and auditing.
Coopers & Lybrand were the Fund's independent accountants from the Fund's
commencement of operations February 14, 1992 to October 31, 1993 and were
responsible for providing audit services, tax return preparation and assistance
and consultation with respect to the preparation of filings with the SEC. The
Statement of Changes in Net Assets for the year ended October 31, 1993 and the
Financial Highlights table for the period from February 14, 1992 (commencement
of operations) to October 31, 1993, each of which is included in the Annual
Report to Shareholders, were audited by Coopers & Lybrand LLP and are
incorporated by reference into this Statement of Additional Information in
reliance upon the report of Coopers & Lybrand, independent accountants of the
Fund for its fiscal years through October 31, 1993.
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(R)
UTILITIES
FUND
500 BOYLSTON STREET
BOSTON, MA 02116
Printed on recycled paper.
MUF-13-3/95/500 35/235/335
<PAGE>
<PAGE>
<TABLE>
PORTFOLIO OF INVESTMENTS - October 31, 1994
Non-Convertible Bonds - 14.3%
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Telecommunications - 0.3%
Rogers Cablesystems, Inc., 10.125s, 2012 $ 200 $ 193,000
- ---------------------------------------------------------------------------------------------------------------------
U.S. Government Guaranteed - 7.4%
Government National Mortgage Association - 0.5%
GNMA, 9s, 2017 $ 183 $ 186,356
GNMA, 9s, 2018 136 139,294
----------
$ 325,650
- ---------------------------------------------------------------------------------------------------------------------
U.S. Treasury Obligations - 6.9%
Stripped Principal Payments, 0s, 2021 $1,000 $ 120,620
U.S. Treasury Notes, 6.75s, 1997 2,500 2,489,450
U.S. Treasury Bonds, 11.625s, 2004 1,450 1,827,899
----------
$ 4,437,969
- ---------------------------------------------------------------------------------------------------------------------
Utilities - Electric - 4.0%
Central Maine Power Co., 7.875s, 2023 $ 450 $ 370,517
Commonwealth Edison Co., 6.4s, 2005 500 398,670
First PV Funding Corp., 10.15s, 2016 500 456,250
Gulf States Utilities Co., 8.7s, 2024 250 236,335
Midland Cogeneration Venture Corp., 10.33s, 2002 571 552,890
Systems Energy Resources, 7.43s, 2011 300 256,689
Texas & New Mexico Power Co., 12.5s, 1999 300 316,500
----------
$ 2,587,851
- ---------------------------------------------------------------------------------------------------------------------
Utilities - Gas - 1.4%
ANR Pipeline Co., 7.375s, 2024 $ 500 $ 414,550
Texas East Transmission, 8.25s, 2004 500 490,330
----------
$ 904,880
- ---------------------------------------------------------------------------------------------------------------------
Utilities - Telephone - 0.4%
Northwestern Bell Telephone Co., 9.125s, 2030 $ 250 $ 263,868
- ---------------------------------------------------------------------------------------------------------------------
Other - 0.8%
Tennessee Valley Authority, 7.875s, 2001 $ 500 $ 493,945
- ---------------------------------------------------------------------------------------------------------------------
Total Non-Convertible Bonds (Identified Cost, $9,859,845) $ 9,207,163
- ---------------------------------------------------------------------------------------------------------------------
Convertible Bonds - 3.6%
- ---------------------------------------------------------------------------------------------------------------------
General Motors Acceptance Corp., 5.95s, 1998
(Financial Institutions) $ 250 $ 231,770
Genesis Health Ventures, Inc., 6s, 2003 (Medical and Health
Services) 740 1,013,800
Hidroelectrica Alicura, 8.375s, 1999 (Utilities - Electric)+<F2> 150 132,188
Rogers Communications, Inc., 2s, 2005
(Utilities - Telecommunications) 1,674 945,810
- ---------------------------------------------------------------------------------------------------------------------
Total Convertible Bonds (Identified Cost, $2,397,078) $ 2,323,568
- ---------------------------------------------------------------------------------------------------------------------
Common Stocks - 78.5%
- ---------------------------------------------------------------------------------------------------------------------
Shares
- ---------------------------------------------------------------------------------------------------------------------
Pollution Control - 1.4%
WMX Technologies, Inc. 30,000 $ 881,250
- ---------------------------------------------------------------------------------------------------------------------
Real Estate Investment Trusts - 12.0%
Avalon Properties, Inc. 30,000 $ 585,000
Bay Apartment Communities, Inc. 17,200 335,400
Chateau Properties, Inc. 25,000 500,000
Equity Residential Properties 21,700 648,288
Evans Withycombe Residential, Inc. 39,500 780,125
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Common Stocks - continued
- ---------------------------------------------------------------------------------------------------------------------
Issuer Shares Value
- ---------------------------------------------------------------------------------------------------------------------
Real Estate Investment Trusts - continued
Factory Stores America, Inc. 25,200 $ 522,900
Highwoods Properties, Inc. 19,800 408,375
LTC Properties, Inc. 44,400 571,650
Liberty Property Trust 40,400 767,600
National Health Investors, Inc. 44,700 1,223,663
Roc Communities, Inc. 43,000 860,000
Tanger Factory Outlet Centers, Inc. 23,400 526,500
----------
$ 7,729,501
- ---------------------------------------------------------------------------------------------------------------------
Telecommunications - 1.2%
AirTouch Communications, Inc.*<F1> 17,100 $ 510,863
IDB Communications Group, Inc.*<F1> 26,500 245,125
----------
$ 755,988
- ---------------------------------------------------------------------------------------------------------------------
Utilities - Electric - 28.3%
AES (The) Corp. 30 $ 593
CMS Energy Corp. 67,700 1,557,100
Central Costanera, ADR+<F2> 22,400 784,000
Cinergy Corp. 28,349 655,589
DPL, Inc. 43,000 876,125
Eastern Utilities Assn. 40,000 875,000
Empresa Nacional de Electricidad, ADR 17,000 779,875
Entergy Corp. 15,040 351,560
Florida Gas Transmission Co.+<F2> 500,000 500,000
General Public Utilities Corp. 46,900 1,207,675
Huaneng Power International, Inc.*<F1> 24,800 458,800
Illinova Corp. 89,600 1,769,600
Korea Electric Power Corp.*<F1> 38,000 741,000
NIPSCO Industries, Inc. 15,000 418,125
Pacific Gas & Electric Co. 30,000 675,000
Peco Energy Co. 44,700 1,145,436
Pinnacle West Capital Corp. 58,500 1,089,562
Public Service Company of New Mexico*<F1> 61,300 758,588
Sithe Energies, Inc.*<F1> 83,000 871,500
Texas Utilities Co. 30,800 1,004,850
Unicom Corp. 37,900 819,587
United Illuminating Co. 28,100 857,051
----------
$18,196,616
- ---------------------------------------------------------------------------------------------------------------------
Utilities - Gas - 10.0%
El Paso Natural Gas 20,000 $ 622,500
Enron Corp. 33,700 1,091,038
Panhandle Eastern Corp. 29,000 681,500
Sonat, Inc. 28,600 929,500
Tenneco, Inc. 18,500 818,625
Westcoast Energy, Inc. 94,200 1,542,525
Williams Cos., Inc. 24,600 713,400
----------
$ 6,399,088
- ---------------------------------------------------------------------------------------------------------------------
Utilities - Telephone - 16.0%
American Telephone & Telegraph Co. 21,000 $ 1,155,000
BellSouth Corp. 27,600 1,469,700
Empresas Telex-Chile S.A.*<F1> 3,200 58,800
GTE Corp. 27,150 834,861
MCI Communications Corp. 59,700 1,373,100
PT Indosat*<F1> 8,900 349,325
Southwestern Bell Corp. 34,000 1,423,750
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Common Stocks - continued
- ---------------------------------------------------------------------------------------------------------------------
Issuer Shares Value
- ---------------------------------------------------------------------------------------------------------------------
Utilities - Telephone - continued
Sprint Corp. 27,100 $ 884,138
Tele Danmark, ADR*<F1> 49,400 1,420,250
Telefonos de Mexico, ADR, "A" 22,295 1,229,012
----------
$10,197,936
- ---------------------------------------------------------------------------------------------------------------------
Foreign - Non-U.S. Dollar Denominated - 9.6%
Italy - 1.0%
Telecom Italia (Utilities - Telecommunications) 231,000 $ 634,235
- ---------------------------------------------------------------------------------------------------------------------
Netherlands - 1.1%
Royal PTT Nederland N.V. (Utilities - Telecommunications)*<F1> 23,000 $ 733,084
- ---------------------------------------------------------------------------------------------------------------------
Spain - 1.3%
Iberdrola (Utilities - Electric) 125,000 $ 824,670
- ---------------------------------------------------------------------------------------------------------------------
United Kingdom - 6.2%
East Midlands Electricity (Utilities - Electric) 51,000 $ 572,925
London Electricity (Utilities - Electric) 40,000 474,881
Midlands Electricity (Utilities - Electric) 25,000 321,551
NORWEB (Utilities - Electric) 16,000 212,862
Northern Electricity (Utilities - Electric) 25,000 341,597
PowerGen (Utilities - Electric) 83,050 771,925
South Wales Electricity (Utilities - Electric) 38,000 508,035
Southern Electric (Utilities - Electric) *<F1> 60,000 785,960
----------
$ 3,989,736
- ---------------------------------------------------------------------------------------------------------------------
Total Common Stocks (Identified Cost, $50,398,899) $50,342,104
- ---------------------------------------------------------------------------------------------------------------------
Convertible Preferred Stocks - 2.4%
- ---------------------------------------------------------------------------------------------------------------------
Cointel, 7%, Prides (Utilities - Telecommunications)+<F2> 12,500 $ 771,875
Kenetech Corp., 8.25% (Utilities - Electric) 20,300 340,025
Tejas Gas Corp., 5.25% (Utilities - Gas) 10,000 430,001
- ---------------------------------------------------------------------------------------------------------------------
Total Convertible Preferred Stocks (Identified Cost, $1,811,075) $ 1,541,901
- ---------------------------------------------------------------------------------------------------------------------
Short-Term Obligation - 0.5%
- ---------------------------------------------------------------------------------------------------------------------
Principal Amount
(000 Omitted)
- ---------------------------------------------------------------------------------------------------------------------
Federal Home Loan Bank, due 11/01/94 $ 300 $ 300,000
- ---------------------------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $64,766,897) $63,714,735
Other Assets, Less Liabilities - 0.7% 485,497
- ---------------------------------------------------------------------------------------------------------------------
Net Assets - 100.0% $64,200,232
- ---------------------------------------------------------------------------------------------------------------------
<FN>
<F1>*Non-income producing security.
<F2>+SEC Rule 144A restriction (see Note 8).
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- -------------------------------------------------------------------------------------------
<CAPTION>
October 31, 1994
- -------------------------------------------------------------------------------------------
<S> <C>
Assets:
Investments, at value (identified cost, $64,766,897) $63,714,735
Cash 124,811
Net receivable for forward foreign currency exchange contracts purchased 267,569
Receivable for investments sold 3,819,509
Receivable for Fund shares sold 478,615
Interest and dividends receivable 492,729
Other assets 54,292
----------
Total assets $68,952,260
----------
Liabilities:
Distributions payable $ 38,034
Payable for investments purchased 3,934,479
Payable for Fund shares reacquired 363,139
Net payable for forward foreign currency exchange contracts sold 306,125
Payable to affiliate for distribution fee 401
Accrued expenses and other liabilities 109,850
----------
Total liabilities $ 4,752,028
----------
Net assets $64,200,232
----------
Net assets consist of:
Paid-in capital $66,320,776
Unrealized depreciation on investments and translation of assets and
liabilities in foreign currencies (1,090,269)
Accumulated distributions in excess of net realized gain on investments (1,092,330)
Accumulated undistributed net investment income 62,055
----------
Total $64,200,232
----------
Shares of beneficial interest outstanding 9,177,365
----------
Class A shares:
Net asset value and redemption price per share
(net assets of $42,027,123 / 6,003,346 shares of beneficial interest
outstanding) $7.00
----
Offering price per share (100/95.25 of net asset value per share) $7.35
----
Class B shares:
Net asset value, redemption price and offering price per share
(net assets of $19,774,375 / 2,831,020 shares of beneficial
interest outstanding) $6.98
----
Class C shares:
Net asset value, redemption price and offering price per share
(net assets of $2,398,734 / 342,999 shares of beneficial interest
outstanding) $6.99
----
On sales of $100,000 or more, the offering price of Class A shares is reduced. A
contingent deferred sales charge may be imposed on redemptions of Class A and
Class B shares.
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- ------------------------------------------------------------------------------------------
<CAPTION>
Year Ended October 31, 1994
- ------------------------------------------------------------------------------------------
<S> <C>
Net investment income:
Income -
Dividends $ 1,936,073
Interest 1,157,100
-----------
Total investment income $ 3,093,173
-----------
Expenses -
Management fee $ 416,085
Trustees' compensation 39,303
Shareholder servicing agent fee (Class A) 65,073
Shareholder servicing agent fee (Class B) 31,782
Shareholder servicing agent fee (Class C) 1,888
Distribution and service fee (Class B) 144,832
Distribution and service fee (Class C) 12,649
Printing 69,861
Registration fee 53,986
Auditing fees 35,298
Custodian fee 29,558
Postage 16,587
Legal fees 15,210
Amortization of organization expenses 5,749
Miscellaneous 65,751
-----------
Total expenses $ 1,003,612
Reduction of expenses by investment adviser (451,719)
-----------
Net expenses $ 551,893
-----------
Net investment income $ 2,541,280
-----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $(1,139,739)
Foreign currency transactions 91,607
-----------
Net realized loss on investments $(1,048,132)
-----------
Change in unrealized appreciation (depreciation) -
Investments $(3,846,420)
Translation of assets and liabilities in foreign currencies (22,374)
-----------
Net unrealized loss on investments $(3,868,794)
-----------
Net realized and unrealized loss on investments and foreign
currency $(4,916,926)
-----------
Net decrease in net assets from operations $(2,375,646)
-----------
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS - continued
Statement of Changes in Net Assets
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended October 31, 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 2,541,280 $ 1,329,128
Net realized gain (loss) on investments and
foreign currency transactions (1,048,132) 1,466,683
Net unrealized gain (loss) on investments and
foreign currency (3,868,794) 2,562,924
------------ ------------
Increase (decrease) in net assets from
operations $ (2,375,646) $ 5,358,735
------------ ------------
Distributions declared to shareholders -
From net investment income and foreign currency
transactions (Class A) $ (2,081,568) $ (1,300,364)
From net investment income and foreign currency
transactions (Class B) (524,361) (10,790)
From net investment income and foreign currency
transactions (Class C) (42,372) --
From net realized gain on investments (Class A) (1,205,090) (62,704)
From net realized gain on investments (Class B) (217,435) --
------------ ------------
Total distributions declared to shareholders
$ (4,070,826) $ (1,373,858)
------------ ------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 45,045,270 $ 35,049,448
Net asset value of shares issued to shareholders
in reinvestment of distributions 3,351,049 917,260
Cost of shares reacquired (26,584,135) (3,976,300)
------------ ------------
Increase in net assets from Fund share
transactions $ 21,812,184 $ 31,990,408
------------ ------------
Total increase in net assets $ 15,365,712 $ 35,975,285
Net assets:
At beginning of year 48,834,520 12,859,235
------------ ------------
At end of year (including accumulated
undistributed net investment income of $62,055 and $81,874, respectively) $ 64,200,232 $ 48,834,520
------------ ------------
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS - continued
Financial Highlights
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
<F1> <F2> <F3>
Year Ended October 31, 1994 1993 1992* 1994 1993** 1994***
- -------------------------------------------------------------------------------------------------------------------------------
Class A Class B Class C
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 7.86 $ 6.68 $ 6.33 $ 7.84 $ 7.83 $ 7.48
------ ------ ------ ------ ------ ------
Income from investment operations++ -<F5>
Net investment income(S)<F7> $ 0.33 $ 0.40 $ 0.17 $ 0.25 $ 0.05 $ 0.25
Net realized and unrealized gain (loss) on investments (0.63) 1.19 0.30 (0.63) 0.01 (0.54)
------ ------ ------ ------ ------ ------
Total from investment operations $(0.30) $ 1.59 $ 0.47 $(0.38) $ 0.06 $(0.29)
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.35) $(0.38) $(0.12) $(0.27) $(0.05) $(0.20)
From net realized gain on investments (0.21) (0.03) -- (0.21) -- --
------ ------ ------ ------ ------ ------
Total distributions declared to shareholders $(0.56) $(0.41) $(0.12) $(0.48) $(0.05) $(0.20)
------ ------ ------ ------ ------ ------
Net asset value - end of period $ 7.00 $ 7.86 $ 6.68 $ 6.98 $ 7.84 $ 6.99
------ ------ ------ ------ ------ ------
Total return+++<F6> (3.89)% 24.39% 11.02% (4.92)% 0.69% (3.87)%
Ratios (to average net assets)/Supplemental data(S)<F7>:
Expenses 0.65% 0.65% 0.65%+<F4> 1.72% 1.50%+<F4> 1.65%+<F4>
Net investment income 4.58% 4.57% 5.44%+<F4> 3.51% 1.80%+<F4> 3.56%+<F4>
Portfolio turnover 115% 119% 63% 115% 119% 115%
Net assets at end of period (000 omitted) $42,027 $43,423 $12,859 $19,774 $5,412 $2,399
<FN>
<F1> *For the period from the commencement of investment operations, February
14, 1992 to October 31, 1992.
<F2> **For the period from the commencement of offering of Class B shares,
September 7, 1993 to October 31, 1993.
<F3>***For the period from the commencement of offering of Class C shares,
January 3, 1994 to October 31, 1994.
<F4> +Annualized.
<F5> ++Per share data for the period are based on average shares outstanding.
<F6>+++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.
<F7>(S)The investment adviser did not impose a portion of its management fee and
agreed to reduce expenses of the Fund for the periods indicated. If these
expenses had been incurred by the Fund, the net investment income per
share and the ratios would have been:
Net investment income $ 0.28 $ 0.31 $ 0.13 $ 0.20 $ (0.07) $ 0.20
Ratios (to average net assets):
Expenses 1.41% 1.68% 2.63%+<F4> 2.48% 3.27%+<F4> 2.41%+<F4>
Net investment income 3.82% 4.20% 3.46%+<F4> 2.74% 1.53%+<F4> 2.80%+<F4>
See notes to financial statements
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Utilities Fund (the Fund) is a non-diversified series of MFS Series Trust VI
(the Trust). The Trust is organized as a Massachusetts business trust and is
registered under the Investment Company Act of 1940, as amended, as an open-end
management investment company.
(2) Significant Accounting Policies
Investment Valuations - Equity securities listed on securities exchanges or
reported through the NASDAQ system are valued at last sale prices. Unlisted
equity securities or listed equity securities for which last sale prices are not
available are valued at last quoted bid prices. Debt securities (other than
short-term obligations which mature in 60 days or less), including listed issues
and forward contracts, are valued on the basis of valuations furnished by
dealers or by a pricing service with consideration to factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data, without exclusive reliance upon exchange or over-the-counter prices.
Short-term obligations, which mature in 60 days or less, are valued at amortized
cost, which approximates market value. Non-U.S. dollar denominated short-term
obligations are valued at amortized cost as calculated in the base currency and
translated into U.S. dollars at the closing daily exchange rate. Futures
contracts, options and options on futures contracts listed on commodities
exchanges are valued at closing settlement prices. Over-the-counter options are
valued by brokers through the use of a pricing model which takes into account
closing bond valuations, implied volatility and short-term repurchase rates.
Securities for which there are no such quotations or valuations are valued at
fair value as determined in good faith by or at the direction of the Trustees.
Repurchase Agreements - The Fund may enter into repurchase agreements with
institutions that the Fund's investment adviser has determined are creditworthy.
Each repurchase agreement is recorded at cost. The Fund requires that the
securities purchased in a repurchase transaction be transferred to the custodian
in a manner sufficient to enable the Fund to obtain those securities in the
event of a default under the repurchase agreement. The Fund monitors, on a daily
basis, the value of the securities transferred to ensure that the value,
including accrued interest, of the securities under each repurchase agreement is
greater than amounts owed to the Fund under each such repurchase agreement.
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases and
sales of foreign investments and income and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates of
such transactions. Gains and losses attributable to foreign currency exchange
rates on sales of securities are recorded for financial statement purposes as
net realized gains and losses on investments. Gains and losses attributable to
foreign exchange rate movements on income and expenses are recorded for
financial statement purposes as investment income. That portion of both realized
and unrealized gains and losses on investments that results from fluctuations in
foreign currency exchange rates is not separately disclosed.
Deferred Organization Expenses - Costs incurred by the Fund in connection with
its organization have been deferred and are being amortized on a straight-line
basis over a five-year period beginning on the date of commencement of
operations of the Fund.
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
Written Options - The Fund may write covered call or put options for which
premiums are received and are recorded as liabilities, and are subsequently
adjusted to the current value of the options written. Premiums received from
writing options which expire are treated as realized gains. Premiums received
from writing options which are exercised or are closed are offset against the
proceeds or amount paid on the transaction to determine the realized gain or
loss. If a put option is exercised, the premium reduces the cost basis of the
securities purchased by the Fund. The Fund, as writer of an option, may have no
control over whether the underlying securities may be sold (call) or purchased
(put) and, as a result, bears the market risk of an unfavorable change in the
price of the securities underlying the written option. At October 31, 1994, the
Fund had no written options.
Futures Contracts - The Fund may enter into financial futures contracts for the
delayed delivery of securities, currency or contracts based on financial indices
at a fixed price on a future date. In entering such contracts, the Fund is
required to deposit either in cash or securities an amount equal to a certain
percentage of the contract amount. Subsequent payments are made or received by
the Fund each day, depending on the daily fluctuations in the value of the
underlying security, and are recorded for financial statement purposes as
unrealized gains or losses by the Fund. The Fund's investment in financial
futures contracts is designed to hedge against anticipated future changes in
interest or exchange rates or securities prices. Should interest or exchange
rates or securities prices move unexpectedly, the Fund may not achieve the
anticipated benefits of the financial futures contracts and may realize a loss.
At October 31, 1994, the Fund had no futures contracts.
Security Loans - The Fund may lend its securities to member banks of the
Federal Reserve System and to member firms of the New York Stock Exchange or
subsidiaries thereof. The loans are collateralized at all times by cash or
securities with a market value at least equal to the market value of securities
loaned. As with other extensions of credit, the Fund may bear the risk of delay
in recovery or even loss of rights in the collateral should the borrower of the
securities fail financially. The Fund receives compensation for lending its
securities in the form of fees or from all or a portion of the income from
investment of the collateral. The Fund also continues to earn income on the
securities loaned. At October 31, 1994, the Fund had no securities on loan.
Forward Foreign Currency Exchange Contracts - The Fund may enter into forward
foreign currency exchange contracts for the purchase or sale of a specific
foreign currency at a fixed price on a future date. Risks may arise upon
entering these contracts from the potential inability of counterparties to meet
the terms of their contracts and from unanticipated movements in the value of a
foreign currency relative to the U.S. dollar. The Fund will enter into forward
contracts for hedging purposes as well as for non-hedging purposes. The forward
foreign currency exchange contracts are adjusted by the daily exchange rate of
the underlying currency and any gains or losses are recorded for financial
statement purposes as unrealized until the contract settlement date.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
original issue discount are amortized or accreted for both financial statement
and tax reporting purposes as required by federal income tax regulations.
Dividend income is recorded on the ex-dividend date for dividends received in
cash. Dividend and interest payments received in additional securities are
recorded on the ex-dividend or ex-interest date in an amount equal to the value
of the security on such date.
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided.
The Fund files a tax return annually using tax accounting methods required under
provisions of the Code which may differ from generally accepted accounting
principles, the basis on which these financial statements are prepared.
Accordingly, the amount of net investment income and net realized gain reported
on these financial statements may differ from that reported on the Fund's tax
return and, consequently, the character of distributions to shareholders
reported in the financial highlights may differ from that reported to
shareholders on Form 1099-DIV. Distributions to shareholders are recorded on the
ex-dividend date.
The Fund distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits which result in temporary
over-distributions for financial statement purposes, are reported as
distributions in excess of net investment income or accumulated net realized
gains. During the year ended October 31, 1994, $87,202 was reclassified to
accumulated undistributed net investment income from accumulated net realized
gain on investments, due to differences between book and tax accounting for
mortgage-backed securities and currency transactions. This change had no effect
on the net assets or net asset value per share.
Multiple Classes of Shares of Beneficial Interest - The Fund offers Class A,
Class B and Class C shares. Class B and Class C shares were first offered to the
public on September 7, 1993 and January 3, 1994, respectively. The three classes
of shares differ in their respective shareholder servicing agent, distribution
and service fees. Shareholders of each class also bear certain expenses that
pertain only to that particular class. All shareholders bear the common expenses
of the Fund pro rata based on the average daily net assets of each class,
without distinction between share classes. Dividends are declared separately for
each class. No class has preferential dividend rights; differences in per share
dividend rates are generally due to differences in separate class expenses,
including distribution and shareholder service fees.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee, computed daily and paid monthly at an annual rate of 0.375% of
average daily net assets and 6.25% of investment income, amounted to $416,085
for the year ended October 31, 1994. The investment adviser did not impose any
of its fee and agreed to further reduce expenses of the Fund by $35,634, which
is reflected as a reduction of expenses in the Statement of Operations.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive remuneration
for their services to the Fund from MFS. Certain of the officers and Trustees of
the Fund are officers or directors of MFS, MFS Financial Services, Inc. (FSI)
and MFS Service Center, Inc. (MFSC). The Fund has an unfunded defined benefit
plan for all its independent Trustees. Included in Trustees' compensation is a
net periodic pension expense of $6,645 for the year ended October 31, 1994.
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
Distributor - FSI, a wholly owned subsidiary of MFS, as distributor, received
$64,642 as its portion of the sales charge on sales of Class A shares of the
Fund. The Trustees have adopted separate distribution plans for Class A, Class B
and Class C shares pursuant to Rule 12b-1 of the Investment Company Act of 1940
as follows:
The Class A Distribution Plan provides that the Fund will pay FSI up to 0.35% of
its average daily net assets attributable to Class A shares annually in order
that FSI may pay expenses on behalf of the Fund related to the distribution and
servicing of its shares. These expenses include a service fee to each securities
dealer that enters into a sales agreement with FSI of up to 0.25% per annum
(reduced to a maximum of 0.15% for an indefinite period of time) of the Fund's
average daily net assets attributable to Class A shares which are attributable
to that securities dealer, a distribution fee to FSI of up to 0.10% per annum of
the Fund's average daily net assets attributable to Class A shares, commissions
to dealers and payments to FSI wholesalers for sales at or above a certain
dollar level, and other such distribution-related expenses that are approved by
the Fund. Payments will commence under the distribution plan when the net assets
of the Fund attributable to Class A shares first equals or exceeds $50,000,000.
The Class B and Class C Distribution Plans provide that the Fund will pay FSI a
monthly distribution fee, equal to 0.75% per annum, and a quarterly service fee
of up to 0.25% per annum, of the Fund's average daily net assets attributable to
Class B and Class C shares. FSI will pay to securities dealers that enter into a
sales agreement with FSI all or a portion of the service fee attributable to
Class B and Class C shares, and will pay to such securities dealers all of the
distribution fee attributable to Class C shares. The service fee is intended to
be additional consideration for services rendered by the dealer with respect to
Class B and Class C shares. Fees incurred under the distribution plans for the
year ended October 31, 1994 were 1.00% of average daily net assets attributable
to Class B and Class C shares on an annualized basis and amounted to $144,832
and $12,649, respectively (of which FSI retained $698 and $233 for Class B and
Class C shares, respectively).
A contingent deferred sales charge is imposed on shareholder redemptions of
Class A shares, on purchases of $1 million or more, in the event of a share
redemption within 12 months following the share purchase. A contingent deferred
sales charge is imposed on shareholder redemptions of Class B shares in the
event of a shareholder redemption within six years of purchase. FSI receives all
contingent deferred sales charges. Contingent deferred sales charges imposed
during the year ended October 31, 1994 were $16 and $45,345 for Class A and
Class B shares.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earned
$65,073, $31,782 and $1,888 for Class A, Class B and Class C shares,
respectively, for its services as shareholder servicing agent. The fee is
calculated as a percentage of the average daily net assets of each class of
shares at an effective annual rate of up to 0.15%, up to 0.22% and up to 0.15%
attributable to Class A, Class B and Class C shares, respectively.
(4) Portfolio Securities
Purchases and sales of investments, other than purchased option transactions and
short-term obligations, were as follows:
<TABLE>
<CAPTION>
Purchases Sales
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. government securities $ 6,248,523 $ 6,285,059
---------- ----------
Investments (non-U.S. government securities) $83,057,175 $61,180,391
---------- ----------
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
The cost and unrealized appreciation or depreciation in value of the investments
owned by the Fund, as computed on a federal income tax basis, are as follows:
<TABLE>
<S> <C>
Aggregate cost $64,920,019
----------
Gross unrealized depreciation $ (3,343,636)
Gross unrealized appreciation 2,138,352
----------
Net unrealized depreciation $ (1,205,284)
----------
</TABLE>
At October 31, 1994, the Fund, for federal income tax purposes, had a capital
loss carryforward of $967,620 which may be applied against any net taxable
realized gains of each succeeding year until the earlier of its utilization or
expiration on October 31, 2002.
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
1994 1993
Class A Shares ---------------------------- ----------------------------
Year Ended October 31, Shares Amount Shares Amount
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 2,190,865 $16,077,771 3,959,706 $29,258,406
Shares issued to shareholders in
reinvestment of distributions 370,127 2,689,482 123,925 915,957
Shares reacquired (2,083,365) (15,124,516) (483,505) (3,577,451)
-------- ---------- -------- ----------
Net increase 477,627 $ 3,642,737 3,600,126 $26,596,912
-------- ---------- -------- ----------
</TABLE>
<TABLE>
<CAPTION>
1994 1993*<F1>
Class B Shares ----------------------------- --------------------------
Year Ended October 31, Shares Amount Shares Amount
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 3,158,234 $22,915,060 740,714 $ 5,791,042
Shares issued to shareholders in
reinvestment of distributions 86,550 623,513 167 1,303
Shares reacquired (1,103,660) (7,857,710) (50,985) (398,849)
-------- ---------- -------- ----------
Net increase 2,141,124 $15,680,863 689,896 $ 5,393,496
-------- ---------- -------- ----------
<FN>
<F1>*For the period from the commencement of offering of Class B shares,
September 7, 1993 to October 31, 1993.
</TABLE>
<TABLE>
<CAPTION>
1994+<F2>
Class C Shares ---------------------------
Period Ended October 31, Shares Amount
- ----------------------------------------------------------------------
<S> <C> <C>
Shares sold 841,006 $6,052,439
Shares issued to shareholders in
reinvestment of distributions 5,376 38,054
Shares reacquired (503,383) (3,601,909)
------ ---------
Net increase 342,999 $2,488,584
------ ---------
<FN>
<F2>+For the period from the commencement of offering of Class C shares, January
3, 1994 to October 31, 1994.
</TABLE>
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS, or an affiliate of MFS, in an unsecured line of credit
with a bank which permits borrowings up to $300 million, collectively.
Borrowings may be made to temporarily finance the repurchase of Fund shares.
Interest is charged to each fund, based on its borrowings, at a rate equal to
the bank's base rate. In addition, a commitment fee, based on the average daily
unused portion of the line of credit, is allocated among the participating funds
at the end of each quarter. The commitment fee allocated to the Fund for the
year ended October 31, 1994 was $1,006.
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
(7) Financial Instruments
The Fund regularly trades financial instruments with off-balance sheet risk in
the normal course of its investing activities in order to manage exposure to
market risks such as interest rates and foreign currency exchange rates. These
financial instruments include forward foreign currency exchange contracts. The
notional or contractual amounts of these instruments represent the investment
the Fund has in particular classes of financial instruments and does not
necessarily represent the amounts potentially subject to risk. The measurement
of the risks associated with these instruments is meaningful only when all
related and offsetting transactions are considered. A summary of obligations
under these financial instruments at October 31, 1994, is as follows:
<TABLE>
Forward Foreign Currency Exchange Contracts
<CAPTION>
Net Unrealized
Contracts to Contracts Appreciation
Settlement Date Receive In Exchange for at Value (Depreciation)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales 1/18/95 DEM 7,027,810 $4,530,856 $4,679,433 $(148,577)
12/22/94 ESP 410,176,000 3,169,830 3,269,513 (99,683)
12/22/94 GBP 808,103 1,263,872 1,321,737 (57,865)
--------- --------- --------
$8,964,558 $9,270,683 $(306,125)
--------- --------- --------
Purchases 1/18/95 DEM 7,027,810 $4,560,256 $4,679,433 $ 119,177
12/22/94 ESP 410,176,000 3,174,000 3,269,513 95,513
12/22/94 GBP 808,103 1,268,858 1,321,737 52,879
--------- --------- --------
$9,003,114 $9,270,683 $ 267,569
--------- --------- --------
</TABLE>
At October 31, 1994, the Fund had sufficient cash and/or securities to cover any
commitments under these contracts.
DEM = German Marks ESP = Spanish Pesetas GBP = British Pounds
(8) Restricted Securities
The Fund may invest not more than 10% of its total assets in securities which
are subject to legal or contractual restrictions on resale. At October 31, 1994,
the Fund owned the following restricted securities (constituting 3.4% of net
assets) which may not be publicly sold without registration under the Securities
Act of 1933. The Fund does not have the right to demand that such securities be
registered. The value of these securities is determined by valuations supplied
by a pricing service or brokers or, if not available, in good faith by or at the
direction of the Trustees. Certain of these securities may be offered and sold
to qualified institutional buyers under Rule 144A of the 1933 Act.
<TABLE>
<CAPTION>
Description Date of Acquisition Share/Par Amount Cost Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Central Costanera, ADR 12/17/93 22,400 $670,600 $ 784,000
Cointel, 7%, Prides, 1998 2/24/94 12,500 900,000 771,875
Florida Gas Transmission Co. 10/31/94 500,000 500,000 500,000
Hidroelectrica Alicura,
8.375s, 1999 4/08/94 150,000 141,977 132,188
---------
$2,188,063
---------
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Trustees and
Shareholders of MFS Utilities Fund:
We have audited the accompanying statement of assets and liabilities of MFS
Utilities Fund including the schedule of portfolio investments as of October 31,
1994, and the related statements of operations, changes in net assets, and
financial highlights for the year then ended for Class A shares and Class B
shares, and for the period from January 3, 1994 (commencement of offering) to
October 31, 1994 for Class C shares. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audit. The financial statements of MFS Utilities Fund for the year
ended October 31, 1993, and the financial highlights for the year then ended,
and for the period from February 14, 1992 (commencement of investment
operations) to October 31, 1992 for Class A shares, and for the period from
September 7, 1993 (commencement of offering) to October 31, 1993 for Class B
shares, were audited by other auditors whose report dated December 14, 1993
expressed an unqualified opinion on those statements and financial highlights.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of October 31, 1994, by
correspondence with the custodian and brokers or by other appropriate auditing
procedures where replies from brokers were not received. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of MFS
Utilities Fund as of October 31, 1994 and the results of its operations, the
changes in its net assets, and the financial highlights for the year then ended
for Class A and Class B shares, and for the period from January 3, 1994
(commencement of offering) to October 31, 1994 for Class C shares, in conformity
with generally accepted accounting principles.
Boston, Massachusetts LOGO ERNST & YOUNG LLP
December 12, 1994
--------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
MFS(R) WORLD
EQUITY FUND
(A member of the MFS Family of Funds(R))
PROSPECTUS
March 1, 1995
Class A Shares of Beneficial Interest
Class B Shares of Beneficial Interest
Class C Shares of Beneficial Interest
- --------------------------------------------------------------------------------
Page
1. Expense Summary 2
2. The Fund 3
3. Condensed Financial Information 4
4. Investment Objective and Policies 4
5. Investment Techniques 7
6. Management of the Fund 13
7. Information Concerning Shares of the Fund 14
Purchases 14
Exchanges 20
Redemptions and Repurchases 20
Distribution Plans 22
Distributions 24
Tax Status 24
Net Asset Value 25
Description of Shares, Voting Rights and Liabilities 25
Performance Information 26
8. Shareholder Services 26
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
MFS WORLD EQUITY FUND
500 Boylston Street, Boston, Massachusetts 02116 (617) 954-5000
The investment objective of MFS World Equity Fund (the "Fund") is to provide
capital appreciation primarily through investments in stocks of U.S. and non-
U.S. issuers. The Fund is a diversified series of MFS Series Trust VI (the
"Trust"), an open-end management investment company. THE FUND IS DESIGNED FOR
INVESTORS WHO WISH TO SPREAD THEIR INVESTMENTS BEYOND THE UNITED STATES AND WHO
ARE PREPARED TO ACCEPT THE RISKS ENTAILED IN SUCH INVESTMENTS, which may be
higher than those associated with certain U.S. investments (see "Investment
Objective and Policies"). The minimum initial investment generally is $1,000 per
account (see "Purchases"). The Fund's investment adviser and distributor are
Massachusetts Financial Services Company ("MFS" or the "Adviser") and MFS Fund
Distributors, Inc. ("MFD"), respectively, both of which are located at 500
Boylston Street, Boston, Massachusetts 02116.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
This Prospectus sets forth concisely the information concerning the Trust and
Fund that a prospective investor ought to know before investing. The Trust, on
behalf of the Fund, has filed with the Securities and Exchange Commission (the
"SEC") a Statement of Additional Information, dated March 1, 1995, which
contains more detailed information about the Trust and the Fund and is
incorporated into this Prospectus by reference. See page 28 for a further
description of the information set forth in the Statement of Additional
Information. A copy of the Statement of Additional Information may be obtained
without charge by contacting the Shareholder Servicing Agent (see back cover for
address and phone number).
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
1. EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES:
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Maximum Initial Sales Charge Imposed on
Purchases of Fund Shares(as a
percentage of offering price) 5.75% 0% 0%
Maximum Contingent Deferred Sales Charge
(as a percentage of original purchase
price or redemption proceeds, as applicable) See Below<F1> 4.00%<F2> 0%
ANNUAL OPERATING EXPENSES OF THE FUND (AS A
PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees 1.00% 1.00% 1.00%
Rule 12b-1 Fees 0%<F3> 1.00%<F4> 1.00%<F4>
Other Expenses .45% .52% .45%<F5>
---- ---- ----
Total Operating Expenses 1.45% 2.52% 2.45%
<FN>
<F1>Purchases of $1 million or more are not subject to an initial sales charge; however, a
contingent deferred sales charge ("CDSC") of 1% will be imposed on such purchases in the
event of certain redemption transactions within 12 months following such purchases (see
"Purchases").
<F2>Class B shares purchased prior to September 1, 1993 were subject to a CDSC of 5% in the
event of a redemption within the first year after purchase.
<F3>The Fund has adopted a Distribution Plan for its Class A shares in accordance with Rule
12b-1 under the Investment Company Act of 1940, as amended (the "1940 Act"), which provides
that it will pay distribution/ service fees aggregating up to (but not necessarily all of)
0.35% per annum of the average daily net assets attributable to the Class A shares (see
"Distribution Plans"). Payments under the Class A Distribution Plan will become payable
when the net assets of the Fund attributable to Class A shares first equal or exceed $40
million. Thereafter, 0.10% of the distribution fee will be waived. After a substantial
period of time, distribution expenses paid under this Plan, together with the initial sales
charge, may total more than the maximum sales charge that would have been permissible if
imposed entirely as an initial sales charge.
<F4>The Fund has adopted separate Distribution Plans for its Class B and its Class C shares in
accordance with Rule 12b-1 under the 1940 Act, which provide that it will pay
distribution/service fees aggregating up to (but not necessarily all of) 1.00% per annum of
the average daily net assets attributable to the Class B shares under the Class B
Distribution Plan and the Class C shares under the Class C Distribution Plan (see
"Distribution Plans"). After a substantial period of time, distribution expenses paid under
these Plans, together with any CDSC payable upon redemption of Class B shares, may total
more than the maximum sales charge that would have been permissible if imposed entirely as
an initial sales charge.
<F5>Except for the shareholder servicing agent fee component, "Other Expenses" is based on
Class A expenses incurred during the fiscal year ended October 31, 1994. The shareholder
servicing agent fee component of "Other Expenses" is a predetermined percentage based upon
the Fund's net assets attributable to each class.
</TABLE>
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a $1,000
investment in the Fund, assuming (a) a 5% annual return and (b) redemption at
the end of each of the time periods indicated (unless otherwise noted):
PERIOD CLASS A CLASS B CLASS C
------- ------------------- -------
(1)
1 year $ 71 $ 66 $ 26 $ 25
3 years 101 108 78 76
5 years 132 154 134 131
10 years 221 259(2) 259(2) 279
(1) Assumes no redemption.
(2) Class B shares convert to Class A shares approximately eight years after
purchase; therefore, years nine and ten reflect Class A expenses.
The purpose of the expense table is to assist investors in understanding the
various costs and expenses that a shareholder of the Fund will bear directly or
indirectly. More complete descriptions of the following Fund expenses are set
forth in the following sections of the Prospectus: (i) varying sales charges on
share purchases -- "Purchases"; (ii) varying CDSCs -- "Purchases"; (iii)
management fees -- "Investment Adviser"; and (iv) Rule 12b-1 (i.e., distribution
plan) fees -- "Distribution Plans."
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
2. THE FUND
The Fund is a diversified series of the Trust, an open-end management investment
company which was organized as a business trust under the laws of The
Commonwealth of Massachusetts on April 30, 1990. The Trust presently consists of
three series, each of which represents a portfolio with separate investment
policies. Shares of the Fund are continuously sold to the public and the Fund
then uses the proceeds to buy securities for its portfolio. Three classes of
shares of the Fund currently are offered to the general public. Class A shares
are offered at net asset value plus an initial sales charge (or a CDSC in the
case of certain purchases of $1 million or more) and subject to a Distribution
Plan providing for an annual distribution fee and service fee. Class B shares
are offered at net asset value without an initial sales charge but subject to a
CDSC and a Distribution Plan providing for an annual distribution fee and
service fee which are greater than the Class A annual distribution fee and
service fee; Class B shares will convert to Class A shares approximately eight
years after purchase. Class C shares are offered at net asset value without an
initial sales charge or a CDSC but subject to a Distribution Plan providing for
an annual distribution fee and service fee which are equal to the Class B annual
distribution fee and service fee. Class C shares do not convert to any other
class of shares of the Fund.
The Trust's Board of Trustees provides broad supervision over the affairs of the
Fund. A majority of the Trustees are not affiliated with the Adviser. The
Adviser is responsible for the management of the Fund's assets and the officers
of the Trust are responsible for the Fund's operations. The Adviser manages the
portfolio from day to day in accordance with the Fund's investment objective and
policies. The selection of investments and the way they are managed depend on
the conditions and trends in the economies of the various countries of the
world, their financial markets and the relationship of their currencies to the
U.S. dollar. The Fund also offers to buy back (redeem) its shares from its
shareholders at any time at net asset value less any applicable CDSC.
<PAGE>
3. CONDENSED FINANCIAL INFORMATION
The following information should be read in conjunction with the Fund's
financial statements included in the Fund's Annual Report to shareholders which
are incorporated by reference into the Statement of Additional Information in
reliance upon the report of Deloitte & Touche LLP, independent certified public
accountants, as experts in accounting and auditing.
FINANCIAL HIGHLIGHTS
CLASS A, CLASS B AND CLASS C SHARES
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
OCTOBER 31, OCTOBER 31,
------------------------------ -----------------------
1994 1994 1994<F5> 1993<F2> 1993<F4>
------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B
------------------------------------------------------------
PER SHARE DATA (FOR A SHARE
OUTSTANDING THROUGHOUT EACH
PERIOD):
<S> <C> <C> <C> <C> <C>
Net asset value --
beginning of period $16.56 $16.53 $16.75 $15.71 $13.50
Income from operations --
Net investment income
(loss)<F7> $ 0.03 $(0.17) $(0.09) $ 0.01 $(0.10)
Net realized and unrealized
gain (loss) on investments 1.13 1.13 0.14 0.84 3.28
Total from operations $ 1.16 $ 0.96 $ 0.05 $ 0.85 $ 3.18
Less distributions declared
to shareholders --
In excess of net investment
income $(0.07) $(0.01) $ -- $ -- $ --
From net realized gain
on investments (0.70) (0.70) -- -- (0.15)
From paid-in capital -- -- -- -- --
Total distributions declared
to shareholders $(0.77) $(0.71) $ -- $ -- $(0.15)
Net asset value --
end of period $16.95 $16.78 $16.80 $16.56 $16.53
TOTAL RETURN<F6> 7.03% 5.91% 0.30% 5.41% 23.80%
RATIOS (TO AVERAGE NET
ASSETS)/ SUPPLEMENTAL DATA:
Expenses 1.54% 2.58% 2.55%<F1> 1.68%<F1> 2.66%<F1>
Net investment income (loss) 0.15% (1.01)% (0.72)%<F1> 0.94%<F1> (0.71)%<F1>
PORTFOLIO TURNOVER 99% 99% 99% 70% 70%
NET ASSETS -- END OF PERIOD
(000 OMITTED) $16,968 $175,438 $1,440 $2,076 $145,575
<CAPTION>
CLASS B
YEAR ENDED NOVEMBER 30,
------------------------------------------------------------------------
1992 1991 1990 1989 1988 1987<F3>
------------------------------------------------------------------------
PER SHARE DATA (FOR A SHARE
OUTSTANDING THROUGHOUT EACH
PERIOD):
<S> <C> <C> <C> <C> <C> <C>
Net asset value --
beginning of period $12.40 $12.94 $12.96 $11.21 $10.12 $ 8.47
Income from operations --
Net investment income
(loss)<F7> $(0.04) $ 0.17 $ 0.13 $ 0.09 $ 0.14 $(0.02)
Net realized and unrealized
gain (loss) on investments 1.17 (0.37) 0.14 2.03 0.95 1.67
Total from operations $ 1.13 $(0.20) $ 0.27 $ 2.12 $ 1.09 $ 1.65
Less distributions declared
to shareholders --
In excess of net investment
income $ -- $ -- $ -- $(0.21) $ -- $ --
From net realized gain
on investments (0.03) (0.15) (0.29) (0.12) -- --
From paid-in capital -- (0.19) -- (0.04) -- --
Total distributions declared
to shareholders $(0.03) $(0.34) $(0.29) $(0.37) $ -- $ --
Net asset value --
end of period $13.50 $12.40 $12.94 $12.96 $11.21 $10.12
TOTAL RETURN<F6> 9.13% (1.57)% 2.02% 19.58% 10.77% 19.48%
RATIOS (TO AVERAGE NET
ASSETS)/SUPPLEMENTAL DATA:
Expenses 2.91% 2.88% 2.93% 3.05% 2.48% 2.50%<F1>
Net investment income (loss) (0.31)% 1.35% 1.07% 0.77% 1.29% (0.29)%<F1>
PORTFOLIO TURNOVER 110% 160% 173% 190% 276% 272%
NET ASSETS -- END OF PERIOD
(000 OMITTED) $101,550 $82,980 $81,505 $50,827 $42,806 $37,248
<FN>
<F1> Annualized.
<F2> For the period from the commencement of offering of Class A shares,
September 7, 1993 to October 31, 1993.
<F3> For the period from the commencement of investment operations, December 29,
1986 to November 30, 1987.
<F4> For the eleven months ended October 31, 1993.
<F5> For the period from commencement of initial public offering of Class C
shares, January 3, 1994 to October 31, 1994.
<F6> These results do not include the sales charges applicable to Class A
shares. If these charges had been included, the results would have been
lower.
<F7> Per share data for the periods subsequent to October 31, 1993 are based on
average shares outstanding.
</TABLE>
4. INVESTMENT OBJECTIVE AND POLICIES
The Fund seeks to provide capital appreciation, primarily through investments in
stocks of U.S. and non-U.S. issuers.
The Fund may invest in all types of common stocks and equivalents (such as
convertible debt securities and warrants) and preferred stocks, sometimes in the
form of American Depositary Receipts ("ADRs"). See "Additional Information as to
Investment Objective and Policies -- Additional Risk Factors" below. ADRs are
receipts typically issued by an American bank or trust company evidencing
ownership of the underlying securities. While the Fund intends to maintain a
portfolio consisting largely of equity securities of non-U.S. issuers, the Fund
may, under normal circumstances, invest up to 50% of its assets in securities of
U.S. and/or Canadian issuers. If extraordinary market conditions abroad so
warrant, the Fund may temporarily invest up to 100% of its assets in securities
of U.S. and/or Canadian issuers. In addition, for defensive purposes, the Fund
may invest up to 20% of its assets in fixed income obligations issued by
national governments, their agencies, authorities and instrumentalities
("Government Securities"). Government Securities include: (1) U.S. Treasury
obligations, which differ only in their interest rates, maturities and times of
issuance -- U.S. Treasury bills (maturities of one year or less), U.S. Treasury
notes (maturities of one to 10 years) and U.S. Treasury bonds (generally
maturities of greater than 10 years), all of which are backed by the full faith
and credit of the U.S. Government; and (2) obligations issued or guaranteed by
U.S. Government agencies, authorities or instrumentalities, some of which are
backed by the full faith and credit of the U.S. Treasury, e.g., direct
pass-through certificates of the Government National Mortgage Association
("GNMA"), some of which are supported by the right of the issuer to borrow from
the U.S. Government but are not guaranteed by the U.S. Government, e.g.,
obligations of Federal Home Loan Banks, and some of which are backed only by the
credit of the issuer itself, e.g., obligations of the Student Loan Marketing
Association. Government Securities also include interests in trusts or other
entities representing interests in obligations that are backed by the full faith
and credit of the U.S. Government or are issued or guaranteed by the U.S.
Government, its agencies, authorities or instrumentalities.
The dividends and interest payable on certain of the Fund's foreign portfolio
securities may be subject to foreign withholding taxes, thus reducing the net
amount available for distribution to the Fund's shareholders (see "Tax Status"
below). Investors should understand that the expense ratio of the Fund can be
expected to be higher than those of investment companies investing in domestic
securities since the costs of operation are higher.
While it is not the Fund's policy generally to invest or trade for short-term
profits, portfolio securities may be disposed of without regard to the length of
time held whenever the Adviser is of the opinion that a security no longer has
an appropriate appreciation potential or has reached its anticipated level of
performance, or when another security appears to offer greater appreciation
potential or a relatively greater anticipated level of performance. The Fund's
relative equity and cash positions may also be increased or decreased when, in
the judgment of the Adviser, a period of substantial rise or decline in
securities prices is anticipated. Subject to tax requirements, portfolio changes
may be made without regard to the length of time a security has been held, or
whether a sale would result in a profit or loss.
EMERGING MARKET COMPANIES
The Fund may invest, as described below, in countries or regions with relatively
low gross national product per capita compared to the world's major economies,
and in countries or regions with the potential for rapid economic growth
(emerging markets). Emerging markets will include any country: (i) having an
"emerging stock market" as defined by the International Finance Corporation;
(ii) with low- to middle-income economies according to the International Bank
for Reconstruction and Development (the World Bank); (iii) listed in World Bank
publications as developing; or (iv) determined by the Adviser to be an emerging
market as defined above. The Fund may invest in securities of: (i) companies the
principal securities trading market for which is an emerging market country;
(ii) companies organized under the laws of, and with a principal office in, an
emerging market country; (iii) companies whose principal activities are located
in emerging market countries; or (iv) companies traded in any market that derive
50% or more of their total revenue from either goods or services produced in an
emerging market or sold in an emerging market.
ADDITIONAL INFORMATION AS TO INVESTMENT OBJECTIVE AND POLICIES
RISK FACTORS REGARDING LOWER RATED SECURITIES -- The Fund may invest to a
limited extent in lower rated fixed income securities or comparable unrated
securities. Investments in fixed income securities offering the high current
income sought by the Fund while generally providing greater income and
opportunity for gain than investments in higher rated securities, usually entail
greater risk of principal and income (including the possibility of default or
bankruptcy of the issuers of such securities), and involve greater volatility of
price (especially during periods of economic uncertainty or change) than
investments in higher rated securities and because yields may vary over time, no
specified level of income can ever be assured. In particular, securities rated
lower than Baa by Moody's Investors Service, Inc. ("Moody's"), BBB by Standard &
Poor's Ratings Group ("S&P") or by Fitch Investors Service, Inc. ("Fitch") or
comparable unrated securities (commonly known as "junk bonds") are considered
speculative. These lower rated high yielding fixed income securities generally
lend to reflect economic changes (and the outlook for economic growth),
short-term corporate and industry developments and the market's perception of
their credit quality (especially during times of adverse publicity) to a greater
extent than higher rated securities which react primarily to fluctuations in the
general level of interest rates (although these lower rated fixed income
securities are also affected by changes in interest rates). In the past,
economic downturns or an increase in interest rates have under certain
circumstances caused a higher incidence of default by the issuers of these
securities and may do so in the future, especially in the case of highly
leveraged issuers. During certain periods, the higher yields on the Fund's lower
rated high yielding fixed income securities are paid primarily because of the
increased risk of loss of principal and income, arising from such factors as the
heightened possibility of default or bankruptcy of the issuers of such
securities. Due to the fixed income payments of these securities, the Fund may
continue to earn the same level of interest income while its net asset value
declines due to portfolio losses, which could result in an increase in the
Fund's yield despite the actual loss of principal. The prices for these
securities may be affected by legislative and regulatory developments. For
example, federal rules require that savings and loan associations gradually
reduce their holdings of high-yield securities. An effect of such legislation
may be to depress the prices of outstanding lower rated high yielding fixed
income securities. Changes in the value of securities subsequent to their
acquisition will not affect cash income or yield to maturity to the Fund but
will be reflected in the net asset value of shares of the Fund. The market for
these lower rated fixed income securities may be less liquid than the market for
investment grade fixed income securities. Furthermore, the liquidity of these
lower rated securities may be affected by the market's perception of their
credit quality. Therefore, the Adviser's judgment may at times play a greater
role in valuing these securities than in the case of investment grade fixed
income securities, and it also may be more difficult during times of certain
adverse market conditions to sell these lower rated securities at their fair
value to meet redemption requests or to respond to changes in the market. No
minimum rating standard is required by the Fund. To the extent the Fund invests
in these lower rated fixed income securities, the achievement of its investment
objective may be more dependent on the Adviser's own credit analysis than in the
case of a fund investing in higher quality bonds. While the Adviser may refer to
ratings issued by established credit rating agencies, it is not a policy of the
Fund to rely exclusively on ratings issued by these agencies, but rather to
supplement such ratings with the Adviser's own independent and ongoing review of
credit quality.
The Fund may also invest in fixed income securities rated Baa by Moody's or BBB
by S&P or Fitch and comparable unrated securities. These securities, while
normally exhibiting adequate protection parameters, may have speculative
characteristics and changes in economic conditions and other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments than in the case of higher grade fixed income securities.
The risks of investing in foreign securities may be intensified in the case of
investments in emerging markets. Securities prices in emerging markets can be
significantly more volatile than in the more developed nations of the world,
reflecting the greater uncertainties of investing in less established markets
and economies. In particular, countries with emerging markets may have
relatively unstable governments, present the risk of nationalization of
businesses, restrictions on foreign ownership, or prohibitions of repatriation
of assets, and may have less protection of property rights than more developed
countries. The economies of countries with emerging markets may be predominantly
based on only a few industries, may be highly vulnerable to changes in local or
global trade conditions, and may suffer from extreme and volatile debt burdens
or inflation rates. Local securities markets may trade a small number of
securities and may be unable to respond effectively to increases in trading
volume, potentially making prompt liquidation of substantial holdings difficult
or impossible at times. Securities of issuers located in countries with emerging
markets may have limited marketability and may be subject to more abrupt or
erratic price movements.
ADDITIONAL RISK FACTORS -- The net asset value of the shares of an open-end
investment company which may invest to a limited extent in fixed income
securities changes as the general levels of interest rates fluctuate. When
interest rates decline, the value of a fixed income portfolio can be expected to
rise. Conversely, when interest rates rise, the value of a fixed income
portfolio can be expected to decline.
Although changes in the value of securities subsequent to their acquisition are
reflected in the net asset value of shares of the Fund, such changes will not
affect the income received by the Fund from such securities. However, the
dividends paid by the Fund, if any, will increase or decrease in relation to the
income received by the Fund from its investments, which would in any case be
reduced by the Fund's expenses before it is distributed to shareholders.
In addition, the use of options, futures contracts, options on futures
contracts, forward contracts and options on foreign currencies (see "Investment
Techniques" below) may result in the loss of principal, particularly where such
instruments are traded for other than hedging purposes (e.g., to enhance current
yield).
SHORT-TERM INVESTMENTS FOR DEFENSIVE PURPOSES -- During periods of unusual
market conditions when the Adviser believes that investing for defensive
purposes is appropriate, or in order to meet anticipated redemption requests, a
large portion or all of the assets of the Fund may be invested in cash or cash
equivalents including, but not limited to, obligations of banks (including
certificates of deposit, bankers' acceptances and repurchase agreements) with
assets of $1 billion or more, commercial paper, short-term notes, obligations
issued or guaranteed by the U.S. Government or any of its agencies, authorities
or instrumentalities and related repurchase agreements. See the Appendix to this
Prospectus for a description of certain short-term obligations.
5. INVESTMENT TECHNIQUES
FOREIGN SECURITIES: The Fund may invest up to 100% (and expects generally to
invest between 10% to 100%) of its total assets in foreign securities, which may
be traded on foreign exchanges. The Fund intends to maintain a portfolio with a
significant investment in securities of non-U.S. issuers. Investing in foreign
securities or on foreign exchanges may present a greater degree of risk than
investing in domestic issuers. These risks include changes in currency rates,
exchange control regulations, governmental administration, economic or monetary
policy (in this country or abroad), war or expropriation. In particular, the
dollar value of portfolio securities of non-U.S. issuers fluctuates with changes
in market and economic conditions abroad and with changes in relative currency
values (when the value of the dollar increases as compared to a foreign
currency, the dollar value of a foreign-denominated security decreases, and vice
versa). Costs may be incurred in connection with conversions between various
currencies. Special considerations may also include more limited information
about foreign issuers, higher brokerage costs, different accounting standards
and thinner trading markets. Foreign securities markets may also be less liquid,
more volatile and less subject to government supervision than in the United
States. Investments in foreign countries could be affected by other factors
including confiscatory taxation and potential difficulties in enforcing
contractual obligations and could be subject to extended settlement periods.
Therefore, an investment in shares of the Fund may be subject to a greater
degree of risk than investments in other investment companies which invest
exclusively in domestic securities.
As a result of its investments in foreign securities, the Fund may receive
interest or dividend payments or the proceeds of the sale or redemption of such
securities, in the foreign currencies in which such securities are denominated.
In that event, the Fund may promptly convert such currencies into dollars at the
then current exchange rate. Under certain circumstances, however, such as where
the Adviser believes that the applicable exchange rate is unfavorable at the
time the currencies are received or the Adviser anticipates, for any other
reason, that the exchange rate will improve, the Fund may hold such currencies
for an indefinite period of time.
In addition, the Fund may be required to receive delivery of the foreign
currencies underlying options on foreign currencies it has entered into, and the
Fund may be required to receive delivery of the foreign currency underlying
forward foreign currency contracts it has entered into. This could occur, for
example, if an option written by the Fund is exercised or the Fund is unable to
close out a forward contract into which it has entered. The Fund may also hold
foreign currency in anticipation of purchasing foreign securities. The Fund may
also elect to take delivery of the currencies underlying options or forward
contracts if, in the judgment of the Adviser, it is in the best interest of the
Fund to do so. In such instances as well, the Fund may promptly convert the
foreign currencies to dollars at the then current exchange rate, or may hold
such currencies for an indefinite period of time.
While the holding of currencies will permit the Fund to take advantage of
favorable movements in the applicable exchange rate, it also exposes the Fund to
risk of loss if such rates move in a direction adverse to the Fund's position.
Such losses could reduce any profits or increase any losses sustained by the
Fund from the sale or redemption of securities, and could reduce the dollar
value of interest or dividend payments received. In addition, the holding of
currencies could adversely affect the Fund's profit or loss on currency options
or forward contracts, as well as its hedging strategies.
Costs may be incurred in connection with conversions between various currencies.
Foreign brokerage commissions are generally higher than in the United States and
foreign securities markets may be less liquid, more volatile and less subject to
governmental supervision than in the United States. See the Statement of
Additional Information for further discussion of foreign securities and the
holding of foreign currency as well as the associated risks.
Given the above average investment risk inherent in the Fund, investment in
shares of the Fund should not be considered a complete investment program and
may not be appropriate for all investors.
AMERICAN DEPOSITARY RECEIPTS: The Fund may invest in ADRs which are certificates
issued by a U.S. depository (usually a bank) and represent a specified quantity
of shares of an underlying non-U.S. stock on deposit with a custodian bank as
collateral. Because ADRs trade on United States securities exchanges, the
Adviser does not treat them as foreign securities. However, they are subject to
many of the risks of foreign securities (which are described above) such as
changes in exchange rates and more limited information about foreign issuers.
LENDING OF SECURITIES: The Fund may make loans of its portfolio securities. Such
loans will usually be made only to member banks of the Federal Reserve System
and member firms (and subsidiaries thereof) of the New York Stock Exchange (the
"Exchange") and would be required to be secured continuously by collateral in
cash, cash equivalents or U.S. Government Securities maintained on a current
basis at an amount at least equal to the market value of the securities loaned.
The Fund would continue to collect the equivalent of the interest on the
securities loaned and would also receive either interest (through investment of
cash collateral) or a fee (if the collateral is U S. Government Securities). As
with other extensions of credit, there are risks of delay in recovery or even
loss of rights in the collateral should the borrower fail financially. However,
the loans would be made only to firms deemed by the Adviser to be of good
standing, and when, in the judgment of the Adviser, the consideration which
could be earned currently from securities loans of this type justifies the
attendant risk.
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements in order to
earn additional income on available cash or as a temporary defensive measure.
Under a repurchase agreement the Fund acquires securities subject to the
seller's agreement to repurchase at a specified time and price. If the seller
becomes subject to a proceeding under the bankruptcy laws or its assets are
otherwise subject to a stay order, the Fund's right to liquidate the securities
may be restricted (during which time the value of the securities could decline).
As discussed in the Statement of Additional Information, the Fund has adopted
certain procedures which are intended to minimize any such risk.
MORTGAGE DOLLAR ROLL TRANSACTIONS: The Fund may enter into mortgage "dollar
roll" transactions with selected banks and broker-dealers pursuant to which the
Fund sells mortgage-backed securities for delivery in the future (generally
within 30 days) and simultaneously contracts to repurchase substantially similar
(same type, coupon and maturity) securities on a specified future date. The Fund
will only enter into covered rolls. A "covered roll" is a specific type of
dollar roll for which there is an offsetting cash position or a cash equivalent
security position which matures on or before the forward settlement date of the
dollar roll transaction.
RESTRICTED SECURITIES: The Fund may also purchase securities that are not
registered under the Securities Act of 1933 ("1933 Act") ("restricted
securities"), including those that can be offered and sold to "qualified
institutional buyers" under Rule 144A under the 1933 Act ("Rule 144A
securities"). The Trust's Board of Trustees determines, based upon a continuing
review of the trading markets for a specific Rule 144A security, whether such
security is illiquid and thus subject to the Fund's limitation on investing not
more than 15% of its net assets in illiquid investments, or liquid and thus not
subject to such limitation. The Board of Trustees has adopted guidelines and
delegated to MFS the daily function of determining and monitoring the liquidity
of Rule 144A securities. The Board, however, will retain sufficient oversight
and be ultimately responsible for the determinations. The Board will carefully
monitor the Fund's investments in Rule 144A securities, focusing on such
important factors, among others, as valuation, liquidity and availability of
information. This investment practice could have the effect of increasing the
level of illiquidity in the Fund to the extent that qualified institutional
buyers become for a time uninterested in purchasing Rule 144A securities held in
the Fund's portfolio. Subject to the Fund's 15% limitation on investments in
illiquid investments, the Fund may also invest in restricted securities that may
not be sold under Rule 144A, which presents certain risks. As a result, the Fund
might not be able to sell these securities when the Adviser wishes to do so, or
might have to sell them at less than fair value. In addition, market quotations
are less readily available. Therefore, judgment may at times play a greater role
in valuing these securities than in the case of unrestricted securities.
WHEN-ISSUED SECURITIES: In order to help ensure the availability of suitable
securities for its portfolio, the Fund may purchase securities on a "when-
issued" or on a "forward delivery" basis, which means that the obligations will
be delivered to the Fund at a future date usually beyond customary settlement
time. It is expected that, under normal circumstances, the Fund will take
delivery of such securities. In general, the Fund does not pay for the
securities until received and does not start earning interest on the obligations
until the contractual settlement date. While awaiting delivery of the
obligations purchased on such bases, the Fund will establish a segregated
account consisting of cash, short-term money market instruments or high quality
debt securities equal to the amount of the commitments to purchase "when-issued"
securities. See the Statement of Additional Information. Although the Fund does
not intend to make such purchases for speculative purposes and intends to adhere
to the provisions of SEC policies, purchases of securities on such bases may
involve more risk than other types of purchases. For example, the Fund may have
to sell assets which have been set aside in order to meet redemptions. Also, if
the Fund determines it is necessary to sell the "when-issued" or "forward
delivery" securities before delivery, it may incur a loss because of market
fluctuations since the time the commitment to purchase such securities was made
and any gain would not be tax-exempt. When the time comes to pay for
"when-issued" or "forward delivery" securities, the Fund will meet its
obligations from the then-available cash flow on the sale of securities, or,
although it would not normally expect to do so, from the sale of the
"when-issued" or "forward delivery" securities themselves (which may have a
value greater or less than the Fund's payment obligation).
CORPORATE ASSET-BACKED SECURITIES: The Fund may invest in corporate asset-
backed securities. These securities, issued by trusts and special purpose
corporations, are backed by a pool of assets, such as credit card or automobile
loan receivables, representing the obligations of a number of different parties.
Corporate asset-backed securities present certain risks. For instance, in the
case of credit card receivables, these securities may not have the benefit of
any security interest in the related collateral. See the Statement of Additional
Information for further information on these securities.
LOAN PARTICIPATIONS AND OTHER DIRECT INDEBTEDNESS: The Fund may invest a portion
of its assets in "loan participations" and other direct indebtedness. By
purchasing a loan participation, the Fund acquires some or all of the interest
of a bank or other lending institution in a loan to a corporate borrower. Many
such loans are secured, and most impose restrictive covenants which must be met
by the borrower. These loans are made generally to finance internal growth,
mergers, acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans may be in default at the time of purchase. The Fund may
also purchase other direct indebtedness such as trade or other claims against
companies, which generally represent money owed by the company to a supplier of
goods and services. These claims may also be purchased at a time when the
company is in default. Certain of the loan participations and other direct
indebtedness acquired by the Fund may involve revolving credit facilities or
other standby financing commitments which obligate the Fund to pay additional
cash on a certain date or on demand.
The highly leveraged nature of many such loans and other direct indebtedness may
make such loans especially vulnerable to adverse changes in economic or market
conditions. Loan participations and other direct indebtedness may not be in the
form of securities or may be subject to restrictions on transfer, and only
limited opportunities may exist to resell such instruments. As a result, the
Fund may be unable to sell such investments at an opportune time or may have to
resell them at less than fair market value. For a further discussion of loan
participations, other direct indebtedness and the risks related to transactions
therein, see the Statement of Additional Information.
TRANSACTIONS IN OPTIONS, FUTURES AND FORWARD CONTRACTS: The Fund may enter into
transactions in options, futures and forward contracts on a variety of
instruments and indices, in order to protect against declines in the value of
portfolio securities or increases in the cost of securities or other assets to
be acquired and, subject to applicable law, to increase the Fund's gross income.
The types of instruments to be purchased and sold by the Fund are described in
the Statement of Additional Information, which should be read in conjunction
with the following section. In addition, the Statement of Additional Information
contains a further discussion of the nature of the transactions which may be
entered into and the risks associated therewith.
OPTIONS
OPTIONS ON SECURITIES -- The Fund may write (sell) covered call and put options
and purchase call and put options on securities. The Fund will write options on
securities for the purpose of increasing its return on such securities and/or
protect the values of its portfolio. In particular, where the Fund writes an
option which expires unexercised or is closed out by the Fund at a profit, it
will retain the premium paid for the option which will increase its gross income
and will offset in part the reduced value of the portfolio security underlying
the option, or the increased cost of portfolio securities to be acquired. In
contrast, however, if the price of the underlying security moves adversely to
the Fund's position, the option may be exercised and the Fund will be required
to purchase or sell the underlying security at a disadvantageous price, which
may only be partially offset by the amount of the premium. The Fund may also
write combinations of put and call options on the same security, known as
"straddles." Such transactions can generate additional premium income but also
present increased risk.
By writing a call option on a security, the Fund limits its opportunity to
profit from any increase in the market value of the underlying security, since
the holder will usually exercise the call option when the market value of the
underlying security exceeds the exercise price of the call. However, the Fund
retains the risk of depreciation in value of securities on which it has written
call options.
The Fund may also purchase put or call options in anticipation of market
fluctuations which may adversely affect the value of its portfolio or the prices
of securities that the Fund wants to purchase at a later date. In the event that
the expected market fluctuations occur, the Fund may be able to offset the
resulting adverse effect on its portfolio, in whole or in part, through the
options purchased. The premium paid for a put or call option plus any
transaction costs will reduce the benefit, if any, realized by the Fund upon
exercise or liquidation of the option, and, unless the price of the underlying
security changes sufficiently, the option may expire without value to the Fund.
In certain instances, the Fund may enter into options on U.S. Treasury
securities which may be referred to as "reset" options or "adjustable strike"
options. These options provide for periodic adjustment of the strike price and
may also provide for the periodic adjustment of the premium during the term of
the option.
OPTIONS ON STOCK INDICES -- The Fund may write (sell) covered call and put
options and purchase call and put options on stock indices. The Fund may write
options on stock indices for the purpose of increasing its gross income and to
protect its portfolio against declines in the value of securities it owns or
increases in the value of securities to be acquired. When the Fund writes an
option on a stock index, and the value of the index moves adversely to the
holder's position, the option will not be exercised, and the Fund will either
close out the option at a profit or allow it to expire unexercised. The Fund
will thereby retain the amount of the premium, less related transaction costs,
which will increase its gross income and offset part of the reduced value of
portfolio securities or the increased cost of securities to be acquired. Such
transactions, however, will constitute only partial hedges against adverse price
fluctuations, since any such fluctuations will be offset only to the extent of
the premium received by the Fund for the writing of the option, less related
transaction costs. In addition, if the value of an underlying index moves
adversely to the Fund's option position, the option may be exercised, and the
Fund will experience a loss which may only be partially offset by the amount of
the premium received.
The Fund may also purchase put or call options on stock indices in order,
respectively, to hedge its investments against a decline in value or to attempt
to reduce the risk of missing a market or industry segment advance. The Fund's
possible loss in either case will be limited to the premium paid for the option,
plus related transaction costs.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
FUTURES CONTRACTS -- The Fund may enter into stock index and foreign currency
futures contracts. (Unless otherwise specified, futures contracts on indices and
foreign currency futures contracts are collectively referred to as "Futures
Contracts.") The Fund will utilize Futures Contracts for hedging and non-hedging
purposes, subject to applicable law. Purchases or sales of stock index futures
contracts for hedging purposes are used to attempt to protect the Fund's current
or intended stock investments from broad fluctuations in stock prices, and
foreign currency futures contracts are purchased or sold to attempt to hedge
against the effects of exchange rate charges on the Fund's current or intended
investments in fixed income or foreign securities. In the event that an
anticipated decrease in the value of portfolio securities occurs as a result of
a general stock market decline, a general increase in interest rates or a
decline in the dollar value of foreign currencies in which portfolio securities
are denominated, the adverse effects of such changes may be offset, in whole or
part, by gains on the sale of Futures Contracts. Conversely, the increased cost
of portfolio securities to be acquired, caused by a general rise in the stock
market, a general decline in interest rates or a rise in the dollar value of
foreign currencies, may be offset, in whole or part, by gains on Futures
Contracts purchased by the Fund. The Fund will incur brokerage fees when it
purchases and sells Futures Contracts, and it will be required to make and
maintain margin deposits.
OPTIONS ON FUTURES CONTRACTS -- The Fund may purchase and write options on stock
index and foreign currency futures contracts. (Unless otherwise specified,
options on stock index futures contracts and options on foreign currency futures
contracts are collectively referred to as "Options on Futures Contracts.") Such
investment strategies will be used for hedging and non-hedging purposes,
subject to applicable law. Put and call Options on Futures Contracts may be
traded by the Fund in order to protect against declines in the values of
portfolio securities or natural resources or against increases in the cost of
securities or natural resources to be acquired. Purchases of Options on Futures
Contracts may present less risk in hedging the portfolios of the Fund than the
purchase or sale of the underlying Futures Contracts since the potential loss is
limited to the amount of the premium plus related transaction costs. The writing
of such options, however, does not present less risk than the trading of Futures
Contracts and will constitute only a partial hedge, up to the amount of the
premium received. In addition, if an option is exercised, the Fund may suffer a
loss on the transaction.
FORWARD CONTRACTS ON FOREIGN CURRENCY -- The Fund may enter into contracts for
the purchase or sale of a specific currency at a future date at a price set at
the time of the contract (a "Forward Contract"). The Fund will enter into
Forward Contracts for hedging and non-hedging purposes including transactions
entered into for the purpose of profiting from anticipated changes in foreign
currency exchange rates. Transactions in Forward Contracts entered into for
hedging purposes may include forward purchases or sales of foreign currencies
for the purpose of protecting the dollar value of securities denominated in a
foreign currency or protecting the dollar equivalent of interest or dividends to
be paid on such securities. The Fund may also enter into Forward Contracts for
"cross hedging" purposes, e.g., the purchase or sale of a Forward Contract on
one type of currency as a hedge against adverse fluctuations in the value of a
second type of currency. By entering into such transactions, however, the Fund
may be required to forgo the benefits of advantageous changes in exchange rates.
The Fund may also enter into transactions in Forward Contracts for other than
hedging purposes. For example, if the Adviser believes that the value of a
particular foreign currency will increase or decrease relative to the value of
the U.S. dollar, the Fund may purchase or sell such currency, respectively,
through a Forward Contract. If the expected changes in the value of the currency
occur, the Fund will realize profits which will increase its gross income. Such
transactions, however, may be considered speculative and could involve
significant risk of loss, as set forth below. The Fund has established
procedures consistent with statements of the SEC and its staff regarding the use
of Forward Contracts by registered investment companies, which requires use of
segregated assets or "cover" in connection with the purchase and sale of such
contracts.
Forward Contracts are traded over-the-counter, and not on organized commodities
or securities exchanges. As a result, such contracts operate in a manner
distinct from exchange-traded instruments, and their use involves certain risks
beyond those associated with transactions in the Futures and Options contracts
described above.
OPTIONS ON FOREIGN CURRENCIES: The Fund may purchase and write put and call
options on foreign currencies for the purpose of protecting against declines in
the dollar value of portfolio securities, and against increases in the dollar
cost of securities to be acquired. As in the case of other types of options,
however, the writing of an option on foreign currency will constitute only a
partial hedge, up to the amount of the premium received, and the Fund could be
required to purchase or sell foreign currencies at disadvantageous exchange
rates, thereby incurring losses. The purchase of an option on foreign currency
may constitute an effective hedge against fluctuations in exchange rates
although, in the event of rate movements adverse to the Fund's position, it may
forfeit the entire amount of the premium plus related transaction costs. As in
the case of Forward Contracts, certain options on foreign currencies are traded
over-the-counter and involve risks which may not be present in the case of
exchange-traded instruments.
RISKS OF TRANSACTIONS IN OPTIONS, FUTURES CONTRACTS AND FORWARD CONTRACTS:
Although the Fund will enter into certain transactions in Futures Contracts,
Options on Futures Contracts, Forward Contracts and options for hedging
purposes, such transactions do involve certain risks. For example, a lack of
correlation between the index or instrument underlying an option, Futures
Contract of Forward Contract and the assets being hedged, or unexpected adverse
price movements, could render the Fund's hedging strategy unsuccessful and could
result in losses. "Cross hedging" transactions may involve greater correlation
risks. In addition, there can be no assurance that a liquid secondary market
will exist for any contract purchased or sold, and the Fund may be required to
maintain a position until exercise or expiration, which could result in losses.
As noted, the Fund may also enter into transactions in such instruments (except
for options on foreign currencies) for other than hedging purposes (subject to
applicable law), including speculative transactions, which involve greater risk.
In particular, in entering into such transactions, the Fund may experience
losses which are not offset by gains on other portfolio positions, thereby
reducing its gross income. In addition, the markets for such instruments may be
extremely volatile from time to time, as discussed in the Statement of
Additional Information, which could increase the risks incurred by the Fund in
entering into such transactions.
Transactions in options may be entered into on U.S. exchanges regulated by the
SEC, in the over-the-counter market and on foreign exchanges, while Forward
Contracts may be entered into only in the over-the-counter market. Futures
Contracts and Options on Futures Contracts may be entered into on U.S. exchanges
regulated by the Commodity Futures Trading Commission (the "CFTC") and on
foreign exchanges. The securities underlying options and Futures Contracts
traded by the Fund may include domestic as well as foreign securities. Investors
should recognize that transactions involving foreign securities or foreign
currencies, and transactions entered into in foreign countries, may involve
considerations and risks not typically associated with investing in U.S.
markets.
Transactions in options, Futures Contracts, Options on Futures Contracts and
Forward Contracts entered into for non-hedging purposes involve greater risk and
could result in losses which are not offset by gains on other portfolio assets.
For example, the Fund may sell Futures Contracts on an index of securities in
order to profit from any anticipated decline in the value of the securities
comprising the underlying index. In such instances, any losses on the Futures
transaction will not be offset by gains on any portfolio securities comprising
such index, as might occur in connection with a hedging transaction. The risks
related to transactions in options, Futures Contracts, Options on Futures
Contracts and Forward Contracts entered into by the Fund are set forth in
greater detail in the Statement of Additional Information, which should be
reviewed in conjunction with the foregoing discussion.
PORTFOLIO TRADING: The primary consideration in placing portfolio security
transactions is execution at the most favorable prices. Consistent with the
foregoing primary consideration, the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. (the "NASD") and such other policies as
the Trustees may determine, the Adviser may consider sales of shares of the Fund
and of other investment company clients of MFD, the Fund's distributor, as a
factor in the selection of broker-dealers to execute the Fund's portfolio
transactions. From time to time, the Adviser may direct certain portfolio
transactions to broker-dealer firms, which, in turn, have agreed to pay a
portion of the Fund's operating expenses (e.g., fees charged by the custodian of
the Fund's assets). For a further discussion of portfolio trading, see the
Statement of Additional Information.
The Fund intends to manage its portfolio by buying and selling securities to
help attain its investment objective. This may result in increases or decreases
in the Fund's current income available for distribution to the Fund's
shareholders and in the holding by the Fund of debt securities which sell at
moderate to substantial premiums or discounts from face value. The Fund will
engage in portfolio trading if it believes a transaction, net of costs
(including custodian charges), will help in attaining its investment objective.
(See "Portfolio Transactions and Brokerage Commissions" in the Statement of
Additional Information.)
--------------------------------
The investment objective and policies described above are not fundamental and
may be changed without shareholder approval. A change in the Fund's investment
objective may result in the Fund having an investment objective different from
the objective which the shareholder considered appropriate at the time of
investment in the Fund.
The Statement of Additional Information includes a discussion of other
investment policies and a listing of specific investment restrictions which
govern the Fund's investment policies. The specific investment restrictions
listed in the Statement of Additional Information may not be changed without
shareholder approval (see "Investment Restrictions" in the Statement of
Additional Information).
The Fund's investment limitations, policies and rating standards are adhered to
at the time of purchase or utilization of assets; a subsequent change in
circumstances will not be considered to result in a violation of policy.
6. MANAGEMENT OF THE FUND
INVESTMENT ADVISER -- MFS manages the Fund pursuant to an Investment Advisory
Agreement dated September 1, 1993 (the "Advisory Agreement"). The Adviser
provides the Fund with overall investment advisory and administrative services,
as well as general office facilities. David R. Mannheim, a Vice President of the
Adviser, has been the Fund's portfolio manager since 1992. Mr. Mannheim has been
employed by the Adviser since 1988. Subject to such policies as the Trustees may
determine, the Adviser makes investment decisions for the Fund. For its services
and facilities, the Adviser receives a management fee, computed and paid
monthly, in an amount equal to 1.00% of the Fund's average daily net assets for
its then-current fiscal year.
For the Fund's fiscal year ended October 31, 1994, the investment advisory fees
received under the Advisory Agreement were $1,778,464. This management fee is
greater than the fee paid by most funds, but is comparable to funds having
similar investment objectives and policies.
MFS also serves as investment adviser to each of the other funds in the MFS
Family of Funds (the "MFS Funds") and to MFS(R) Municipal Income Trust, MFS
Multimarket Income Trust, MFS Government Markets Income Trust, MFS Intermediate
Income Trust, MFS Charter Income Trust, MFS Special Value Trust, MFS
Institutional Trust, MFS Union Standard Trust, MFS Variable Insurance Trust,
MFS/Sun Life Series Trust, Sun Growth Variable Annuity Fund, Inc. and seven
variable accounts, each of which is a registered investment company established
by Sun Life Assurance Company of Canada (U.S.) ("Sun Life of Canada (U.S.)") in
connection with the sale of Compass-2 and Compass-3 combination fixed/variable
annuity contracts. MFS and its wholly-owned subsidiary, MFS Asset Management,
Inc., provide investment advice to substantial private clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the United States, Massachusetts Investors
Trust. Net assets under the management of the MFS organization were
approximately $33.4 billion on behalf of approximately 1.6 million investor
accounts as of January 31, 1995. As of such date, the MFS organization managed
approximately $10.8 billion of assets invested in equity securities and
approximately $18.7 billion of assets invested in fixed income securities.
Approximately $3.1 billion of the assets managed by MFS are invested in
securities of foreign issuers and non-U.S. dollar denominated securities of U.S.
issuers. MFS is a subsidiary of Sun Life of Canada (U.S.), which in turn is a
subsidiary of Sun Life Assurance Company of Canada ("Sun Life"). The Directors
of MFS are A. Keith Brodkin, Jeffrey L. Shames, Arnold D. Scott, John D. McNeil
and John R. Gardner. Mr. Brodkin is the Chairman, Mr. Shames is the President
and Mr. Scott is the Secretary and a Senior Executive Vice President of MFS.
Messrs. McNeil and Gardner are the Chairman and President, respectively, of Sun
Life. Sun Life, a mutual life insurance company, is one of the largest
international life insurance companies and has been operating in the United
States since 1895, establishing a headquarters office here in 1973. The
executive officers of MFS report to the Chairman of Sun Life.
A. Keith Brodkin, the Chairman and a Director of MFS, is the Chairman and
President of the Trust. W. Thomas London, Stephen E. Cavan, James O. Yost and
James R. Bordewick, Jr., all of whom are officers of MFS, are officers of the
Trust.
DISTRIBUTOR -- MFD, a wholly-owned subsidiary of MFS, is the distributor of
shares of the Fund and also serves as distributor for each of the other MFS
Funds.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. (the "Shareholder
Servicing Agent"), a wholly owned subsidiary of MFS, performs transfer agency,
certain dividend disbursing agency and other services for the Fund.
7. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Shares of the Fund may be purchased at the public offering price through any
securities dealer, certain banks and other financial institutions having selling
agreements with MFD. Non-securities dealer financial institutions will receive
transaction fees that are the same as commission fees to dealers. Securities
dealers and other financial institutions may also charge their customers fees
relating to investments in the Fund.
The Fund offers three classes of shares which bear sales charges and
distribution fees in different forms and amounts:
CLASS A SHARES. Class A shares are offered at net asset value plus an initial
sales charge (or CDSC in the case of certain purchases of $1 million or more) as
follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
SALES CHARGE<F1> AS
PERCENTAGE OF:
------------------------------- DEALER ALLOWANCE
NET AMOUNT AS A PERCENTAGE
OFFERING PRICE INVESTED OF OFFERING PRICE
<S> <C> <C> <C>
Less than $50,000 5.75% 6.10% 5.00%
$50,000 but less than $100,000 4.75 4.99 4.00
$100,000 but less than $250,000 4.00 4.17 3.20
$250,000 but less than $500,000 2.95 3.04 2.25
$500,000 but less than $1,000,000 2.20 2.25 1.70
$1,000,000 or more None<F2> None<F2> See Below<F2>
<FN>
<F1>Because of rounding in the calculation of offering price, actual sales
charges may be more or less than those calculated using the percentages above.
<F2>A CDSC may apply in certain circumstances. MFD will pay a commission on
purchases of $1 million or more.
</TABLE>
No sales charge is payable at the time of purchase of Class A shares on
investments of $1 million or more. However, a CDSC shall be imposed on such
investments in the event of a share redemption within 12 months following the
share purchase, at the rate of 1% on the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares.
In determining whether a CDSC on Class A shares is payable, and, if so, the
amount of the charge, it is assumed that shares not subject to the CDSC are the
first redeemed followed by other shares held for the longest period of time. All
investments made during a calendar month, regardless of when during the month
the investment occurred, will age one month on the last day of the month and
each subsequent month. Except as noted below, the CDSC on Class A shares will be
waived in the case of: (i) exchanges (except that if the shares acquired by
exchange were then redeemed within 12 months of the initial purchase (other than
in connection with subsequent exchanges to other MFS Funds), the charge would
not be waived); (ii) distributions to participants from a retirement plan
qualified under sections 401(a) or 401(k) of the Internal Revenue Code of 1986,
as amended (the "Code") (a "Retirement Plan"), due to: (a) a loan from the plan
(repayments of loans, however, will constitute new sales for purposes of
assessing the CDSC); (b) "financial hardship" of the participant in the plan, as
that term is defined in Treasury Regulation Section 1.401(k)-1(d)(2), as amended
from time to time; or (c) the death of a participant in such a plan; (iii)
distributions from a 403(b) plan or an Individual Retirement Account ("IRA"),
due to death, disability, or attainment of age 59 1/2; (iv) tax-free returns of
excess contributions to an IRA; (v) distributions by other employee benefit
plans to pay benefits; and (vi) certain involuntary redemptions and redemptions
in connection with certain automatic withdrawals from a qualified retirement
plan. The CDSC on Class A shares will not be waived, however, if the Retirement
Plan withdraws from the Fund except if that Retirement Plan has invested its
assets in Class A shares of one or more of the MFS Funds for more than 10 years
from the later to occur of (i) January 1, 1993 or (ii) the date such Retirement
Plan first invests its assets in Class A shares of one or more of the MFS Funds,
the CDSC on Class A shares will be waived in the case of a redemption of all of
the Retirement Plan's shares (including shares of any other class) in all MFS
Funds (i.e., all the assets of the Retirement Plan invested in the MFS Funds are
withdrawn), unless, immediately prior to the redemption, the aggregate amount
invested by the Retirement Plan in Class A shares of the MFS Funds (excluding
the reinvestment of distributions) during the prior four-year period equals 50%
or more of the total value of the Retirement Plan's assets in the MFS Funds, in
which case the CDSC will not be waived. The CDSC on Class A shares will be
waived upon redemption by a Retirement Plan where the redemption proceeds are
used to pay expenses of the Retirement Plan or certain expenses of participants
under the Retirement Plan (e.g., participant account fees), provided that the
Retirement Plan's sponsor subscribes to the MFS Fundamental 401(k) Plan(SM) or
another similar recordkeeping system made available by the Shareholder Servicing
Agent. The CDSC on Class A shares will be waived upon the transfer of
registration from shares held by a Retirement Plan through a single account
maintained by the Shareholder Servicing Agent to multiple Class A share accounts
maintained by the Shareholder Servicing Agent on behalf of individual
participants in the Retirement Plan, provided that the Retirement Plan's sponsor
subscribes to the MFS Fundamental 401(k) Plan(SM) or another similar
recordkeeping system made available by the Shareholder Servicing Agent. Any
applicable CDSC will be deferred upon an exchange of Class A shares of the Fund
for units of participation of the MFS Fixed Fund (a bank collective investment
fund) (the "Units"), and the CDSC will be deducted from the redemption proceeds
when such Units are subsequently redeemed (assuming the CDSC is then payable).
No CDSC will be assessed upon an exchange of Units for Class A shares of the
Fund. For purposes of calculating the CDSC payable upon redemption of Class A
shares of the Fund or Units acquired pursuant to one or more exchanges, the
period during which the Units are held will be aggregated with the period during
which the Class A shares are held. MFD shall receive all CDSCs which it intends
to apply for the benefit of the Fund.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price, as shown in the above table. In the case of
the maximum sales charge, the dealer retains 5% and MFD retains approximately
3/4 of 1% of the public offering price. The sales charge may vary depending on
the number of shares of the Fund as well as certain MFS Funds and other funds
owned or being purchased, the existence of an agreement to purchase additional
shares during a 13-month period or 36-month period for purchases of $1 million
or more or other special purchase programs. A description of the Right of
Accumulation, Letter of Intent and Group Purchases privileges by which the sales
charge may be reduced is set forth in the Statement of Additional Information.
In addition, MFD will pay commissions to dealers who initiate and are
responsible for purchases of $1 million or more as follows: 1.00% on sales up to
$5 million, plus 0.25% on the amount in excess of $5 million. Purchases of $1
million or more for each shareholder account will be aggregated over a 12-month
period (commencing from the date of the first such sale) for purposes of
determining the level of commissions to be paid during that period with respect
to such account.
Class A shares of the Fund may be sold at their net asset value to the officers
of the Trust, to any of the subsidiary companies of Sun Life, to eligible
Directors, officers, employees (including retired employees) and agents of MFS,
Sun Life or any of their subsidiary companies, to any trust, pension,
profit-sharing or any other benefit plan for such persons, to any trustees and
retired trustees of any investment company for which MFD serves as distributor
or principal underwriter, and to certain family members of such individuals and
their spouses, provided such shares will not be resold except to the Fund. Class
A shares of the Fund may be sold at net asset value to any employee, partner,
officer or trustee of any sub-adviser to any MFS Fund and to certain family
members of such individuals and their spouses, or to any trust, pension,
profit-sharing or other Retirement Plan for the sole benefit of such employee or
representative, provided such shares will not be resold except to the Fund.
Class A shares of the Fund may also be sold at their net asset value to any
employee or registered representative of any dealer or other financial
institution which has a sales agreement with MFD or its affiliates, to certain
family members of such employees or representatives and their spouses, or to any
trust, pension, profit-sharing or other Retirement Plan for the sole benefit of
such employee or representative, as well as to clients of MFS Asset Management,
Inc. Class A shares may be sold at net asset value, subject to appropriate
documentation, through a dealer where the amount invested represents redemption
proceeds from a registered open-end management investment company not
distributed or managed by MFD or its affiliates if: (i) the redeemed shares were
subject to an initial sales charge or a deferred sales charge (whether or not
actually imposed); (ii) such redemption has occurred no more than 90 days prior
to the purchase of Class A shares of the Fund; and (iii) the Fund, MFD or its
affiliates have not agreed with such company or its affiliates, formally or
informally, to sell Class A shares at net asset value or provide any other
incentive with respect to such redemption and sale. Class A shares of the Fund
may also be sold at net asset value where the amount invested represents
redemption proceeds from MFS Fixed Fund. In addition, Class A shares may be sold
at their net asset value in connection with the acquisition or liquidation of
the assets of other investment companies or personal holding companies.
Insurance company separate accounts may purchase Class A shares of the Fund at
their net asset value. Class A shares of the Fund may be purchased at net asset
value by Retirement Plans whose third party administrators have entered into an
administrative services agreement with MFD or one of more of its affiliates to
perform certain administrative services, subject to certain operational
requirements specified from time to time by MFD or one or more of its
affiliates. Class A shares of the Fund may be purchased at net asset value
through certain broker-dealers and other financial institutions which have
entered into an agreement with MFD, which includes a requirement that such
shares be sold for the benefit of clients participating in a "wrap account" or a
similar program under which such clients pay a fee to such broker-dealer or
other financial institution.
Class A shares of the Fund may be purchased at net asset value by Retirement
Plans qualified under Section 401(k) of the Code through certain broker-dealers
and other financial institutions which have entered into an agreement with MFD
which includes certain minimum size qualifications for such Retirement Plans and
provides that the broker-dealer or other financial institution will perform
certain administrative services with respect to the plan's account.
Class A shares of the Fund may be purchased at net asset value by certain
Retirement Plans subject to the Employee Retirement Income Security Act of 1974,
as amended, subject to the following:
(i) the sponsoring organization must demonstrate to the satisfaction of MFD
that either (a) the employer has at least 25 employees or (b) the aggregate
purchases by the retirement plan of Class A shares of the MFS Funds will be
in an amount of at least $250,000 within a reasonable period of time, as
determined by MFD in its sole direction; and
(ii) a CDSC of 1% will be imposed on such purchases in the event of certain
redemption transactions within 12 months following such purchases.
Dealers who initiate and are responsible for purchases of Class A shares of the
Fund in this manner will be paid a commission by MFD, as follows: 1.00% on sales
up to $5 million, plus 0.25% on the amount in excess of $5 million; provided,
however, that MFD may pay a commission, on sales in excess of $5 million to
certain Retirement Plans, of 1.00% to certain dealers which, at MFD's
invitation, enter into an agreement with MFD in which the dealer agrees to
return any commission paid to it on the sale (or on a pro rata portion thereof)
if the shareholder redeems his or her shares within a period of time after
purchase as specified by MFD. Purchases of $1 million or more for each
shareholder account will be aggregated over a 12-month period (commencing from
the date of the first such purchase) for purposes of determining the level of
commissions to be paid during that period with respect to such account. Class A
shares of the Fund may be sold at net asset value through the automatic
reinvestment of Class A and Class B distributions which constitute required
withdrawals from qualified retirement plans. Furthermore, Class A shares of the
Fund may be sold at net asset value through the automatic reinvestment of
distributions of dividends and capital gains of other MFS Funds pursuant to the
Distribution Investment Program (see "Shareholder Services" in the Statement of
Additional Information).
CLASS B SHARES: Class B shares are offered at net asset value without an initial
sales charge but subject to a CDSC as follows:
YEAR OF CONTINGENT
REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
-------------- --------------
First 4%*
Second 4%
Third 3%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh and following 0%
*Class B shares purchased from January 1, 1993 through August 31, 1993 were
subject to a CDSC of 5% in the event of a redemption within the first year
after purchase.
For Class B shares purchased prior to January 1, 1993, the Fund imposes a CDSC
as a percentage of redemption proceeds as follows:
YEAR OF CONTINGENT
REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
-------------- --------------
First 6%
Second 5%
Third 4%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh and following 0%
No CDSC is paid upon an exchange of shares. For purposes of calculating the CDSC
upon redemption of shares acquired in an exchange, the purchase of shares
acquired in one or more exchanges is deemed to have occurred at the time of the
original purchase of the exchanged shares. See "Redemptions and Repurchases --
Contingent Deferred Sales Charge" for further discussion of the CDSC.
The CDSC on Class B shares will be waived upon the death or disability (as
defined in section 72(m)(7) of the Code) of any investor, provided the account
is registered (i) in the case of a deceased individual, solely in the deceased
individual's name, (ii) in the case of a disabled individual, solely or jointly
in the disabled individual's name or (iii) in the name of a living trust for the
benefit of the deceased or disabled individual. The CDSC on Class B shares will
also be waived in the case of redemptions of shares of the Fund pursuant to a
systematic withdrawal plan. In addition, the CDSC on Class B shares will be
waived in the case of distributions from an IRA, SAR-SEP or any other retirement
plan qualified under section 401(a), 401(k) or 403(b) of the Code due to death
or disability, or in the case of required minimum distributions from any such
retirement plan due to attainment of age 70 1/2. The CDSC on Class B shares will
be waived in the case of distributions from a retirement plan qualified under
Sections 401(a) or 401(k) of the Code due to (i) returns of excess contribution
to the plan, (ii) retirement of a participant in the plan, (iii) a borrowing
from the plan (repayments of borrowings, however, will constitute new sales for
purposes of assessing the CDSC), (iv) "financial hardship" of the participant in
the plan, as that term is defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time, and (v) termination of
employment of the participant in the plan (excluding, however, a partial or
other termination of the plan). The CDSC on Class B shares will also be waived
upon redemptions by (i) officers of the Trust, (ii) any of the subsidiary
companies of Sun Life, (iii) eligible Directors, officers, employees (including
retired and former employees) and agents of MFS, Sun Life or any of their
subsidiary companies, (iv) any trust, pension, profit-sharing or any other
benefit plan for such persons, (v) any trustees and retired trustees of any
investment company for which MFD serves as distributor or principal underwriter,
and (vi) certain family members of such individuals and their spouses, provided
in each case that the shares will not be resold except to the Fund. The CDSC on
Class B shares will also be waived in the case of redemptions by any employee or
registered representative of any dealer or other financial institution which has
a sales agreement with MFD, by certain family members of any such employee or
representative and their spouses, by any trust, pension, profit-sharing or other
retirement plan for the sole benefit of such employee or representative and by
clients of MFS Asset Management, Inc. A retirement plan qualified under Section
401(a) of the Code a ("Retirement Plan") that has invested its assets in Class B
shares of one or more of the MFS Funds Family of Funds (the "MFS Funds") for
more than 10 years from the later to occur of (i) January 1, 1993 or (ii) the
date the Retirement Plan first invests its assets in Class B shares of one or
more of the funds in the MFS Funds, will have the CDSC on Class B shares waived
in the case of a redemption of all the Retirement Plan's shares (including any
shares of any other class) in all MFS Funds (i.e., all the assets of the
Retirement Plan invested in the MFS Funds are withdrawn), except that if,
immediately prior to the redemption, the aggregate amount invested by the
Retirement Plan in Class B shares of the MFS Funds (excluding the reinvestment
of distributions) during the prior four year period equals 50% or more of the
total value of the Retirement Plan's assets in the MFS Funds, then the CDSC will
not be waived. The CDSC on Class B shares will be waived upon redemption by a
Retirement Plan where the redemption proceeds are used to pay expenses of the
Retirement Plan or certain expenses of participants under the Retirement Plan
(e.g., participant account fees), provided that the Retirement Plan's sponsor
subscribes to the MFS Fundamental 401(k) Plan(SM) or another similar
recordkeeping system made available by the Shareholder Servicing Agent. The CDSC
on Class B shares will be waived upon the transfer of registration from shares
held by a Retirement Plan through a single account maintained by the Shareholder
Servicing Agent to multiple Class B share accounts maintained by the Shareholder
Servicing Agent on behalf of individual participants in the Retirement Plan,
provided that the Retirement Plan's sponsor subscribes to the MFS Fundamental
401(k) Plan(SM) or another similar recordkeeping system made available by the
Shareholder Servicing Agent. The CDSC on Class B shares may also be waived in
connection with the acquisition or liquidation of the assets of other investment
companies or personal holding companies.
CONVERSION OF CLASS B SHARES. Class B shares of the Fund will convert to Class A
shares of the Fund approximately eight years after the purchase date. Shares
purchased through the reinvestment of distributions paid in respect of Class B
shares will be treated as Class B shares for purposes of the payment of the
distribution and service fees under the Distribution Plan applicable to Class B
shares. However, for purposes of conversion to Class A shares, all shares in a
shareholder's account that were purchased through the reinvestment of dividends
and distributions paid in respect of Class B shares (and which have not
converted to Class A shares as provided in the following sentence) will be held
in a separate sub-account. Each time any Class B shares in the shareholder's
account (other than those in the sub-account) convert to Class A shares, a
portion of the Class B shares then in the sub-account will also convert to Class
A shares. The portion will be determined by the ratio that the shareholder's
Class B shares not acquired through reinvestment of dividends and distributions
that are converting to Class A shares bear to the shareholder's total Class B
shares not acquired through such reinvestment. The conversion of Class B shares
to Class A shares is subject to the continuing availability of a ruling from the
Internal Revenue Service or an opinion of counsel that such conversion will not
constitute a taxable event for Federal tax purposes. There can be no assurance
that such ruling or opinion will be available, and the conversion of Class B
shares to Class A shares will not occur if such ruling or opinion is not
available. In such event, Class B shares would continue to be subject to higher
expenses than Class A shares for an indefinite period.
CLASS C SHARES: Class C shares are offered at net asset value without an initial
sales charge or a CDSC. Class C shares do not convert to any other class of
shares of the Fund. The maximum investment in Class C shares that may be made is
$5,000,000 per transaction.
Class C Shares are not currently available for purchase by any retirement plan
qualified under 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 401(a) or 403(b) recordkeeping program made available by the Shareholder
Servicing Agent.
GENERAL: Except as described below, the minimum initial investment is $1,000 per
account and the minimum additional investment is $50 per account. Accounts being
established for monthly automatic investments and under payroll savings programs
and tax-deferred retirement programs (other than IRAs) involving the submission
of investments by means of group remittal statements are subject to a $50
minimum on initial and additional investments per account. The minimum initial
investment for IRAs is $250 per account and the minimum additional investment is
$50 per account. Accounts being established for participation in the Automatic
Exchange Plan are subject to a $50 minimum on initial and additional investments
per account. There are also other limited exceptions to these minimums for
certain tax-deferred retirement programs. Any minimums may be changed at any
time at the discretion of MFD. The Fund reserves the right to cease offering its
shares for sale at any time.
For shareholders who elect to participate in certain investment programs (e.g.,
the automatic investment plan) or other shareholder services, MFD or its
affiliates may either (i) give a gift of nominal value, such as a hand- held
calculator, or (ii) make a normal charitable contribution on their behalf.
A shareholder whose shares are held in the name of, or controlled by, an
investment dealer might not receive many of the privileges and services from the
Fund (such as Right of Accumulation, Letter of Intent and certain recordkeeping
services) that the Fund ordinarily provides.
Purchases and exchanges should be made for investment purposes only. The Fund
and MFD each reserve the right to reject any specific purchase order or to
restrict purchases by a particular purchaser (or group of related purchasers).
The Fund or MFD may reject or restrict any purchases by a particular purchaser
or group, for example, when such purchase is contrary to the best interests of
the Fund's other shareholders or otherwise would disrupt the management of the
Fund.
MFD may enter into an agreement with shareholders who intend to make exchanges
among certain classes of certain MFS Funds (as determined by MFD) which follow a
timing pattern, and with individuals or entities acting on such shareholders'
behalf (collectively, "market timers"), setting forth the terms, procedures and
restrictions with respect to such exchanges. In the absence of such an
agreement, it is the policy of the Fund and MFD to reject or restrict purchases
by market timers if (i) more than two exchange purchases are effected in a timed
account in the same calendar quarter or (ii) a purchase would result in shares
being held in timed accounts by market timers representing more than (x) one
percent of the Fund's net assets or (y) specified dollar amounts in the case of
certain MFS Funds which may include the Fund and which may change from time to
time. The Fund and MFD each reserve the right to request market timers to redeem
their shares at net asset value, less any applicable CDSC, if either of these
restrictions is violated.
Securities dealers and other financial institutions may receive different
compensation with respect to sales of Class A, Class B shares and Class C
shares. In some instances, promotional incentives to dealers may be offered only
to certain dealers who have sold or may sell significant amounts of Fund shares.
From time to time, MFD may pay dealers 100% of the applicable sales charge on
sales of Class A shares of certain specified MFS Funds sold by such dealer
during a specified sales period. In addition, MFD or its affiliates may, from
time to time, pay dealers an additional commission equal to 0.50% of the net
asset value of all of the Class B shares of certain specified MFS Funds sold by
such dealer during a specified sales period. In addition, from time to time MFD,
at its expense, may provide additional commissions, compensation or promotional
incentives ("concessions") to dealers which sell shares of the Fund. The staff
of the SEC has indicated that dealers who receive more than 90% of the sales
charge may be considered underwriters. Such concessions provided by MFD may
include financial assistance to dealers in connection with preapproved
conferences or seminars, sales or training programs for invited registered
representatives, payment for travel expenses, including lodging, incurred by
registered representatives and members of their families or other invited guests
to various locations for such seminars or training programs, seminars for the
public, advertising and sales campaigns regarding one or more MFS Funds, and/or
other dealer-sponsored events. In some instances, these concessions may be
offered to dealers or only to certain dealers who have sold or may sell, during
specified periods, certain minimum amounts of shares of the Fund. From time to
time, MFD may make expense reimbursements for special training of a dealer's
registered representatives in group meetings or to help pay the expenses of
sales contests. Other concessions may be offered to the extent not prohibited by
the laws of any state or any self-regulatory agency, the NASD.
The Glass-Steagall Act prohibits national banks from engaging in the business of
underwriting, selling or distributing securities. Although the scope of the
prohibition has not been clearly defined, MFD believes that such Act should not
preclude banks from entering into agency agreements with MFD (as described
above). If, however, a bank were prohibited from so acting, the Trustees would
consider what actions, if any, would be necessary to continue to provide
efficient and effective shareholder services. It is not expected that
shareholders would suffer any adverse financial consequences as a result of
these occurrences. In addition, state securities laws on this issue may differ
from the interpretation of federal law expressed herein, and banks and financial
institutions may be required to register as broker-dealers pursuant to state
law.
EXCHANGES
Subject to the requirements set forth below, some or all of the shares in an
account with the Fund for which payment has been received by the Fund (i.e., an
established account) may be exchanged for shares of the same class of any of the
other MFS Funds, if available for sale, at net asset value. In addition, Class C
shares may be exchanged for shares of the MFS Money Market Fund at net asset
value. Shares of one class may not be exchanged for shares of any other class.
Exchanges will be made only after instructions in writing or by telephone (an
"Exchange Request") are received for an established account by the Shareholder
Servicing Agent in proper form (i.e., if in writing -- signed by the record
owner(s) exactly as the shares are registered; if by telephone -- proper account
identification is given by the dealer or shareholder of record); and each
exchange must involve either shares having an aggregate value of at least $1,000
or all the shares in the account (except that the minimum is $50 for accounts of
retirement plan participants whose sponsoring organizations subscribe to the MFS
FUNDamental 401(k) Plan or another similar 401(k) recordkeeping system made
available by the Shareholder Servicing Agent. If the Exchange Request is
received by the Shareholder Servicing Agent on any business day prior to the
close of regular trading on the Exchange, the exchange usually will occur on
that day if all the requirements set forth above have been complied with at that
time. No more than five exchanges may be made in any one Exchange Request by
telephone. Additional information concerning this exchange privilege and
prospectuses for any of the other MFS Funds may be obtained from investment
dealers or the Shareholder Servicing Agent. A shareholder should read the
prospectus of the other MFS Fund and consider the differences in objectives and
policies before making any exchange. For federal and (generally) state income
tax purposes, an exchange is treated as a sale of the shares exchanged and,
therefore, an exchange could result in a gain or loss to the shareholder making
the exchange. Exchanges by telephone are automatically available to most non-
retirement plan accounts and certain retirement plan accounts. For further
information regarding exchanges by telephone see "Redemptions By Telephone." The
exchange privilege (or any aspect of it) may be changed or discontinued and is
subject to certain limitations, including certain restrictions on purchases by
market timers. Special procedures, privileges and restrictions with respect to
exchanges may apply to market timers who enter into an agreement with MFD, as
set forth in such agreement (see "Purchases").
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the amount in his account on
any date on which the Fund is open for business by redeeming shares at their net
asset value or by selling such shares to the Fund through a dealer (a
repurchase). Since the net asset value of shares of the account fluctuate,
redemptions or repurchases, which are taxable transactions, are likely to result
in gains or losses to the shareholder. When a shareholder withdraws an amount
from his account, the shareholder is deemed to have tendered for redemption a
sufficient number of full and fractional shares in his account to cover the
amount withdrawn. The proceeds of a redemption or repurchase will normally be
available within seven days, except that for shares purchased, or received in
exchange for shares purchased, by check (including certified checks or cashier's
checks) payment of redemption proceeds may be delayed for 15 days from the
purchase date in an effort to assure that such check has cleared. Payment of
redemption proceeds may be delayed for up to seven days from the redemption date
if the Fund determines that such a delay would be in the best interest of all
its shareholders.
A. REDEMPTION BY MAIL -- Each shareholder has the right to redeem all or any
portion of the shares in his account by mailing or delivering to the Shareholder
Servicing Agent (see back cover for address) a stock power with a written
request for redemption or a letter of instruction, together with his share
certificates (if any were issued), all in "good order" for transfer. "Good
order" generally means that a stock power, written request for redemption,
letter of instruction or certificate must be endorsed by the record owner(s)
exactly as the shares are registered and the signature(s) must be guaranteed in
the manner set forth below under the caption "Signature Guarantee." In addition,
in some cases, "good order" may require the furnishing of additional documents.
The Shareholder Servicing Agent may make certain de minimis exceptions to the
above requirements for redemption. Within seven days after receipt of a
redemption request by the Shareholder Servicing Agent in "good order," the Fund
will make payment in cash of the net asset value of the shares next determined
after such redemption request was received, reduced by the amount of any
applicable CDSC described above and the amount of any income tax required to be
withheld, except during any period in which the right of redemption is suspended
or date of payment is postponed because the Exchange is closed or trading on the
Exchange is restricted, or, to the extent otherwise permitted by the 1940 Act,
if an emergency exists.
B. REDEMPTION BY TELEPHONE -- Each shareholder may redeem an amount from his
account by telephoning toll-free at (800) 225-2606. Shareholders wishing to
avail themselves of this telephone redemption privilege must so elect on their
Account Application, designate thereon a commercial bank and account number to
receive the proceeds of such redemption, and sign the Account Application Form
with the signature(s) guaranteed in the manner set forth below under the caption
"Signature Guarantee". The proceeds of such a redemption, reduced by the amount
of any applicable CDSC described above and the amount of any income tax required
to be withheld, are mailed by check to the designated account, without charge.
As a special service, investors may arrange to have proceeds in excess of $1,000
wired in federal funds to the designated account. If a telephone redemption
request is received by the Shareholder Servicing Agent by the close of regular
trading on the Exchange on any business day, shares will be redeemed at the
closing net asset value of the Fund on that day. Subject to the conditions
described in this section, proceeds of a redemption are normally mailed or wired
on the next business day following the date of receipt of the order for
redemption. The Shareholder Servicing Agent will not be responsible for any
losses resulting from unauthorized telephone transactions if it follows
reasonable procedures designed to verify the identity of the caller. The
Shareholder Servicing Agent will request personal or other information from the
caller, and will normally also record calls. Shareholders should verify the
accuracy of confirmation statements immediately after their receipt.
C. REPURCHASE THROUGH A DEALER -- If a shareholder desires to sell his shares at
their net asset value through his securities dealer (a repurchase), the
shareholder can place a repurchase order with his dealer, who may charge the
shareholder a fee. IF THE DEALER RECEIVES THE SHAREHOLDER'S ORDER PRIOR TO THE
CLOSE OF REGULAR TRADING ON THE EXCHANGE AND COMMUNICATES IT TO MFD ON THE SAME
DAY BEFORE MFD CLOSES FOR BUSINESS, THE SHAREHOLDER WILL RECEIVE THE NET ASSET
VALUE CALCULATED ON THAT DAY.
GENERAL: Shareholders of the Fund who have redeemed their shares have a one-
time right to reinvest the redemption proceeds in the same class of shares of
any of the MFS Funds (if shares of such Fund are available for sale) at net
asset value (with a credit for any CDSC paid) within 90 days of the redemption
pursuant to the Reinstatement Privilege. If the shares credited for any CDSC
paid are then redeemed within six years of the initial purchase in the case of
Class B shares, or within 12 months of the initial purchase for certain Class A
purchases, a CDSC will be imposed upon redemption. Such purchases under the
Reinstatement Privilege are subject to all limitations in the Statement of
Additional Information regarding this privilege.
Subject to the Fund's compliance with applicable regulations, the Fund has
reserved the right to pay the redemption or repurchase price of shares of the
Fund, either totally or partially, by a distribution in kind of securities
(instead of cash) from the Fund's portfolio. The securities distributed in such
a distribution would be valued at the same amount as that assigned to them in
calculating the net asset value for the shares being sold. If a shareholder
received a distribution in kind, the shareholder could incur transaction charges
when converting the securities to cash.
Due to the relatively high cost of maintaining small accounts, the Fund reserves
the right to redeem shares in any account for their then-current value (which
will be promptly paid to the shareholder) if at any time the total investment in
such account drops below $500 because of redemptions, except in the case of
accounts established for monthly automatic investments, certain payroll savings
programs, Automatic Exchange Plan accounts and tax-deferred retirement plans,
for which there is a lower minimum investment requirement (see "Purchases").
Shareholders will be notified that the value of their account is less than the
minimum investment requirement and allowed 60 days to make an additional
investment before the redemption is processed. No CDSC will be imposed on such
involuntary redemptions.
SIGNATURE GUARANTEE: In order to protect shareholders against fraud to the
greatest extent possible, the Fund requires in certain instances as indicated
above that the shareholder's signature be guaranteed. In these cases the
shareholder's signature must be guaranteed by an eligible bank, broker, dealer,
credit union, national securities exchange, registered securities association,
clearing agency or savings association. Signature guarantees shall be accepted
in accordance with policies established by the Shareholder Servicing Agent.
CONTINGENT DEFERRED SALES CHARGE -- Investments ("Direct Purchases") in Class A
or B shares will be subject to a CDSC for a period of 12 months (in the case of
purchases of $1 million or more of Class A shares) or six years (in the case of
purchases of Class B shares). Purchases of Class A shares made during a calendar
month, regardless of when during the month the investment occurred, will age one
month on the last day of the month and each subsequent month. Class B shares
purchased on or after January 1, 1993 will be aggregated on a calendar month
basis -- all transactions made during a calendar month, regardless of when
during the month they have occurred, will age one year at the close of business
on the last day of such month in the following calendar year and each subsequent
year. For Class B shares of the Fund purchased prior to January 1, 1993,
transactions will be aggregated on a calendar year basis - - all transactions
made during a calendar year, regardless of when during the year they have
occurred, will age one year at the close of business on December 31 of that year
and each subsequent year. At the time of a redemption, the amount by which the
value of a shareholder's account represented by Direct Purchases exceeds the sum
of six calendar year aggregations (12 months in the case of purchases of $1
million or more of Class A shares) of Direct Purchases may be redeemed without
charge ("Free Amount"). Moreover, no CDSC is ever assessed on additional shares
acquired through the automatic reinvestment of dividends or capital gain
distributions ("Reinvested Shares").
Therefore, at the time of redemption of shares of a particular class, (i) any
Free Amount is not subject to the CDSC, and (ii) the amount of the redemption
equal to the then-current value of Reinvested Shares is not subject to the CDSC,
but (iii) any amount of the redemption in excess of the aggregate of the
then-current value of Reinvested Shares and the Free Amount is subject to a
CDSC. The CDSC will first be applied against the amount of Direct Purchases
which will result in any such charge being imposed at the lowest possible rate.
The CDSC to be imposed upon redemptions of shares will be calculated as set
forth in "Purchases" above.
The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except that, with respect to transfers of registration to an IRA
rollover account, the CDSC will be waived if the shares being reregistered would
have been eligible for a CDSC waiver had they been redeemed.
DISTRIBUTION PLANS
The Trustees have adopted separate distribution plans for Class A, Class B and
Class C shares pursuant to Section 12(b) of the 1940 Act and Rule 12b-1
thereunder (the "Rule"), after having concluded that there is a reasonable
likelihood that the plans would benefit the Fund and its shareholders.
CLASS A DISTRIBUTION PLAN. The Class A Distribution Plan provides that the
Fund will pay MFD a distribution/service fee aggregating up to (but not
necessarily all of) 0.35% of the average daily net assets attributable to Class
A shares annually in order that MFD may pay expenses on behalf of the Fund
related to the distribution and servicing of Class A shares. The expenses to be
paid by MFD on behalf of the Fund include a service fee to securities dealers
which enter into a sales agreement with MFD of up to 0.25% of the Fund's average
daily net assets attributable to Class A shares that are owned by investors for
whom such securities dealer is the holder or dealer of record. This fee is
intended to be partial consideration for all personal services and/or account
maintenance services rendered by the dealer with respect to Class A shares. MFD
may from time to time reduce the amount of the service fee paid for shares sold
prior to a certain date. MFD will also retain a distribution fee of 0.10% of the
Fund's average daily net assets attributable to Class A shares as partial
consideration for services performed and expenses incurred in the performance of
MFD's obligations under its distribution agreement with the Fund. In addition,
to the extent that the aggregate of the foregoing fees does not exceed 0.35% per
annum of the average daily net assets of the Fund attributable to Class A
shares, the Fund is permitted to pay other distribution-related expenses,
including commissions to dealers and payments to wholesalers employed by MFD for
sales at or above a certain dollar level. Payments under the Class A
Distribution Plan will become payable when the net assets of the Fund
attributable to Class A shares first equal or exceed $40 million. Thereafter,
0.10% of the distribution fee will be waived. Service fees may be reduced for a
securities dealer that is the holder or dealer of record for an investor who
owns shares of the Fund having a net asset value at or above a certain dollar
level. Fees payable under the Class A Distribution Plan are charged to and
therefore reduce, income applicable to Class A shares. Dealers may from time to
time be required to meet certain criteria in order to receive service fees. MFD
or its affiliates are entitled to retain all service fees payable under the
Class A Distribution Plan for which there is no dealer or record or for which
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by MFD or its affiliates
for shareholder accounts. Certain banks and other financial institutions that
have agency agreements with MFD will receive service fees that are the same as
service fees to dealers.
CLASS B DISTRIBUTION PLAN. The Class B Distribution Plan provides that the
Fund will pay MFD a daily distribution fee equal on an annual basis to 0.75% of
the Fund's average daily net assets attributable to Class B shares and will pay
MFD a service fee of up to 0.25% per annum of the Fund's average daily net
assets attributable to Class B shares (which MFD will in turn pay to securities
dealers which enter into a sales agreement with MFD at a rate of up to 0.25% per
annum of the Fund's average daily net assets attributable to Class B shares
owned by investors for whom that securities dealer is the holder or dealer of
record). This service fee is intended to be additional consideration for all
personal services and/or account maintenance services rendered by the dealer
with respect to Class B shares. Fees payable under the Class B Distribution Plan
are charged to, and therefore reduce, income allocated to Class B shares. The
Class B Distribution Plan also provides that MFD will receive all CDSCs
attributable to Class B shares (see "Redemptions and Repurchases" above), which
do not reduce the distribution fee. MFD will pay commissions to dealers of 3.75%
of the purchase price of shares purchased through dealers. MFD will also advance
to dealers the first year service fee at a rate equal to 0.25% of the purchase
price of such shares and, as compensation therefor, MFD may retain the service
fee paid by the Fund with respect to such shares for the first year after
purchase. Therefore, the total amount paid to a dealer upon the sale of shares
is 4.00% of the purchase price of the shares (commission rate of 3.75% plus
service fee equal to 0.25% of the purchase price). Dealers will become eligible
for additional service fees with respect to such shares commencing in the
thirteenth month following the purchase. Dealers may from time to time be
required to meet certain criteria in order to receive service fees. MFD or its
affiliates are entitled to retain all service fees payable under the Class B
Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by MFD or its affiliates
for shareholder accounts. The purpose of the distribution payments to MFD under
the Class B Distribution Plan is to compensate MFD for its distribution services
to the Fund. Since MFD's compensation is not directly tied to its expenses, the
amount of compensation received by MFD during any year may be more or less than
its actual expenses. For this reason, this type of distribution fee arrangement
is characterized by the staff of the SEC as being of the "compensation" variety.
However, the Fund is not liable for any expenses incurred by MFD in excess of
the amount of compensation it receives. The expenses incurred by MFD, including
commissions to dealers, are likely to be greater than the distribution fees for
the next several years, but thereafter such expenses may be less than the amount
of the distribution fees. Certain banks and other financial institutions that
have agency agreements with MFD will receive agency transaction and service fees
that are the same as commissions and service fees to dealers.
CLASS C DISTRIBUTION PLAN. The Class C Distribution Plan provides that the
Fund will pay MFD a distribution fee of up to 0.75% per annum of the Fund's
average daily net assets attributable to Class C shares and will pay MFD a
service fee of up to 0.25% per annum of the Fund's average daily net assets
attributable to Class C shares (which MFD in turn pays to securities dealers
which enter into a sales agreement with MFD at a rate of up to 0.25% per annum
of the Fund's daily net assets attributable to Class C shares owned by investors
for whom that securities dealer is the holder or dealer of record). The
distribution/service fees attributable to Class C shares are designed to permit
an investor to purchase such shares through a broker-dealer without the
assessment of an initial sales charge or a CDSC while allowing MFD to compensate
broker-dealers in connection with the sale of such shares. The service fee is
intended to be additional consideration for all personal services and/or account
maintenance services rendered with respect to Class C shares. MFD or its
affiliates are entitled to retain all service fees payable under the Class C
Distribution Plan with respect to accounts for which there is no dealer of
record as partial consideration for personal services and/or account maintenance
services performed by MFD or its affiliates for shareholder accounts. The
purpose of the distribution payments to MFD under the Class C Distribution Plan
is to compensate MFD for its distribution services to the Fund. Distribution
payments under the Plan will be used by MFD to pay securities dealers a
distribution fee in an amount equal on an annual basis to 0.75% of the Fund's
average daily net assets attributable to Class C shares owned by investors for
whom that securities dealer is the holder or dealer of record. (Therefore, the
total amount of distribution/service fees paid to a dealer on an annual basis is
1.00% of the Fund's average daily net assets attributable to Class C shares
owned by investors for whom the securities dealer is the holder or dealer of
record.) MFD also pays expenses of printing prospectuses and reports used for
sales purposes, expenses with respect to the preparation and printing of sales
literature and other distribution related expenses, including, without
limitation, the compensation of personnel and all costs of travel, office
expense and equipment. Since MFD's compensation is not directly tied to its
expenses, the amount of compensation received by MFD during any year may be more
or less than its actual expenses. For this reason, this type of distribution fee
arrangement is characterized by the staff of the SEC as being of the
"compensation" variety. However, the Fund is not liable for any expenses
incurred by MFD in excess of the amount of compensation it receives. Certain
banks and other financial institutions that have agency agreements with MFD will
receive agency transaction and service fees that are the same as distribution
fees and service fees to dealers. Fees payable under the Class C Distribution
Plan are charged to, and therefore reduce, income allocated to Class C shares.
DISTRIBUTIONS
The Fund intends to pay substantially all of its net investment income to its
shareholders as dividends on an annual basis. In determining the net investment
income available for distributions, the Fund may rely on projections of its
anticipated net investment income over a longer term, rather than its actual net
investment income for the period. The Fund may make one or more distributions
during the calendar year to its shareholders from any long-term capital gains,
and may also make one or more distributions during the calendar year to its
shareholders from short-term capital gains. Shareholders may elect to receive
dividends and capital gain distributions in either cash or additional shares of
the same class with respect to which a distribution is made (see "Tax Status"
and "Shareholder Services -- Distribution Options" below). Distributions paid by
the Fund with respect to Class A shares will generally be greater than those
paid with respect to Class B and Class C shares because expenses attributable to
Class B and Class C shares will generally be higher.
TAX STATUS
The Fund is treated as an entity separate from the other series of the Trust for
federal income tax purposes. In order to minimize the taxes the Fund would
otherwise be required to pay, the Fund intends to qualify each year as a
"regulated investment company" under Subchapter M of the Code, and to make
distributions to its shareholders in accordance with the timing requirements
imposed by the Code. It is expected that the Fund will not be required to pay
entity level federal income or excise taxes, although foreign-source income
received by the Fund may be subject to foreign withholding taxes. Shareholders
of the Fund normally will have to pay federal income taxes (and any state or
local taxes) on the dividends and capital gain distributions they receive from
the Fund, whether paid in cash or additional shares. A portion of the dividends
received from the Fund (but none of the Fund's capital gain distributions) may
qualify for the dividends-received deduction for corporations.
A statement setting forth the federal income tax status of all dividends and
distributions for that year, including the portion taxable as ordinary income,
the portion taxable as long-term capital gain, the portion, if any, representing
a return of capital (which is free of current taxes but results in a basis
reduction), and the amount, if any, of federal income tax withheld will be sent
to each shareholder promptly after the end of such year. In certain
circumstances, the Fund may also elect to "pass through" to shareholders foreign
income taxes paid by the Fund. Under those circumstances, the Fund will notify
shareholders of their pro rata portion of the foreign income taxes paid by the
Fund; shareholders may be eligible for foreign tax credits or deductions with
respect to those taxes, but will be required to treat the amount of the taxes as
an amount distributed to them and thus includable in their gross income for
federal income tax purposes.
Fund distributions will reduce the Fund's net asset value per share.
Shareholders who buy shares just before the Fund makes a distribution of net
capital gains or net short-term capital gains may thus pay the full price for
the shares and then effectively receive a portion of the purchase price back as
a taxable distribution.
The Fund intends to withhold U.S. federal income tax at a rate of 30% on
dividends and certain other payments that are subject to such withholding and
that are made to persons who are neither citizens nor residents of the U.S.,
regardless of whether a lower rate may be permitted under an applicable law or
treaty. The Fund is also required in certain circumstances to apply backup
withholding of 31% on 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. However,
backup withholding will not be applied to payments which have had 30%
withholding taken. Prospective investors should read the Account Application for
information regarding backup withholding of federal income tax and should
consult their own tax advisers as to the tax consequences of an investment in
the Fund.
NET ASSET VALUE
The net asset value per share of each class of the Fund is determined each day
during which the Exchange is open for trading. This determination is made once
each day as of the close of regular trading on the Exchange by deducting the
amount of the liabilities attributable to the class from the value of the Fund's
assets attributable to the class and dividing the difference by the number of
outstanding shares of the class. Assets in the Fund's portfolio are valued on
the basis of their current values or otherwise at their fair values, as
described in the Statement of Additional Information. All investments and assets
are expressed in U.S. dollars based upon current currency exchange rates. The
net asset value per share of each class of shares is effective for orders
received by the dealer prior to its calculation and received by MFD prior to the
close of that business day.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund, one of three series of the Trust, has three classes of shares,
entitled Class A, Class B and Class C Shares of Beneficial Interest (without par
value). The Trust has reserved the right to create and issue additional classes
and series of shares, in which case each class of shares of a series would
participate equally in the earnings, dividends and assets attributable to that
class of that particular series. Shareholders are entitled to one vote for each
share held and shares of each series would be entitled to vote separately to
approve investment advisory agreements or changes in investment restrictions,
but shares of all series would vote together in the election of Trustees or
selection of accountants. Additionally, each class of shares of a series will
vote separately on any material increases in the fees under its Distribution
Plan or on any other matter that affects solely that class of shares, but will
otherwise vote together with all other classes of shares of the series on all
other matters. The Trust does not intend to hold annual shareholder meetings.
The Declaration of Trust provides that a Trustee may be removed from office in
certain instances (see "Description of Shares, Voting Rights and Liabilities" in
the Statement of Additional Information).
Each share of a class of the Fund represents an equal proportionate interest in
the Fund with each other class share, subject to the liabilities of that
particular class. Shares have no pre-emptive or conversion rights (except as set
forth above in "Purchases -- Conversion of Class B Shares"). Shares are fully
paid and non-assessable. Should the Fund be liquidated, shareholders of each
class are entitled to share pro rata in the net assets attributable to that
class available for distribution to shareholders. Shares will remain on deposit
with the Shareholder Servicing Agent and certificates will not be issued except
in connection with pledges and assignments and in certain other limited
circumstances.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a business trust may,
under certain circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance (e.g., fidelity bonding and omissions insurance) existed
and the Trust itself was unable to meet its obligations.
PERFORMANCE INFORMATION
From time to time, the Fund will provide total rate of return quotations for
each class of shares and may also quote fund rankings in the relevant fund
category from various sources, such as the Lipper Analytical Services, Inc. and
Wiesenberger Investment Companies Service. Total rate of return quotations will
reflect the average annual percentage change over stated periods in the value of
an investment in each class of shares of the Fund made at the maximum public
offering price of shares of that class and with all distributions reinvested and
which, if quoted for periods of six years or less, will give effect to the
imposition of the CDSC assessed upon redemptions of the Fund's Class B shares.
Such total rate of return quotations may be accompanied by quotations which do
not reflect the reduction in value of the initial investment due to the sales
charge or the deduction of a CDSC, and which will thus be higher. The Fund's
total rate of return quotations are based on historical performance and are not
intended to indicate future performance. Total rate of return reflects all
components of investment return over a stated period of time. The Fund's
quotations may from time to time be used in advertisements, shareholder reports
or other communications to shareholders. For a discussion of the manner in which
the Fund will calculate its total rate of return, see the Statement of
Additional Information. For further information about the Fund's performance for
the fiscal year ended October 31, 1994, please see the Fund's Annual Report. A
copy of the Annual Report may be obtained without charge by contacting the
Shareholders Servicing Agent (see back cover for address and phone number.) In
addition to information provided in shareholder reports, the Fund may, in its
discretion, from time to time, make a list of all or a portion of its holdings
available to investors upon request.
8. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described below
or concerning other aspects of the Fund should contact the Shareholder Servicing
Agent (see back cover for address and phone number).
ACCOUNT AND CONFIRMATION STATEMENTS -- Each shareholder will receive
confirmation statements showing the transaction activity in his account. At the
end of each calendar year, each shareholder will receive income tax information
regarding reportable dividends and capital gain distributions for that year (see
"Tax Status").
DISTRIBUTION OPTIONS -- The following options are available to all accounts
(except Systematic Withdrawal Plan accounts) and may be changed as often as
desired by notifying the Shareholder Servicing Agent:
-- Dividends and capital gain distributions reinvested in additional shares.
This option will be assigned if no other option is specified;
-- Dividends in cash; capital gain distributions reinvested in additional
shares;
-- Dividends and capital gain distributions in cash.
Reinvestments (net of any tax withholding) will be made in additional full and
fractional shares of the same class of shares at the net asset value in effect
at the close of business on the record date. Checks for dividends and capital
gain distributions in amounts less than $10 will automatically be reinvested in
additional shares of the Fund. If a shareholder has elected to receive dividends
and/or capital gain distributions in cash and the postal or other delivery
service is unable to deliver checks to the shareholder's address of record, such
shareholder's distribution option will automatically be converted to having all
dividends and other distributions reinvested in additional shares. Any request
to change a distribution option must be received by the Shareholder Servicing
Agent by the record date for a dividend or distribution in order to be effective
for that dividend or distribution. No interest will accrue on amounts
represented by uncashed distribution or redemption checks.
INVESTMENT AND WITHDRAWAL PROGRAMS -- For the convenience of shareholders, the
Fund makes available the following programs designed to enable shareholders to
add to their investment in an account with the Fund or withdraw from it with a
minimum of paper work. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or the Fund.
LETTER OF INTENT: If a shareholder (other than a group purchaser as
described in the Statement of Additional Information) anticipates purchasing
$50,000 or more of Class A shares of the Fund alone or in combination with
shares of Class B or Class C of the Fund or any of the classes of other MFS
Funds or MFS Fixed Fund (a bank collective investment fund) within a 13-month
period (or 36-month period for purchases of $1 million or more), the shareholder
may obtain such shares at the same reduced sales charge as though the total
quantity were invested in one lump sum, subject to escrow agreements and the
appointment of an attorney for redemptions from the escrow amount if the
intended purchases are not completed, by completing the Letter of Intent section
of the Account Application.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on purchases of Class A shares when his new investment, together with
the current offering price value of all holdings of Class A, Class B and Class C
shares of that shareholder in the MFS Funds or MFS Fixed Fund (a bank collective
investment fund) reaches a discount level.
DISTRIBUTION INVESTMENT PROGRAM: Shares of a particular class of the Fund
may be sold at net asset value (and without any applicable CDSC) through the
automatic reinvestment of dividend and capital gain distributions from the same
class of other MFS Funds. Furthermore, distributions made by the Fund may be
automatically invested at net asset value (and without any applicable CDSC) in
shares of the same class of another MFS Fund, if shares of such Fund are
available for sale.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder
Servicing Agent to send him (or anyone he designates) regular periodic payments,
as designated on the Account Application and based upon the value of his
account. Each payment under a Systematic Withdrawal Plan (a "SWP") must be at
least $100 except in certain limited circumstances. The aggregate withdrawals of
Class B shares in any year pursuant to a SWP will not be subject to a CDSC and
are limited to 10% of the value of the account at the time of the establishment
of the SWP. The CDSC will not be waived in the case of SWP redemptions of Class
A shares which are subject to a CDSC.
DOLLAR COST AVERAGING PROGRAMS --
AUTOMATIC INVESTMENT PLAN: Cash investments of $50 or more may be made
through a shareholder's checking account twice monthly, monthly or quarterly.
Required forms are available from the Shareholder Servicing Agent or investment
dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may exchange their shares for the same class of shares of
the other MFS Funds under the Automatic Exchange Plan. The Automatic Exchange
Plan provides for automatic monthly or quarterly exchanges of funds from the
shareholder's account in such Fund for investment in the same class of shares of
other MFS Funds selected by the shareholder. Under the Automatic Exchange Plan,
exchanges of at least $50 each may be made to up to four different funds. A
shareholder should consider the objectives and policies of a fund and review its
prospectus before electing to exchange money into such fund through the
Automatic Exchange Plan. No transaction fee is imposed in connection with
exchange transactions under the Automatic Exchange Plan. However, exchanges of
shares of MFS Money Market Fund, MFS Government Money Market Fund or Class A
shares of MFS Cash Reserve Fund will be subject to any applicable sales charge.
For federal and (generally) state income tax purposes, an exchange is treated as
a sale of the shares exchanged and, therefore, could result in a capital gain or
loss to the shareholder making the exchange. See the Statement of Additional
Information for further information concerning the Automatic Exchange Plan.
Investors should consult their tax advisers for information regarding the
potential capital gain and loss consequences of transactions under the Automatic
Exchange Plan.
Because a dollar cost averaging program involves periodic purchases of shares
regardless of fluctuating share offering prices, a shareholder should consider
his financial ability to continue his purchases through periods of low price
levels. Maintaining a dollar cost averaging program concurrently with a
withdrawal program could be disadvantageous because of the sales charges
included in share purchases in the case of Class A shares, and because of the
assessment of the CDSC for certain share redemptions in the case of Class A
shares.
TAX-DEFERRED RETIREMENT PLANS -- Except as noted under "Purchases -- Class C
Shares," shares of the Fund may be purchased by all types of tax-deferred
retirement plans, including IRAs, SEP-IRA plans, 401(k) plans, 403(b) plans and
other corporate pension and profit-sharing plans. Investors should consult with
their tax adviser before establishing any of the tax-deferred retirement plans
described above.
--------------------------------------------
The Fund's Statement of Additional Information, dated March 1, 1995, contains
more detailed information about the Trust and the Fund, including information
related to (i) investment policies and restrictions, including the purchase and
sale of options, Futures Contracts, Options on Futures Contracts, Forward
Contracts and Options on Foreign Currencies, (ii) the Trustees, officers and
investment adviser, (iii) portfolio trading, (iv) the Fund's shares, including
rights and liabilities of shareholders, (v) tax status of dividends and
distributions, (vi) the Distribution Plans, (vii) the method used to calculate
total rate of return quotations and (viii) various services and privileges
provided by the Fund for the benefit of its shareholders, including additional
information with respect to the exchange privilege.
<PAGE>
APPENDIX
DESCRIPTION OF OBLIGATIONS ISSUED OR GUARANTEED BY
U.S. GOVERNMENT AGENCIES, AUTHORITIES OR INSTRUMENTALITIES
U.S. GOVERNMENT OBLIGATIONS -- are issued by the Treasury and include bills,
certificates of indebtedness, notes and bonds. Agencies and instrumentalities of
the U.S. Government are established under the authority of an act of Congress
and include, but are not limited to, the Tennessee Valley Authority, the bank
for Cooperatives, the Farmers Home Administration, Federal Home Loan Banks,
Federal Intermediate Credit Banks and Federal Land Banks, as well as those
listed below.
FEDERAL FARM CREDIT CONSOLIDATED SYSTEMWIDE NOTES AND BONDS -- are bonds issued
by a cooperatively owned nationwide system of banks and associations supervised
by the Farm Credit Administration. These bonds are not guaranteed by the U.S.
Government.
MARITIME ADMINISTRATION BONDS -- are bonds issued by the Department of
Transportation of the U.S. Government.
FHA DEBENTURES -- are debentures issued by the Federal Housing Administration of
the U.S. Government and are fully and unconditionally guaranteed by the U.S.
Government.
GNMA CERTIFICATES -- are mortgage-backed securities, with timely payment
guaranteed by the full faith and credit of the U.S. Government, which represent
a partial ownership interest in a pool of mortgage loans issued by lenders such
as mortgage bankers, commercial banks and savings and loan associations. Each
mortgage loan included in the pool is also insured or guaranteed by the Federal
Housing Administration, the Veterans Administration or the Farmers Home
Administration.
FEDERAL HOME LOAN MORTGAGE CORPORATION BONDS -- are bonds issued and guaranteed
by the Federal Home Loan Mortgage Corporation and are not guaranteed by the U.S.
Government.
FEDERAL HOME LOAN BANK BONDS -- are bonds issued by the Federal Home Loan Bank
System and are not guaranteed by the U.S.Government.
FINANCING CORPORATION BONDS AND NOTES -- are bonds and notes issued and
guaranteed by the Financing Corporation.
FEDERAL NATIONAL MORTGAGE ASSOCIATION BONDS -- are bonds issued and guaranteed
by the Federal National Mortgage Association and are not guaranteed by the U.S.
Government.
RESOLUTION FUNDING CORPORATION BONDS AND NOTES -- are bonds and notes issued and
guaranteed by the Resolution Funding Corporation.
STUDENT LOAN MARKETING ASSOCIATION DEBENTURES -- are debentures backed by the
Student Loan Marketing Association and are not guaranteed by the U.S.
Government.
TENNESSEE VALLEY AUTHORITY BONDS AND NOTES -- are bonds and notes issued and
guaranteed by the Tennessee Valley Authority. Some of the foregoing obligations,
such as Treasury bills and GNMA pass-through certificates, are supported by the
full faith and credit of the U.S. Government; others, such as securities of
FNMA, by the right of the issuer to borrow from the U.S. Treasury; still others,
such as bonds issued by SLMA, are supported only by the credit of the
instrumentality. No assurance can be given that the U.S. Government will provide
financial support to instrumentalities sponsored by the U.S. Government as it is
not obligated by law, in certain instances, to do so.
Although this list includes a description of the primary types of U.S.
Government agency, authorities or instrumentality obligations in which the Fund
intends to invest, the Fund may invest in obligations of U.S. Government
agencies or instrumentalities other than those listed above.
<PAGE>
THE MFS FAMILY OF FUNDS(r) -- America's Oldest Mutual Fund Group
<TABLE>
The members of the MFS Family of Funds are grouped below according to the types of
securities in their portfolios. For free prospectuses containing more complete
information, including the exchange privilege and all charges and expenses, please
contact your financial adviser or call the MFS Service Center at 1-800-225-2606 any
business day from 8 a.m. to 8 p.m. Eastern time. This material should be read carefully
before investing or sending money.
<CAPTION>
<S> <C>
STOCK LIMITED MATURITY BOND
Massachusetts Investors Trust MFS(r) Government Limited Maturity Fund
Massachusetts Investors Growth Stock Fund MFS(r) Limited Maturity Fund
MFS(r) Capital Growth Fund MFS(r) Municipal Limited Maturity Fund
MFS(r) Emerging Growth Fund WORLD
MFS(r) Gold & Natural Resources Fund MFS(r) World Asset Allocation Fund
MFS(r) Growth Opportunities Fund MFS(r) World Equity Fund
MFS(r) Managed Sectors Fund MFS(r) World Governments Fund
MFS(r) OTC Fund MFS(r) World Growth Fund
MFS(r) Research Fund MFS(r) World Total Return Fund
MFS(r) Value Fund NATIONAL TAX-FREE BOND
STOCK AND BOND MFS(r) Municipal Bond Fund
MFS(r) Total Return Fund MFS(r) Municipal High Income Fund
MFS(r) Utilities Fund (closed to new investors)
BOND MFS(r) Municipal Income Fund
MFS(r) Bond Fund STATE TAX-FREE BOND
MFS(r) Government Mortgage Fund Alabama, Arkansas, California, Florida,
MFS(r) Government Securities Fund Georgia, Louisiana, Maryland, Massachusetts,
MFS(r) High Income Fund Mississippi, New York, North Carolina,
MFS(r) Intermediate Income Fund Pennsylvania, South Carolina Tennessee, Texas,
MFS(r) Strategic Income Fund Virginia, Washington, West Virginia
(formerly MFS(r) Income & Opportunity Fund) MONEY MARKET
MFS(r) Cash Reserve Fund
MFS(r) Government Money Market Fund
MFS(r) Money Market Fund
</TABLE>
<PAGE>
Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116 MFS(R) WORLD EQUITY FUND
(617) 954-5000
Distributor Prospectus
MFS Fund Distributors, Inc. March 1, 1995
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Custodian and Dividend Disbursing Agent
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Shareholder Servicing Agent
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116
Toll-free: (800) 225-2606
Mailing Address:
P.O. Box 2281
Boston, MA 02107-9906
Independent Accountants
Deloitte & Touche LLP
125 Summer Street
Boston, MA 02116
[Logo]
THE FIRST NAME IN MUTUAL FUNDS
MFS(R) WORLD EQUITY FUND
500 Boylston Street
Boston, MA 02116
MWE-1 3/95/162M 04/204/304
<PAGE>
MFS(R) WORLD EQUITY FUND
(A SERIES OF MFS SERIES TRUST VI)
SUPPLEMENT TO BE AFFIXED TO THE CURRENT
PROSPECTUS FOR DISTRIBUTION IN IOWA
For shares designated as Class B purchased after September 1, 1993, a contingent
deferred sales charge declining from 4% to 0% will be imposed if the investor
redeems within six years from the date of purchase. In addition, the Fund is
subject to an annual distribution and service fee of 1% of its average daily net
assets.
THE DATE OF THIS SUPPLEMENT IS MARCH 1, 1995.
MWE-16IA-3/95/6.5M
<PAGE>
<PAGE>
MFS(R) WORLD
EQUITY FUND
(A member of the MFS Family of Funds(R))
STATEMENT OF
ADDITIONAL INFORMATION
March 1, 1995
- --------------------------------------------------------------------------------
Page
1. Definitions 2
2. Investment Techniques 2
3. Investment Restrictions 12
4. Management of the Fund 13
Trustees 13
Officers 13
Investment Adviser 14
Custodian 15
Shareholder Servicing Agent 15
Distributor 15
5. Portfolio Transactions and Brokerage Commissions 16
6. Shareholder Services 17
Investment and Withdrawal Programs 17
Exchange Privilege 19
Tax-Deferred Retirement Plans 19
7. Tax Status 20
8. Determination of Net Asset Value; Performance Information 21
9. Distribution Plans 23
10. Description of Shares, Voting Rights and Liabilities 24
11. Independent Accountants and Financial Statements 25
MFS WORLD EQUITY FUND
A Series of MFS Series Trust VI
500 Boylston Street, Boston, Massachusetts 02116
(617) 954-5000
This Statement of Additional Information sets forth information which may be of
interest to investors but which is not necessarily included in the Fund's
Prospectus, dated March 1, 1995. This Statement of Additional Information should
be read in conjunction with the Prospectus, a copy of which may be obtained
without charge by contacting the Shareholder Servicing Agent (see back cover for
address and phone number).
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A
CURRENT PROSPECTUS.
<PAGE>
1. DEFINITIONS
"Fund" -- MFS(R) World Equity Fund, a series of MFS Series
Trust VI, a Massachusetts business trust (the
"Trust"), formerly known as MFS Lifetime Worldwide
Equity Fund until its name was changed on June 29,
1993. Prior to August 3, 1992, the Fund was known
as Lifetime Global Equity Trust. The Fund became a
series of the Trust on September 7, 1993.
"MFS" or the "Adviser" -- Financial Services Company, a Delaware
Massachusetts corporation.
"MFD" -- MFS Fund Distributors, Inc., a Delaware corporation.
"Prospectus" -- The Prospectus, dated March 1, 1995, of the Fund.
2. INVESTMENT TECHNIQUES
The investment policies and techniques are described in the Prospectus. In
addition, certain of the Fund's investment policies are described in greater
detail below.
LENDING OF SECURITIES
The Fund may seek to increase its income by lending portfolio securities. Such
loans will usually be made only to member banks of the Federal Reserve System
and to member firms (and subsidiaries thereof) of the New York Stock Exchange
(the "Exchange") and would be required to be secured continuously by collateral
in cash, cash equivalents, or U.S. Government securities maintained on a current
basis at an amount at least equal to the market value of the securities loaned.
The Fund would have the right to call a loan and obtain the securities loaned at
any time on customary industry settlement notice (which will usually not exceed
five days). During the existence of a loan, the Fund would continue to receive
the equivalent of the interest or dividends paid by the issuer on the securities
loaned and would also receive compensation based on investment of the
collateral. The Fund would not, however, have the right to vote any securities
having voting rights during the existence of the loan, but would call the loan
in anticipation of an important vote to be taken among holders of the securities
or of the giving or withholding of their consent on a material matter affecting
the investment. As with other extensions of credit, there are risks of delay in
recovery or even loss of rights in the collateral should the borrower fail
financially. However, the loans would be made only to firms deemed by the
Adviser to be of good standing, and when, in the judgment of the Adviser, the
consideration which could be earned currently from securities loans of this type
justifies the attendant risk. If the Adviser determines to make securities
loans, it is not intended that the value of the securities loaned would exceed
20% of the value of the Fund's total assets.
WHEN-ISSUED SECURITIES
The Fund may purchase securities on a "when-issued" or on a "forward delivery"
basis. It is expected that, under normal circumstances, the Fund will take
delivery of such securities. When the Fund commits to purchase a security on a
"when-issued" or on a "forward delivery" basis, it will set up procedures
consistent with the General Statement of Policy of the Securities and Exchange
Commission (the "SEC") concerning such purchases. Since that policy currently
recommends that an amount of the Fund's assets equal to the amount of the
purchase be held aside or segregated to be used to pay for the commitment, the
Fund will always have cash, short-term money market instruments or high quality
debt securities sufficient to cover any commitments or to limit any potential
risk. However, although the Fund does not intend to make such purchases for
speculative purposes and intends to adhere to the provisions of SEC policies,
purchases of securities on such bases may involve more risk than other types of
purchases. For example, the Fund may have to sell assets which have been set
aside in order to meet redemptions. Also, if the Fund determines it is necessary
to sell the "when-issued" or "forward delivery" securities before delivery, it
may incur a loss because of market fluctuations since the time the commitment to
purchase such securities was made and any gain would not be tax-exempt. When the
time comes to pay for "when-issued" or "forward delivery" securities, the Fund
will meet its obligations from the then-available cash flow on the sale of
securities, or, although it would not normally expect to do so, from the sale of
the "when-issued" or "forward delivery" securities themselves (which may have a
value greater or less than the Fund's payment obligation).
CORPORATE ASSET-BACKED SECURITIES
As described in the Prospectus, the Fund may invest in corporate asset-backed
securities. These securities, issued by trusts and special purpose corporations,
are backed by a pool of assets, such as credit card and automobile loan
receivables, representing the obligations of a number of different parties.
Corporate asset-backed securities present certain risks. For instance, in the
case of credit card receivables, these securities may not have the benefit of
any security interest in the related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the servicers to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore, there is
the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities. The underlying
assets (E.G., loans) are also subject to prepayments which shorten the
securities weighted average life and may lower their return.
Corporate asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
resulting from ultimate default ensures payment through insurance policies or
letters of credit obtained by the issuer or sponsor from third parties. The Fund
will not pay any additional or separate fees for credit support. The degree of
credit support provided for each issue is generally based on historical
information respecting the level of credit risk associated with the underlying
assets. Delinquency or loss in excess of that anticipated or failure of the
credit support could adversely affect the return on an investment in such a
security.
REPURCHASE AGREEMENTS
As described in the Prospectus, the Fund may enter into repurchase agreements
with sellers who are member firms (or subsidiaries thereof) of the Exchange,
members of the Federal Reserve System, recognized primary U.S. Government
securities dealers or institutions which the Adviser has determined to be of
comparable creditworthiness. The securities that the Fund purchases and holds
through its agent are U.S. Government securities, the values, including accrued
interest, of which are equal to or greater than the repurchase price agreed to
be paid by the seller. The repurchase price may be higher than the purchase
price, the difference being income to the Fund, or the purchase and repurchase
prices may be the same, with interest at a standard rate due to the Fund
together with the repurchase price on repurchase. In either case, the income to
the Fund is unrelated to the interest rate on the U.S. Government securities.
The repurchase agreement provides that in the event the seller fails to pay the
price agreed upon on the agreed upon delivery date or upon demand, as the case
may be, the Fund will have the right to liquidate the securities. If at the time
the Fund is contractually entitled to exercise its right to liquidate the
securities, the seller is subject to a proceeding under the bankruptcy laws or
its assets are otherwise subject to a stay order, the Fund's exercise of its
right to liquidate the securities may be delayed and result in certain losses
and costs to the Fund. The Fund has adopted and follows procedures which are
intended to minimize the risks of repurchase agreements. For example, the Fund
only enters into repurchase agreements after the Adviser has determined that the
seller is creditworthy, and the Adviser monitors the seller's creditworthiness
on an ongoing basis. Moreover, under such agreements, the value, including
accrued interest, of the securities (which are marked to market every business
day) is required to be greater than the repurchase price, and the Fund has the
right to make margin calls at any time if the value of the securities falls
below the agreed upon margin.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS
As described in the Prospectus, the Fund may enter into mortgage "dollar roll"
transactions pursuant to which it sells mortgage-backed securities for delivery
in the future and simultaneously contracts to repurchase substantially similar
securities on a specified future date. During the roll period, the Fund foregoes
principal and interest paid on the mortgage-backed securities. The Fund is
compensated for the lost principal and interest by the difference between the
current sales price and the lower price for the future purchase (often referred
to as the "drop") as well as by the interest earned on the cash proceeds of the
initial sale. The Fund may also be compensated by receipt of a commitment fee.
AMERICAN DEPOSITARY RECEIPTS
The Fund may invest in American Depositary Receipts ("ADRs") which are
certificates issued by a U.S. depository (usually a bank) and represent a
specified quantity of shares of an underlying non-U.S. stock on deposit with a
custodian bank as collateral. ADRs may be sponsored or unsponsored. A sponsored
ADR is issued by a depository which has an exclusive relationship with the
issuer of the underlying security. An unsponsored ADR may be issued by any
number of U.S. depositories. The Fund may invest in either type of ADR. Although
the U.S. investor holds a substitute receipt of ownership rather than direct
stock certificates, the use of the depository receipts in the United States can
reduce costs and delays as well as potential currency exchange and other
difficulties. The Fund may purchase securities in local markets and direct
delivery of these ordinary shares to the local depository of an ADR agent bank
in the foreign country. Simultaneously, the ADR agents create a certificate
which settles at the Fund's custodian in five days. The Fund may also execute
trades on the U.S. markets using existing ADRs. A foreign issuer of the security
underlying an ADR is generally not subject to the same reporting requirements in
the United States as a domestic issuer. Accordingly, the information available
to a U.S. investor will be limited to the information the foreign issuer is
required to disclose in its own country and the market value of an ADR may not
reflect undisclosed material information concerning the issuer of the underlying
security. ADRs may also be subject to exchange rate risks if the underlying
foreign securities are denominated in foreign currency.
LOAN PARTICIPATIONS AND OTHER DIRECT INDEBTEDNESS
As described in the Prospectus, the Fund may purchase loan participations and
other direct indebtedness. In purchasing a loan participation, the Fund acquires
some or all of the interest of a bank or other lending institution in a loan to
a corporate borrower. Many such loans are secured, although some may be
unsecured. Such loans may be in default at the time of purchase. Loans and other
direct indebtedness that are fully secured offer the Fund more protection than
an unsecured loan in the event of non-payment of scheduled interest or
principal. However, there is no assurance that the liquidation of collateral
from a secured loan or other direct indebtedness would satisfy the corporate
borrower's obligation, or that the collateral can be liquidated.
These loans and other direct indebtedness are made generally to finance internal
growth, mergers, acquisitions, stock repurchases, leveraged buy-outs and other
corporate activities. Such loans and other direct indebtedness loans are
typically made by a syndicate of lending institutions, represented by an agent
lending institution which has negotiated and structured the loan and is
responsible for collecting interest, principal and other amounts due on its own
behalf and on behalf of the others in the syndicate, and for enforcing its and
their other rights against the borrower. Alternately, such loans and other
direct indebtedness may be structured as a novation, pursuant to which the Fund
would assume all of the rights of the lending institution in a loan, or as an
assignment, pursuant to which the Fund would purchase an assignment of a portion
of a lender's interest in a loan or other direct indebtedness either directly
from the lender or through an intermediary. The Fund may also purchase trade or
other claims against companies, which generally represent money owed by the
company to a supplier of goods or services. These claims may also be purchased
at a time when the company is in default.
Certain of the loan participations and other direct indebtedness acquired by the
Fund may involve revolving credit facilities or other standby financing
commitments which obligate the Fund to pay additional cash on a certain date or
on demand. These commitments may have the effect of requiring the Fund to
increase its investment in a company at a time when the Fund might not otherwise
decide to do so (including at a time when the company's financial condition
makes it unlikely that such amounts will be repaid). To the extent that the Fund
is committed to advance additional funds, it will at all times hold and maintain
in a segregated account 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 loan participations and other direct
indebtedness which the Fund will purchase, the Adviser will rely upon its own
(and not the original lending institution's) credit analysis of the borrower. As
the Fund may be required to rely upon another lending institution to collect and
pass on to the Fund amounts payable with respect to the loan and to enforce the
Fund's rights under the loan and other direct indebtedness, an insolvency,
bankruptcy or reorganization of the lending institution may delay or prevent the
Fund from receiving such amounts. In such cases, the Fund will evaluate as well
the creditworthiness of the lending institution and will treat both the borrower
and the lending institution as an "issuer" of the loan participation for
purposes of certain investment restrictions pertaining to the diversification of
the Fund's portfolio investments. The highly leveraged nature of many such loans
and other direct indebtedness may make such loans and other direct indebtedness
especially vulnerable to adverse changes in economic or market conditions.
Investments in such loans and other direct indebtedness may involve additional
risk to the Fund. For example, if a loan or other direct indebtedness is
foreclosed, the Fund could become part owner of any collateral, and would bear
the costs and liabilities associated with owning and disposing of the
collateral. In addition, it is conceivable that under emerging legal theories of
lender liability, the Fund could be held liable as a co-lender. It is unclear
whether loans and other forms of direct indebtedness offer securities law
protections against fraud and misrepresentation. In the absence of definitive
regulatory guidance, the Fund relies on the Adviser's research in an attempt to
avoid situations where fraud and misrepresentation could adversely affect the
Fund. In addition, loan participations and other direct investments may not be
in the form of securities or may be subject to restrictions on transfer, and
only limited opportunities may exist to resell such instruments. As a result,
the Fund may be unable to sell such investments at an opportune time or may have
to resell them at less than fair market value. To the extent that the Adviser
determines that any such investments are illiquid, the Fund will include them in
the investment limitations described below.
FOREIGN SECURITIES
The Fund may invest up to 100% (and expects generally to invest between 10% to
100%) of its total assets in foreign securities.As discussed in the Prospectus,
investing in foreign securities generally presents a greater degree of risk than
investing in domestic securities due to possible exchange rate fluctuations,
less publicly available information, more volatile markets, less securities
regulation, less favorable tax provisions, war or expropriation. As a result of
its investments in foreign securities, the Fund may receive interest or dividend
payments, or the proceeds of the sale or redemption of such securities, in the
foreign currencies in which such securities are denominated. Under certain
circumstances, such as where the Adviser believes that the applicable exchange
rate is unfavorable at the time the currencies are received or the Adviser
anticipates, for any other reason, that the exchange rate will improve, the Fund
may hold such currencies for an indefinite period of time. The Fund may also
hold foreign currency in anticipation of purchasing foreign securities. While
the holding of currencies will permit the Fund to take advantage of favorable
movements in the applicable exchange rate, such strategy also exposes the Fund
to risk of loss if exchange rates move in a direction adverse to the Fund's
position. Such losses could reduce any profits or increase any losses sustained
by the Fund from the sale or redemption of securities and could reduce the
dollar value of interest or dividend payments received.
OPTIONS
OPTIONS ON SECURITIES -- As noted in the Prospectus, the Fund may write covered
call and put options and purchase call and put options on securities. Call and
put options written by the Fund may be covered in the manner set forth below.
A call option written by the Fund is "covered" if the Fund owns the security
underlying the call or has an absolute and immediate right to acquire that
security without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion or
exchange of other securities held in its portfolio. A call option is also
covered if the Fund holds a call on the same security and in the same principal
amount as the call written where the exercise price of the call held (a) is
equal to or less than the exercise price of the call written or (b) is greater
than the exercise price of the call written if the difference is maintained by
the Fund in cash, short-term money market instruments or high quality debt
securities in a segregated account with its custodian. A put option written by
the Fund is "covered" if the Fund maintains cash, short-term money market
instruments or high quality debt securities with a value equal to the exercise
price in a segregated account with its custodian, or else holds a put on the
same security and in the same principal amount as the put written where the
exercise price of the put held is 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 difference is maintained by the Fund in
cash, short-term money market instruments or high quality debt securities in a
segregated account with its custodian. Put and call options written by the Fund
may also be covered in such other manner as may be in accordance with the
requirements of the exchange on which, or the counter party with which, the
option is traded, and applicable laws and regulations. If the writer's
obligation is not so covered, it is subject to the risk of the full change in
value of the underlying security from the time the option is written until
exercise.
Effecting a closing transaction in the case of a written call option will permit
the Fund to write another call option on the underlying security with either a
different exercise price or expiration date or both, or in the case of a written
put option will permit the Fund to write another put option to the extent that
the exercise price thereof is secured by deposited cash, short-term money market
instruments or high quality debt securities. Such transactions permit the Fund
to generate additional premium income, which will partially offset declines in
the value of portfolio securities or increases in the cost of securities to be
acquired. Also, effecting a closing transaction will permit the cash or proceeds
from the concurrent sale of any securities subject to the option to be used for
other investments of the Fund, provided that another option on such security is
not written. If the Fund desires to sell a particular security from its
portfolio on which it has written a call option, it will effect a closing
transaction in connection with the option prior to or concurrent with the sale
of the security.
The Fund will realize a profit from a closing transaction if the premium paid in
connection with the closing of an option written by the Fund is less than the
premium received from writing the option, or if the premium received in
connection with the closing of an option purchased by the Fund is more than the
premium paid for the original purchase. Conversely, the Fund will suffer a loss
if the premium paid or received in connection with a closing transaction is more
or less, respectively, than the premium received or paid in establishing the
option position. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the repurchase of a call option previously written by the
Fund is likely to be offset in whole or in part by appreciation of the
underlying security owned by the Fund.
The Fund may write options in connection with buy-and-write transactions; that
is, the Fund may purchase a security and then write a call option against that
security. The exercise price of the call the Fund determines to write will
depend upon the expected price movement of the underlying security. The exercise
price of a call option may be below ("in-the-money"), equal to ("at-the-money")
or above ("out-of-the-money") the current value of the underlying security at
the time the option is written. Buy-and-write transactions using in-the-money
call options may be used when it is expected that the price of the underlying
security will decline moderately during the option period. Buy-and-write
transactions using out-of-the-money call options may be used when it is expected
that the premiums received from writing the call option plus the appreciation in
the market price of the underlying security up to the exercise price will be
greater than the appreciation in the price of the underlying security alone. If
the call options are exercised in such transactions, the Fund's maximum gain
will be the premium received by it for writing the option, adjusted upwards or
downwards by the difference between the Fund's purchase price of the security
and the exercise price, less related transaction costs. If the options are not
exercised and the price of the underlying security declines, the amount of such
decline will be offset in part, or entirely, by the premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Fund's gain will be limited to the premium
received, less related transaction costs. If the market price of the underlying
security declines or otherwise is below the exercise price, the Fund may elect
to close the position or retain the option until it is exercised, at which time
the Fund will be required to take delivery of the security at the exercise
price; the Fund's return will be the premium received from the put option minus
the amount by which the market price of the security is below the exercise
price, which could result in a loss. Out-of-the-money, at-the-money and
in-the-money put options may be used by the Fund in the same market environments
that call options are used in equivalent buy-and-write transactions.
The Fund may also write combinations of put and call options on the same
security, known as "straddles," with the same exercise price and expiration
date. By writing a straddle, the Fund undertakes a simultaneous obligation to
sell and purchase the same security in the event that one of the options is
exercised. If the price of the security subsequently rises sufficiently above
the exercise price to cover the amount of the premium and transaction costs, the
call will likely be exercised and the Fund will be required to sell the
underlying security at a below market price. This loss may be offset, however,
in whole or part, by the premiums received on the writing of the two options.
Conversely, if the price of the security declines by a sufficient amount, the
put will likely be exercised. The writing of straddles will likely be effective,
therefore, only where the price of the security remains stable and neither the
call nor the put is exercised. In those instances where one of the options is
exercised, the loss on the purchase or sale of the underlying security may
exceed the amount of the premiums received.
By writing a call option, the Fund limits its opportunity to profit from any
increase in the market value of the underlying security above the exercise price
of the option. By writing a put option, the Fund assumes the risk that it may be
required to purchase the underlying security for an exercise price above its
then current market value, resulting in a capital loss unless the security
subsequently appreciates in value. The writing of options on securities will not
be undertaken by the Fund solely for hedging purposes, and could involve certain
risks which are not present in the case of hedging transactions. Moreover, even
where options are written for hedging purposes, such transactions constitute
only a partial hedge against declines in the value of portfolio securities or
against increases in the value of securities to be acquired, up to the amount of
the premium.
The Fund may purchase options for hedging purposes or to increase its return.
Put options may be purchased to hedge against a decline in the value of
portfolio securities. If such decline occurs, the put options will permit the
Fund to sell the securities at the exercise price, or to close out the options
at a profit. By using put options in this way, the Fund will reduce any profit
it might otherwise have realized in the underlying security by the amount of the
premium paid for the put option and by transaction costs.
The Fund may purchase call options to hedge against an increase in the price of
securities that the Fund anticipates purchasing in the future. If such increase
occurs, the call option will permit the Fund to purchase the securities at the
exercise price, or to close out the options at a profit. The premium paid for
the call option plus any transaction costs will reduce the benefit, if any,
realized by the Fund upon exercise of the option, and, unless the price of the
underlying security rises sufficiently, the option may expire worthless to the
Fund.
In certain instances, the Fund may enter into options on Treasury securities
which provide for periodic adjustment of the strike price and may also provide
for the periodic adjustment of the premium during the term of each such option.
Like other types of options, these transactions, which may be referred to as
"reset" options or "adjustable strike options," grant the purchaser the right to
purchase (in the case of a "call") or sell (in the case of a "put"), a specified
type and series of U.S. Treasury security at any time up to a stated expiration
date (or, in certain instances, on such date). In contrast to other types of
options, however, the price at which the underlying security may be purchased or
sold under a "reset" option is determined at various intervals during the term
of the option, and such price fluctuates from interval to interval based on
changes in the market value of the underlying security. As a result, the strike
price of a "reset" option, at the time of exercise, may be less advantageous to
the Fund than if the strike price had been fixed at the initiation of the
option. In addition, the premium paid for the purchase of the option may be
determined at the termination, rather than the initiation, of the option. If the
premium is paid at termination, the Fund assumes the risk that (i) the premium
may be less than the premium which would otherwise have been received at the
initiation of the option because of such factors as the volatility in yield of
the underlying Treasury security over the term of the option and adjustments
made to the strike price of the option, and (ii) the option purchaser may
default on its obligation to pay the premium at the termination of the option.
OPTIONS ON STOCK INDICES -- As noted in the Prospectus, the Fund may write
(sell) covered call and put options and purchase call and put options on stock
indices. In contrast to an option on a security, an option on a stock index
provides the holder with the right but not the obligation to make or receive a
cash settlement upon exercise of the option, rather than the right to purchase
or sell a security. The amount of this settlement is equal to (i) the amount, if
any, by which the fixed exercise price of the option exceeds (in the case of a
call) or is below (in the case of a put) the closing value of the underlying
index on the date of exercise, multiplied by (ii) a fixed "index multiplier."
The Fund may cover call options on stock indices by owning securities whose
price changes, in the opinion of the Adviser, are expected to be similar to
those of the underlying index, or by having an absolute and immediate right to
acquire such securities without additional cash consideration (or for additional
cash consideration held in a segregated account by its custodian) upon
conversion or exchange of other securities in its portfolio. Where the Fund
covers a call option on a stock index through ownership of securities, such
securities may not match the composition of the index and, in that event, the
Fund will not be fully covered and could be subject to risk of loss in the event
of adverse changes in the value of the index. The Fund may also cover call
options on stock indices by holding a call on the same index and in the same
principal amount as the call written where the exercise price of the call held
(a) is equal to or less than the exercise price of the call written or (b) is
greater than the exercise price of the call written if the difference is
maintained by the Fund in cash, short-term money market instruments or high
quality debt securities in a segregated account with its custodian. The Fund may
cover put options on stock indices by maintaining cash, short-term money market
instruments or high quality debt securities with a value equal to the exercise
price in a segregated account with its custodian, or by holding a put on the
same security and in the same principal amount as the put written where the
exercise price of the put held 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 difference is maintained by the Fund in
cash, short-term money market instruments or high quality debt securities in a
segregated account with its custodian. Put and call options on stock indices may
also be covered in such other manner as may be in accordance with the rules of
the exchange on which, or the counterparty with which, the option is traded and
applicable laws and regulations.
The Fund will receive a premium from writing a put or call option, which
increases the Fund's gross income in the event the option expires unexercised or
is closed out at a profit. If the value of an index on which the Fund has
written a call option falls or remains the same, the Fund will realize a profit
in the form of the premium received (less transaction costs) that could offset
all or a portion of any decline in the value of the securities it owns. If the
value of the index rises, however, the Fund will realize a loss in its call
option position, which will reduce the benefit of any unrealized appreciation in
the Fund's stock investments. By writing a put option, the Fund assumes the risk
of a decline in the index. To the extent that the price changes of securities
owned by the Fund correlate with changes in the value of the index, writing
covered put options on indices will increase the Fund's losses in the event of a
market decline, although such losses will be offset in part by the premium
received for writing the option.
The Fund may also purchase put options on stock indices to hedge its investments
against a decline in value. By purchasing a put option on a stock index, the
Fund will seek to offset a decline in the value of securities it owns through
appreciation of the put option. If the value of the Fund's investments does not
decline as anticipated, or if the value of the option does not increase, the
Fund's loss will be limited to the premium paid for the option plus related
transaction costs. The success of this strategy will largely depend on the
accuracy of the correlation between the changes in value of the index and the
changes in value of the Fund's security holdings.
The purchase of call options on stock indices may be used by the Fund to attempt
to reduce the risk of missing a broad market advance, or an advance in an
industry or market segment, at a time when the Fund holds uninvested cash or
short-term debt securities awaiting investment. When purchasing call options for
this purpose, the Fund will also bear the risk of losing all or a portion of the
premium paid if the value of the index does not rise. The purchase of call
options on stock indices when the Fund is substantially fully invested is a form
of leverage, up to the amount of the premium and related transaction costs, and
involves risks of loss and of increased volatility similar to those involved in
purchasing calls on securities the Fund owns.
The index underlying a stock index option may be a "broad-based" index, such as
the Standard & Poor's 500 Index or the New York Stock Exchange Composite Index,
the changes in value of which ordinarily will reflect movements in the stock
market in general. In contrast, certain options may be based on narrower market
indexes, such as the Standard & Poor's 100 Index, or on indexes of securities of
particular industry groups, such as those of oil and gas or technology
companies. A stock index assigns relative values to the stocks included in the
index and the index fluctuates with changes in the market values of the stocks
so included. The composition of the index is changed periodically.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
FUTURES CONTRACTS -- As noted in the Prospectus, the Fund may enter into stock
index futures contracts and/or foreign currency futures contracts. (Unless
otherwise specified, futures contracts on indexes and foreign currency futures
contracts are collectively referred to as "Futures Contracts.") Such investment
strategies will be used for hedging purposes and for non-hedging purposes,
subject to applicable law.
A Futures Contract is a bilateral agreement providing for the purchase and sale
of a specified type and amount of a financial instrument or foreign currency, or
for the making and acceptance of a cash settlement, at a stated time in the
future for a fixed price. By its terms, a Futures Contract provides for a
specified settlement date on which, in the case of the majority of foreign
currency futures contracts, the currency is delivered by the seller and paid for
by the purchaser, or on which, in the case of stock index futures contracts and
certain foreign currency futures contracts, the difference between the price at
which the contract was entered into and the contract's closing value is settled
between the purchaser and seller in cash. Futures Contracts differ from options
in that they are bilateral agreements, with both the purchaser and the seller
equally obligated to complete the transaction. Futures Contracts call for
settlement only on the expiration date and cannot be "exercised" at any other
time during their term.
The purchase or sale of a Futures Contract differs from the purchase or sale of
a security or the purchase of an option in that no purchase price is paid or
received. Instead, an amount of cash or cash equivalents, which varies but may
be as low as 5% or less of the value of the contract, must be deposited with the
broker as "initial margin." Subsequent payments to and from the broker, referred
to as "variation margin," are made on a daily basis as the value of the index or
instrument underlying the Futures Contract fluctuates, making positions in the
Futures Contract more or less valuable -- a process known as "marking to the
market."
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.
As noted in the Prospectus, the Fund may purchase and sell foreign currency
futures contracts for hedging purposes, to attempt to protect its current or
intended investments from fluctuations in currency exchange rates. Such
fluctuations could reduce the dollar value of portfolio securities denominated
in foreign currencies, or increase the cost of foreign-denominated securities to
be acquired, even if the value of such securities in the currencies in which
they are denominated remains constant. The Fund may sell futures contracts on a
foreign currency, for example, where it holds securities denominated in such
currency and it anticipates a decline in the value of such currency relative to
the dollar. In the event such decline occurs, the resulting adverse effect on
the value of foreign-denominated securities may be offset, in whole or in part,
by gains on the futures contracts.
Conversely, the Fund could protect against a rise in the dollar cost of
foreign-denominated securities to be acquired by purchasing futures contracts on
the relevant currency, which could offset, in whole or in part, the increased
cost of such securities resulting from a rise in the dollar value of the
underlying currencies. Where the Fund purchases futures contracts under such
circumstances, however, and the prices of securities to be acquired instead
decline, the Fund will sustain losses on its futures position which could reduce
or eliminate the benefits of the reduced cost of portfolio securities to be
acquired.
OPTIONS ON FUTURES CONTRACTS -- As noted in the Prospectus, the Fund may
purchase and write options to buy or sell futures contracts in which it may
invest ("Options on Futures Contracts"). Such investment strategies will be used
for hedging purposes and for non-hedging purposes, subject to applicable law.
An Option on a Futures Contract provides the holder with the right to enter into
a "long" position in the underlying Futures Contract, in the case of a call
option, or a "short" position in the underlying Futures Contract, in the case of
a put option, at a fixed exercise price up to a stated expiration date or, in
the case of certain options, on such date. Upon exercise of the option by the
holder, the contract market clearinghouse establishes a corresponding short
position for the writer of the option, in the case of a call option, or a
corresponding long position in the case of a put option. In the event that an
option is exercised, the parties will be subject to all the risks associated
with the trading of Futures Contracts, such as payment of initial and variation
margin deposits. In addition, the writer of an Option on a Futures Contract,
unlike the holder, is subject to initial and variation margin requirements on
the option position.
A position in an Option on a Futures Contract may be terminated by the purchaser
or seller prior to expiration by effecting a closing purchase or sale
transaction, subject to the availability of a liquid secondary market, which is
the purchase or sale of an option of the same series (i.e., the same exercise
price and expiration date) as the option previously purchased or sold. The
difference between the premiums paid and received represents the 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 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 difference is
maintained by the Fund in cash or securities in a segregated account with its
custodian. The Fund may cover the writing of put Options on Futures Contracts
(a) through sales of the underlying Futures Contract, (b) through segregation of
cash, short-term money market instruments or high quality debt securities in an
amount equal to the value of the security or index underlying the Futures
Contract, or (c) through the holding of a put on the same Futures Contract and
in the same principal amount as the put written where the exercise price of the
put held is equal to or greater than the exercise price of the put written or
where the exercise price of the put held is less than the exercise price of the
put written if the difference is maintained by the Fund in cash, short-term
money market instruments or high quality debt securities in a segregated account
with its custodian. Put and call Options on Futures Contracts may also be
covered in such other manner as may be in accordance with the rules of the
exchange on which the option is traded and applicable laws and regulations. Upon
the exercise of a call Option on a Futures Contract written by the Fund, the
Fund will be required to sell the underlying Futures Contract which, if the Fund
has covered its obligation through the purchase of such Contract, will serve to
liquidate its futures position. Similarly, where a put Option on a Futures
Contract written by the Fund is exercised, the Fund will be required to purchase
the underlying Futures Contract which, if the Fund has covered its obligation
through the sale of such Contract, will close out its futures position.
The writing of a call option on a Futures Contract for hedging purposes
constitutes a partial hedge against declining prices of the securities or other
instruments required to be delivered under the terms of the Futures Contract. If
the futures price at expiration of the option is below the exercise price, the
Fund will retain the full amount of the option premium, less related transaction
costs, which provides a partial hedge against any decline that may have occurred
in the Fund's portfolio holdings. The writing of a put option on a Futures
Contract constitutes a partial hedge against increasing prices of the securities
or other instruments required to be delivered under the terms of the Futures
Contract. If the futures price at expiration of the option is higher than the
exercise price, the Fund will retain the full amount of the option premium which
provides a partial hedge against any increase in the price of securities which
the Fund intends to purchase. If a put or call option the Fund has written is
exercised, the Fund will incur a loss which will be reduced by the amount of the
premium it receives. Depending on the degree of correlation between changes in
the value of its portfolio securities and the changes in the value of its
futures positions, the Fund's losses from existing Options on Futures Contracts
may to some extent be reduced or increased by changes in the value of portfolio
securities.
The Fund may purchase Options on Futures Contracts for hedging purposes instead
of purchasing or selling the underlying Futures Contracts. For example, where a
decrease in the value of portfolio securities is anticipated as a result of a
projected market-wide decline or changes in interest or exchange rates, the Fund
could, in lieu of selling Futures Contracts, purchase put options thereon. In
the event that such decrease occurs, it may be offset, in whole or part, by a
profit on the option. Conversely, where it is projected that the value of
securities to be acquired by the Fund will increase prior to acquisition, due to
a market advance or changes in interest or exchange rates, the Fund could
purchase call Options on Futures Contracts, rather than purchasing the
underlying Futures Contracts.
FORWARD CONTRACTS ON FOREIGN CURRENCY
As noted in the Prospectus, the Fund may enter into forward foreign currency
exchange contracts ("Forward Contracts") for hedging and non-hedging purposes.
Forward Contracts may be used for hedging to attempt to minimize the risk to the
Fund from adverse changes in the relationship between the U.S. dollar and
foreign currencies. The Fund intends to enter into Forward Contracts for hedging
purposes similar to those described above in connection with foreign currency
futures contracts. In particular, a Forward Contract to sell a currency may be
entered into in lieu of the sale of a foreign currency futures contract where
the Fund seeks to protect against an anticipated increase in the exchange rate
for a specific currency which could reduce the dollar value of portfolio
securities denominated in such currency. Conversely, the Fund may enter into a
Forward Contract to purchase a given currency to protect against a projected
increase in the dollar value of securities denominated in such currency which
the Fund intends to acquire. The Fund also may enter into a Forward Contract in
order to assure itself of a predetermined exchange rate in connection with a
security denominated in a foreign currency. In addition, the Fund may enter into
Forward Contracts for "cross hedging" purposes; e.g., the purchase or sale of a
Forward Contract on one type of currency as a hedge against adverse fluctuations
in the value of a second type of currency.
If a hedging transaction in Forward Contracts is successful, the decline in the
value of portfolio securities or other assets or the increase in the cost of
securities or other assets to be acquired may be offset, at least in part, by
profits on the Forward Contract. Nevertheless, by entering into such Forward
Contracts, the Fund may be required to forego all or a portion of the benefits
which otherwise could have been obtained from favorable movements in exchange
rates or natural resources prices. The Fund does not intend, in most instances,
to hold Forward Contracts entered into until maturity, at which time it would be
required to deliver or accept delivery of the underlying currency, but will
usually seek to close out positions in such contracts by entering into
offsetting transactions, which will serve to fix the Fund's profit or loss based
upon the value of the contracts at the time the offsetting transaction is
executed.
The Fund will also enter into transactions in Forward Contracts for other than
hedging purposes, which present greater profit potential but also involve
increased risk. For example, the Fund may purchase a given foreign currency
through a Forward Contract if, in the judgment of the Adviser, the value of such
currency is expected to rise relative to the U.S. dollar. Conversely, the Fund
may sell the currency through a Forward Contract if the Adviser believes that
its value will decline relative to the dollar.
The Fund will profit if the anticipated movements in foreign currency exchange
rates occurs, which will increase its gross income. Where exchange rates do not
move in the direction or to the extent anticipated, however, the Fund may
sustain losses which will reduce its gross income. Such transactions, therefore,
could be considered speculative and could involve significant risk of loss.
The Fund has established procedures consistent with statements by the SEC and
its staff regarding the use of Forward Contracts by registered investment
companies, which require the use of segregated assets or "cover" in connection
with the purchase and sale of such contracts. In those instances in which the
Fund satisfies this requirement through segregation of assets, it will maintain,
in a segregated account, cash, cash equivalents or high quality debt securities,
which will be marked to market on a daily basis, in an amount equal to the value
of its commitments under Forward Contracts. While these contracts are not
presently regulated by the CFTC, the CFTC may in the future assert authority to
regulate Forward Contracts. In such event, the Fund's ability to utilize Forward
Contracts in the manner set forth above may be restricted.
OPTIONS ON FOREIGN CURRENCIES
As noted in the Prospectus, the Fund may purchase and write options on foreign
currencies for hedging purposes in a manner similar to that in which futures
contracts on foreign currencies, or Forward Contracts, will be utilized. For
example, a decline in the dollar value of a foreign currency in which portfolio
securities are denominated will reduce the dollar value of such securities, even
if their value in the foreign currency remains constant. In order to protect
against such diminutions in the value of portfolio securities, the Fund may
purchase put options on the foreign currency. If the value of the currency does
decline, the Fund will have the right to sell such currency for a fixed amount
in dollars and will thereby offset, in whole or in part, the adverse effect on
its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby increasing the cost of such
securities, the Fund may purchase call options thereon. The purchase of such
options could offset, at least partially, the effects of the adverse movements
in exchange rates. As in the case of other types of options, however, the
benefit to the Fund deriving from purchases of foreign currency options will be
reduced by the amount of the premium and related transaction costs. In addition,
where currency exchange rates do not move in the direction or to the extent
anticipated, the Fund could sustain losses on transactions in foreign currency
options which would require it to forego a portion or all of the benefits of
advantageous changes in such rates.
The Fund may write options on foreign currencies for the same types of hedging
purposes. For example, where the Fund anticipates a decline in the dollar value
of foreign-denominated securities due to adverse fluctuations in exchange rates
it could, instead of purchasing a put option, write a call option on the
relevant currency. If the expected decline occurs, the option will most likely
not be exercised, and the diminution in value of portfolio securities will be
offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, the Fund could write a
put option on the relevant currency which, if rates move in the manner
projected, will expire unexercised and allow the Fund to hedge such increased
cost up to the amount of the premium. Foreign currency options written by the
Fund will generally be covered in a manner similar to the covering of other
types of options. As in the case of other types of options, however, the writing
of a foreign currency option will constitute only a partial hedge up to the
amount of the premium, and only if rates move in the expected direction. If this
does not occur, the option may be exercised and the Fund would be required to
purchase or sell the underlying currency at a loss which may not be offset by
the amount of the premium. Through the writing of options on foreign currencies,
the Fund also may be required to forego all or a portion of the benefits which
might otherwise have been obtained from favorable movements in exchange rates.
RISK FACTORS IN OPTIONS, FUTURES AND FORWARD TRANSACTIONS
RISK OF IMPERFECT CORRELATION OF HEDGING INSTRUMENTS WITH THE FUND'S PORTFOLIO.
The Fund's abilities effectively to hedge all or a portion of its portfolio
through transactions in options, Futures Contracts, Options on Futures
Contracts, Forward Contracts and options on foreign currencies depend on the
degree to which price movements in the underlying index or instrument correlate
with price movements in the relevant portion of the Fund's portfolio. In the
case of futures and options based on an index, the portfolio will not duplicate
the components of the index, and in the case of futures and options on fixed
income securities, the portfolio securities which are being hedged may not be
the same type of obligation underlying such contract. The use of Forward
Contracts for "cross hedging" purposes may involve greater correlation risks. As
a result, the correlation probably will not be exact. Consequently, the Fund
bears the risk that the price of the portfolio securities being hedged will not
move in the same amount or direction as the underlying index or obligation.
For example, if the Fund purchases a put option on an index and the index
decreases less than the value of the hedged securities, the Fund would
experience a loss which is not completely offset by the put option. It is also
possible that there may be a negative correlation between the index or
obligation underlying an option or Futures Contract in which the Fund has a
position and the portfolio securities the Fund is attempting to hedge, which
could result in a loss on both the portfolio and the hedging instrument. In
addition, the Fund may enter into transactions in Forward Contracts or options
on foreign currencies in order to hedge against exposure arising from the
currencies underlying such forwards. In such instances, the Fund will be subject
to the additional risk of imperfect correlation between changes in the value of
the currencies underlying such forwards or options and changes in the value of
the currencies being hedged.
It should be noted that stock index futures contracts or options based upon a
narrower index of securities, such as those of a particular industry group, may
present greater risk than options or futures based on a broad market index. This
is due to the fact that a narrower index is more susceptible to rapid and
extreme fluctuations as a result of changes in the value of a small number of
securities. Nevertheless, where the Fund enters into transactions in options or
futures on narrow-based indexes for hedging purposes, movements in the value of
the index should, if the hedge is successful, correlate closely with the portion
of the Fund's portfolio or the intended acquisitions being hedged.
The trading of Futures Contracts, options and Forward Contracts for hedging
purposes entails the additional risk of imperfect correlation between movements
in the futures or option price and the price of the underlying index or
obligation. The anticipated spread between the prices may be distorted due to
the differences in the nature of the markets, such as differences in margin
requirements, the liquidity of such markets and the participation of speculators
in the options, futures and forward markets. In this regard, trading by
speculators in options, futures and Forward Contracts has in the past
occasionally resulted in market distortions, which may be difficult or
impossible to predict, particularly near the expiration of such contracts.
The trading of Options on Futures Contracts also entails the risk that changes
in the value of the underlying Futures Contract will not be fully reflected in
the value of the option. The risk of imperfect correlation, however, generally
tends to diminish as the maturity date of the Futures Contract or expiration
date of the option approaches.
Further, with respect to options on securities, options on stock indexes,
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 indexes or Options on
Futures Contracts constitutes only a partial hedge against fluctuations in the
value of the Fund's portfolio. When the Fund writes an option, it will receive
premium income in return for the holder's purchase of the right to acquire or
dispose of the underlying obligation. In the event that the price of such
obligation does not rise sufficiently above the exercise price of the option, in
the case of a call, or fall below the exercise price, in the case of a put, the
option will not be exercised and the Fund will retain the amount of the premium,
less related transaction costs, which will constitute a partial hedge against
any decline that may have occurred in the Fund's portfolio holdings or any
increase in the cost of the instruments to be acquired.
Where the price of the underlying obligation moves sufficiently in favor of the
holder to warrant exercise of the option, however, and the option is exercised,
the Fund will incur a loss which may only be partially offset by the amount of
the premium it received. Moreover, by writing an option, the Fund may be
required to forego the benefits which might otherwise have been obtained from an
increase in the value of portfolio securities or other assets or a decline in
the value of securities or assets to be acquired.
In the event of the occurrence of any of the foregoing adverse market events,
the Fund's overall return may be lower than if it had not engaged in the hedging
transactions.
It should also be noted that the Fund may enter transactions in options (except
for options on foreign currencies), Futures Contracts, Options on Futures
Contracts and Forward Contracts not only for hedging purposes, but also for
non-hedging purposes intended to increase portfolio returns. Non-hedging
transactions in such investments involve greater risks and may result in losses
which may not be offset by increases in the value of portfolio securities or
declines in the cost of securities to be acquired. The Fund will only write
covered options, such that cash or securities necessary to satisfy an option
exercise will be segregated at all times, unless the option is covered in such
other manner as may be in accordance with the rules of the exchange on which the
option is traded and applicable laws and regulations. Nevertheless, the method
of covering an option employed by the Fund may not fully protect it against risk
of loss and, in any event, the Fund could suffer losses on the option position
which might not be offset by corresponding portfolio gains.
The Fund also may enter into transactions in Futures Contracts, Options on
Futures Contracts and Forward Contracts for other than hedging purposes, which
could expose the Fund to significant risk of loss if foreign currency exchange
rates do not move in the direction or to the extent anticipated. In this regard,
the foreign currency may be extremely volatile from time to time, as discussed
in the Prospectus and in this Statement of Additional Information, and the use
of such transactions for non-hedging purposes could therefore involve
significant risk of loss.
With respect to the writing of straddles on securities, the Fund incurs the risk
that the price of the underlying security will not remain stable, that one of
the options written will be exercised and that the resulting loss will not be
offset by the amount of the premiums received. Such transactions, therefore,
create an opportunity for increased return by providing the Fund with two
simultaneous premiums on the same security, but involve additional risk, since
the Fund may have an option exercised against it regardless of whether the price
of the security increases or decreases.
RISK OF A POTENTIAL LACK OF A LIQUID SECONDARY MARKET. Prior to exercise or
expiration, a futures or option position can only be terminated by entering into
a closing purchase or sale transaction. This requires a secondary market for
such instruments on the exchange on which the initial transaction was entered
into. While the Fund will enter into options or futures positions only if there
appears to be a liquid secondary market therefor, there can be no assurance that
such a market will exist for any particular contracts at any specific time. In
that event, it may not be possible to close out a position held by the Fund, and
the Fund could be required to purchase or sell the instrument underlying an
option, make or receive a cash settlement or meet ongoing variation margin
requirements. Under such circumstances, if the Fund has insufficient cash
available to meet margin requirements, it will be necessary to liquidate
portfolio securities or other assets at a time when it is disadvantageous to do
so. The inability to close out options and futures positions, therefore, could
have an adverse impact on the Fund's ability effectively to hedge its portfolio,
and could result in trading losses.
The liquidity of a secondary market in a Futures Contract or option thereon may
be adversely affected by "daily price fluctuation limits," established by
exchanges, which limit the amount of fluctuation in the price of a contract
during a single trading day. Once the daily limit has been reached in the
contract, no trades may be entered into at a price beyond the limit, thus
preventing the liquidation of open futures or option positions and requiring
traders to make additional margin deposits. Prices have in the past moved the
daily limit on a number of consecutive trading days.
The trading of Futures Contracts and options is also subject to the risk of
trading halts, suspensions, exchange or clearinghouse equipment failures,
government intervention, insolvency of a brokerage firm or clearinghouse or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
MARGIN. Because of low initial margin deposits made upon the opening of a
futures or forward position and the writing of an option, such transactions
involve substantial leverage. As a result, relatively small movements in the
price of the contract can result in substantial unrealized gains or losses.
Where the Fund enters into such transactions for hedging purposes, any losses
incurred in connection therewith should, if the hedging strategy is successful,
be offset, in whole or in part, by increases in the value of securities or other
assets held by the Fund or decreases in the prices of securities or other assets
the Fund intends to acquire. Where the Fund enters into such transactions for
other than hedging purposes, the margin requirements associated with such
transactions could expose the Fund to greater risk.
TRADING AND POSITION LIMITS. The exchanges on which futures and options are
traded may impose limitations governing the maximum number of positions on the
same side of the market and involving the same underlying instrument which may
be held by a single investor, whether acting alone or in concert with others
(regardless of whether such contracts are held on the same or different
exchanges or held or written in one or more accounts or through one or more
brokers). Further, the CFTC and the various contract markets have established
limits referred to as "speculative position limits" on the maximum net long or
net short position which any person may hold or control in a particular futures
or option contract. An exchange may order the liquidation of positions found to
be in violation of these limits and it may impose other sanctions or
restrictions. The Adviser does not believe that these trading and position
limits will have any adverse impact on the strategies for hedging the portfolio
of the Fund.
RISKS OF OPTIONS ON FUTURES CONTRACTS. The amount of risk the Fund assumes
when it purchases an Option on a Futures Contract is the premium paid for the
option, plus related transaction costs. In order to profit from an option
purchased, however, it may be necessary to exercise the option and to liquidate
the underlying Futures Contract, subject to the risks of the availability of a
liquid offset market described herein. The writer of an Option on a Futures
Contract is subject to the risks of commodity futures trading, including the
requirement of initial and variation margin payments, as well as the additional
risk that movements in the price of the option may not correlate with movements
in the price of the underlying security, index, currency or Futures Contract.
RISKS OF TRANSACTIONS RELATED TO FOREIGN CURRENCIES AND TRANSACTIONS NOT
CONDUCTED ON U.S. EXCHANGES. Transactions in Forward Contracts on foreign
currencies, as well as futures and options on foreign currencies and
transactions executed on foreign exchanges, are subject to all of the
correlation, liquidity and other risks outlined above. In addition, however,
such transactions are subject to the risk of governmental actions affecting
trading in or the prices of currencies underlying such contracts, which could
restrict or eliminate trading and could have a substantial adverse effect on the
value of positions held by the Fund. Further, the value of such positions could
be adversely affected by a number of other complex political and economic
factors applicable to the countries issuing the underlying currencies.
Further, unlike trading in most other types of instruments, there is no
systematic reporting of last sale information with respect to the foreign
currencies underlying contracts thereon. As a result, the available information
on which trading systems will be based may not be as complete as the comparable
data on which the Fund makes investment and trading decisions in connection with
other transactions. Moreover, because the foreign currency market is a global,
24-hour market, events could occur in that market which will not be reflected in
the forward, futures or options markets until the following day, thereby making
it more difficult for the Fund to respond to such events in a timely manner.
Settlements of exercises of over-the-counter Forward Contracts or foreign
currency options generally must occur within the country issuing the underlying
currency, which in turn requires traders to accept or make delivery of such
currencies in conformity with any U.S. or foreign restrictions and regulations
regarding the maintenance of foreign banking relationships, fees, taxes or other
charges.
Unlike transactions entered into by the Fund in Futures Contracts and
exchange-traded options, options on foreign currencies, Forward Contracts and
over-the-counter options on securities are not traded on contract markets
regulated by the CFTC or (with the exception of certain foreign currency
options) the SEC. To the contrary, such instruments are traded through financial
institutions acting as market-makers, although foreign currency options are also
traded on certain national securities exchanges, such as the Philadelphia Stock
Exchange and the Chicago Board Options Exchange, subject to SEC regulation. In
an over-the-counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there are no daily
price fluctuation limits, and adverse market movements could therefore continue
to an unlimited extent over a period of time. Although the purchaser of an
option cannot lose more than the amount of the premium plus related transaction
costs, this entire amount could be lost. Moreover, the option writer and a
trader of Forward Contracts could lose amounts substantially in excess of their
initial investments, due to the margin and collateral requirements associated
with such positions.
In addition, over-the-counter transactions can only be entered into with a
financial institution willing to take the opposite side, as principal, of the
Fund's position unless the institution acts as broker and is able to find
another counterparty willing to enter into the transaction with the Fund. Where
no such counterparty is available, it will not be possible to enter into a
desired transaction. There also may be no liquid secondary market in the trading
of over-the-counter contracts, and the Fund could be required to retain options
purchased or written, or Forward Contracts entered into, until exercise,
expiration or maturity. This in turn could limit the Fund's ability to profit
from open positions or to reduce losses experienced, and could result in greater
losses.
Further, over-the-counter transactions are not subject to the guarantee of an
exchange clearinghouse, and the Fund will therefore be subject to the risk of
default by, or the bankruptcy of, the financial institution serving as its
counterparty. One or more of such institutions also may decide to discontinue
their role as market-makers in a particular currency or security, thereby
restricting the Fund's ability to enter into desired hedging transactions. The
Fund will enter into an over-the-counter transaction only with parties whose
creditworthiness has been reviewed and found satisfactory by the Adviser.
Options on securities, options on stock indexes, Futures Contracts, Options on
Futures Contracts and options on foreign currencies may be traded on exchanges
located in foreign countries. Such transactions may not be conducted in the same
manner as those entered into on U.S. exchanges, and may be subject to different
margin, exercise, settlement or expiration procedures. As a result, many of the
risks of over-the-counter trading may be present in connection with such
transactions.
Options on foreign currencies traded on national securities exchanges are within
the jurisdiction of the SEC, as are other securities traded on such exchanges.
As a result, many of the protections provided to traders on organized exchanges
will be available with respect to such transactions. In particular, all foreign
currency option positions entered into on a national securities exchange are
cleared and guaranteed by the Options Clearing Corporation (the "OCC"), thereby
reducing the risk of counterparty default. Further, a liquid secondary market in
options traded on a national securities exchange may be more readily available
than in the over-the-counter market, potentially permitting the Fund to
liquidate open positions at a profit prior to exercise or expiration, or to
limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however, is
subject to the risks of the availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effects of other political and
economic events. In addition, exchange-traded options on foreign currencies
involve certain risks not presented by the over-the-counter market. For example,
exercise and settlement of such options must be made exclusively through the
OCC, which has established banking relationships in applicable foreign countries
for this purpose. As a result, the OCC may, if it determines that foreign
governmental restrictions or taxes would prevent the orderly settlement of
foreign currency option exercises, or would result in undue burdens on the OCC
or its clearing member, impose special procedures on exercise and settlement,
such as technical changes in the mechanics of delivery of currency, the fixing
of dollar settlement prices or prohibitions on exercise.
POLICIES ON THE USE OF FUTURES AND OPTIONS ON FUTURES CONTRACTS. In order to
assure that the Fund will not be deemed to be a "commodity pool" for purposes of
the Commodity Exchange Act, regulations of the CFTC require that the Fund enter
into transactions in Futures Contracts and Options on Futures Contracts only (i)
for bona fide hedging purposes (as defined in CFTC regulations), or (ii) for
non-hedging purposes, provided that the aggregate initial margin and premiums on
such non-hedging positions does not exceed 5% of the liquidation value of the
Fund's assets. In addition, the Fund must comply with the requirements of
various state securities laws in connection with such transactions.
The Fund has adopted the additional restriction that it will not enter into a
Futures Contract if, immediately thereafter, the value of securities and other
obligations underlying all such Futures Contracts would exceed 50% of the value
of the Fund's total assets. Moreover, the Fund will not purchase put and call
options if as a result more than 5% of its total assets would be invested in
such options.
When the Fund purchases a Futures Contract, an amount of cash or securities will
be deposited in a segregated account with the Fund's custodian so that the
amount so segregated will at all times equal the value of the Futures Contract,
thereby insuring that the use of such futures is unleveraged.
The staff of the SEC has taken the position that purchased over-the-counter
options and assets used to cover written over-the-counter options are illiquid
and, therefore, together with other illiquid securities held by a Fund, cannot
exceed 15% of the Fund's assets (the "SEC illiquidity ceiling"). Although the
Adviser disagrees with this position, the Adviser intends to limit the Fund's
writing of over-the-counter options in accordance with the following procedure.
Except as provided below, the Fund intends to write over-the-counter options
only with primary U.S. Government securities dealers recognized as such by the
Federal Reserve Bank of New York. Also, the contracts the Fund has in place with
such primary dealers provide that the Fund has the absolute right to repurchase
an option it writes at any time at a price which represents the fair market
value, as determined in good faith through negotiation between the parties, but
which in no event will exceed a price determined pursuant to a formula in the
contract. Although the specific formula may vary between contracts with
different primary dealers, the formula generally is based on a multiple of the
premium received by the Fund for writing the option, plus the amount, if any of
the option's intrinsic value (i.e., the amount that the option is in-the-money).
The formula may also include a factor to account for the difference between the
price of the security and the strike price of the option if the option is
written out-of-the-money. The Fund will treat all or a portion of the formula as
illiquid for purposes of the SEC illiquidity ceiling test imposed by the SEC
staff. The Fund may also write over-the-counter options with non-primary
dealers, including foreign dealers (where applicable), and will treat the assets
used to cover these options as illiquid for purposes of such SEC illiquidity
ceiling test.
3. INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions which cannot be changed without
the approval of the holders of a majority of the Fund's shares (which, as used
in this Statement of Additional Information, means the lesser of (i) more than
50% of the outstanding shares of the Trust (or a class or series, as applicable)
or (ii) 67% or more of the outstanding shares of the Trust (or a class or
series, as applicable) present at a meeting if holders of more than 50% of the
outstanding shares of the Trust (or a class or series, as applicable) are
represented in person or by proxy). Except for Investment Restriction (1), these
investment restrictions and policies are adhered to at the time of purchase or
utilization of assets; a subsequent change in circumstances will not be
considered to result in a violation of policy.
The Fund may not:
(1) Borrow money in an amount in excess of 33 1/3% of its total assets, and
then only as a temporary measure for extraordinary or emergency purposes, or
pledge, mortgage or hypothecate an amount of its assets (taken at market value)
in excess of 15% of its total assets, in each case taken at the lower of cost or
market value. For the purpose of this restriction, collateral arrangements with
respect to options, Futures Contracts, Options on Futures Contracts, Forward
Contracts and options on foreign currencies, and payments of initial and
variation margin in connection therewith, are not considered a pledge of assets.
(2) Underwrite securities issued by other persons except insofar as the Fund
may technically be deemed an underwriter under the Securities Act of 1933 in
selling a portfolio security.
(3) Concentrate its investments in any particular industry, but if it is
deemed appropriate for the attainment of its investment objective, the Fund may
invest up to 25% of its assets (taken at market value at the time of each
investment) in securities of issuers in any one industry.
(4) Purchase or sell real estate (including limited partnership interests but
excluding securities of companies, such as real estate investment trusts, which
deal in real estate or interests therein and securities secured by real
estate), or mineral leases, commodities or commodity contracts (except
contracts for the future or forward delivery of securities or foreign
currencies and related options, and except Futures Contracts and Options on
Futures Contracts) in the ordinary course of its business. The Fund reserves
the freedom of action to hold and to sell real estate or mineral leases,
commodities or commodity contracts acquired as a result of the ownership of
securities.
(5) Make loans to other persons except by the purchase of obligations in which
the Fund is authorized to invest and by entering into repurchase agreements;
provided that the Fund may lend its portfolio securities representing not in
excess of 30% of its total assets (taken at market value). Not more than 10% of
the Fund's total assets (taken at market value) may be invested in repurchase
agreements maturing in more than seven days. The Fund may purchase all or a
portion of an issue of debt securities distributed privately to financial
institutions. For these purposes the purchase of short-term commercial paper or
a portion or all of an issue of debt securities which are part of an issue to
the public shall not be considered the making of a loan.
(6) Purchase the securities of any issuer if such purchase, at the time
thereof, would cause more than 5% of its total assets (taken at market value)
to be invested in the securities of such issuer, other than U.S. Government
securities.
(7) Purchase voting securities of any issuer if such purchase, at the time
thereof, would cause more than 10% of the outstanding voting securities of such
issuer to be held by the Fund; or purchase securities of any issuer if such
purchase at the time thereof would cause more than 10% of any class of
securities of such issuer to be held by the Fund. For this purpose all
indebtedness of an issuer shall be deemed a single class and all preferred
stock of an issuer shall be deemed a single class.
(8) Invest for the purpose of exercising control or management.
(9) Purchase or retain in its portfolio any securities issued by an issuer any
of whose officers, directors, trustees or security holders is an officer or
Trustee of the Trust, or is a member, partner, officer or Director of the
Adviser, if after the purchase of the securities of such issuer by the Fund one
or more of such persons owns beneficially more than 1/2 of 1% of the shares or
securities, or both, all taken at market value, of such issuer, and such
persons owning more than 1/2 of 1% of such shares or securities together own
beneficially more than 5% of such shares or securities, or both, all taken at
market value.
(10) Purchase any securities or evidences of interest therein on margin,
except that the Fund may obtain such short-term credit as may be necessary for
the clearance of purchases and sales of securities and the Fund may make margin
deposits in connection with options, Futures Contracts, Options on Futures
Contracts, Forward Contracts and options on foreign currencies.
(11) Sell any security which the Fund does not own unless by virtue of its
ownership of other securities it has at the time of sale a right to obtain
securities without payment of further consideration equivalent in kind and
amount to the securities sold and provided that if such right is conditional
the sale is made upon equivalent conditions.
(12) Purchase securities issued by any other registered investment company or
investment trust except by purchase in the open market where no commission or
profit to a sponsor or dealer results from such purchase other than the
customary broker's commission, or except when such purchase, though not made in
the open market, is part of a plan of merger or consolidation; provided,
however, that the Fund will not purchase such securities if such purchase at
the time thereof would cause more than 10% of its total assets (taken at market
value) to be invested in the securities of such issuers; and, provided further,
that the Fund will not purchase securities issued by an open-end investment
company.
(13) Write, purchase or sell any put or call option or any combination
thereof, provided that this shall not prevent the Fund from writing, purchasing
and selling puts, calls or combinations thereof with respect to securities,
indexes of securities or foreign currencies, and with respect to Futures
Contracts.
(14) Issue any senior security (as that term is defined in the 1940 Act), if
such issuance is specifically prohibited by the 1940 Act or the rules and
regulations promulgated thereunder. For the purposes of this restriction,
collateral arrangements with respect to options, Futures Contracts and Options
on Futures Contracts and collateral arrangements with respect to initial and
variation margins are not deemed to be the issuance of a senior security.
As a non-fundamental policy, the Fund will not knowingly invest in securities
which are subject to legal or contractual restrictions on resale (other than
repurchase agreements), unless the Board of Trustees has determined that such
securities are liquid based upon trading markets for the specific security, if,
as a result thereof, more than 15% of the Fund's net assets (taken at market
value) would be so invested.
OTHER OPERATING POLICIES
The Fund will not invest more than 5% of its total assets in companies which,
including their respective predecessors, have a record of less than three years'
continuous operation.
In order to comply with certain state statutes, the Fund will not, as a matter
of operating policy, pledge, mortgage or hypothecate its portfolio securities if
the percentage of securities so pledged, mortgaged or hypothecated would exceed
33-1/3%. Also, the Fund may not exceed 5.0% of the value of the Fund's net
assets in investments in warrants, valued at the lower of cost or market.
Included within that amount, but not to exceed 2.0% of the value of the Fund's
net assets, may be warrants which are not listed on the New York or American
Stock Exchange. Warrants acquired by the Fund in units or attached to securities
may be deemed to be without value.
These operating policies are not fundamental and may be changed without
shareholder approval.
4. MANAGEMENT OF THE FUND
The Board of Trustees of the Trust provides broad supervision over the affairs
of the Fund. The Adviser is responsible for the investment management of the
Fund's assets, and the officers of the Trust are responsible for its operations.
The Trustees and officers of the Trust are listed below, together with their
principal occupations during the past five years. (Their titles may have varied
during that period.)
TRUSTEES
A. KEITH BRODKIN,* Chairman and President
Massachusetts Financial Services Company, Chairman
RICHARD B. BAILEY*
Private Investor; Massachusetts Financial Services Company, former Chairman
(until September 30, 1991)
MARSHALL N. COHAN
Private Investor
Address: 2524 Bedford Mews Drive, Wellington, Florida
LAWRENCE H. COHN, M.D.
Brigham and Women's Hospital, Chief of Cardiac Surgery; Harvard Medical
School, Professor of Surgery
Address: 75 Francis Street, Boston, Massachusetts
THE HON. SIR J. DAVID GIBBONS, KBE
Edmund Gibbons Limited, Chief Executive Officer; The Bank of N.T. Butterfield
& Son Ltd., Chairman
Address: 21 Reid Street, Hamilton, Bermuda
ABBY M. O'NEILL
Private Investor; Rockefeller Financial Services, Inc. (investment advisers),
Director
Address: 30 Rockefeller Plaza, Room 5600, New York, New York
WALTER E. ROBB, III
Benchmark Advisors, Inc. (corporate financial consultants), President and
Treasurer
Address: 110 Broad Street, Boston, Massachusetts
ARNOLD D. SCOTT*
Massachusetts Financial Services Company, Senior Executive Vice President
JEFFREY L. SHAMES*
Massachusetts Financial Services Company, President
J.DALE SHERRATT Insight Resources, Inc. (acquisition planning specialists),
President (since January 1990); The Kendall Company (health care products),
Chairman and Chief Executive Officer (prior to January 1990);
Colgate-Palmolive Company, Senior Executive Vice President (prior to January
1990)
Address: One Liberty Square, 10th Fl., Boston, Massachusetts
WARD SMITH
NACCO Industries (holding company), Chairman (prior to June 1994); Sundstrand
Corporation (diversified mechanical manufacturer), Director; Society
Corporation (bank holding company), Director (prior to April 1992); Society
National Bank (commercial bank), Director (1986 to April 1992)
Address: 5875 Landerbrook Drive, Mayfield Heights, Ohio
OFFICERS
A. KEITH BRODKIN,* President
Massachusetts Financial Services Company, Chairman
W. THOMAS LONDON,* Treasurer
Massachusetts Financial Services Company, Senior Vice President and Assistant
Treasurer
STEPHEN E. CAVAN,* Secretary and Clerk
Massachusetts Financial Services Company, Senior Vice President, General Counsel
and Assistant Secretary
JAMES O. YOST,* Assistant Treasurer
Massachusetts Financial Services Company, Vice President
JAMES R. BORDEWICK, JR.,* Assistant Secretary
Massachusetts Financial Services Company, Vice President and Associate General
Counsel (since September 1990); associated with a major law firm (prior to
August 1990)
*"Interested persons" (as defined in the 1940 Act) of the Adviser, whose address
is 500 Boylston Street, Boston, Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain MFS affiliates
or with certain other funds of which MFS or a subsidiary is the investment
adviser or distributor. Mr. Brodkin, the Chairman of MFD, Messrs. Shames and
Scott, Directors of MFD, and Mr. Cavan, the Secretary of MFD, hold similar
positions with certain other MFS affiliates. Mr. Bailey is a Director of Sun
Life Assurance Company of Canada (U.S.) ("Sun Life of Canada (U.S.)"), the
corporate parent of MFS.
The Trust has adopted a retirement plan for non-interested Trustees and Mr.
Bailey. Under this plan, a Trustee will retire upon reaching age 72 and if the
Trustee has completed at least five years of service, he would be entitled to
annual payments during his lifetime of up to 50% of such Trustee's average
annual compensation (based on the three years prior to his retirement) depending
on his length of service. A Trustee may also retire prior to age 72 and receive
reduced payments if he has completed at least five years of service. Under the
plan, a Trustee (or his beneficiaries) will also receive benefits for a period
of time in the event the Trustee is disabled or dies. These benefits will also
be based on the Trustee's average annual compensation and length of service.
There is no retirement plan provided by the Trust for any interested Trustee,
except Mr. Bailey. The Fund will accrue its allocable share of compensation
expenses each year to cover current year's service and amortize past service
cost.
As of November 30, 1994, the Trustees and officers, as a group, of the Fund
owned less than 1% of the outstanding shares of the Fund.
As of November 30, 1994, Painwebber for the benefit of Marcela Gonzalez, Sugar
Land, Texas and Merrill Lynch Pierce Fenner & Smith, Inc., P.O. Box 45286,
Jacksonville, Florida, were the owners of approximately 6.38% and 14.85% of the
outstanding Class C shares of the Fund.
The Declaration of Trust provides that the Trust will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the Trust, unless,
as to liabilities to the Trust or its shareholders, it is finally adjudicated
that they engaged in willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in their offices, or with respect to
any matter, unless it is adjudicated that they did not act in good faith in the
reasonable belief that their actions were in the best interest of the Trust. In
the case of settlement, such indemnification will not be provided unless it has
been determined pursuant to the Declaration of Trust, that such officers or
Trustees have not engaged in willful misfeasance, bad faith, gross negligence or
reckless disregard of their duties.
INVESTMENT ADVISER
MFS, together with its predecessor organizations, has a history of money
management dating from 1924. MFS is a subsidiary of Sun Life of Canada (U.S.)
which in turn is a subsidiary of Sun Life Assurance Company of Canada
("SunLife").
The Adviser manages the assets of the Fund pursuant to an Investment Advisory
Agreement with the Fund dated as of September 1, 1993. The Adviser provides the
Fund with overall investment advisory and administrative services, as well as
general office facilities. Subject to such policies as the Trustees may
determine, the Adviser makes investment decisions for the Fund. For its services
and facilities, the Adviser is entitled to receive a management fee, computed
and paid monthly, in an amount equal to 1.00% of the Fund's average daily net
assets for its then current fiscal year.
For the Fund's fiscal years ended November 30, 1992, the fiscal period ended
October 31, 1993, and the fiscal year ended October 31, 1994, the investment
advisory fees paid by the Fund were $929,219, $1,038,647 and $1,778,464,
respectively. Lifetime Advisers, Inc. ("LAI") the Fund's Adviser prior to
September 1, 1993, had no employees and relied on the Adviser to furnish it with
overall administrative services and general office facilities.
In order to comply with the expense limitations of certain state securities
commissions, the Adviser will reduce its management fee or otherwise reimburse
the Fund for any expenses, exclusive of interest, taxes and brokerage
commissions, incurred by the Fund in any fiscal year to the extent such expenses
exceed the most restrictive of such state expense limitations. The Adviser will
make appropriate adjustments to such reductions and reimbursements in response
to any amendment or rescission of the various state requirements.
The Fund pays the compensation of the Trustees who are not officers of MFS (who
will each receive from $1,250 to $2,600 annually, depending on attendance at
meetings, plus fees for meetings of special committees, such as the Audit
Committee) and all expenses of the Fund (other than those assumed by MFS or MFD
including: governmental fees; interest charges; taxes; membership dues in the
Investment Company Institute allocable to that Fund; fees and expenses of
independent auditors, of legal counsel, and of any transfer agent, registrar or
dividend disbursing agent of the Fund; expenses of repurchasing and redeeming
shares and servicing shareholder accounts; expenses of preparing, printing and
mailing share certificates, periodic reports, notices and proxy statements to
shareholders and to governmental officers and commissions; brokerage and other
expenses connected with the execution, recording and settlement of portfolio
security transactions; insurance premiums; fees and expenses of State Street
Bank and Trust Company, the Fund's Custodian, for all services to the Fund,
including safekeeping of funds and securities and maintaining required books and
accounts; expenses of calculating the net asset value of shares of the Fund; and
expenses of shareholder meetings. Expenses relating to the issuance,
registration and qualification of shares of the Fund and the preparation,
printing and mailing of prospectuses are borne by the Fund except that the
Fund's Distribution Agreement with MFD requires MFD to pay for prospectuses that
are to be used for sales purposes. Expenses of the Trust which are not
attributable to a specific series are allocated among the series in a manner
believed by management of the Trust to be fair and equitable. Payment by the
Fund of brokerage commissions for brokerage and research services of value to
the Adviser in serving its clients is discussed under the caption "Portfolio
Transactions and Brokerage Commissions" below.
MFS pays the compensation of the Trust's officers and of any Trustee who is an
officer of MFS. The Adviser also furnishes at its own expense all necessary
administrative services, including office space, equipment, clerical personnel,
investment advisory facilities, and all executive and supervisory personnel
necessary for managing the Fund's investments, effecting its portfolio
transactions and, in general, administering its affairs. The Advisory Agreement
with the Fund will remain in effect until August 1, 1995, and will continue in
effect thereafter only if such continuance is specifically approved at least
annually by the Board of Trustees or by vote of a majority of the Fund's shares
(as defined in "Investment Restrictions") and, in either case, by a majority of
the Trustees who are not parties to the Advisory Agreement or interested persons
of any such party. The Advisory Agreement terminates automatically if it is
assigned and may be terminated without penalty by vote of a majority of the
Fund's shares (as defined in "Investment Restrictions") or by either party on
not more than 60 days' nor less than 30 days' written notice. The Advisory
Agreement provides that if MFS ceases to serve as the Adviser to the Fund, the
Fund will change its name so as to delete the term "MFS" and that MFS may render
services to others and may permit other fund clients to use the term "MFS" in
their names. The Advisory Agreement also provides that neither the Adviser nor
its personnel shall be liable for any error of judgment or mistake of law or for
any loss arising out of any investment or for any act or omission in the
execution and management of the Fund, except for willful misfeasance, bad faith
or gross negligence in the performance of its or their duties or by reason of
reckless disregard of its or their obligations and duties under the Advisory
Agreement.
CUSTODIAN
State Street Bank and Trust Company (the "Custodian") is the custodian of the
Fund's assets. The Custodian's responsibilities include safekeeping and
controlling the Fund's cash and securities, handling the receipt and delivery of
securities, determining income and collecting interest and dividends on the
Fund's investments, maintaining books of original entry for portfolio and fund
accounting and other required books and accounts, and calculating the daily net
asset value and public offering price of each class of shares of the Fund. The
Custodian does not determine the investment policies of the Fund or decide which
securities the Fund will buy or sell. The Fund may, however, invest in
securities of the Custodian and may deal with the Custodian as principal in
securities transactions. The Trustees have reviewed and approved as in the best
interests of the Fund and the shareholders the custodial arrangements with Chase
Manhattan Bank, N.A., for securities of the Fund held outside the United States.
The Custodian also serves as the dividend and distribution disbursing agent of
the Fund. The Custodian has contracted with the Adviser for the Adviser to
perform certain accounting functions related to options transactions for which
the Adviser receives remuneration on a cost basis.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (the "Shareholder Servicing Agent"), a wholly-owned
subsidiary of MFS, is the Fund's shareholder servicing agent, pursuant to a
Shareholder Servicing Agent Agreement with the Fund, dated as of September 10,
1986 (the "Agency Agreement"). The Shareholder Servicing Agent's
responsibilities under the Agency Agreement include administering and performing
transfer agent functions and the keeping of records in connection with the
issuance, transfer and redemption of each class of shares of the Fund. For these
services, the Shareholder Servicing Agent will receive a fee based on the net
assets of each class of the Fund, computed and paid monthly. In addition, the
Shareholder Servicing Agent will be reimbursed by the Fund for certain expenses
incurred by the Shareholder Servicing Agent on behalf of the Fund. For the
fiscal year ended October 31, 1994, the Fund paid to the Shareholder Servicing
Agent fees of $383,702 under its Agency Agreement. State Street Bank and Trust
Company, the dividend and distribution disbursing agent for the Fund, has
contracted with the Shareholder Servicing Agent to administer and perform
certain dividend and distribution disbursing functions for the Fund.
DISTRIBUTOR
MFD, a wholly-owned subsidiary of MFS, serves as distributor for the continuous
offering of shares of the Fund pursuant to a Distribution Agreement dated
January 1, 1995 (the "Distribution Agreement"). Prior to January 1, 1995, MFS
Financial Services, Inc. ("FSI"), another wholly-owned subsidiary of MFS, was
the Fund distributor. Where this SAI refers to MFD in relation to the receipt or
payment of money with respect to a period or periods prior to January 1, 1995,
such reference shall be deemed to include FSI, as the predecessor in interest to
MFD.
CLASS A SHARES: MFD acts as agent in selling shares of the Fund to dealers. The
public offering price of the Class A shares of the Fund is their net asset value
next computed after the sale plus a sales charge which varies based upon the
quantity purchased. The public offering price of a Class A share of the Fund is
calculated by dividing the net asset value of a Class A share by the difference
(expressed as a decimal) between 100% and the sales charge percentage of
offering price applicable to the purchase (see "Purchases" in the Prospectus).
The sales charge scale set forth in the Prospectus applies to purchases of Class
A shares of the Fund alone or in combination with shares of all classes of
certain other funds in the MFS Family of Funds (the "MFS Funds") and other funds
(as noted under Right of Accumulation) by any person, including members of a
family unit (e.g., husband, wife and minor children) and bona fide trustees, and
also applies to purchases made under the Right of Accumulation or a Letter of
Intent (see "Investment and Withdrawal Programs" below). A group might qualify
to obtain quantity sales charge discounts (see "Investment and Withdrawal
Programs" below).
Class A shares of the Fund may be sold at their net asset value to certain
persons and in certain transactions as described in the Prospectus. Such sales
are made without a sales charge to promote good will with employees and others
with whom MFS, MFD and/or the Fund have business relationships, and because the
sales effort, if any, involved in making such sales is negligible.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price of the Class A shares. Dealer allowances
expressed as a percentage of offering price for all offering prices are set
forth in the Prospectus (see "Purchases" in the Prospectus). The difference
between the total amount invested and the sum of (a) the net proceeds to the
Fund and (b) the dealer commission, is the commission paid to the distributor.
Because of rounding in the computation of offering price, the portion of the
sales charge paid to the distributor may vary and the total sales charge may be
more or less than the sales charge calculated using the sales charge expressed
as a percentage of offering price or as a percentage of the net amount invested
as listed in the Prospectus. In the case of the maximum sales charge the dealer
retains 5% and MFD retains approximately 3/4 of 1% of the public offering price.
In addition, MFD pays a commission to dealers who initiate and are responsible
for purchases of $1 million or more as described in the Prospectus.
CLASS B AND CLASS C SHARES: MFD acts as agent in selling Class B and Class C
shares of the Fund to dealers. The public offering price of Class B and Class C
shares is their net asset value next computed after the sale (see "Purchases" in
the Prospectus).
GENERAL: Neither MFD nor dealers are permitted to delay placing orders to
benefit themselves by a price change. On occasion, MFD may obtain brokers loans
from various banks, including the custodian banks for the MFS Funds, to
facilitate the settlement of sales of shares of the Fund to dealers. MFD may
benefit from its temporary holding of funds paid to it by investment dealers for
the purchase of Funds shares.
During the Fund's fiscal year ended October 31, 1994, MFD received net
commissions of $31,650 and dealers received net commissions of $207,581 (as
their concession on gross commissions of $239,231) for selling Class A shares of
the Fund; the Fund received $9,928,946 representing the aggregated net asset
value of shares. During the period September 7, 1993 through October 31, 1993,
FSI received net commissions of $2,457 and dealers received net commissions of
$11,682 (as their concession on gross commissions of $14,139) for selling Class
A shares of the Fund; the Fund received $517,128 representing the aggregate net
asset value of such shares. For the fiscal year ended October 31, 1994, the
approximate CDSC imposed for Class B shares was $212,918.
During the period ended October 31, 1993, the CDSC imposed for Class B shares
was $294,138. For the fiscal year ended November 30, 1992, the CDSC imposed for
Class B shares was $247,300.
The Distribution Agreement will remain in effect until August 1, 1995 and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Fund's shares (as defined in "Investment Restrictions") and in either case, by a
majority of the Trustees who are not parties to such Distribution Agreement or
interested persons of any such party. The Distribution Agreement terminates
automatically if it is assigned and may be terminated without penalty by either
party on not more than 60 days' nor less than 30 days' notice.
5. PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are made by
employees of the Adviser, who are appointed and supervised by its senior
officers. Changes in the Fund's investments are reviewed by the Board of
Trustees. The Fund's portfolio manager may serve other clients of the Adviser or
any subsidiary of MFS in a similar capacity.
The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain and maintain the availability of
execution at the most favorable prices and in the most effective manner
possible. The Adviser attempts to achieve this result by selecting broker-
dealers to execute portfolio transactions on behalf of the Fund and other
clients of the Adviser on the basis of their professional capability, the value
and quality of their brokerage services, and the level of their brokerage
commissions. In the case of securities, such as government securities, which are
principally traded in the over-the-counter market (where no stated commissions
are paid but the prices include a dealer's markup or markdown), the Adviser
normally seeks to deal directly with the primary market makers, unless in its
opinion, better prices are available elsewhere. In the case of securities
purchased from underwriters, the cost of such securities generally includes a
fixed underwriting commission or concession. Securities firms or futures
commission merchants may receive brokerage commissions on transactions involving
options, Futures Contracts and Options on Futures Contracts and the purchase and
sale of underlying securities upon exercise of options. The brokerage
commissions associated with buying and selling options may be proportionately
higher than those associated with general securities transactions. From time to
time, soliciting dealer fees are available to the Adviser on the tender of the
Fund's portfolio securities in so-called tender or exchange offers. Such
soliciting dealer fees are in effect recaptured for the Fund by the Adviser. At
present no other recapture arrangements are in effect.
Under the Advisory Agreement and as permitted by Section 28(e) of the Securities
Exchange Act of 1934, the Adviser may cause the Fund to pay a broker-dealer
which provides brokerage and research services to the Adviser an amount of
commission for effecting a securities transaction for the Fund in excess of the
amount other broker-dealers would have charged for the transaction if the
Adviser determines in good faith that the greater commission is reasonable in
relation to the value of the brokerage and research services provided by the
executing broker-dealer viewed in terms of either a particular transaction or
the Adviser's overall responsibilities to the Fund or to its other clients. Not
all of such services are useful or of value in advising the Fund.
The term "brokerage and research services" includes advice as to the value of
securities, the advisability of purchasing or selling securities, and the
availability of purchasers or sellers of securities; furnishing analyses and
reports concerning issues, industries, securities, economic factors and trends,
portfolio strategy and the performance of accounts; and effecting securities
transactions and performing functions incidental thereto such as clearance and
settlement.
Although commissions paid on every transaction will, in the judgment of the
Adviser, be reasonable in relation to the value of the brokerage services
provided, commissions exceeding those which another broker might charge may be
paid to broker-dealers who were selected to execute transactions on behalf of
the Fund and the Adviser's other clients in part for providing advice as to the
availability of purchasers or sellers of securities and services in effecting
securities transactions and performing functions incidental thereto such as
clearance and settlement.
Broker-dealers may be willing to furnish statistical, research and other factual
information or services ("Research") to the Adviser for no consideration other
than brokerage or underwriting commissions. Securities may be bought or sold
through such broker-dealers, but at present, unless otherwise directed by the
Fund, a commission higher than one charged elsewhere will not be paid to such a
firm solely because it provided Research to the Adviser. The Trustees (together
with the Trustees of the other MFS Funds) have directed the Adviser to allocate
a total of $20,000 of commission business from the MFS Funds to the Pershing
Division of Donaldson Lufkin & Jenrette as consideration for the annual renewal
of the Lipper Directors' Analytical Data Service (which provides information
useful to the Trustees in reviewing the relationship between the Fund and the
Adviser).
The Adviser's investment management personnel attempt to evaluate the quality of
Research provided by brokers. Results of this effort are sometimes used by the
Adviser as a consideration in the selection of brokers to execute portfolio
transactions. However, the Adviser is unable to quantify the amount of
commissions which will be paid as a result of such Research because a
substantial number of transactions will be effected through brokers which
provide Research but which were selected principally because of their execution
capabilities.
The management fee that the Fund pays to the Adviser will not be reduced as a
consequence of the Adviser's receipt of brokerage and research services. To the
extent the Fund's portfolio transactions are used to obtain such services, the
brokerage commissions paid by the Fund will exceed those that might otherwise be
paid, by an amount which cannot be presently determined. Such services would be
useful and of value to the Adviser in serving both the Fund and other clients
and, conversely, such services obtained by the placement of brokerage business
of other clients would be useful to the Adviser in carrying out its obligations
to the Fund. While such services are not expected to reduce the expenses of the
Adviser, the Adviser would, through use of the services, avoid the additional
expenses which would be incurred if it should attempt to develop comparable
information through its own staff.
For the Fund's fiscal year ended October 31, 1994, total brokerage commissions
of $844,899 were paid on transactions of $362,491,084. For the Fund's fiscal
period ended October 31, 1993, total brokerage commissions of $497,148 were paid
on total transactions of $179,157,784. For the Fund's fiscal year ended November
30, 1992, total brokerage commissions of $592,958 were paid on transactions
(other than U.S. Government securities, purchased options transactions and
short-term obligations) of $193,369,114. Not all of the Fund's transactions are
equity security transactions which involve the payment of brokerage commissions.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for that of one or more of the other clients of the Adviser
or MFS or any subsidiary of MFS. Investment decisions for the Fund and for such
other clients are made with a view to achieving their respective investment
objectives. It may develop that a particular security is bought or sold for only
one client even though it might be held by, or bought or sold for, other
clients. Likewise, a particular security may be bought for one or more clients
when one or more other clients are selling that same security. Some simultaneous
transactions are inevitable when several clients receive investment advice from
the same investment adviser, particularly when the same security is suitable for
the investment objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed to be equitable to
each. It is recognized that in some cases this system could have a detrimental
effect on the price or volume of the security as far as the Fund is concerned.
In other cases, however, it is believed that the Fund's ability to participate
in volume transactions will produce better executions for the Fund.
6. SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS -- The Fund makes available programs designed
to enable shareholders to add to their investment or withdraw from it with a
minimum of paper work. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or the Fund.
LETTER OF INTENT: If a shareholder (other than a group purchaser described
below) anticipates purchasing $50,000 or more of Class A shares of the Fund
alone or in combination with Class B or Class C shares of the Fund or any of the
classes of other MFS Funds or MFS Fixed Fund (a bank collective investment fund)
within a 13-month period (or 36-month period 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 Fund's Account Application
or filing a separate Letter of Intent application (available from the
Shareholder Servicing Agent) within 90 days of the commencement of purchases.
Subject to acceptance by MFD and the conditions mentioned below, each purchase
will be made at a public offering price applicable to a single transaction of
the dollar amount specified in the Letter of Intent application. The shareholder
or his dealer must inform MFD that the Letter of Intent is in effect each time
shares are purchased. The shareholder makes no commitment to purchase additional
shares, but if his purchases within 13 months (or 36 months in the case of
purchases of $1 million or more) plus the value of shares credited toward
completion of the Letter of Intent do not total the sum specified, he will pay
the increased amount of the sales charge as described below. Instructions for
issuance of shares in the name of a person other than the person signing the
Letter of Intent application must be accompanied by a written statement from the
dealer stating that the shares were paid for by the person signing such Letter.
Neither income dividends not capital gain distributions taken in additional
shares will apply toward the completion of the Letter of Intent. Dividends and
distributions of other MFS Funds automatically reinvested in shares of the Fund
pursuant to the Distribution Investment Program will also not apply toward
completion of the Letter of Intent.
Out of the shareholder's initial purchase (or subsequent purchases if
necessary), 5% of the dollar amount specified in the Letter of Intent
application shall be held in escrow by the Shareholder Servicing Agent in the
form of shares registered in the shareholder's name. All income dividends and
capital gain distributions on escrowed shares will be paid to the shareholder or
to his order. When the minimum investment so specified is completed (either
prior to or by the end of the 13-month or 36-month, as applicable) period, the
shareholder will be notified and the escrowed shares will be released.
If the intended investment is not completed, the Shareholder Servicing Agent
will redeem an appropriate number of the escrowed shares in order to realize
such difference. Shares remaining after any such redemption will be released by
the Shareholder Servicing Agent. By completing and signing the Account
Application or separate Letter of Intent application, the shareholder
irrevocably appoints the Shareholder Servicing Agent his attorney to surrender
for redemption any or all escrowed shares with full power of substitution in the
premises.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on the purchase of Class A shares when his new investment, together
with the current offering price value of all holdings of all classes of shares
of that shareholder in the MFS Funds or MFS Fixed Fund (a bank collective
investment fund) reaches a discount level. For example, if a shareholder owns
shares valued at $37,500 and purchases an additional $12,500 of Class A shares
of the Fund, the sales charge for the $12,500 purchase would be at the rate of
4.75% (the rate applicable to single transactions of $50,000). A shareholder
must provide the Shareholder Servicing Agent (or his investment dealer must
provide MFD) with information to verify that the quantity sales charge discount
is applicable at the time the investment is made.
DISTRIBUTION INVESTMENT PROGRAM: Distributions of dividends and capital
gains made by the Fund with respect to a particular class of shares may be
automatically invested in shares of the same class of one of the other MFS
Funds, if shares of the fund are available for sale. Such investments will be
subject to additional purchase minimums. Distributions will be invested at net
asset value (exclusive of any sales charge) and will not be subject to any CDSC.
Distributions will be invested at the close of business on the payable date for
the distribution. A shareholder considering the Distribution Investment Program
should obtain and read the prospectus of the other fund and consider the
differences in objectives and policies before making any investment.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder
Servicing Agent to send him (or anyone he designates) regular periodic payments,
as designated on the Account Application and based upon the value of his
account. Each payment under a Systematic Withdrawal Plan (a "SWP") must be at
least $100, except certain limited circumstances. The aggregate withdrawals of
Class B shares in any year pursuant to a SWP generally are limited to 10% of the
value of the account at the time of establishment of the SWP. SWP payments are
drawn from the proceeds of share redemptions (which would be a return of
principal and, if reflecting a gain, would be taxable). Redemptions of Class B
shares will be made in the following order: (i) any "Reinvested Shares"; (ii) to
the extent necessary, any "Free Amount"; and (iii) to the extent necessary, the
"Direct Purchase" subject to the lowest CDSC (as such terms are defined in
"Contingent Deferred Sales Charge" in the Prospectus). The CDSC will be waived
in the case of redemptions of Class B shares pursuant to a SWP but will not be
waived in the case of SWP redemptions of Class A shares which are subject to a
CDSC. All dividend and capital gain distributions for an account with a SWP will
be received in full and fractional shares of the Fund at the net asset value in
effect at the close of business on the record date for such distributions. To
initiate this service, shares having an aggregate value of at least $10,000
either must be held on deposit by, or certificates for such shares must be
deposited with, the Shareholder Servicing Agent. Maintaining a withdrawal plan
concurrently with an investment program would be disadvantageous because of the
sales charges included in share purchases in the case of Class A shares, and
because of the assessment of the CDSC (on certain share redemptions in the case
of Class A shares). The shareholder by written instruction to the Shareholder
Servicing Agent may deposit into the account additional shares of the Fund,
change the payee or change the amount of each payment. The Shareholder Servicing
Agent may charge the account for services rendered and expenses incurred beyond
those normally assumed by the Fund with respect to the liquidation of shares. No
charge is currently assessed against the account, but one could be instituted by
the Shareholder Servicing Agent on 60 days' notice in writing to the shareholder
in the event that the Fund ceases to assume the cost of these services. The Fund
may terminate any SWP for an account if the value of the account falls below
$5,000 as a result of share redemptions (other than as a result of a SWP) or an
exchange of shares of the Fund for shares of another MFS Fund. Any SWP may be
terminated at any time by either the shareholder or the Fund.
INVEST BY MAIL: Additional investments of $50 or more in the Fund may be
made at any time either by mailing a check payable to the Fund directly to the
Shareholder Servicing Agent. The shareholder's account number and the name of
his investment dealer must be included with each investment.
GROUP PURCHASES: A bona fide group and all its members may be treated as a
single purchaser and, under the Right of Accumulation (but not the Letter of
Intent), obtain quantity sales charge discounts on the purchase of Class A
shares if the group (1) gives its endorsement or authorization to the investment
program so it may be used by the investment dealer to facilitate solicitation of
the membership, thus effecting economies of sales effort; (2) has been in
existence for at least six months and has a legitimate purpose other than to
purchase mutual fund shares at a discount; (3) is not a group of individuals
whose sole organizational nexus is as credit cardholders of a company,
policyholders of an insurance company, customers of a bank or broker-dealer,
clients of an investment adviser or other similar groups; and (4) agrees to
provide certification of membership of those members investing money in the MFS
Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may exchange their shares for the same class of shares of
the other MFS Funds (if available for sale) (and in the case of Class C shares,
for shares of MFS Money Market Fund) under the Automatic Exchange Plan. The
Automatic Exchange Plan provides for automatic exchanges of funds from the
shareholder's account in an MFS Fund for investment in the same class of shares
of other MFS Funds selected by the shareholder. Under the Automatic Exchange
Plan, exchanges of at least $50 each may be made to up to four different funds
effective on the seventh day of each month or of every third month, depending on
whether monthly or quarterly exchanges are elected by the shareholder. If the
seventh day of the month is not a business day, the transaction will be
processed on the next business day. Generally, the initial exchange will occur
after receipt and processing by the Shareholder Servicing Agent of an
application in good order. Exchanges will continue to be made from a
shareholder's account in any MFS Fund, as long as the balance of the account is
sufficient to complete the exchanges. Additional payments made to a
shareholder's account will extend the period that exchanges will continue to be
made under the Automatic Exchange Plan. However, if additional payments are
added to an account subject to the Automatic Exchange Plan shortly before an
exchange is scheduled, such funds may not be available for exchange until the
following month; therefore, care should be used to avoid inadvertently
terminating the Automatic Exchange Plan through exhaustion of the account
balance.
No transaction fee for exchanges will be charged in connection with the
Automatic Exchange Plan. However, exchanges from any of MFS Money Market Fund,
MFS Government Money Market Fund and Class A shares of MFS Cash Reserve Fund
will be subject to any applicable sales charge. Changes in amounts to be
exchanged to each fund, the funds to which exchanges are to be made and the
timing of exchanges (monthly or quarterly), or termination of a shareholder's
participation in the Automatic Exchange Plan will be made after instructions in
writing or by telephone (an "Exchange Change Request") are received by the
Shareholder Servicing Agent in proper form (i.e., if in writing -- signed by the
record owner(s) exactly as shares are registered; if by telephone -- proper
account identification is given by the dealer or shareholder of record). Each
Exchange Change Request (other than termination of participation in the program)
must involve at least $50. Generally, if an Exchange Change Request is received
by telephone or in writing before the close of business on the last business day
of the month, the Exchange Change Request will be effective for the following
month's transfer.
A shareholder's right to make additional investments in any of the MFS Funds, to
make exchanges of shares from one MFS Fund to another and to withdraw from an
MFS Fund, as well as a shareholder's other rights and privileges are not
affected by a shareholder's participation in the Automatic Exchange Plan.
The Automatic Exchange Plan is part of the Exchange Privilege. For additional
information regarding the Automatic Exchange Plan, including the treatment of
any CDSC, see "Exchange Privilege" below.
REINSTATEMENT PRIVILEGE: Shareholders of the Fund and shareholders of the
other MFS Funds (except MFS Money Market Fund, MFS Government Money Market Fund
and holders of Class A shares of MFS Cash Reserve Fund in the case where the
shares are acquired through direct purchase or reinvested dividends) who have
redeemed their shares have a one-time right to reinvest the redemption proceeds
in shares of any of the MFS Funds (if shares of the fund are available for sale)
at net asset value (without a sales charge) and, if applicable, with credit for
any CDSC paid. In the case of proceeds reinvested in shares of MFS Money Market
Fund, MFS Government Money Market Fund and Class A shares of MFS Cash Reserve
Fund, the shareholder has the right to exchange the acquired shares for shares
of another MFS Fund at net asset value pursuant to the exchange privilege
described below. Such a reinvestment must be made within 90 days of the
redemption and is limited to the amount of the redemption proceeds. If the
shares credited for any CDSC paid are then redeemed within six years of the
initial purchase in the case of Class B shares or 12 months of the initial
purchase in the case of certain Class A shares, a CDSC will be imposed upon
redemption. Although redemptions and repurchases of shares are taxable events, a
reinvestment within such 90-day period of time in the same fund may be
considered a "wash sale" and may result in the inability to recognize currently
all or a portion of a loss realized on the original redemption for federal
income tax purposes. Please see your tax adviser for further information.
EXCHANGE PRIVILEGE -- Subject to the requirements set forth below, some or all
of the shares in an account with the Fund for which payment has been received by
the Fund (i.e., an established account) may be exchanged for shares of the same
class of any other MFS Funds (if available for sale) at net asset value. In
addition, Class C shares may be exchanged for shares of MFS Money Market Fund at
net asset value. Exchanges will be made after instructions in writing or by
telephone (an "Exchange Request") are received for an established account by the
Shareholder Servicing Agent.
Each Exchange Request must be in proper form (i.e., if in writing -- signed by
the record owner(s) exactly as the shares are registered; if by telephone --
proper account identification is given by the dealer or shareholder of record),
and each exchange must involve either shares having an aggregate value of at
least $1,000 or all the shares in the account (except that the minimum is $50
for accounts of retirement plan participants whose sponsoring organizations
subscribe to the MFS FUNDamental 401(k) Plan or another similar 401(k)
recordkeeping system made available by the Shareholder Servicing Agent) or all
the shares in the account. Any gain or loss on the redemption of the shares
exchanged is reportable on the shareholder's federal income tax return, unless
such shares were and the shares received in the exchange are held in a
tax-deferred retirement plan or other tax-exempt account. No more than five
exchanges may be made in any one Exchange Request by telephone. If an Exchange
Request is received by the Shareholder Servicing Agent prior to the close of
regular trading on the Exchange, the exchange usually will occur on that day if
all of the requirements set forth above have been complied with at that time.
However, payment of the redemption proceeds by the Fund, and thus the purchase
of shares of another MFS Fund, may be delayed for up to seven days if the Fund
determines that such a delay would be in the best interest of all its
shareholders. Investment dealers which have satisfied criteria established by
MFD may also communicate a shareholder's Exchange Request to MFD by facsimile
subject to the requirements set forth above.
No CDSC is imposed on exchanges among the MFS Funds, although liability for the
CDSC is carried forward to the exchanged shares. For purposes of calculating the
CDSC upon redemption of shares acquired in an exchange, the purchase of shares
acquired in one or more exchanges is deemed to have occurred at the time of the
original purchase of the exchanged shares.
Additional information with respect to any of the MFS Funds, including a copy of
its current prospectus, may be obtained from investment dealers or the
Shareholder Servicing Agent. A shareholder considering an exchange should obtain
and read the prospectus of the other MFS Fund and consider the differences in
objectives and policies before making any exchange. Shareholders of the other
MFS Funds (except holders of shares of MFS Money Market Fund, MFS Government
Money Market Fund and Class A shares of MFS Cash Reserve Fund acquired through
direct purchase or dividends reinvested prior to June 1, 1992) have the right to
exchange their shares for shares of the Fund, subject to the conditions, if any,
set forth in their respective prospectuses. In addition, unitholders of the MFS
Fixed Fund (a bank collective investment fund) have the right to exchange their
units (except units acquired through direct purchases) for shares of the Fund,
subject to the conditions, if any, imposed upon such unitholders by the MFS
Fixed Fund.
Any state income tax advantages for investment in shares of each state-specific
series of MFS Municipal Series Trust may only benefit residents of such states.
Investors should consult with their own tax advisers to be sure this is an
appropriate investment based on their residency and each state's income tax
laws. The exchange privilege (or any aspect of it) may be changed or
discontinued and is subject to certain limitations, including certain
restrictions on purchases by market timer accounts (see "Purchases" in the
Prospectus).
TAX-DEFERRED RETIREMENT PLANS
Except as noted below, shares of the Fund are available for purchase by all
types of tax-deferred retirement plans. MFD makes available through investment
dealers plans and/or custody agreements for the following:
Individual Retirement Accounts (IRAs) (for individuals and their
non-employed spouses who desire to make limited contributions to a
tax-deferred retirement program and, if eligible, to receive a federal
income tax deduction for amounts contributed);
Simplified Employee Pension (SEP-IRA) Plans;
Retirement Plans Qualified under Section 401(k) of the Code;
403(b) Plans (deferred compensation arrangements for employees of public
school systems and certain nonprofit organizations); and
Certain other qualified pension and profit-sharing plans.
The plan documents provided by MFD designate a trustee or custodian (unless
another trustee or custodian is designated by the individual or group
establishing the plan) and contain specific information about the plans. Each
plan provides that dividends and distributions will be reinvested automatically.
For further details with respect to any plan, including fees charged by the
trustee, custodian or MFD, tax consequences and redemption information, see the
specific documents for that plan. Plan documents other than those provided by
MFD may be used to establish any of the plans described above. Third party
administrative services, available for some corporate plans, may limit or delay
the processing of transactions.
An investor should consult with his tax adviser before establishing any of the
tax-deferred retirement plans described above.
Class C shares are not currently available for purchase by any retirement plan
qualified under section 401(a) or 403(b) of the Code if the retirement plan
and/or the sponsoring organization subscribe to the MFS FUNDamental 401(k) Plan
or another similar 401(a) or 403(b) recordkeeping program made available by the
Shareholder Servicing Agent.
7. TAX STATUS
The Fund has elected to be treated and intends to qualify each year as a
"regulated investment company" under Subchapter M of the Code by meeting all
applicable requirements of Subchapter M, including requirements as to the nature
of the Fund's gross income, the amount of Fund distributions, and the
composition and holding period of the Fund's portfolio assets. Because the Fund
intends to distribute all of its net investment income and net realized capital
gains to shareholders in accordance with the timing requirements imposed by the
Code, it is not expected that the Fund will be required to pay any federal
income or excise taxes, although the Fund's foreign-source income may be subject
to foreign withholding taxes. If the Fund should fail to qualify as a "regulated
investment company" in any year, the Fund would incur a regular corporate
federal income tax upon its taxable income and Fund distributions would
generally be taxable as ordinary dividend income to the shareholders.
Shareholders of the Fund normally will have to pay federal income taxes, and any
state or local taxes, on the dividends and capital gain distributions they
receive from the Fund. Dividends from income including certain foreign currency
gains and any distributions from net short-term capital gains (whether received
in cash or reinvested in additional shares) are taxable to shareholders as
ordinary income for federal income tax purposes. A portion of the Fund's
ordinary income dividends (but none of its capital gains) is eligible for the
dividends received deduction for corporations if the recipient otherwise
qualifies for that deduction with respect to its holding of Fund shares.
Availability of the deduction for particular corporate shareholders is subject
to certain limitations, and deducted amounts may be subject to the alternative
minimum tax or result in certain basis adjustments. Distributions of net capital
gains (i.e., the excess of the net long-term capital gains over the short-term
capital losses), whether received in cash or invested in additional shares, are
taxable to the Fund's shareholders as long-term capital gains for federal income
tax purposes regardless of how long they have owned shares in the Fund. Fund
dividends declared in October, November, or December and paid the following
January will be taxable to shareholders as if received on December 31 of the
year in which they are declared.
Any dividend or distribution will have the effect of reducing the per share net
asset value of shares in the Fund by the amount of the dividend or distribution.
Shareholders purchasing shares shortly before the record date of any
distribution may thus pay the full price for the shares and then effectively
receive a portion of the purchase price back as a taxable distribution.
In general, any gain or loss realized upon a taxable disposition of shares of
the Fund by a shareholder that holds such shares as a capital asset will be
treated as long-term capital gain or loss if the shares have been held for more
than twelve months and otherwise as a short-term capital gain or loss. However,
any loss realized upon a disposition of shares in the Fund held for six months
or less will be treated as a long-term capital loss to the extent of any
distributions of net capital gain made with respect to those shares. Any loss
realized upon a redemption of shares may also be disallowed under rules relating
to wash sales. Gain may be increased (or loss reduced) upon a redemption of
Class A shares of the Fund within ninety days after their purchase followed by
any purchase (including purchases by exchange or by reinvestment) of the Fund or
of another MFS Fund (or any other shares of an MFS Fund generally sold subject
to a sales charge) without payment of an additional sales charge of Class A
shares.
The Fund's transactions in options, Futures Contracts and Forward Contracts will
be subject to special tax rules that may affect the amount, timing and character
of Fund income and distributions to shareholders. For example, certain positions
held by the Fund on the last business day of each taxable year will be marked to
market (i.e., treated as if closed out) on such day, and any gain or loss
associated with the positions will be treated as 60% long-term and 40%
short-term capital gain or loss. Certain positions held by the Fund that
substantially diminish its risk of loss with respect to other positions in its
portfolio may constitute "straddles", and may be subject to special tax rules
that would cause deferral of Fund losses, adjustments in the holding periods of
Fund securities and conversion of short-term into long-term capital losses.
Certain tax elections exist for straddles that may alter the effects of these
rules. The Fund will limit its activities in options, Forward Contracts and
Futures Contracts, and swaps and related transactions to the extent necessary to
meet the requirements of Subchapter M of the Code.
The Fund's current dividend and accounting policies will affect the amount,
timing, and character of distributions to shareholders, and may, under certain
circumstances, make an economic return of capital taxable to shareholders. The
Fund's investment in certain securities purchased at a market discount will
cause it to realize income prior to the receipt of cash payments with respect to
those securities. In order to distribute this income and avoid a tax on the
Fund, the Fund may be required to liquidate portfolio securities that it might
otherwise have continued to hold, potentially resulting in additional taxable
gain or loss to the Fund.
Special tax considerations apply with respect to foreign investments of the
Fund. Foreign exchange gains and losses realized by the Fund will generally be
treated as ordinary income and losses. The holding of foreign currencies for
non-hedging purposes and investment by the Fund in certain "passive foreign
investment companies" may be limited in order to avoid a tax on the Fund. The
Fund may elect to mark to market any investments in "passive foreign investment
companies" on the last day of each year. This election may cause the Fund to
recognize income prior to the receipt of cash payments with respect to those
investments; in order to distribute this income and avoid a tax on the Fund, the
Fund may be required to liquidate portfolio securities that it might otherwise
have continued to hold.
Investment income received by the Fund from sources within foreign countries may
be subject to foreign income taxes withheld at the source. The United States has
entered into tax treaties with many foreign countries that may entitle the Fund
to a reduced rate of tax or an exemption from tax on such income; the Fund
intends to qualify for treaty reduced rates where available. It is impossible to
determine the effective rate of foreign tax in advance since the amount of the
Fund's assets to be invested within various countries is not known.
If the Fund holds more than 50% of its assets in foreign securities at the close
of its taxable year, the Fund may elect to "pass through" to the Fund's
shareholders foreign income taxes paid. If the Fund so elects, shareholders will
be required to treat their pro rata portion of the foreign income taxes paid by
the Fund as part of the amounts distributed to them by the Fund and thus
includable in their gross income for federal income tax purposes. Shareholders
who itemize deductions would then be able to claim a deduction or credit (but
not both) on their federal income tax returns for such amounts, subject to
certain limitations. Shareholders who do not itemize deductions would be able
(subject to such limitations) to claim a credit but not a deduction.
Dividends and certain other payments to persons who are not citizens or
residents of the United States or U.S. entities ("Non-U.S. Persons") are
generally subject to U.S. tax withholding at a rate of 30%. The Fund intends to
withhold U.S. federal income tax at the rate of 30% on taxable dividends and
other payments to Non-U.S. Persons that are subject to such withholding,
regardless of whether a lower treaty rate may be permitted. Any amounts
overwithheld may be recovered by such persons by filing a claim for refund with
the U.S. Internal Revenue Service within the time period appropriate to such
claims. The Fund is also required in certain circumstances to apply backup
withholding of 31% on taxable dividends and redemption proceeds paid to any
shareholder who does not furnish to the Fund certain information and
certifications or who is otherwise subject to backup withholding. Backup
withholding will not, however, be applied to payments that have been subject to
30% withholding. Distributions received from the Fund by Non-U.S. Persons may
also be subject to tax under the laws of their own jurisdiction.
As long as it qualifies as a regulated investment company under the Code, the
Fund will not be required to pay Massachusetts income or excise taxes.
Distributions of the Fund that are derived from interest on obligations of the
U.S. Government and certain of its agencies and instrumentalities (but generally
not from capital gains realized upon the disposition of such obligations) may be
exempt from state and local taxes in certain states. The Fund intends to advise
shareholders of the extent, if any, to which its distributions consist of such
interest. Shareholders are urged to consult their tax advisers regarding the
possible exclusion of such portion of their dividends for state and local income
tax purposes as well as regarding the tax consequences of an investment in the
Fund.
8. DETERMINATION OF NET ASSET VALUE; PERFORMANCE INFORMATION
NET ASSET VALUE
The net asset value per share of each class of the Fund is determined each day
during which the Exchange is open for trading. (As of the date of this Statement
of Additional Information, the Exchange is open for trading every weekday except
for the following holidays or the days on which they are observed: New Year's
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.) This determination is made once during each
such day as of the close of regular trading on the Exchange by deducting the
amount of the liabilities attributable to the class from the value of the assets
attributable to the class and dividing the difference by the number of shares of
the class outstanding. Forward Contracts will be valued using a pricing model
taking into consideration market data from an external pricing source. Use of
the pricing services has been approved by the Board of Trustees. All other
securities, futures contracts and options in the Fund's portfolio (other than
short-term obligations) for which the principal market is one or more securities
or commodities exchanges (whether domestic or foreign) will be valued at the
last reported sale price or at the settlement price prior to the determination
(or if there has been no current sale, at the closing bid price) on the primary
exchange on which such securities, futures contracts or options are traded; but
if a securities exchange is not the principal market for securities, such
securities will, if market quotations are readily available, be valued at
current bid prices, unless such securities are reported on the NASDAQ system, in
which case they are valued at the last sale price or, if no sales occurred
during the day, at the last quoted bid price. Debt securities (other than
short-term obligations) in the Fund's portfolio are valued on the basis of
valuations furnished by a pricing service which utilizes both dealer-supplied
valuations and electronic data processing techniques which take into account
appropriate factors such as institutional-sized trading in similar groups of
securities, yields, quality, coupon rate, maturity, type of issue, trading
characteristics and other market data, without exclusive reliance upon quoted
prices or exchange or over-the-counter prices, since such valuations are
believed to reflect more accurately the fair value of such securities.
Short-term obligations, if any, in the Fund's portfolio are valued at amortized
cost, which constitutes fair value as determined by the Board of Trustees.
Short-term securities with a remaining maturity in excess of 60 days will be
valued based upon dealer supplied valuations. Portfolio securities and
over-the-counter options and Forward Contracts, for which there are no
quotations or valuations are valued at fair value as determined in good faith by
or at the direction of the Board of Trustees. A share's net asset value is
effective for orders received by the dealer prior to its calculation and
received by MFD, in its capacity as the Fund's distributor, prior to the close
of the business day.
PERFORMANCE INFORMATION
TOTAL RATE OF RETURN: The Fund will calculate its total rate of return for each
class of shares for certain periods by determining the average annual compounded
rates of return over those periods that would cause an investment of $1,000
(made with all distributions reinvested and reflecting the CDSC or the maximum
public offering price) to reach the value of that investment at the end of the
periods. The Fund may also calculate (i) a total rate of return, which is not
reduced by the CDSC (4% maximum for Class B shares) and therefore may result in
a higher rate of return, (ii) a total rate of return assuming an initial account
value of $1,000, which will result in a higher rate of return with respect to
Class A shares since the value of the initial account will not be reduced by the
maximum sales charge (currently 5.75% for Class A shares) and/or (iii) total
rates of return which represent aggregate performance over a period or
year-by-year performance and which may or may not reflect the effect of the
maximum or other sales charge or CDSC. The Fund's average annual total rate of
return for Class B shares, reflecting the CDSC, for the one-year and five-year
periods ended October 31, 1994 and for the period from December 29, 1986 (the
Fund's commencement of investment operations) to October 31, 1994 was 1.91%,
8.06% and 10.91%, respectively. The average annual total rates of return for
Class B shares, not giving effect to the CDSC, for the same periods was 5.91%,
8.35% and 11.04%, respectively. The Fund's average total rate of return for
Class A shares reflecting the initial investment at the current maximum public
offering price for one-year period ended October 31, 1994 and for the period
September 7, 1993 (commencement of offering of this class of shares) to October
31, 1994 was, respectively, 0.88% and 5.49%. The Fund's average annual total
rate of return for Class A shares not giving effect to the sales charge on the
initial investment, for the same periods were 7.03% and 11.08%, respectively.
The Fund's aggregate total rate of return for Class C shares from January 3,
1994 (commencement of offering of this class of shares) to October 31, 1994 was
0.30%. This aggregate total rate of return is not annualized and represents a
limited time frame and, like the total rates of return presented above for Class
A and Class B shares, may not be indicative of future performance.
PERFORMANCE RESULTS: The performance results below, based on an assumed initial
investment of $10,000 in Class B shares, cover the period from December 29, 1986
through December 31, 1994. It has been assumed that dividend and capital gain
distributions were reinvested in additional shares. Any performance results or
total rate of return quotation provided by the Fund should not be considered as
representative of the performance of the Fund in the future since the net asset
value of shares of the Fund will vary based not only on the type, quality and
maturities of the securities held in the Fund's portfolio, but also on changes
in the current value of such securities and on changes in the expenses of the
Fund. These factors and possible differences in the methods used to calculate
total rates of return should be considered when comparing the total rate of
return of the Fund to total rates of return published for other investment
companies or other investment vehicles. Total rate of return reflects the
performance of both principal and income. Current net asset value and account
balance information may be obtained by calling 1-800-MFS-TALK (637-8255).
MFS WORLD EQUITY FUND
- --------------------------------------------------------------------------------
DIRECT CAPITAL GAIN DIVIDEND TOTAL
INVESTMENT REINVESTMENT REINVESTMENT VALUE
- --------------------------------------------------------------------------------
12/31/86 $ 9,917 $ 0 $ 0 $ 9,917
12/31/87 13,128 0 0 13,128
12/31/88 12,798 0 439 13,237
12/31/89 15,974 360 548 16,882
12/31/90 14,817 706 561 16,084
12/31/91 15,867 797 601 17,265
12/31/92 15,938 991 604 17,533
12/31/93 19,728 1,998 902 22,628
12/31/94 17,166 2,871 1,750 21,787
*For the period from the start of business, December 29, 1986, through December
31, 1987.
EXPLANATORY NOTES: The results shown in the table take into account the annual
distribution fee but not the CDSC. No adjustment has been made for any income
taxes payable by shareholders.
From time to time each Fund may, as appropriate, quote Fund rankings or reprint
all or a portion of evaluations of fund performance and operations appearing in
various independent publications, including but not limited to the following:
Money, Fortune, U.S. News and World Report, Kiplinger's Personal Finance, The
Wall Street Journal, Barron's, Investors Business Daily, Newsweek, Financial
World, Financial Planning, Investment Advisor, USA Today, Pensions and
Investments, SmartMoney, Forbes, Global Finance, Registered Representative,
Institutional Investor, the Investment Company Institute, Johnson's Charts,
Morningstar, Lipper Analytical Services, Inc., CDA Wiesenberger, Shearson Lehman
and Saloman Bros. Indices, Ibbotson, Business Week, Lowry Associates, Media
General, Investment Company Data, The New York Times, Your Money, Strangers
Investment Advisor, Financial Planning on Wall Street, Standard and Poor's,
Individual Investor, The 100 Best Mutual Funds You Can Buy by Gordon K.
Williamson, Consumer Price Index, and Sanford C. Bernstein & Co. Fund
performance may also be compared to the performance of other mutual funds
tracked by financial or business publications or periodicals.
The Fund may also quote evaluations mentioned in independent radio or television
broadcasts.
From time to time the Fund may use charts and graphs to illustrate the past
performance of various indices such as those mentioned above and illustrations
using hypothetical rates of return to illustrate the effects of compounding and
tax-deferral.
The Fund may advertise examples of the effects of periodic investment plans,
including the principle of dollar cost averaging. In such a program, an investor
invests a fixed dollar amount in a fund at periodic intervals, thereby
purchasing fewer shares when prices are high and more shares when prices are
low. While such a strategy does not assure a profit or guard against a loss in a
declining market, the investor's average cost per share can be lower than if
fixed numbers of shares are purchased at the same intervals.
MFS FIRSTS: MFS has a long history of innovations.
- -- 1924 -- Massachusetts Investors Trust is established as the first mutual fund
in America.
- -- 1924 -- Massachusetts Investors Trust is the first mutual fund to make full
public disclosure of its operations in shareholder reports.
- -- 1932 -- One of the first internal research departments is established to
provide in-house analytical capability for an investment management firm.
- -- 1933 -- Massachusetts Investors Trust is the first mutual fund to register
under the Securities Act of 1933.
- -- 1936 -- Massachusetts Investors Trust is the first mutual fund to let
shareholders take capital gain distributions either in additional shares or
in cash.
- -- 1976 -- MFS(R) Municipal Bond Fund is among the first municipal bond funds
established.
- -- 1979 -- Spectrum becomes the first combination fixed/variable annuity with no
initial sales charge.
- -- 1981 -- MFS(R) World Governments Fund is established as America's first
globally diversified fixed/income mutual fund.
- -- 1984 -- MFS(R) Municipal High Income Fund is the first mutual fund to seek
high tax-free income from lower-rated municipal securities.
- -- 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual fund to target
and shift investments among industry sectors for shareholders.
- -- 1986 -- MFS(R) Municipal Income Trust is the first closed-end, high-yield
municipal bond fund traded on the New York Stock Exchange.
- -- 1987 -- MFS(R) Multimarket Income Trust is the first-closed-end, multimarket
high income fund listed on the New York Stock Exchange.
- -- 1989 -- MFS(R) Regatta becomes America's first non-qualified market-value-
adjusted fixed/variable annuity.
- -- 1990 -- MFS(R) World Total Return Fund is the first global balanced fund.
- -- 1993 -- MFS(R) World Growth Fund is the first global emerging markets fund to
offer the expertise of two sub-advisers.
- -- 1993 -- MFS becomes money manager of MFS Union Standard Trust, the first
trust to invest in companies deemed to be union-friendly by an Advisory Board
of senior labor officials, senior managers of companies with significant
labor contracts, academics and other national labor leaders or experts.
9. DISTRIBUTION PLANS
The Trustees have adopted a Distribution Plan for each of Class A, Class B and
Class C shares (the "Distribution Plans") 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 each Distribution Plan would benefit the Fund and
the respective class of shareholders. The Distribution Plans are designed to
promote sales, thereby increasing the net assets of the Fund. Such an increase
may reduce the expense ratio to the extent the Fund's fixed costs are spread
over a larger net asset base. Also, an increase in net assets may lessen the
adverse effects that could result were the Fund required to liquidate portfolio
securities to meet redemptions. There is, however, no assurance that the net
assets of the Fund will increase or that the other benefits referred to above
will be realized.
CLASS A DISTRIBUTION PLAN: The Distribution Plan relating to Class A shares (the
"Class A Distribution Plan") provides that the Fund will pay MFD up to (but not
necessarily all of) an aggregate of 0.35% of the average daily net assets
attributable to the Class A shares annually in order that MFD may pay expenses
on behalf of the Fund related to the distribution and servicing of its Class A
shares. The expenses to be paid by MFD on behalf of the Fund include a service
fee to securities dealers which enter into a sales agreement with MFD of up to
0.25% of the portion of the Fund's average daily net assets attributable to the
Class A shares owned by investors for whom that securities dealer is the holder
or dealer of record. These payments are partial consideration for personal
services and/or account maintenance performed by such dealers with respect to
Class A shares. MFD may from time to time reduce the amount of the service fee
paid for shares sold prior to a certain date. MFD may also retain a distribution
fee of 0.10% of the Fund's average daily net assets attributable to Class A
shares as partial consideration for services performed and expenses incurred in
the performance of MFD's obligations as to Class A shares under the Distribution
Agreement with the Fund. Any remaining funds may be used to pay for other
distribution related expenses as described in the Prospectus. Payments under the
Class A Distribution Plan will become payable when the net assets of the Fund
attributable to Class A shares first equal or exceed $40 million. Thereafter,
0.10% of the distribution fee will be waived. Service fees may be reduced for a
securities dealer that is the holder or dealer of record for an investor who
owns shares of the Fund having a net asset value at or above a certain dollar
level. No service fee will be paid (i) to any securities dealer who is the
holder or dealer of record for investors who own shares having an aggregate net
asset value less than $750,000, or such other amount as may be determined from
time to time by MFD (MFD, however, may waive this minimum amount requirement
from time to time if the dealer satisfies certain criteria), or (ii) to any
insurance company which has entered into an agreement with the Fund and MFD that
permits such insurance company to purchase shares from the Fund at their net
asset value in connection with annuity agreements issued in connection with the
insurance company's separate accounts. Dealers may from time to time be required
to meet certain other criteria in order to receive service fees. MFD or its
affiliates are entitled to retain all service fees payable under the Class A
Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by MFD or its affiliates
for shareholder accounts. Certain banks and other financial institutions that
have agency agreements with MFD will receive agency transaction and service
calculation fees that are the same as commissions and service fees to dealers.
Payments will commence under the Class A Distribution Plan on the date on which
the value of the net assets of the Fund attributable to Class A Shares first
equal or exceed $40,000,000.
CLASS B DISTRIBUTION PLAN: The Class B Distribution Plan relating to Class B
shares (the "Class B Distribution Plan") provides that the Fund shall pay MFD,
as the Fund's distributor for its Class B shares, a daily distribution fee equal
on an annual basis to 0.75% of the Fund's average daily net assets attributable
to Class B shares and will pay MFD a service fee of up to 0.25% per annum of the
Fund's average daily net assets attributable to Class B shares (which MFD will
in turn pay to securities dealers which enter into a sales agreement with MFD at
a rate of up to 0.25% per annum of the Fund's average daily net assets
attributable to Class B shares owned by investors for whom that securities
dealer is the holder or dealer of record). This service fee is intended to be
additional consideration for all personal services and/or account maintenance
services rendered by the dealer with respect to Class B shares. MFD will advance
to dealers the first-year service fee at a rate equal to 0.25% per annum of the
amount invested. As compensation therefor, MFD may retain the service fee paid
by the Fund with respect to such shares for the first year after purchase.
Dealers will become eligible for additional service fees with respect to such
shares commencing in the thirteenth month following purchase. Except in the case
of the first year service fee, no service fee will be paid to any securities
dealer who is the holder or dealer of record for investors who own shares having
an aggregate net asset value less than $750,000, or such other amount as may be
determined from time to time by MFD. MFD, however, may waive this minimum amount
requirement from time to time if the dealer satisfies certain criteria. Dealers
may from time to time be required to meet certain other criteria in order to
receive service fees. MFD or its affiliates are entitled to retain all service
fees payable under the Class B Distribution Plan for which there is no dealer of
record or for which qualification standards have not been met as partial
consideration for personal services and/or account maintenance services
performed by MFD or its affiliates for shareholder accounts.
The purpose of distribution payments to MFD under the Class B Distribution Plan
is to compensate MFD for its distribution services to the Fund. MFD pays
commissions to dealers as well as for expenses of printing prospectuses and
reports used for sales purposes, expenses of printing of sales literature and
other distribution related expenses, including, without limitation, the cost
necessary to provide distribution-related services, of personnel, travel, office
expenses and equipment. The Class B Distribution Plan also provides that MFD
will receive all contingent deferred sales charges relating to Class B shares
("CDSC"). (See "Distribution Plans" and "Purchases" in the Prospectus.)
For the Fund's fiscal year ended October 31, 1994, the Fund incurred expenses of
$1,671,427 (equal to 1.0% of the average daily net assets attributable to Class
B shares), relating to the distribution and servicing of Class B shares of which
FSI retained $1,252,855 and securities dealers of the Fund and certain banks and
other financial institutions received $418,572.
CLASS C DISTRIBUTION PLAN: The Distribution Plan relating to Class C shares (the
"Class C Distribution Plan") provides that the Fund will pay MFD a distribution
fee of up to 0.75% per annum of the Fund's average daily net assets attributable
to Class C shares and will annually pay MFD a service fee of up to 0.25% per
annum of the Fund's average daily net assets attributable to Class C shares
(which MFD will in turn pay to securities dealers which enter into a sales
agreement with MFD at a rate of up to 0.25% per annum of the Fund's daily net
assets attributable to Class C shares owned by investors for whom that
securities dealer is the holder or dealer of record).
The distribution/service fees attributable to Class C shares are designed to
permit an investor to purchase such shares through a broker-dealer without the
assessment of an initial sales charge or a CDSC while allowing MFD to compensate
broker-dealers in connection with the sale of such shares.
The service fee is intended to be additional consideration for all personal
services and/or account maintenance service rendered by the dealer with respect
to Class C shares. MFD or its affiliates are entitled to retain all service fees
payable under the Class C distribution Plan with respect to accounts for which
there is no dealer of record as partial consideration for personal services
and/or account maintenance services performed by MFD or its affiliates for
shareholder accounts.
The purpose of the distribution payments to MFD under the Class C Distribution
Plan is to compensate MFD for its distribution services to the Fund.
Distribution payments under the Plan will be used by MFD to pay securities
dealers a distribution fee in an amount equal on an annual basis to 0.75% of the
Fund's average daily net assets attributable to Class C shares owned by
investors for whom securities dealer is the holder or dealer of record.
(Therefore, the total amount of distribution/service fees paid to a dealer on an
annual basis is 1.00% of the Fund's average daily net assets attributable to
Class C shares owned by investors for whom the securities dealer is the holder
or dealer of record.) MFD also pays expenses of printing prospectuses and
reports used for sales purposes, expenses with respect to the preparation and
printing of sales literature and other distribution-related expenses, including,
without limitation, the compensation of personnel and all costs of travel,
office expense and equipment. Since MFD's compensation is not directly tied to
its expenses, the amount of compensation received by MFD during any year may be
more or less than its actual expenses. For this reason, this type of
distribution fee arrangement is characterized by the staff of the SEC as being
of the "compensation" variety. However, the Fund is not liable for any expenses
incurred by MFD in excess of the amount of compensation it receives. Certain
banks and other financial institutions that have agency agreements with MFD will
receive agency transaction and service fees that are the same as distribution
and service fees to dealers. Fees payable under the Class C Distribution Plan
are charged to, and therefore reduce, income allocated to Class C shares.
During the period January 3, 1994 to October 31, 1994, the Fund incurred
expenses of $10,673 (equal to 1.00% of its average daily net assets attributable
to Class C shares on an annualized basis) relating to the distribution and
servicing of Class C shares, all of which was paid to securities dealers of the
Fund and certain banks and other financial institutions.
GENERAL: Each of the Distribution Plans will remain in effect until August 1,
1995, and will continue in effect thereafter only if such continuance is
specifically approved at least annually by vote of both the Trustees and a
majority of the Trustees who are not "interested persons" or financially
interested parties to such Plan ("Distribution Plan Qualified Trustees"). Each
of the Distribution Plans also requires that the Fund and MFD each shall provide
to the Trustees, and the Trustees shall review, at least quarterly, a written
report of the amounts expended (and purposes therefor) under such Plan. Each of
the Distribution Plans may be terminated at any time by vote of a majority of
the Distribution Plan Qualified Trustees or by vote of the holders of a majority
of the respective class of the Fund's shares (as defined in "Investment
Restrictions"). All agreements relating to any of the Distribution Plans entered
into between the Fund or MFD and other organizations must be approved by the
Board of Trustees, including a majority of the Distribution Plan Qualified
Trustees. Agreements under any of the Distribution Plans must be in writing,
will be terminated automatically if assigned, and may be terminated at any time
without payment of any penalty, by vote of a majority of the Distribution Plan
Qualified Trustees or by vote of the holders of a majority of the respective
class of the Fund's shares. None of the Distribution Plans may be amended to
increase materially the amount of permitted distribution expenses without the
approval of a majority of the respective class of the Fund's shares (as defined
in "Investment Restrictions") or may be materially amended in any case without a
vote of the Trustees an a majority of the Distribution Plan Qualified Trustees.
The selection and nomination of Distribution Plan Qualified Trustees shall be
committed to the discretion of the non-interested Trustees then in office. No
Trustee who is not an "interested person" has any financial interest in any of
the Distribution Plans or in any related agreement.
10. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Trust's Declaration of Trust permits the Trustees of the Fund to issue an
unlimited number of full and fractional Shares of Beneficial Interest (without
par value) of one or more separate series and to divide or combine the shares of
any series into a greater or lesser number of shares without thereby changing
the proportionate beneficial interests in that series. The Trustees have
currently authorized shares of the Fund and two other series. The Declaration of
Trust further authorizes the Trustees to classify or reclassify any series of
shares into one or more classes. Pursuant thereto, the Trustees have authorized
the issuance of two classes of shares of each of the Trust's three series, Class
A, Class B and Class C shares. Each share of a class of the Fund represents an
equal proportionate interest in the assets of the Fund allocable to that class.
Upon liquidation of the Fund, shareholders of each class are entitled to share
PRO RATA in the net assets of the Fund allocable to such class available for
distribution to shareholders. The Trust reserves the right to create and issue
additional series or classes of shares, in which case the shares of each class
of a series would participate equally in the earnings, dividends and assets
allocable to that class of the particular series.
Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to meetings of shareholders.
Although Trustees are not elected annually by the shareholders, shareholders
have under certain circumstances the right to remove one or more Trustees in
accordance with the provisions of Section 16(c) of the 1940 Act. No material
amendment may be made to the Declaration of Trust without the affirmative vote
of a majority of the Trust's shares. Shares have no pre-emptive or conversion
rights (except as described in "Purchases -- Conversion of Class B Shares" in
the Prospectus). Shares are fully paid and non-assessable. The Trust may enter
into a merger or consolidation, or sell all or substantially all of its assets
(or all or substantially all of the assets belonging to any series of the
Trust), if approved by the vote of the holders of two-thirds of the Trust's
outstanding shares voting as a single class, or of the affected series of the
Trust, as the case may be, except that if the Trustees of the Trust recommend
such merger, consolidation or sale, the approval by vote of the holders of a
majority of the Trust's or the affected series' outstanding shares (as defined
in "Investment Restrictions") will be sufficient. The Trust or any series of the
Trust may also be terminated (i) upon liquidation and distribution of its
assets, if approved by the vote of the holders of two-thirds of its outstanding
shares, or (ii) by the Trustees by written notice to the shareholders of the
Trust or the affected series. If not so terminated, the Trust will continue
indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Trust and provides for indemnification
and reimbursement of expenses out of Trust property for any shareholder held
personally liable for the obligations of the Trust. The Declaration of Trust
also provides that it shall maintain appropriate insurance (for example,
fidelity bonding and errors and omissions insurance) for the protection of the
Trust, its shareholders, Trustees, officers, employees and agents covering
possible tort or other liabilities. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which both inadequate insurance existed and the Trust itself was unable to
meet its obligations.
The Declaration of Trust further provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust
and that the Trustees will not be liable for any action or failure to act, but
nothing in the Declaration of Trust protects a Trustee against any liability to
which he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct of
his office.
11. INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS
Deloitte & Touche LLP are the Fund's independent certified public accountants.
The Portfolio of Investments at October 31, 1994, the Statement of Assets and
Liabilities at October 31, 1994, the related Statements of Operations for the
year ended October 31, 1994, the Statements of Changes in Net Assets for the
year ended October 31, 1994, and the eleven months ended October 31, 1993 and
the Financial Highlights for the year ended October 31, 1994, the eleven months
ended October 31, 1993 and for each of the six years in the period ended
November 30, the Notes to Financial Statements and the Independent Auditors'
Report, each of which is included in the Annual Report to shareholders of the
Fund, are incorporated by reference into this Statement of Additional
Information and have been so incorporated in reliance upon the report of
Deloitte & Touche LLP independent certified public accountants, as experts in
accounting and auditing. A copy of the Annual Report accompanies this Statement
of Additional Information.
<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 ACCOUNTANTS
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
MFS(R)
World
Equities Fund
500 BOYLSTON STREET
BOSTON, MA 02116
[LOGO]
THE FIRST NAME IN MUTUAL FUNDS
MWE-13-3/95/500 04/204/304
<PAGE>
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS - October 31, 1994
Common Stocks - 95.7%
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Issuer Shares Value
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Foreign - 67.7%
Argentina - 1.7%
Mirgor Sacifia, ADR (Auto Parts)<F1><F3> 108,100 $ 972,900
YPF S.A., ADR (Oils) 98,000 2,364,250
-----------
$ 3,337,150
- ----------------------------------------------------------------------------------------------------------------------
Australia - 2.8%
Australia & New Zealand Bank Group Ltd. (Finance) 973,074 $ 2,816,736
Seven Network Ltd. (Entertainment) 1,147,000 2,613,590
-----------
$ 5,430,326
- ----------------------------------------------------------------------------------------------------------------------
Canada - 5.2%
Avenor, Inc. (Forest and Paper
Products)<F1> 181,000 $ 3,563,124
Call-Net Enterprises, Inc., ADR
(Telecommunications)<F1><F3> 85,500 537,338
Rogers Communications, Inc.
(Telecommunications)<F1> 327,000 4,802,201
Teleglobe, Inc. (Telecommunications) 97,900 1,221,488
-----------
$ 10,124,151
- ----------------------------------------------------------------------------------------------------------------------
Chile - 0.1%
Empresas Telex-Chile S.A., ADR
(Telecommunications)<F1> 11,600 $ 213,150
- ----------------------------------------------------------------------------------------------------------------------
Finland - 1.8%
Aamulehti Yhtymae Oy II
(Publishing)<F1> 23,900 $ 540,054
Kesko (Retail) 80,000 978,598
Repola Corp. (Forest and Paper Products)<F3> 92,000 1,928,951
-----------
$ 3,447,603
- ----------------------------------------------------------------------------------------------------------------------
France - 3.9%
LVMH Moet-Hennessy (Food and Beverage) 8,600 $ 1,387,366
Michelin, "B" (Tire and Rubber)<F1> 101,000 4,230,418
Total S.A., "B" (Oils) 30,000 1,946,939
-----------
$ 7,564,723
- ----------------------------------------------------------------------------------------------------------------------
Germany - 5.5%
BASF AG (Chemicals) 12,000 $ 2,540,979
Hornbach Baumarkt AG (Retail) 4,018 2,178,466
Schering AG (Pharmaceuticals) 4,300 2,873,437
Volkswagen AG (Automotive) 10,300 3,025,180
-----------
$ 10,618,062
- ----------------------------------------------------------------------------------------------------------------------
Hong Kong - 4.1%
Consol Electric Power Asia Ltd., ADR (Utility -
Electric)<F1><F3>* 57,000 $ 1,311,000
National Mutual Asia Ltd. (Insurance) 3,164,000 2,047,497
Peregrine Investment Holdings (Finance) 1,052,000 1,838,089
Television Broadcasting Ltd. (Broadcasting) 143,000 660,726
Varitronix International Ltd. (Manufacturing) 640,000 948,424
Wharf Holdings Ltd. (Real Estate) 280,000 1,105,287
-----------
$ 7,911,023
- ----------------------------------------------------------------------------------------------------------------------
Indonesia - 0.8%
Pt Indosat, ADR
(Telecommunications)<F1> 37,600 $ 1,475,800
- ----------------------------------------------------------------------------------------------------------------------
Japan - 9.6%
Asatsu, Inc. (Advertising) 40,000 $ 2,057,851
Bridgestone Corp. (Tire and Rubber) 148,000 2,446,281
Canon, Inc. (Office Equipment) 44,000 818,182
DAI Nippon Printing Co., Ltd. (Office Equipment) 126,000 2,342,975
DDI Corp. (Telecommunications) 260 2,358,264
Daiwa House Industry Co. (Manufacturing - Housing) 66,000 913,636
East Japan Railway Co. (Railroad) 280 1,397,107
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Common Stocks - continued
- ----------------------------------------------------------------------------------------------------------------------
Issuer Shares Value
- ----------------------------------------------------------------------------------------------------------------------
Foreign - continued
Japan - continued
Matsushita Electric Industrial Co. (Electric) 128,000 $ 2,128,926
Mos Food Services (Food Services) 23,000 855,372
Nissen Corp. (Retail) 23,000 940,909
Osaka Sanso Kogyo (Chemicals) 330,000 1,482,954
Tokyo Broadcasting System (Broadcasting) 53,000 919,835
-----------
$ 18,662,292
- ----------------------------------------------------------------------------------------------------------------------
Mexico - 2.4%
Grupo Iusacell, ADR
(Telecommunications)<F1> 62,280 $ 1,915,110
Grupo Iusacell S.A., ADR, "D"
(Telecommunications)<F1> 6,120 171,360
Telefonos de Mexico S.A., ADR (Utility - Telephone) 45,000 2,480,625
-----------
$ 4,567,095
- ----------------------------------------------------------------------------------------------------------------------
Netherlands - 1.9%
Frans Maas Group (Transportation) 37,000 $ 1,177,113
Royal Dutch Petroleum Co. (Oils) 21,400 2,492,094
-----------
$ 3,669,207
- ----------------------------------------------------------------------------------------------------------------------
New Zealand - 1.7%
Lion Nathan Ltd. (Food and Beverage) 1,762,000 $ 3,338,900
- ----------------------------------------------------------------------------------------------------------------------
South Korea - 1.0%
Hansol Paper (Forest and Paper
Products)<F1> 449 $ 13,358
Hansol Paper Ltd., GDR (Forest and Paper
Products)<F1><F3> 360 8,994
Korea Electric Power Corp. (Utility -
Electric)<F1> 45,000 1,710,790
Korea Electric Power Corp., ADR (Utility -
Electric)<F1> 12,000 234,000
-----------
$ 1,967,142
- ----------------------------------------------------------------------------------------------------------------------
Spain - 3.4%
Acerinox (Iron and Steel) 25,000 $ 2,770,892
Fabrica Autom Renault de Esp
(Automotive)<F1> 36,000 1,727,309
Iberdrola (Utility - Electric) 310,000 2,045,182
-----------
$ 6,543,383
- ----------------------------------------------------------------------------------------------------------------------
Sweden - 9.5%
Asea, "B" (Electrical Equipment) 40,000 $ 2,910,794
Astra AB, "B" (Pharmaceuticals) 258,000 6,905,608
Autoliv AB (Auto Parts)<F1> 42,000 1,487,182
Hennes & Mauritz AB, "B" (Retail) 21,000 1,165,154
Kalmar Industries (Manufacturing)<F1> 54,200 657,357
Marieberg Tidnings, "A" (Publishing) 27,500 678,558
Skandinaviska Enskilda Banken, "A" (Banks and Credit
Companies)<F1> 373,000 2,443,924
TV 4 AB (Broadcasting)<F1> 88,500 2,257,747
-----------
$ 18,506,324
- ----------------------------------------------------------------------------------------------------------------------
Switzerland - 2.2%
CS Holdings, Registered Shares (Finance) 31,235 $ 2,652,733
Publicitas (Advertising)<F1> 2,000 1,698,564
-----------
$ 4,351,297
- ----------------------------------------------------------------------------------------------------------------------
Thailand - 0.1%
Electricity Generating Public Co., Ltd. (Utility -
Electric)<F1><F2><F3> 300,000 $ 267,571
- ----------------------------------------------------------------------------------------------------------------------
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Common Stocks - continued
- ----------------------------------------------------------------------------------------------------------------------
Issuer Shares Value
- ----------------------------------------------------------------------------------------------------------------------
Foreign - continued
United Kingdom - 10.0%
ASDA Group PLC (Supermarkets) 3,580,400 $ 3,573,952
British Steel PLC (Iron and Steel) 1,928,000 5,055,832
CLM Insurance Fund PLC (Insurance) 530,000 763,214
New London Capital PLC
(Insurance)<F1> 670,000 811,324
PowerGen PLC (Utility - Electric) 316,000 2,937,130
Scottish Television PLC (Broadcasting) 115,000 818,606
Storehouse PLC (Retail) 750,000 2,663,229
Takare PLC (Medical and Health Technology and Services)<F3> 720,000 2,668,630
-----------
$ 19,291,917
- ----------------------------------------------------------------------------------------------------------------------
Total Foreign (Identified Cost, $116,882,156) $131,287,116
- ----------------------------------------------------------------------------------------------------------------------
U.S. Dollars - 28.0%
Aerospace - 0.8%
Allied Signal, Inc. 44,000 $ 1,523,500
- ----------------------------------------------------------------------------------------------------------------------
Broadcasting - 0.1%
Central European Media Enterprises Ltd.,
"A"<F1> 6,000 $ 97,500
- ----------------------------------------------------------------------------------------------------------------------
Building Materials - 1.0%
Owens Corning Fiberglass Corp.<F1> 60,000 $ 1,942,500
- ----------------------------------------------------------------------------------------------------------------------
Business Services - 1.4%
Ceridian Corp.<F1> 108,000 $ 2,808,000
- ----------------------------------------------------------------------------------------------------------------------
Cellular Phones - 3.7%
AirTouch Communications<F1> 78,000 $ 2,330,250
LIN Broadcasting Corp.<F1> 35,000 4,830,000
-----------
$ 7,160,250
- ----------------------------------------------------------------------------------------------------------------------
Chemicals - 1.1%
Grace (W.R.) & Co. 52,000 $ 2,060,500
- ----------------------------------------------------------------------------------------------------------------------
Computer Software - Personal Computers - 1.1%
Microsoft Corp.<F1> 35,000 $ 2,205,000
- ----------------------------------------------------------------------------------------------------------------------
Computer Software - Systems - 2.0%
Compuware Corp.<F1> 61,000 $ 2,386,625
Sybase, Inc.<F1> 28,000 1,466,500
-----------
$ 3,853,125
- ----------------------------------------------------------------------------------------------------------------------
Consumer Goods and Services - 3.6%
American Greetings Corp., "A" 88,000 $ 2,409,000
Colgate-Palmolive Co. 49,000 2,989,000
Philip Morris Cos., Inc. 25,000 1,531,250
-----------
$ 6,929,250
- ----------------------------------------------------------------------------------------------------------------------
Electronics - 1.1%
Intel Corp. 33,000 $ 2,050,125
- ----------------------------------------------------------------------------------------------------------------------
Entertainment - 1.3%
Viacom, Inc., "B"<F1> 64,251 $ 2,521,852
- ----------------------------------------------------------------------------------------------------------------------
Financial Institutions - 0.7%
Federal Home Loan Mortgage Corp. 26,500 $ 1,444,250
- ----------------------------------------------------------------------------------------------------------------------
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Common Stocks - continued
- ----------------------------------------------------------------------------------------------------------------------
Issuer Shares Value
- ----------------------------------------------------------------------------------------------------------------------
U.S. Dollars - continued
Insurance - 2.0%
AMBAC, Inc. 25,000 $ 875,000
CIGNA Corp. 33,000 2,173,875
Equitable of Iowa Cos. 25,700 909,137
-----------
$ 3,958,012
- ----------------------------------------------------------------------------------------------------------------------
Machinery - 0.8%
Deere & Co., Inc. 21,000 $ 1,506,750
- ----------------------------------------------------------------------------------------------------------------------
Medical and Health Technology and Services - 1.1%
United Healthcare Corp. 40,000 $ 2,110,000
- ----------------------------------------------------------------------------------------------------------------------
Metals and Minerals - 0.7%
Allegheny Ludlum Corp. 72,000 $ 1,431,000
- ----------------------------------------------------------------------------------------------------------------------
Precious Metals and Minerals - 1.3%
Santa Fe Pacific Corp. 158,000 $ 2,429,250
- ----------------------------------------------------------------------------------------------------------------------
Printing and Publishing - 0.6%
Meredith Corp. 22,000 $ 1,078,000
- ----------------------------------------------------------------------------------------------------------------------
Retail - 2.6%
Federated Department Stores, Inc.<F1> 134,000 $ 2,780,500
Home Depot, Inc. 49,000 2,229,500
-----------
$ 5,010,000
- ----------------------------------------------------------------------------------------------------------------------
Special Products and Services - 1.0%
Stanley Works 50,000 $ 1,987,500
- ----------------------------------------------------------------------------------------------------------------------
Total U.S. Dollars (Identified Cost, $48,049,073) $ 54,106,364
- ----------------------------------------------------------------------------------------------------------------------
Total Common Stocks (Identified Cost, $164,931,229) $185,393,480
- ----------------------------------------------------------------------------------------------------------------------
Short-Term Obligations - 5.0%
- ----------------------------------------------------------------------------------------------------------------------
Principal Amount
(000 Omitted)
- ----------------------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp., due 11/01/94 $5,850 $ 5,850,000
Federal Home Loan Mortgage Corp., due 11/07/94 3,885 3,881,976
- ----------------------------------------------------------------------------------------------------------------------
Total Short-Term Obligations, at Amortized Cost and Value $ 9,731,976
- ----------------------------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $174,663,205) $195,125,456
Other Assets, Less Liabilities - (0.7)% (1,279,508)
- ----------------------------------------------------------------------------------------------------------------------
Net Assets - 100.0% $193,845,948
- ----------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Non-income producing security.
<F2> Security valued by or at the direction of the Trustees.
<F3> Restricted security - SEC Rule 144A.
</FN>
</TABLE>
See notes to financial statements
<PAGE>
<TABLE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- ------------------------------------------------------------------------------------------
<CAPTION>
October 31, 1994
- ------------------------------------------------------------------------------------------
Assets:
<S> <C>
Investments, at value (identified cost, $174,663,205) $195,125,456
Cash 85,337
Foreign currency, at value (identified cost, $21,901) 22,757
Receivable for investments sold 3,138,902
Receivable for Fund shares sold 461,510
Dividends receivable 245,153
Other assets 19,802
-----------
Total assets $199,098,917
-----------
Liabilities:
Payable for investments purchased $ 2,745,351
Payable for Fund shares reacquired 622,159
Net payable for forward foreign currency exchange contracts sold 1,493,708
Net payable for forward foreign currency exchange contracts 72,802
Payable to affiliates -
Management fee 15,787
Shareholder servicing agent fee 41,416
Distribution fee 10,728
Accrued expenses and other liabilities 251,018
-----------
Total liabilities $ 5,252,969
-----------
Net assets $193,845,948
-----------
Net assets consist of:
Paid-in capital $156,662,034
Unrealized appreciation on investments and translation of assets and
liabilities in foreign currencies 18,907,288
Accumulated undistributed net realized gain on investments and foreign
currency transactions 18,305,276
Accumulated distributions in excess of net investment income (28,650)
-----------
Total $193,845,948
-----------
Shares of beneficial interest outstanding 11,538,736
-----------
Class A shares:
Net asset value and redemption price per share
(net assets of $16,967,906 / 1,000,924 shares of beneficial interest $16.95
outstanding) ------
Offering price per share (100/94.25) $17.98
------
Class B shares:
Net asset value, redemption price and offering price per share
(net assets of $175,438,218 / 10,452,100 shares of beneficial $16.78
interest outstanding) ------
Class C shares:
Net asset value, redemption price and offering price per share
(net assets of $1,439,824 / 85,712 shares of beneficial interest $16.80
outstanding) ------
On sales of $50,000 or more, the offering price of Class A shares is reduced. A
contingent deferred sales charge may be imposed on redemptions of Class A and
Class B shares.
</TABLE>
See notes to financial statements
<PAGE>
<TABLE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- -----------------------------------------------------------------------------------------------
<CAPTION>
Year Ended October 31, 1994
- -----------------------------------------------------------------------------------------------
<S> <C>
Net investment income:
Income -
Dividends $ 2,499,211
Interest 516,853
Foreign taxes withheld (219,008)
-----------
Total investment income $ 2,797,056
-----------
Expenses -
Management fee $ 1,778,464
Trustees' compensation 38,324
Shareholder servicing agent fee (Class A) 14,597
Shareholder servicing agent fee (Class B) 367,504
Shareholder servicing agent fee (Class C) 1,601
Distribution and service fee (Class B) 1,671,427
Distribution and service fee (Class C) 10,673
Custodian fee 174,686
Printing 81,108
Auditing fees 62,848
Postage 41,734
Legal fees 7,318
Miscellaneous 209,789
-----------
Total expenses $ 4,460,073
-----------
Net investment loss $ (1,663,017)
-----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis)-
Investment transactions $ 24,927,307
Foreign currency and forward foreign currency exchange contracts
and other transactions denominated in foreign currency (4,215,885)
-----------
Net realized gain on investments $ 20,711,422
-----------
Change in unrealized appreciation (depreciation) -
Investments $ (8,075,350)
Foreign currency and forward foreign currency exchange contracts (2,239,151)
-----------
Net unrealized loss on investments $(10,314,501)
-----------
Net realized and unrealized gain on investments and foreign currency $ 10,396,921
-----------
Increase in net assets from operations $ 8,733,904
-----------
</TABLE>
See notes to financial statements
<PAGE>
<TABLE>
FINANCIAL STATEMENTS - continued
Statement of Changes in Net Assets
- -------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended Eleven Months Ended
October 31, 1994 October 31, 1993
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment loss $ (1,663,017) $ (734,335)
Net realized gain on investments and
foreign currency transactions 20,711,422 7,392,985
Net unrealized gain (loss) on investments
and foreign currency (10,314,501) 18,525,745
----------- -----------
Increase in net assets from operations $ 8,733,904 $ 25,184,395
----------- -----------
Distributions declared to shareholders -
From net realized gain on investments and
foreign currency transactions (Class A) $ (180,562) $ --
From net realized gain on investments and
foreign currency transactions (Class B) (6,235,701) (1,141,735)
In excess of net investment income (Class A) (16,838) --
In excess of net investment income (Class B) (128,567) --
----------- -----------
Total distributions declared to
shareholders $ (6,561,668) $ (1,141,735)
----------- -----------
Fund share (principal) transactions -
Net proceeds from sale of shares $151,326,611 $ 63,717,518
Net asset value of shares issued to
shareholders in reinvestment
of distributions 5,986,233 1,053,221
Cost of shares reacquired (113,290,222) (42,712,346)
----------- -----------
Increase (decrease) in net assets from
Fund share transactions $ 44,022,622 $ 22,058,393
----------- -----------
Total increase (decrease) in net
assets $ 46,194,858 $ 46,101,053
Net assets:
At beginning of period 147,651,090 101,550,037
----------- -----------
At end of period (including accumulated
distributions in excess of net
investment income of $28,650 and
$1,935,877, respectively) $193,845,948 $147,651,090
----------- -----------
</TABLE>
See notes to financial statements
<PAGE>
<TABLE>
FINANCIAL STATEMENTS - continued
Financial Highlights
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended October 31, Year Ended November 30,
- ----------------------------------------------------------------------------------------------------------------------------------
1994 1993<F1> 1994 1993<F4> 1992 1991
- ----------------------------------------------------------------------------------------------------------------------------------
Class A Class B
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $16.56 $15.71 $16.53 $13.50 $12.40 $12.94
----- ----- ------ ------ ------ ------
Income from investment operations -
Net investment income (loss)<F6> $ 0.03 $ 0.01 $(0.17) $(0.10) $(0.04) $ 0.17
Net realized and unrealized gain (loss) on investments 1.13 0.84 1.13 3.28 1.17 (0.37)
----- ----- ------ ------ ------ ------
Total from investment operations $ 1.16 $ 0.85 $ 0.96 $ 3.18 $ 1.13 $(0.20)
----- ----- ------ ------ ------ ------
Less distributions declared to shareholders -
In excess of net investment income $(0.07) $ -- $(0.01) $ -- $ -- $ --
----- ----- ------ ------ ------ ------
From net realized gain on investments (0.70) -- (0.70) (0.15) (0.03) (0.15)
From paid-in capital -- -- -- -- -- (0.19)
----- ----- ------ ------ ------ ------
Total distributions declared to shareholders $(0.77) $ -- $(0.71) $(0.15) $(0.03) $(0.34)
----- ----- ------ ------ ------ ------
Net asset value - end of period $16.95 $16.56 $16.78 $16.53 $13.50 $12.40
----- ----- ------ ------ ------ ------
Total return<F5> 7.03% 5.41%<F3> 5.91% 23.80%<F3> 9.13% (1.57)%
Ratios (to average net assets)/Supplemental data:
Expenses 1.54% 1.68%<F2> 2.58% 2.66%<F2> 2.91% 2.88%
Net investment income (loss) 0.15% 0.94%<F2>(1.01)% (0.71)%<F2>(0.31)% 1.35%
Portfolio turnover 99% 70% 99% 70% 110% 160%
Net assets at end of period (000 omitted) $16,968 $2,076 $175,438 $145,575 $101,550 $82,980
<FN>
<F1> For the period from the commencement of offering of Class A shares, September 7, 1993 to October 31, 1993.
<F2> Annualized.
<F3> Not annualized.
<F4> For the eleven months ended October 31, 1993.
<F5> 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.
<F6> Per share data for the periods subsequent to October 31, 1993 are based on
average shares outstanding.
</FN>
</TABLE>
See notes to financial statements
<PAGE>
<TABLE>
FINANCIAL STATEMENTS - continued
Financial Highlights- continued
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended November 30, October 31,
- -----------------------------------------------------------------------------------------------------------------------------------
1990 1989 1988 1987<F1> 1994<F2>
- -----------------------------------------------------------------------------------------------------------------------------------
Class B Class C
- -----------------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period $12.96 $11.21 $10.12 $ 8.47 $16.75
------ ------ ------ ------ ------
Income from investment operations -
Net investment income (loss)<F5> $ 0.13 $ 0.09 $ 0.14 $(0.02) $(0.09)
Net realized and unrealized gain (loss)
on investments 0.14 2.03 0.95 1.67 0.14
------ ------ ------ ------ ------
Total from investment operations $ 0.27 $ 2.12 $ 1.09 $ 1.65 $ 0.05
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $ -- $(0.21) $ -- $ -- $ --
From net realized gain on investments (0.29) (0.12) -- -- --
From paid-in capital -- (0.04) -- -- --
------ ------ ------ ------ ------
Total distributions declared to shareholders $(0.29) $(0.37) $ -- $ -- $ --
------ ------ ------ ------ ------
Net asset value - end of period $12.94 $12.96 $11.21 $10.12 $16.80
------ ------ ------ ------ ------
Total return 2.02% 19.58% 10.77% 19.48%<F4> 0.30%<F4>
Ratios (to average net assets)/Supplemental data:
Expenses 2.93% 3.05% 2.48% 2.50%<F3> 2.55%<F3>
Net investment income (loss) 1.07% 0.77% 1.29% (0.29)%<F3>(0.72)%<F3>
Portfolio turnover 173% 190% 276% 272% 99%
Net assets at end of period (000 omitted) $81,505 $50,827 $42,806 $37,248 $1,440
<FN>
<F1>For the period from the commencement of investment operations, December 29,
1986 to November 30, 1987.
<F2>For the period from the commencement of offering of Class C shares, January
3, 1994 to October 31, 1994.
<F3>Annualized.
<F4>Not annualized.
<F5>Per share data for the periods subsequent to October 31, 1993 are based on
average shares outstanding.
</FN>
</TABLE>
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS World Equity Fund (the Fund) is a diversified series of MFS Series Trust VI
(the Trust). The Trust is organized as a Massachusetts business trust and is
registered under the Investment Company Act of 1940, as amended, as an open-end
management investment company.
(2) Significant Accounting Policies
Investment Valuations - Equity securities listed on securities exchanges or
reported through the NASDAQ system are valued at last sale prices. Unlisted
equity securities or listed equity securities for which last sale prices are not
available are valued at last quoted bid prices. Debt securities (other than
short-term obligations which mature in 60 days or less), including listed issues
and forward contracts, are valued on the basis of valuations furnished by
dealers or by a pricing service with consideration to factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data, without exclusive reliance upon exchange or over-the-counter prices.
Short-term obligations, which mature in 60 days or less, are valued at amortized
cost, which approximates value. Non-U.S. dollar denominated short-term
obligations are valued at amortized cost as calculated in the base currency and
translated into U.S. dollars at the closing daily exchange rate. Futures
contracts, options and options on futures contracts listed on commodities
exchanges are valued at closing settlement prices. Over-the- counter options are
valued by brokers through the use of a pricing model which takes into account
closing bond valuations, implied volatility and short-term repurchase rates.
Securities for which there are no such quotations or valuations are valued at
fair value as determined in good faith by or at the direction of the Trustees.
Repurchase Agreements - The Fund may enter into repurchase agreements with
institutions that the Fund's investment adviser has determined are creditworthy.
Each repurchase agreement is recorded at cost. The Fund requires that the
securities purchased in a repurchase transaction be transferred to the custodian
in a manner sufficient to enable the Fund to obtain those securities in the
event of a default under the repurchase agreement. The Fund monitors, on a daily
basis, the value of the securities transferred to ensure that the value,
including accrued interest, of the securities under each repurchase agreement is
greater than amounts owed to the Fund under each such repurchase agreement.
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases and
sales of foreign investments and income and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates of
such transactions. Gains and losses attributable to foreign currency exchange
rates on sales of securities are recorded for financial statement purposes as
net realized gains and losses on investments. Gains and losses attributable to
foreign exchange rate movements on income and expenses are recorded for
financial statement purposes as foreign currency transaction gains and losses.
That portion of both realized and unrealized gains and losses on investments
that results from fluctuations in foreign currency exchange rates is not
separately disclosed.
Written Options - The Fund may write covered call or put options for which
premiums are received and are recorded as liabilities, and are subsequently
adjusted to the current value of the options written. Premiums received from
writing options which expire are treated as realized gains. Premiums received
from writing options which are exercised or are closed are offset against the
proceeds or amount paid on the transaction to determine the realized gain or
loss. If a put option is exercised, the premium reduces the cost basis of the
securities purchased by the Fund. The Fund, as writer of an option, may have no
control over whether the underlying securities may be sold (call) or purchased
(put) and, as a result, bears the market risk of an unfavorable change in the
price of the securities underlying the written option.
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
Futures Contracts - The Fund may enter into financial futures contracts for the
delayed delivery of securities, currency or contracts based on financial indices
at a fixed price on a future date. In entering such contracts, the Fund is
required to deposit either in cash or securities an amount equal to a certain
percentage of the contract amount. Subsequent payments are made or received by
the Fund each day, depending on the daily fluctuations in the value of the
underlying security, and are recorded for financial statement purposes as
unrealized gains or losses by the Fund. The Fund's investment in financial
futures contracts is designed to hedge against anticipated future changes in
interest or exchange rates or securities prices. The Fund may also invest in
financial futures contracts for non-hedging purposes. Should interest or
exchange rates or securities prices move unexpectedly, the Fund may not achieve
the anticipated benefits of the financial futures contracts and may realize a
loss.
Security Loans - The Fund may lend its securities to member banks of the Federal
Reserve System and to member firms of the New York Stock Exchange or
subsidiaries thereof. The loans are collateralized at all times by cash or
securities with a market value at least equal to the market value of securities
loaned. As with other extensions of credit, the Fund may bear the risk of delay
in recovery or even loss of rights in the collateral should the borrower of the
securities fail financially. The Fund receives compensation for lending its
securities in the form of fees or from all or a portion of the income from
investment of the collateral. The Fund would also continue to earn income on the
securities loaned. At October 31, 1994, the Fund had no securities on loan.
Forward Foreign Currency Exchange Contracts - The Fund may enter into forward
foreign currency exchange contracts for the purchase or sale of a specific
foreign currency at a fixed price on a future date. Risks may arise upon
entering these contracts from the potential inability of counterparties to meet
the terms of their contracts and from unanticipated movements in the value of a
foreign currency relative to the U.S. dollar. The Fund will enter into forward
contracts for hedging purposes as well as for non-hedging purposes. The forward
foreign currency exchange contracts are adjusted by the daily exchange rate of
the underlying currency and any gains or losses are recorded for financial
statement purposes as unrealized until the contract settlement date.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
original issue discount are amortized or accreted for both financial statement
and tax reporting purposes as required by federal income tax regulations.
Dividend income is recorded on the ex-dividend date for dividends received in
cash. Dividend and interest payments received in additional securities are
recorded on the ex-dividend or ex-interest date in an amount equal to the value
of the security on such date.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided.
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
The Fund files a tax return annually using tax accounting methods required under
provisions of the Code which may differ from generally accepted accounting
principles, the basis on which these financial statements are prepared.
Accordingly, the amount of net investment income and net realized gain reported
on these financial statements may differ from that reported on the Fund's tax
return and, consequently, the character of distributions to shareholders
reported in the financial highlights may differ from that reported to
shareholders on Form 1099-DIV. Foreign taxes have been provided for on interest
and dividend income earned on foreign investments in accordance with the
applicable country's tax rates and to the extent unrecoverable are recorded as a
reduction of investment income. Distributions to shareholders are recorded on
the ex-dividend date.
The Fund expects to pass through to shareholders foreign income taxes paid. This
election increases the taxable distributions of the Fund by the amount of the
foreign taxes paid. An individual shareholder who itemizes deductions, or a
corporate shareholder, will be able to claim an offsetting deduction or a tax
credit (but not both) on their federal income tax returns. Individuals who do
not itemize deductions may claim a foreign tax credit but not a deduction. The
foreign source income would be considered passive income for the purpose of
computing the foreign tax credit limitations.
The Fund distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or accumulated net realized
gains. During the year ended October 31, 1994, $3,715,649 was reclassified from
accumulated net realized gain on investments to accumulated distributions in
excess of net investment income due to differences between book and tax
accounting for investment losses and currency transactions. This change had no
effect on the net assets or net asset value per share. Temporary differences
between book and tax undistributed amounts are primarily due to unrealized
appreciation of foreign currency contracts.
Multiple Classes of Shares of Beneficial Interest - The Fund offers Class A,
Class B and Class C shares. Class A and Class C shares were first offered to the
public on September 7, 1993 and January 3, 1994, respectively. The three classes
of shares differ in their respective shareholder servicing agent, distribution
and service fees. Shareholders of each class also bear certain expenses that
pertain only to that particular class. All shareholders bear the common expenses
of the Fund pro rata based on the average daily net assets of each class,
without distinction between share classes. Dividends are declared separately for
each class. No class has preferential dividend rights; differences in per share
dividend rates are generally due to differences in separate class expenses,
including distribution and shareholder service fees.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee, computed daily and paid monthly at an annual rate of 1.00% of
average daily net assets, amounted to $1,778,464.
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive remuneration
for their services to the Fund from MFS. Certain of the officers and Trustees of
the Fund are officers or directors of MFS, MFS Financial Services, Inc. (FSI)
and MFS Service Center, Inc. (MFSC). The Fund has an unfunded defined benefit
plan for all of its independent Trustees. Included in Trustees' compensation is
a net periodic pension expense of $8,974 for the year ended October 31, 1994.
Distributor - FSI, a wholly owned subsidiary of MFS, as distributor, received
$31,649 as its portion of the sales charge on sales of Class A shares of the
Fund. The Trustees have adopted separate distribution plans for Class A, Class B
and Class C shares pursuant to Rule 12b-1 of the Investment Company Act of 1940
as follows:
The Class A Distribution Plan provides that the Fund will pay FSI up to 0.35% of
its average daily net assets attributable to Class A shares annually in order
that FSI may pay expenses on behalf of the Fund related to the distribution and
servicing of its shares. These expenses include a service fee to each securities
dealer that enters into a sales agreement with FSI of up to 0.25% per annum of
the Fund's average daily net assets attributable to Class A shares which are
attributable to that securities dealer, a distribution fee to FSI of up to 0.10%
per annum of the Fund's average daily net assets attributable to Class A shares,
commissions to dealers and payments to FSI wholesalers for sales at or above a
certain dollar level, and other such distribution-related expenses that are
approved by the Fund. Payments will commence under the distribution plan when
the value of the net assets of the Fund attributable to Class A shares first
equals or exceeds $40 million.
The Class B and Class C Distribution Plans provide that the Fund will pay FSI a
monthly distribution fee, equal to 0.75% per annum, and a quarterly service fee
of up to 0.25% per annum, of the Fund's average daily net assets attributable to
Class B and Class C shares. FSI will pay to securities dealers that enter into a
sales agreement with FSI all or a portion of the service fee attributable to
Class B and Class C shares, and will pay to such securities dealers all of the
distribution fee attributable to Class C shares. The service fee is intended to
be additional consideration for services rendered by the dealer with respect to
Class B and Class C shares. Fees incurred under the distribution plans during
the year ended October 31, 1994 were 1.00% of average daily net assets
attributable to Class B and Class C shares on an annualized basis and amounted
to $1,671,427 and $10,673, respectively (of which FSI retained $59,763 and $633
for Class B and Class C shares, respectively).
A contingent deferred sales charge is imposed on shareholder redemption of Class
A shares, on purchases of $1 million or more, in the event of a share redemption
within 12 months following the share purchase. A contingent deferred sales
charge is imposed on shareholder redemptions of Class B shares in the event of a
shareholder redemption within six years of purchase. FSI receives all contingent
deferred sales charges. Contingent deferred sales charges imposed during the
year ended October 31, 1994 were $31 and $212,918 for Class A and Class B
shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earned
$14,597, $367,504 and $1,601 for Class A, Class B and Class C shares,
respectively, for its services as shareholder servicing agent. The fee is
calculated as a percentage of the average daily net assets of each class of
shares at an effective annual rate of up to 0.15%, up to 0.22% and up to 0.15%
attributable to Class A, Class B and Class C shares, respectively.
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
(4) Portfolio Securities
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions and short-term obligations, aggregated
$198,077,166 and $164,413,918, respectively.
The cost and unrealized appreciation or depreciation in value of the investments
owned by the Fund, as computed on a federal income tax basis, are as follows:
Aggregate cost $174,663,205
-----------
Gross unrealized appreciation $ 24,555,562
Gross unrealized depreciation (4,093,311)
-----------
Net unrealized appreciation $ 20,462,251
-----------
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
Class A Shares
<TABLE>
<CAPTION>
Year Ended Period Ended
October 31, 1994 October 31, 1993<F1>
--------------------------------- -----------------------------
Shares Amount Shares Amount
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 1,978,367 $33,143,923 148,874 $ 2,072,864
Shares issued to shareholders in
reinvestment of distributions 9,733 162,345 -- --
Shares reacquired (1,112,569) (18,679,384) (23,481) (385,271)
-------- ---------- ------ ----------
Net increase 875,531 $14,626,884 125,393 $ 1,687,593
-------- ---------- ------ ----------
Class B Shares
Year Ended Eleven Months Ended
October 31, 1994 October 31, 1993
--------------------------------- -----------------------------
Shares Amount Shares Amount
- -----------------------------------------------------------------------------------------------------------
Shares sold 6,764,741 $112,853,245 4,149,762 $61,644,654
Shares issued to shareholders in
reinvestment of distributions 349,342 5,823,888 77,558 1,053,221
Shares reacquired (5,466,499) (90,745,071) (2,946,052) (42,327,075)
-------- ----------- -------- ----------
Net increase 1,647,584 $ 27,932,062 1,281,268 $20,370,800
-------- ----------- -------- ----------
Class C Shares
<CAPTION>
Period Ended
October 31, 1994<F2>
--------------------------------
Shares Amount
- ------------------------------------------------------------------------
<S> <C> <C>
Shares sold 319,076 $ 5,329,443
Shares issued to shareholders in
reinvestment of distributions -- --
Shares reacquired (233,364) (3,865,767)
------ ----------
Net increase 85,712 $ 1,463,676
------ ----------
<FN>
<F1> For the period from the commencement of offering of Class A shares,
September 7, 1993 to October 31, 1993.
<F2> For the period from the commencement of offering of Class C shares, January
3, 1994 to October 31, 1994.
</FN>
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS, or an affiliate of MFS, in an unsecured line of credit
with a bank which permits borrowings up to $300 million, collectively.
Borrowings may be made to temporarily finance the repurchase of Fund shares.
Interest is charged to each fund, based on its borrowings, at a rate equal to
the bank's base rate. In addition, a commitment fee, based on the average daily
unused portion of the line of credit, is allocated among the participating funds
at the end of each quarter. The commitment fee allocated to the Fund for the
year ended October 31, 1994 was $2,879.
(7) Financial Instruments
The Fund regularly trades financial instruments with off-balance sheet risk in
the normal course of its investing activities in order to manage exposure to
market risks such as interest rates and foreign currency exchange rates. These
financial instruments include written options, forward foreign currency exchange
contracts and futures contracts. The notional or contractual amounts of these
instruments represent the investment the Fund has in particular classes of
financial instruments and does not necessarily represent the amounts potentially
subject to risk. The measurement of the risks associated with these instruments
is meaningful only when all related and offsetting transactions are considered.
A summary of obligations under these financial instruments at October 31, 1994
is as follows:
Forward Foreign Currency Exchange Contracts
<TABLE>
<CAPTION>
Net Unrealized
Settlement Contracts to Contracts Appreciation
Date Deliver In Exchange for at Value (Depreciation)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales 1/10/95 - 2/06/95 CAD 11,630,715 $ 8,643,128 $ 8,602,158 $ 40,970
11/21/94 - 1/31/95 ESP 781,199,580 6,048,430 6,227,286 (178,856)
12/28/94 FRF 21,086,300 3,981,026 4,098,312 (117,286)
11/23/94 GBP 4,200,000 6,455,400 6,870,948 (415,548)
11/30/94 - 1/31/95 SEK 116,473,475 15,341,475 16,164,463 (822,988)
----------- ----------- -----------
$40,469,459 $41,963,167 $ (1,493,708)
----------- ----------- -----------
CAD = Canadian Dollars FRF = French Francs SEK = Swedish Kronor
ESP = Spanish Pesetas GBP = British Pounds
</TABLE>
Forward foreign currency purchases and sales under master netting
arrangements and closed forward foreign currency exchange contracts excluded
above amounted to a net payable of $72,802 at October 31, 1994.
At October 31, 1994, the Fund had sufficient cash and/or securities to cover any
commitments under these contracts.
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
(8) Restricted Securities
The Fund may invest not more than 15% of its net assets in securities which are
subject to legal or contractual restrictions on resale. At October 31, 1994, the
Fund owned the following restricted securities (constituting 3.97% of net
assets) which may not be publicly sold without registration under the Securities
Act of 1933. The Fund does not have the right to demand that such securities be
registered. The value of these securities is determined by valuations supplied
by a pricing service or brokers or, if not available, in good faith by or at the
direction of the Trustees. These securities may be offered and sold to
"qualified institutional buyers" under Rule 144A of the 1933 Act.
<TABLE>
<CAPTION>
Description Date of Acquisition Shares Cost Value
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Call-Net Enterprises, Inc., ADR 11/10/93 85,500 $ 719,294 $ 537,338
Consol Electric Power Asia Ltd., ADR 11/29/93 57,000 923,584 1,311,000
Electricity Generating Public Co., Ltd. 10/27/94 300,000 267,861 267,571
Hansol Paper Ltd., GDR 12/31/93 360 10,800 8,994
Mirgor Sacifia, ADR 10/20/94 108,100 972,900 972,900
Repola Corp. 10/22/93 92,000 1,540,065 1,928,951
Takare PLC 4/08/92 - 8/22/94 720,000 2,395,090 2,668,630
----------
$7,695,384
----------
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Series Trust VI and Shareholders of MFS World Equity
Fund: We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of MFS World Equity Fund as of October
31, 1994, the related statement of operations for the year then ended, the
statement of changes in net assets for the year ended October 31, 1994 and the
eleven months ended October 31, 1993, and the financial highlights for each of
the years in the eight-year period ended October 31, 1994. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned at
October 31, 1994 by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS World Equity
Fund at October 31, 1994, the results of its operations, the changes in its net
assets, and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
December 5, 1994
--------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
PROSPECTUS
March 1, 1995
MFS(R) WORLD Class A Shares of Beneficial Interest
TOTAL RETURN FUND Class B Shares of Beneficial Interest
(A member of the MFS Family of Funds(R)) Class C Shares of Beneficial Interest
- ------------------------------------------------------------------------------
Page
---
1. Expense Summary ...................................................... 2
2. The Fund ............................................................. 3
3. Condensed Financial Information ...................................... 4
4. Investment Objective and Policies .................................... 4
5. Management of the Fund ............................................... 13
6. Information Concerning Shares of the Fund ............................ 13
Purchases ......................................................... 13
Exchanges ......................................................... 19
Redemptions and Repurchases ....................................... 20
Distribution Plans ................................................ 22
Distributions ..................................................... 24
Tax Status ........................................................ 24
Net Asset Value ................................................... 25
Description of Shares, Voting Rights and Liabilities .............. 25
Performance Information ........................................... 25
7. Shareholder Services ................................................. 26
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
MFS WORLD TOTAL RETURN FUND
500 Boylston Street, Boston, Massachusetts 02116 (617) 954-5000
The investment objective of MFS World Total Return Fund (the "Fund") is to seek
total return by investing in securities which will provide above-average current
income (compared to a portfolio invested entirely in equity securities) and
opportunities for long-term growth of capital and income. The Fund will invest
primarily in global equity and fixed income securities (i.e., those of U.S. and
non-U.S. issuers). The Fund is a non-diversified series of MFS Series Trust VI
(the "Trust"), an open-end management investment company. THE FUND IS DESIGNED
FOR INVESTORS WHO WISH TO SPREAD THEIR INVESTMENTS BEYOND THE UNITED STATES AND
WHO ARE PREPARED TO ACCEPT THE RISKS ENTAILED IN SUCH INVESTMENTS, WHICH MAY BE
HIGHER THAN THOSE ASSOCIATED WITH CERTAIN U.S. INVESTMENTS (see "Investment
Objective and Policies"). The minimum initial investment generally is $1,000 per
account (see "Purchases"). The Fund's investment adviser and distributor are
Massachusetts Financial Services Company ("MFS" or the "Adviser") and MFS Fund
Distributors, Inc. ("MFD"), respectively, both of which are located at 500
Boylston Street, Boston, Massachusetts 02116.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
This Prospectus sets forth concisely the information concerning the Fund and the
Trust that a prospective investor ought to know before investing. The Trust, on
behalf of the Fund, has filed with the Securities and Exchange Commission (the
"SEC") a Statement of Additional Information, dated March 1, 1995, which
contains more detailed information about the Trust and Fund and is incorporated
into this Prospectus by reference. See page 28 for a further description of the
information set forth in the Statement of Additional Information. A copy of the
Statement of Additional Information may be obtained without charge by contacting
the Shareholder Servicing Agent (see back cover for address and phone number).
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE>
1. EXPENSE SUMMARY
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Initial Sales Charge Imposed on Purchases of Fund
Shares (as a percentage of offering price) ............... 4.75% 0.00% 0.00%
Maximum Contingent Deferred Sales Charge (as a percentage of
original purchase price or redemption proceeds, as
applicable) .............................................. See Below<F1> 4.00% 0.00%
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees ............................................ 0.90% 0.90% 0.90%
Rule 12b-1 Fees ............................................ 0.35%<F2> 1.00%<F3> 1.00%<F3>
Other Expenses ............................................. 0.43% 0.50% 0.43%<F4>
---- ---- ----
Total Operating Expenses ................................... 1.68% 2.40% 2.33%
<FN>
- ---------
<F1>Purchases of $1 million or more are not subject to an initial sales charge;
however, a contingent deferred sales charge ("CDSC") of 1% will be imposed
on such purchases in the event of certain redemption transactions within 12
months following such purchases (see "Purchases").
<F2>The Fund has adopted a Distribution Plan for its Class A shares in
accordance with Rule 12b-1 under the Investment Company Act of 1940, as
amended (the "1940 Act"), which provides that it will pay distribution/
service fees aggregating up to (but not necessarily all of) 0.35% per annum
of the average daily net assets attributable to the Class A shares (see
"Distribution Plans"). After a substantial period of time, distribution
expenses under this Plan, together with the initial sales charge, may total
more than the maximum sales charge that would have been permissible if
imposed entirely as an initial sales charge.
<F3>The Fund has adopted separate Distribution Plans for its Class B and its
Class C shares in accordance with Rule 12b-1 under the 1940 Act, which
provide that it will pay distribution/service fees aggregating up to (but
not necessarily all of) 1.00% per annum of the average daily net assets
attributable to the Class B shares under the Class B Distribution Plan and
the Class C shares under the Class C Distribution Plan (see "Distribution
Plans"). After a substantial period of time, distribution expenses paid
under these Plans, together with any CDSC payable upon redemption of Class B
shares, may total more than the maximum sales charge that would have been
permissible if imposed entirely as an initial sales charge.
<F4>Except for the shareholder servicing agent fee component, "Other Expenses"
is based on Class A expenses incurred during the fiscal year ended October
31, 1994. The shareholder servicing agent fee component of "Other Expenses"
is a predetermined percentage based upon the Fund's net assets attributable
to each class.
</FN>
</TABLE>
EXAMPLE OF EXPENSES
-------------
An investor would pay the following dollar amounts of expenses on a $1,000
investment in the Fund, assuming (a) a 5% annual return and (b) redemption at
the end of each of the time periods indicated (unless otherwise noted):
<TABLE>
<CAPTION>
PERIOD CLASS A CLASS B CLASS C
------ ------- --------------------- -------
<S> <C> <C> <C> <C>
<F1>
1 year .......................................... $ 64 $ 64 $ 24 $ 24
3 years ......................................... 98 105 75 73
5 years ......................................... 134 148 128 125
10 years ......................................... 237 256<F2> 256<F2> 267
<FN>
- ---------
<F1>Assumes no redemption.
<F2>Class B shares convert to Class A shares approximately eight years after
purchase; therefore, years nine and ten reflect Class A expenses.
</TABLE>
<PAGE>
The purpose of the expense table above is to assist investors in
understanding the various costs and expenses that a shareholder of the Fund will
bear directly or indirectly. More complete descriptions of the following Fund
expenses are set forth in the following sections of the Prospectus: (i) varying
sales charges on share purchases -- "Purchases"; (ii) varying CDSCs --
"Purchases"; (iii) management fees -- "Investment Adviser"; and (iv) Rule 12b-1
(i.e., distribution plan) fees -- "Distribution Plans."
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
2. THE FUND
The Fund is a non-diversified series of the Trust, an open-end management
investment company which was organized as a business trust under the laws of The
Commonwealth of Massachusetts on April 30, 1990. The Trust presently consists of
three series, each of which represents a portfolio with separate investment
policies. Shares of the Fund are continuously sold to the public and the Fund
then uses the proceeds to buy securities (primarily equity and debt securities)
for its portfolio. Three classes of shares of the Fund currently are offered to
the general public. Class A shares are offered at net asset value plus an
initial sales charge (or a CDSC in the case of certain purchases of $1 million
or more) and subject to a Distribution Plan, providing for an annual
distribution fee and service fee. Class B shares are offered at net asset value
without an initial sales charge but subject to a CDSC and a Distribution Plan
providing for an annual distribution fee and service fee which are greater than
the Class A annual distribution fee and service fee; Class B shares will convert
to Class A shares approximately eight years after purchase. Class C shares are
offered at net asset value without an initial sales charge or a CDSC but subject
to a Distribution Plan providing for an annual distribution fee and service fee
which are equal to the Class B annual distribution fee and service fee. Class C
shares do not convert to any other class of shares of the Fund.
The Trust's Board of Trustees provides broad supervision over the affairs of the
Fund. The Adviser is responsible for the management of the Fund's assets and the
officers of the Trust are responsible for the Fund's operations. The Adviser
manages the portfolio from day to day in accordance with the Fund's investment
objective and policies. A majority of the Trustees are not affiliated with the
Adviser. The selection of investments and the way they are managed depend on the
conditions and trends in the economies of the various countries of the world,
their financial markets and the relationship of their currencies to the U.S.
dollar. The Fund also offers to buy back (redeem) its shares from its
shareholders at any time at net asset value, less any applicable CDSC.
3. CONDENSED FINANCIAL INFORMATION
The following information should be read in conjunction with financial
statements included in the Fund's Annual Report to shareholders which are
incorporated by reference into the Statement of Additional Information, in
reliance upon the report of Ernst & Young LLP, independent auditors, as experts
in accounting and auditing. From commencement of operations on August 10, 1990
to October 31, 1993, Coopers & Lybrand were the Fund's independent accountants
and were responsible for auditing the Fund's financial statements and issuing
reports for those fiscal years.
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
CLASS A, CLASS B AND CLASS C SHARES
1994<F6> 1993 1992 1991 1990<F3> 1994<F6> 1993<F2> 1994<F5><F6>
- ----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, CLASS A CLASS B CLASS C
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A
SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):
Net asset value -
beginning of period $11.19 $10.21 $ 9.42 $ 8.55 $ 8.50 $11.19 $10.84 $11.06
------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations -
Net investment
income $ 0.30 $ 0.28 $ 0.36 $ 0.37 $ 0.08 $ 0.25 $ 0.06 $ 0.27
Net realized and
unrealized gain
(loss) on
investments 0.15 1.42 0.86 0.88 (0.03) 0.13 0.35 (0.29)
------ ------ ------ ------ ------ ------ ------ ------
Total from
investment
operations $ 0.45 $ 1.70 $ 1.22 $ 1.25 $ 0.05 $ 0.38 $ 0.41 $(0.02)
------ ------ ------ ------ ------ ------ ------ ------
Less distributions
declared to
shareholders -
From net investment
income $(0.25) $(0.45) $(0.26) $(0.38) $ -- $(0.24) $(0.06) $(0.12)
From net realized
gain on investments $(0.33) $(0.27) $(0.17) $ -- $ -- $(0.32) -- $(0.16)
In excess of net
realized gain on
investments $(0.38) -- -- -- -- $(0.38) -- $(0.18)
From paid-in
capital $(0.10) $ -- $ -- $ -- $ -- $(0.09) $ -- $(0.05)
------ ------ ------ ------ ------ ------ ------ ------
Total
distributions
declared to
shareholders $(1.06) $(0.72) $(0.43) $(0.38) $ -- $(1.03) $(0.06) $(0.51)
------ ------ ------ ------ ------ ------ ------ ------
Net asset value -
end of period $10.58 $11.19 $10.21 $ 9.42 $ 8.55 $10.54 $11.19 $10.53
====== ====== ====== ====== ====== ====== ====== ======
Total return<F4> 4.10% 17.78% 13.14% 14.94% 3.76%* 3.38% 3.79% (0.15)%
RATIOS (TO AVERAGE
DAILY NET ASSETS)/
SUPPLEMENTAL DATA:
Expenses 1.76% 1.92% 1.84% 2.18% 1.57%* 2.49% 2.77%* 2.39%<F1>
Net investment income 2.81% 2.96% 3.65% 4.05% 3.14%* 2.33% 2.15%* 2.51%<F1>
PORTFOLIO TURNOVER 118% 112% 72% 134% 2% 118% 112% 118%
NET ASSETS AT END OF
PERIOD (000 OMITTED) $99,870 $71,262 $44,707 $30,847 $12,510 $47,677 $4,381 $10,903
<FN>
- ---------
<F1>Annualized.
<F2>For the period from the commencement of offering of Class B shares, September 7, 1993 to October 31, 1993.
<F3>For the period from the commencement of investment operations, September 4, 1990 to October 31, 1990.
<F4>Total return does not include the applicable sales charge. If the charge had been included, the results would have been lower.
<F5>For the period from the commencement of offering of Class C shares, January 3, 1994 to October 31, 1994.
<F6>Per share data for the period was calculated using average share method.
</TABLE>
<PAGE>
4. INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE -- The Fund's investment objective is to seek total return
by investing in securities which will provide above-average current income
(compared to a portfolio invested entirely in equity securities) and
opportunities for long-term growth of capital and income. The Fund will invest
primarily in global equity and fixed income securities (i.e., those of U.S. and
non-U.S. issuers). Any investment involves risk and there can be no assurance
that the Fund will achieve its investment objective.
INVESTMENT POLICIES -- The Fund seeks to achieve its investment objective
through a professionally managed, internationally diversified portfolio
consisting of equity and fixed income securities. The Fund attempts to provide
investors with an opportunity to enhance the value and increase the protection
of their investment against inflation and otherwise by taking advantage of
investment opportunities in the United States as well as in other countries
where opportunities may be more rewarding. It is believed that diversification
of assets on an international basis decreases the degree to which events in any
one country, including the United States, can affect the entire portfolio.
Although the percentage of the Fund's assets invested in securities issued
abroad and denominated or quoted in foreign currencies ("non-dollar securities")
will vary depending on the state of the economies of the various countries of
the world, their financial markets and the relationship of their currencies to
the U.S. dollar, under normal conditions the Fund will be invested in at least
three different countries, one of which will be the United States. For defensive
reasons or during times of international political or economic uncertainty or
turmoil, most or all of the Fund's investments may be in the United States.
While the Fund will invest no less than 40% of its assets in equity securities
under normal economic and market conditions, the Fund expects that 60% of its
assets will most likely be so invested. Such securities will include common
stocks and equivalents (such as convertible securities and warrants) and
preferred stocks of (i) U.S. issuers which derive, or have the potential to
derive, a meaningful portion (approximately 25% or more) of their revenues and
earnings in foreign markets; (ii) non-U.S. issuers; and (iii) to a lesser
extent, other U.S. issuers. The Fund may invest up to 90% (and expects generally
to invest between 25% to 90%) of its total assets in foreign securities (not
including American Depositary Receipts), which may be traded on foreign
exchanges. Convertible securities in which the Fund may invest will be rated BBB
or better by Standard & Poor's Ratings Group ("S&P") or Fitch Investors Service,
Inc. ("Fitch"), or Baa or better by Moody's Investors Service, Inc. ("Moody's"),
or if unrated, will be determined by the Adviser to be of comparable quality. If
a security purchased by the Fund is subsequently downgraded to below BBB by S&P
or by Fitch or Baa by Moody's (or comparable standards for unrated securities),
the security will be sold only if the Adviser believes it is advantageous to do
so. The Fund may invest up to 5% of its assets in convertible securities rated
below BBB or Baa (commonly known as "Junk Bonds") (see "Appendix -- Description
of Bond Ratings" in the Statement of Additional Information for a description of
bond ratings).
In managing the Fund conservatively, the Adviser attempts to exercise prudence,
discretion and intelligence in the selection of securities of high or improving
investment quality, with due regard for probable income and probable safety of
capital. The words "high investment quality" reflect the intention of the Fund
to invest in securities of well-known, established issuers and to avoid the
acquisition of speculative securities or those of doubtful character even if the
immediate prospect is tempting. The Adviser may determine that a security
possesses high or improving investment quality if, for instance, there has been
an increase in the issuer's sales and earnings or if current trends indicate
that an increase in the issuer's sales and earnings is likely, or if the
issuer's balance sheet is strong or has improved. The opportunity for currency
appreciation generally is not a significant factor in the Fund's selection of
equity securities.
Under normal economic and market conditions the remaining portion of the Fund's
portfolio will be invested in fixed income securities, such as bonds,
debentures, mortgage securities, notes, commercial paper, obligations issued or
guaranteed by a government or any of its political subdivisions, agencies or
instrumentalities, certificates of deposit, as well as debt obligations which
may have a call on common stock by means of attached warrants. Debt securities
in which the Fund may invest may also include zero coupon bonds. Zero coupon
bonds do not require the periodic payment of interest and 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 at
a rate of interest reflecting the market rate of the security at the time of
issuance. Zero coupon bonds 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 will
experience greater volatility in market value than debt obligations with
comparable maturities which make regular payments of interest. The Fund's
investment in zero coupon securities and certain securities purchased at a
market discount will cause it to recognize income prior to the receipt of cash
payments with respect to these securities. In order to distribute this income
and avoid a tax on the Fund, the Fund may be required to liquidate portfolio
securities that it might otherwise have continued to hold.
The Fund will purchase non-dollar fixed income securities denominated in the
currency of countries where the interest rate environment as well as the general
economic climate provide an opportunity for declining interest rates and
currency appreciation. If interest rates decline, such non-dollar fixed income
securities will generally appreciate in value. If the currency also appreciates
against the dollar, the total investment in such non-dollar fixed income
securities would be enhanced further. Conversely, a rise in interest rates or
decline in currency exchange rates would adversely affect the Fund's return.
Investments in non-dollar fixed income securities are evaluated by the Adviser
primarily on the strength of a particular currency against the dollar and on the
interest rate climate of that country. Currency is judged on the basis of
fundamental economic criteria (e.g., relative inflation levels and trends,
growth rate forecasts, balance of payments status and economic policies) as well
as technical and political data. In addition to the foregoing, interest rates
are evaluated on the basis of differentials or anomalies that may exist between
different countries. The Fund may hold foreign currency received in connection
with investments in non-dollar fixed income securities when, in the judgment of
the Adviser, it would be beneficial to convert such currency into U.S. dollars
at a later date, based on anticipated changes in the exchange rate.
The Fund will invest in investment grade U.S. and non-U.S. fixed income
securities. Such securities will be rated BBB or better by S&P or Fitch, or Baa
or better by Moody's, or if unrated, will be determined by the Adviser to be of
comparable quality. Securities rated BBB or Baa, 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 fixed income securities.
Assets invested in fixed income securities of non-U.S. issuers will be
diversified among countries where opportunities for total return are expected to
be most attractive. It is currently expected that fixed income investments
within foreign countries will be primarily in securities issued or guaranteed by
governments, including their political subdivisions, authorities, agencies and
instrumentalities, or supranational authorities (such as the World Bank) to
minimize credit risk. While the Fund will invest in fixed income securities
which are believed to have minimal credit risk, an error of judgment in
selecting a currency or an interest rate environment could result in a loss of
capital.
Although it may invest anywhere in the world, the Fund expects to invest most of
its assets in the equity securities of issuers located in Europe, Japan or the
United States and in the debt securities of issuers located in any of such
regions or countries or Australia, New Zealand or Canada. The Fund may invest
more than 25% of its assets in securities of issuers located in the United
States. The Adviser will determine the amount of the Fund's assets to be
invested in the United States and the amount to be invested abroad.
The Fund has registered as a "non-diversified" investment company. As a result,
the Fund is limited as to the percentage of its assets which may be invested in
the securities of any one issuer only by its own investment restrictions and the
diversification requirements imposed by the Internal Revenue Code of 1986, as
amended (the "Code"). U.S. Government securities are not subject to any
investment limitation. Since the Fund may invest a relatively high percentage of
its assets in a limited number of issuers, the Fund may be more susceptible to
any single economic, political or regulatory occurrence and to the financial
conditions of the issuers in which it invests.
When unfavorable economic or market conditions exist, the Fund may, until
favorable conditions return, invest all or a portion of its assets in cash (or
foreign currency) or cash equivalents (such as certificates of deposit, bankers'
acceptances and time deposits), commercial paper, short-term obligations,
repurchase agreements and obligations issued or guaranteed by the U.S. or any
foreign government or any of their agencies, authorities or instrumentalities.
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements in order to
earn additional income on available cash or as a temporary defensive measure.
Under a repurchase agreement, the Fund acquires securities subject to the
seller's agreement to repurchase at a specified time and price. If the seller
becomes subject to a proceeding under the bankruptcy laws or its assets are
otherwise subject to a stay order, the Fund's right to liquidate the securities
may be restricted (during which time the value of the securities could decline).
As discussed in the Statement of Additional Information, the Fund has adopted
certain procedures intended to minimize any such risk.
LENDING OF SECURITIES: The Fund may seek to increase its income by lending
portfolio securities. Such loans will usually be made only to member firms (and
subsidiaries thereof) of the New York Stock Exchange (the "Exchange") and to
member banks of the Federal Reserve System, and would be required to be secured
continuously by collateral in cash, cash equivalents or U.S. Government
securities maintained on a current basis at an amount at least equal to the
market value of the securities loaned. The Fund will continue to collect the
equivalent of interest on the securities loaned and will also receive either
interest (through investment of cash collateral) or a fee (if the collateral is
U.S. Government securities). As with other extensions of credit, there are risks
of delay in recovery or even loss of rights in the collateral should the
borrower of the securities fail financially. However, the loans would be made
only to firms deemed by the Adviser to be of good standing, and when, in the
judgment of the Adviser, the consideration which could be earned currently from
securities loans of this type justifies the attendant risk.
"WHEN ISSUED" OR "FORWARD DELIVERY" 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. The
Fund does not pay for the securities until received, and does not start earning
interest on the securities until the contractual settlement date. In order to
invest its assets immediately, while awaiting delivery of securities purchased
on such bases, the Fund will normally invest in cash, short-term money market
instruments and high quality debt securities. Although the Fund does not intend
to make such purchases for speculative purposes and intends to adhere to the
provisions of SEC policies, purchases of securities on such bases may involve
more risk than other types of purchases. For example, the Fund may have to sell
assets which have been set aside in order to meet redemptions. Also, if the Fund
determines it necessary to sell the "when-issued" or "forward delivery"
securities before delivery, it may incur a loss because of market fluctuations
since the time the commitment to purchase such securities was made.
EMERGING MARKET COMPANIES: The Fund may invest, as described below, in countries
or regions with relatively low gross national product per capita compared to the
world's major economies, and in countries or regions with the potential for
rapid economic growth (emerging markets). Emerging markets will include any
country: (i) having an "emerging stock market" as defined by the International
Finance Corporation; (ii) with a low- to middle-income economy acording to the
International Bank for Reconstruction and Development (the World Bank); (iii)
listed in World Bank publications as developing; or (iv) determined by the
Adviser to be an emerging market as defined above. The Fund may invest in
securities of: (i) companies the principal securities trading market for which
is an emerging market country; (ii) companies organized under the laws of, and
with a principal office in, an emerging market country; (iii) companies whose
principal activities are located in emerging market countries; or (iv) companies
traded in any market that derive 50% or more of their total revenue from either
goods or services produced in an emerging market or sold in an emerging market.
BRADY BONDS: The Fund may invest in Brady Bonds, which are securities created
through the exchange of existing commercial bank loans to public and private
entities in certain emerging markets for new bonds in connection with debt
restructurings under a debt restructuring plan introduced by former U.S.
Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan debt
restructurings have been implemented to date in Argentina, Brazil, Bulgaria,
Costa Rica, Ecuador, Mexico, Nigeria, the Philippines, Poland, Uruguay and
Venezuela. Brady Bonds have been issued only recently, and for that reason do
not have a long payment history. Brady Bonds may be collateralized or
uncollateralized, are issued in various currencies (but primarily the U.S.
dollar) and are actively traded in over-the-counter secondary markets. U.S.
dollar-denominated, collateralized Brady Bonds, which may be fixed-rate bonds or
floating-rate bonds, are generally collateralized in full as to principal by
U.S. Treasury zero coupon bonds having the same maturity as the bonds. Brady
Bonds are often viewed as having three or four valuation components: the
collateralized repayment of principal at final maturity; the collateralized
interest payment; the uncollateralized interest payments; and any
uncollateralized repayment of principal at maturity (these uncollateralized
amounts constituting the "residual risk"). In light of the residual risk of
Brady Bonds and the history of defaults of countries issuing Brady Bonds with
respect to commercial bank loans by public and private entities, investments in
Brady Bonds may be viewed as speculative.
AMERICAN DEPOSITARY RECEIPTS: The Fund may invest in American Depositary
Receipts ("ADRs") which are certificates issued by a U.S. depository (usually a
bank) and represent a specified quantity of shares of an underlying non-U.S.
stock on deposit with a custodian bank as collateral. Because ADRs trade on
United States securities exchanges, the Adviser does not treat them as foreign
securities. However, they are subject to many of the risks of foreign securities
such as changes in exchange rates and more limited information about foreign
issuers.
RESTRICTED SECURITIES: The Fund may also purchase securities that are not
registered under the Securities Act of 1933 ("1933 Act") ("restricted
securities"), including those that can be offered and sold to "qualified
institutional buyers" under Rule 144A under the 1933 Act ("Rule 144A
securities"). The Trust's Board of Trustees determines, based upon a continuing
review of the trading markets for a specific Rule 144A security, whether such
security is illiquid and thus subject to a Fund's limitation on investing not
more than 15% of its net assets in illiquid investments, or liquid and thus not
subject to such limitation. The Board of Trustees has adopted guidelines and
delegated to MFS the daily function of determining and monitoring the liquidity
of Rule 144A securities. The Board, however, will retain sufficient oversight
and be ultimately responsible for the determinations. The Board will carefully
monitor the Fund's investments in Rule 144A securities, focusing on such
important factors, among others, as valuation, liquidity and availability of
information. This investment practice could have the effect of increasing the
level of illiquidity in the Fund to the extent that qualified institutional
buyers become for a time uninterested in purchasing Rule 144A securities held in
the Fund's portfolio. Subject to the Fund's 15% limitation on investments in
illiquid investments, the Fund may also invest in restricted securities that may
not be sold under Rule 144A, which presents certain risks. As a result, the Fund
might not be able to sell these securities when the Adviser wishes to do so, or
might have to sell them at less than fair value. In addition, market quotations
are less readily available. Therefore, judgment may at times play a greater role
in valuing these securities than in the case of unrestricted securities.
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 prepayments. Prepayments on underlying mortgages
result in a loss of anticipated interest, and all or part of any premium paid,
and the actual yield (or total return) to the Fund may be different than the
quoted yield on the securities. Mortgage prepayments generally increase with
falling interest rates and decrease with rising interest rates. Like other fixed
income securities, when interest rates rise the value of a 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.
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 securities
guaranteed by the Federal National Mortgage Association ("FNMA") or the Federal
Home Loan Mortgage Corporation, which are not guaranteed by the U.S.
Government). 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.
CORPORATE ASSET-BACKED SECURITIES: The Fund may invest in corporate asset-
backed securities. These securities, issued by trusts and special purpose
corporations, are backed by a pool of assets, such as credit card or automobile
loan receivables, representing the obligations of a number of different parties.
Corporate asset-backed securities present certain risks. For instance, in the
case of credit card receivables, these securities may not have the benefit of
any security interest in the related collateral. See the Statement of Additional
Information for further information on these securities.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: The Fund may enter into mortgage "dollar
roll" transactions with selected banks and broker-dealers pursuant to which the
Fund sells mortgage-backed securities for delivery in the future (generally
within 30 days) and simultaneously contracts to repurchase substantially similar
(same type, coupon and maturity) securities on a specified future date. The Fund
will only enter into covered rolls. A "covered roll" is a specific type of
dollar roll for which there is an offsetting cash position or a cash equivalent
security position which matures on or before the forward settlement date of the
dollar roll transaction.
OPTIONS ON FIXED INCOME SECURITIES: The Fund may write (sell) covered put and
call options on fixed income securities and purchase put and call options. The
Fund will write such options for the purpose of increasing its return and/or to
protect the value of its portfolio. The Fund may also write combinations of put
and call options on the same security, known as "straddles." Such transactions
can generate additional premium income but also present increased risk. The Fund
may purchase put or call options in anticipation of declines in the value of
fixed income portfolio securities or increases in the value of securities to be
acquired.
The Fund may also enter into options on the yield "spread," or yield
differential, between two securities, a transaction referred to as a "yield
curve" option, for hedging and non-hedging (an effort to increase current
income) purposes. In contrast to other types of options, a yield curve option is
based on the difference between the yields of designated securities rather than
the actual prices of the individual securities, and is settled through cash
payments. Accordingly, a yield curve option is profitable to the holder if this
differential widens (in the case of a call) or narrows (in the case of a put),
regardless of whether the yields of the underlying securities increase or
decrease. Yield curve options written by the Fund will be covered as described
in the Statement of Additional Information. The trading of yield curve options
is subject to all the risks associated with trading other types of options, as
discussed below under "Risk Factors" and in the Statement of Additional
Information. In addition, such options present risks of loss even if the yield
on one of the underlying securities remains constant, if the spread moves in a
direction or to an extent which was not anticipated.
The Fund may purchase and sell options that are traded on U.S. and foreign
exchanges, and options traded over-the-counter, with broker-dealers who deal in
these options. The ability to terminate over-the-counter options is more limited
than with exchange-traded options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. The Fund
will treat assets used to cover over-the-counter options as illiquid unless the
dealer is a primary dealer in U.S. Government securities and has given the Fund
the unconditional right to close such options at a formula price, in which event
only an amount of the cover determined with reference to the formula will be
considered illiquid. The Fund may also write over-the-counter options with
non-primary dealers, including foreign dealers, and will treat the assets used
to cover these options as illiquid.
FUTURES CONTRACTS: The Fund may enter into contracts for the purchase or sale
for future delivery of fixed income securities or foreign currencies or
contracts based on indexes of fixed income securities as such instruments become
available for trading ("Futures Contracts"). Such transactions may be entered
into for hedging purposes, in order to protect the Fund's current or intended
investments from the effects of changes in interest or exchange rates, as well
as for non-hedging purposes to the extent permitted by applicable law. The Fund
will incur brokerage fees when it purchases and sells Futures Contracts, and
will be required to maintain margin deposits. In addition, Futures Contracts
entail risks. Although the Adviser believes that use of such contracts will
benefit the Fund, if its investment judgment about the general direction of
interest or exchange rates is incorrect, the Fund's overall performance may be
poorer than if it had not entered into any such contract and the Fund may
realize a loss. The Fund will not enter into any Futures Contract if immediately
thereafter the value of all such Futures Contracts would exceed 50% of the value
of its total assets.
OPTIONS ON FUTURES CONTRACTS: The Fund may also purchase and write options on
Futures Contracts ("Options on Futures Contracts") for hedging purposes for the
purpose of protecting against declines in the value of fixed income portfolio
securities or against increases in the cost of such securities to be acquired,
as well as for non-hedging purposes to the extent permitted by applicable law.
Purchases of Options on Futures Contracts may present less risk in hedging the
portfolio of the Fund than the purchase or sale of the underlying Futures
Contracts, since the potential loss is limited to the amount of the premium paid
for the option, plus related transaction costs. The writing of such options,
however, does not present less risk than the trading of Futures Contracts, and
will constitute only a partial hedge, up to the amount of the premium received,
less related transaction costs. In addition, if an option is exercised, the Fund
may suffer a loss on the transaction.
FORWARD CONTRACTS: The Fund may enter into forward foreign currency exchange
contracts for the purchase or sale of a fixed quantity of a foreign currency at
a future date ("Forward Contracts"). The Fund may enter into Forward Contracts
for hedging purposes as well as for the non-hedging purpose of increasing the
Fund's current income. By entering into transactions in Forward Contracts,
however, the Fund may be required to forego the benefits of advantageous changes
in exchange rates and, in the case of Forward Contracts entered into for
non-hedging purposes, the Fund may sustain losses which will reduce its gross
income. Such transactions, therefore, could be considered speculative. Forward
Contracts are traded over-the-counter and not on organized commodities or
securities exchanges. As a result, such contracts operate in a manner distinct
from exchange-traded instruments, and their use involves certain risks beyond
those associated with transactions in Futures Contracts or options traded on
exchanges. The Fund may also enter into a Forward Contract on one currency in
order to hedge against risk of loss arising from fluctuations in the value of a
second currency (referred to as a "cross hedge") if, in the judgment of the
Adviser, a reasonable degree of correlation can be expected between movements in
the values of the two currencies. The Fund has established procedures consistent
with statements of the SEC and its staff regarding the use of Forward Contracts
by registered investment companies, which requires use of segregated assets or
"cover" in connection with the purchase and sale of such contracts.
OPTIONS ON FOREIGN CURRENCIES: The Fund may also purchase and write options on
foreign currencies ("Options on Foreign Currencies") for the purpose of
protecting against declines in the dollar value of fixed income portfolio
securities and against increases in the dollar cost of fixed income securities
to be acquired. As in the case of other types of options, however, the writing
of Options on Foreign Currencies will constitute only a partial hedge, up to the
amount of the premium received, and the Fund may be required to purchase or sell
foreign currencies at disadvantageous exchange rates, thereby incurring losses.
The purchase of Options on Foreign Currencies may constitute an effective hedge
against fluctuations in exchange rates although, in the event of rate movements
adverse to the Fund's position, it may forfeit the entire amount of the premium
paid for the option plus related transaction costs.
SWAPS AND RELATED TRANSACTIONS: As one way of managing its exposure to different
types of investments, the Fund may enter into interest rate swaps, currency
swaps and other types of available swap agreements, such as caps, collars and
floors. Swaps involve the exchange by the Fund with another party of cash
payments based upon different interest rate indexes, currencies, and other
prices or rates such as the value of mortgage prepayment rates. For example, in
the typical interest rate swap, the Fund might exchange a sequence of cash
payments based on a floating rate index for cash payments based on a fixed rate.
Payments made by both parties to a swap transaction are based on a principal
amount determined by the parties.
The Fund may also purchase and sell caps, floors and collars. In a typical cap
or floor agreement, one party agrees to make payments only under specified
circumstances, usually in return for payment of a fee by the counterparty. For
example, the purchase of an interest rate cap entitles the buyer, to the extent
that a specified index exceeds a predetermined interest rate, to receive
payments of interest on a contractually-based principal amount from the
counterparty selling such interest rate cap. The sale of an interest rate floor
obligates the seller to make payments to the extent that a specified interest
rate falls below an agreed-upon level. A collar arrangement combines elements of
buying a cap and selling a floor.
Swap agreements will tend to shift the Fund's investment exposure from one type
of investment to another. For example, if the Fund agreed to exchange payments
in dollars for payments in foreign currency, in each case based on a fixed rate,
the swap agreement would tend to decrease the Fund's exposure to U.S. interest
rates and increase its exposure to foreign currency and interest rates. Caps and
floors have an effect similar to buying or writing options. Depending on how
they are used, swap agreements may increase or decrease the overall volatility
of the Fund's investments and its share price and yield.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on the
Fund's performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. The Fund may also suffer losses if
it is unable to terminate outstanding swap agreements or reduce its exposure
through offsetting transactions.
Swaps, caps, floors and collars are highly specialized activities which involve
certain risks. See the Statement of Additional Information on the risks involved
in these activities.
RISKS OF INVESTMENT IN OPTIONS, FUTURES CONTRACTS, OPTIONS ON FUTURES CONTRACTS,
FORWARD CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES: Although the Fund will
enter into transactions in Futures Contracts, Options on Futures Contracts and
Options on Foreign Currencies for hedging purposes, and will enter into certain
option transactions and certain Forward Contracts for non-hedging purposes,
such transactions nevertheless involve certain risks. For example, a lack of
correlation between the instrument underlying an option or Futures Contract and
the assets being hedged, or unexpected adverse price movements, could render the
Fund's hedging strategy unsuccessful and could result in losses. The Fund also
may enter into transactions in such instruments for non-hedging purposes to the
extent permitted by applicable law, which involves greater risk. In particular,
such transactions may result in losses for the Fund which are not offset by
gains on other portfolio positions, thereby reducing gross income. In addition,
foreign currency markets may be extremely volatile from time to time. There also
can be no assurance that a liquid secondary market will exist for any contract
purchased or sold, and the Fund may be required to maintain a position until
exercise or expiration, which could result in losses. In addition, the Fund may
be required or may elect to receive delivery of the foreign currencies
underlying Forward Contracts or Options on Foreign Currencies, which may involve
certain risks. In such instances, the Fund may hold the foreign currency when,
in the judgment of the Adviser, it would be beneficial to convert such currency
into U.S. dollars at a later date, based on anticipated changes in the relevant
exchange rate. The Statement of Additional Information contains a description of
the nature and trading mechanics of options, Futures Contracts, Options on
Futures Contracts, Forward Contracts and Options on Foreign Currencies, and
includes a discussion of the risks related to transactions therein.
Transactions in Forward Contracts may be entered into only in the over-the-
counter market. Futures Contracts and Options on Futures Contracts may be
entered into on United States exchanges regulated by the Commodity Futures
Trading Commission and on foreign exchanges. In addition, the fixed income
securities underlying options and Futures Contracts traded by the Fund will
include U.S. Government securities as well as foreign securities.
RISKS OF INVESTMENT IN FOREIGN SECURITIES: Investors should recognize that
transactions involving foreign equity or debt securities or foreign currencies,
and transactions entered into in foreign countries, involve considerations and
risks not typically associated with investing in U.S. markets. Such investments
may be favorably or unfavorably affected by changes in interest rates, currency
exchange rates and exchange control regulations, and costs may be incurred in
connection with conversions between various currencies. Investments in foreign
countries could also be affected by other factors generally not thought to be
present in the United States, including the possibility of heavy taxation, less
publicly available financial and other information, different or lesser
regulatory protection, political or social instability, limitations on the
removal of funds or other assets of the Fund, expropriation of assets,
diplomatic developments adverse to U.S. investments and difficulties in
enforcing contractual obligations. In addition, while the holding of foreign
currencies will permit the Fund to take advantage of favorable movements in the
applicable exchange rate, it also exposes the Fund to risk of loss if such rates
move in a direction adverse to the Fund's position. Such losses could also
adversely affect the Fund's hedging strategies. The Fund will not invest 25% or
more of the value of its assets in the securities of any one foreign government.
Because of the Fund's international investment policies and the risks discussed
above, an investment in shares of the Fund may not be appropriate for all
investors, and an investment in shares of the Fund should not be considered a
complete investment program. Each prospective purchaser should take into account
his investment objectives as well as his other investments when considering the
purchase of shares of the Fund.
The risks of investing in foreign securities may be intensified in the case of
investments in emerging markets. Securities of many issuers in emerging markets
may be less liquid and more volatile than securities of comparable domestic
issuers. Emerging markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when a portion of the assets of the Fund is uninvested and no
return is earned thereon. The inability of the Fund to make intended security
purchases due to settlement problems could cause the Fund to miss attractive
investment opportunities. Inability to dispose of portfolio securities due to
settlement problems could result either in losses to the Fund due to subsequent
declines in value of the portfolio security or, if the Fund has entered into a
contract to sell the security, in possible liability to the purchaser. Certain
markets may require payment for securities before delivery. Securities prices in
emerging markets can be significantly more volatile than in the more developed
nations of the world, reflecting the greater uncertainties of investing in less
established markets and economies. In particular, countries with emerging
markets may have relatively unstable governments, present the risk of
nationalization of businesses, restrictions on foreign ownership, or prohibition
of repatriation of assets, and may have less protection of property rights than
more developed countries. The economies of countries with emerging markets may
be predominantly based on only a few industries, may be highly vulnerable to
changes in local or global trade conditions, and may suffer from extreme and
volatile debt burdens or inflation rates. Local securities markets may trade a
small number of securities and may be unable to respond effectively to increases
in trading volume, potentially making prompt liquidation of substantial holdings
difficult or impossible at times. Securities of issuers located in countries
with emerging markets may have limited marketability and may be subject to more
abrupt or erratic price movements.
Certain emerging markets may require governmental approval for the repatriation
of investment income, capital or the proceeds of sales of securities by foreign
investors. In addition, if a deterioration occurs in an emerging market's
balance of payments or for other reasons, a country could impose temporary
restrictions on foreign capital remittances. The Fund could be adversely
affected by delays in, or a refusal to grant, any required governmental approval
for repatriation of capital, as well as by the application to the Fund of any
restrictions on investments.
Investment in certain foreign emerging market debt obligations may be restricted
or controlled to varying degrees. These restrictions or controls may at times
preclude investment in certain foreign emerging market debt obligations and
increase the expenses of the Fund.
PORTFOLIO TRADING: The primary consideration in placing portfolio security
transactions is execution at the most favorable prices. Consistent with the
foregoing primary consideration, the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. (the "NASD") and such other policies as
the Trustees may determine, the Adviser may consider sales of shares of the Fund
and of the other investment company clients of MFD, the Fund's distributor, as a
factor in the selection of broker-dealers to execute the Fund's portfolio
transactions.
The portfolio will be managed actively and the asset allocations modified as the
Adviser deems necessary. Although the Fund does not intend to seek short-term
profits, securities in its portfolio will be sold whenever the Adviser believes
it is appropriate to do so without regard to the length of time the particular
asset may have been held. A high turnover rate involves greater expenses,
including higher brokerage and transaction costs, to the Fund. The Fund engages
in portfolio trading if it believes a transaction net of costs (including
custodian charges) will help in achieving its investment objective.
From time to time, the Adviser may direct certain portfolio transactions to
broker-dealer firms which, in turn, have agreed to pay a portion of the Fund's
operating expenses (e.g., fees charge by the custodian of the Fund's assets).
For a further discussion of portfolio trading, see the Statement of Additional
Information.
The investment objective and policies described above are not fundamental and
may be changed without shareholder approval. A change in the Fund's investment
objective may result in the Fund having an investment objective different from
the objective which the shareholder considered appropriate at the time of
investment in the Fund.
The Statement of Additional Information includes a discussion of investment
policies and a listing of specific investment restrictions which govern the
Fund's investment policies. The specific investment restrictions listed in the
Statement of Additional Information may not be changed without shareholder
approval (see "Investment Restrictions" in the Statement of Additional
Information).
The Fund's investment limitations, policies and rating standards are adhered to
at the time of purchase or utilization of assets; a subsequent change in
circumstances will not be considered to result in a violation of policy.
5. MANAGEMENT OF THE FUND
INVESTMENT ADVISER -- The Adviser manages the Fund pursuant to an Investment
Advisory Agreement dated August 10, 1990 (the "Advisory Agreement"). The Adviser
provides the Fund with overall investment advisory and administrative services,
as well as general office facilities. Frederick J. Simmons, a Senior Vice
President of the Adviser, has been the Fund's portfolio manager since 1991. Mr.
Simmons has been employed by the Adviser since 1971. Subject to such policies as
the Trustees may determine, the Adviser makes investment decisions for the Fund.
For its services and facilities, the Adviser receives a management fee computed
and paid monthly in an amount equal to the sum of 0.65% of the Fund's average
daily net assets and 5% of the Fund's gross income (i.e., income other than
gains from the sale of securities, gains from options and futures transactions,
premium income from options written and gains from foreign exchange
transactions) for its then-current fiscal year. This management fee is greater
than the fee paid by most funds.
For the Fund's fiscal year ended October 31, 1994, MFS received fees under the
Advisory Agreement of $1,074,047 (of which $792,505 was based on average daily
net assets and $281,542 on gross income), equivalent on an annualized basis to
0.90% of the Fund's average daily net assets.
MFS also serves as investment adviser to each of the other funds in the MFS
Family of Funds (the "MFS Funds") and to MFS(R) Municipal Income Trust, MFS
Multimarket Income Trust, MFS Government Markets Income Trust, MFS Intermediate
Income Trust, MFS Charter Income Trust, MFS Special Value Trust, MFS
Institutional Trust, MFS Union Standard Trust, MFS Variable Insurance Trust,
MFS/Sun Life Series Trust, Sun Growth Variable Annuity Fund, Inc. and seven
variable accounts, each of which is a registered investment company established
by Sun Life Assurance Company of Canada (U.S.) ("Sun Life of Canada (U.S.)") in
connection with the sale of Compass-2 and Compass-3 combination fixed/variable
annuity contracts. MFS and its wholly-owned subsidiary, MFS Asset Management,
Inc., provide investment advice to substantial private clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the United States, Massachusetts Investors
Trust. Net assets under the management of the MFS organization were
approximately $33.4 billion on behalf of approximately 1.6 million investor
accounts as of January 31, 1995. As of such date, the MFS organization managed
approximately $10.8 billion of assets invested in equity securities and
approximately $18.7 billion of assets invested in fixed income securities.
Approximately $3.1 billion of the assets managed by MFS are invested in
securities of foreign issuers. MFS is a subsidiary of Sun Life of Canada (U.S.),
which in turn is a subsidiary of Sun Life Assurance Company of Canada ("Sun
Life"). The Directors of MFS are A. Keith Brodkin, Jeffrey L. Shames, Arnold D.
Scott, John D. McNeil and John R. Gardner. Mr. Brodkin is the Chairman, Mr.
Shames is the President and Mr. Scott is the Secretary and a Senior Executive
Vice President of MFS. Messrs. McNeil and Gardner are the Chairman and
President, respectively, of Sun Life. Sun Life, a mutual life insurance company,
is one of the largest international life insurance companies and has been
operating in the United States since 1895, establishing a headquarters office
here in 1973. The executive officers of MFS report to the Chairman of Sun Life.
A. Keith Brodkin, the Chairman of MFS, is also the Chairman, and President of
the Trust. W. Thomas London, Stephen E. Cavan, James O. Yost and James R.
Bordewick, Jr., all of whom are officers of MFS, are officers of the Trust.
DISTRIBUTOR -- MFD, a wholly-owned subsidiary of MFS, is the distributor of
shares of the Fund and each of the other MFS Funds.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. (the "Shareholder
Servicing Agent"), a wholly-owned subsidiary of MFS, performs transfer agency,
certain dividend disbursing agency and other services for the Fund.
6. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Shares of the Fund may be purchased at the public offering price through any
securities dealer, certain banks and other financial institutions having selling
agreements with MFD. Non-securities dealer financial institutions will receive
transaction fees that are the same as commission fees to dealers. Securities
dealers and other financial institutions may also charge their customers service
fees relating to investments in the Fund.
The Fund offers three classes of shares which bear sales charges and
distribution fees in different forms and amounts:
CLASS A SHARES. Class A shares are offered at net asset value plus an initial
sales charge (or CDSC in the case of certain purchases of $1 million or more) as
follows:
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SALES CHARGE<F1> AS
PERCENTAGE OF:
--------------------------------------------- DEALER ALLOWANCE
NET AMOUNT AS A PERCENTAGE
AMOUNT OF PURCHASE OFFERING PRICE INVESTED OF OFFERING PRICE
<S> <C> <C> <C>
Less than $100,000 .................................... 4.75% 4.99% 4.00%
$100,000 but less than $250,000 ....................... 4.00 4.17 3.20
$250,000 but less than $500,000 ....................... 2.95 3.04 2.25
$500,000 but less than $1,000,000 ..................... 2.20 2.25 1.70
$1,000,000 or more .................................... None<F2> None<F2> See Below<F2>
<FN>
- ----------
<F1>Because of rounding in the calculation of offering price, actual sales charges may be more or less than those calculated
using the percentages above (see the Statement of Additional Information).
<F2>A CDSC may apply in certain circumstances. MFD will pay a commission on purchases of $1 million or more (see below).
</FN>
</TABLE>
No sales charge is payable at the time of purchase of Class A shares on
investments of $1 million or more. However, a CDSC shall be imposed on such
investments in the event of a share redemption within 12 months following the
share purchase, at the rate of 1% on the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares.
In determining whether a CDSC on such Class A shares is payable, and, if so, the
amount of the charge, it is assumed that shares not subject to the CDSC are the
first redeemed followed by other shares held for the longest period of time. All
investments made during a calendar month, regardless of when during the month
the investment occurred, will age one month on the last day of the month and
each subsequent month. Except as noted below, the CDSC on Class A shares will be
waived in the case of: (i) exchanges (except that if the shares acquired by
exchange were then redeemed within 12 months of the initial purchase (other than
in connection with subsequent exchanges to other MFS Funds), the charge would
not be waived); (ii) distributions to participants from a retirement plan
qualified under section 401(a) of the Code (a "Retirement Plan"), due to: (a) a
loan from the plan (repayments of loans, however, will constitute new sales for
purposes of assessing the CDSC); (b) "financial hardship" of the participant in
the plan, as that term is defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time; or (c) the death of a
participant in such a plan; (iii) distributions from a 403(b) plan or an
Individual Retirement Account ("IRA"), due to death, disability or attainment of
age 59 1/2; (iv) tax-free returns of excess contributions to an IRA; (v)
distributions by other employee benefit plans to pay benefits; and (vi) certain
involuntary redemptions and redemptions in connection with certain automatic
withdrawals from a qualified retirement plan. The CDSC on Class A shares will
not be waived, however, if the Retirement Plan withdraws from the Fund except if
that Retirement Plan has invested its assets in Class A shares of one or more of
the MFS Funds for more than 10 years from the later to occur of (i) January 1,
1993 or (ii) the date such Retirement Plan first invests its assets in Class A
shares of one or more of the MFS Funds, the CDSC on Class A shares will be
waived in the case of a redemption of all of the Retirement Plan's shares
(including shares of any other class) in all MFS Funds (i.e., all the assets of
the Retirement Plan invested in the MFS Funds are withdrawn), unless,
immediately prior to the redemption, the aggregate amount invested by the
Retirement Plan in Class A shares of the MFS Funds (excluding the reinvestment
of distributions) during the prior four-year period equals 50% or more of the
total value of the Retirement Plan's assets in the MFS Funds, in which case the
CDSC will not be waived. The CDSC on Class A shares will be waived upon
redemption by a Retirement Plan where the redemption proceeds are used to pay
expenses of the Retirement Plan or certain expenses of participants under the
Retirement Plan (e.g., participant account fees), provided that the Retirement
Plan's sponsor subscribes to the MFS Fundamental 401(k) Plan\s/\m/ or another
similar recordkeeping system made available by the Shareholder Servicing Agent.
The CDSC on Class A shares will be waived upon the transfer of registration from
shares held by a Retirement Plan through a single account maintained by the
Shareholder Servicing Agent to multiple Class A share accounts maintained by the
Shareholder Servicing Agent on behalf of individual participants in the
Retirement Plan, provided that the Retirement Plan's sponsor subscribes to the
MFS Fundamental 401(k) Plan \s/\m/ or another similar recordkeeping system made
available by the Shareholder Servicing Agent. Any applicable CDSC will be
deferred upon an exchange of Class A shares of the Fund for units of
participation of the MFS Fixed Fund (a bank collective investment fund) (the
"Units"), and the CDSC will be deducted from the redemption proceeds when such
Units are subsequently redeemed (assuming the CDSC is then payable). No CDSC
will be assessed upon an exchange of Units for Class A shares of the Fund. For
purposes of calculating the CDSC payable upon redemption of Class A shares of
the Fund or Units acquired pursuant to one or more exchanges, the period during
which the Units are held will be aggregated with the period during which the
Class A shares are held. MFD shall receive all CDSCs which it intends to apply
for the benefit of the Fund.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price, as shown in the above table. In the case of
the maximum sales charge, the dealer retains 4% and MFD retains approximately
3/4 of 1% of the public offering price. The sales charge may vary depending on
the number of shares of the Fund as well as certain MFS Funds and other funds
owned or being purchased, the existence of an agreement to purchase additional
shares during a 13-month period (or 36-month period for purchases of $1 million
or more) or other special purchase programs. A description of the Right of
Accumulation, Letter of Intent and Group Purchases privileges by which the sales
charge may be reduced is set forth in the Statement of Additional Information.
In addition, MFD will pay commissions to dealers who initiate and are
responsible for purchases of $1 million or more as follows: 1.00% on sales up to
$5 million; plus 0.25% on the amount in excess of $5 million. Purchases of $1
million or more for each shareholder account will be aggregated over a 12-month
period (commencing from the date of the first such sale) for purposes of
determining the level of commissions to be paid during that period with respect
to such account.
Class A shares of the Fund may be sold at their net asset value to the officers
of the Trust, to any of the subsidiary companies of Sun Life, to eligible
Directors, officers, employees (including retired employees) and agents of MFS,
Sun Life or any of their subsidiary companies, to any trust, pension,
profit-sharing or any other benefit plan for such persons, to any trustees and
retired trustees of any investment company for which MFD serves as distributor
or principal underwriter, and to certain family members of such individuals and
their spouses, provided such shares will not be resold except to the Fund. Class
A shares of the Fund may be sold at net asset value to any employee, partner,
officer or trustee of any sub-adviser to any MFS Fund and to certain family
members of such individuals and their spouses, or to any trust, pension,
profit-sharing or other Retirement Plan for the sole benefit of such employee or
representative, provided such shares will not be resold except to the Fund.
Class A shares of the Fund may also be sold at their net asset value to any
employee or registered representative of any dealer or other financial
institution which has a sales agreement with MFD or its affiliates, to certain
family members of such employees or representatives and their spouses, or to any
trust, pension, profit-sharing or other Retirement Plan for the sole benefit of
such employee or representative, as well as to clients of MFS Asset Management,
Inc. Class A shares may be sold at net asset value, subject to appropriate
documentation, through a dealer where the amount invested represents redemption
proceeds from a registered open-end management investment company not
distributed or managed by MFD or its affiliates if: (i) the redeemed shares were
subject to an initial sales charge or a deferred sales charge (whether or not
actually imposed); (ii) such redemption has occurred no more than 90 days prior
to the purchase of Class A shares of the Fund; and (iii) the Fund, MFD or its
affiliates have not agreed with such company or its affiliates, formally or
informally, to sell Class A shares at net asset value or provide any other
incentive with respect to such redemption and sale. Class A shares of the Fund
may be sold at net asset value where the amount invested represents redemption
proceeds from MFS Fixed Fund. In addition, Class A shares of the Fund may be
sold at net asset value, in connection with the acquisition or liquidation of
the assets of other investment companies or personal holding companies.
Insurance company separate accounts may purchase Class A shares of the Fund at
their net asset value. Class A shares of the Fund may be purchased at net asset
value by Retirement Plans whose third party administrators have entered into an
administrative services agreement with MFD or one or more of its affiliates to
perform certain administrative services, subject to certain operational
requirements specified from time to time by MFD or one of more of its
affiliates. Class A shares of the Fund may be purchased at net asset value
through certain broker-dealers and other financial institutions which have
entered into an agreement with MFD, which includes a requirement that such
shares be sold for the benefit of clients participating in a "wrap account" or a
similar program under which such clients pay a fee to such broker-dealer or
other financial institution.
Class A shares of the Fund may be purchased at net asset value by retirement
plans qualified under Section 401(k) of the Code through certain broker-dealers
and other financial institutions which have entered into an agreement with MFD
which includes certain minimum size qualifications for such Retirement Plans and
provides that the broker-dealer or other financial institution will perform
certain administrative services with respect to the plan's account.
Class A shares of the Fund may be purchased at net asset value by certain
Retirement Plans subject to the Employee Retirement Income Security Act of 1974,
as amended, subject to the following:
(i) the sponsoring organization must demonstrate to the satisfaction of
MFD that either (a) the employer has at least 25 employees or (b) the
aggregate purchases by the retirement plan of Class A shares of the
MFS Funds will be in an amount of at least $250,000 within a
reasonable period of time, as determined by MFD in its sole direction;
and
(ii) a CDSC of 1% will be imposed on such purchases in the event of certain
redemption transactions within 12 months following such purchases.
Dealers who initiate and are responsible for purchases of Class A shares of the
Fund in this manner will be paid a commission by MFD, as follows: 1.00% on sales
up to $5 million, plus 0.25% on the amount in excess of $5 million; provided,
however, that MFD may pay a commission, on sales in excess of $5 million to
certain Retirement Plans, of 1.00% to certain dealers which, at MFD's
invitation, enter into an agreement with MFD in which the dealer agrees to
return any commission paid to it on the sale (or on a pro rata portion thereof)
if the shareholder redeems his or her shares within a period of time after
purchase as specified by MFD. Purchases of $1 million or more for each
shareholder account will be aggregated over a 12-month period (commencing from
the date of the first such purchase) for purposes of determining the level of
commissions to be paid during that period with respect to such account. Class A
shares of the Fund may be sold at net asset value through the automatic
reinvestment of Class A and Class B distributions which constitute required
withdrawals from qualified retirement plans. Furthermore, Class A shares of the
Fund may be sold at net asset value through the automatic reinvestment of
distributions of dividends and capital gains of Class A shares of other MFS
Funds pursuant to the Distribution Investment Program (see "Shareholder
Services" in the Statement of Additional Information).
CLASS B SHARES: Class B shares are offered at net asset value without an initial
sales charge but subject to a CDSC as follows:
YEAR OF CONTINGENT
REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
-------------- --------------
First ................................ 4%*
Second ............................... 4%
Third ................................ 3%
Fourth ............................... 3%
Fifth ................................ 2%
Sixth ................................ 1%
Seventh and following ................ 0%
- ---------
*Class B shares purchased from January 1, 1993 through August 31, 1993 will be
subject to a CDSC of 5% in the event of a redemption within the first year
after purchase.
For Class B shares purchased prior to January 1, 1993, the Fund imposes a CDSC
as a percentage of redemption proceeds as follows:
YEAR OF CONTINGENT
REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
-------------- --------------
First ............................... 6%
Second .............................. 5%
Third ............................... 4%
Fourth .............................. 3%
Fifth ............................... 2%
Sixth ............................... 1%
Seventh and following ............... 0%
No CDSC is imposed upon an exchange of shares. For purposes of calculating the
CDSC upon redemption of shares acquired in an exchange, the purchase of shares
acquired in one or more exchanges is deemed to have occurred at the time of the
original purchase of the exchanged shares. See "Redemptions and Repurchases --
Contingent Deferred Sales Charge" for further discussion of the CDSC.
The CDSC on Class B shares will be waived upon the death or disability (as
defined in section 72(m)(7) of the Code) of any investor, provided the account
is registered (i) in the case of a deceased individual, solely in the deceased
individual's name, (ii) in the case of a disabled individual, solely or jointly
in the disabled individual's name or (iii) in the name of a living trust for the
benefit of the deceased or disabled individual. The CDSC on Class B shares will
also be waived in the case of redemptions of shares of the Fund pursuant to a
systematic withdrawal plan. In addition, the CDSC on Class B shares will be
waived in the case of distributions from an IRA, SAR-SEP or any other retirement
plan qualified under section 401(a) or 403(b) of the Code, due to death or
disability, or in the case of required minimum distributions from any such
retirement plan due to attainment of age 70 1/2. The CDSC on Class B shares will
be waived in the case of distributions from a retirement plan qualified under
Sections 401(a) or 401(k) of the Code due to (i) returns of excess contribution
to the plan, (ii) retirement of a participant in the plan, (iii) a borrowing
from the plan (repayments of borrowings, however, will constitute new sales for
purposes of assessing the CDSC), (iv) "financial hardship" of the participant in
the plan as that term is defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time, and (v) termination of
employment of the participant in the plan (excluding, however, a partial or
other termination of the plan). The CDSC on Class B shares will also be waived
upon redemption by (i) officers of the Trust, (ii) any of the subsidiary
companies of Sun Life, (iii) eligible Directors, officers, employees (including
retired employees) and agents of MFS, Sun Life or any of their subsidiary
companies, (iv) any trust, pension, profit-sharing or any other benefit plan for
such persons, (v) any trustees and retired trustees of any investment company
for which MFD serves as distributor or principal underwriter, and (vi) to
certain family members of such individuals and their spouses, provided in each
case that the shares will not be resold except to the Fund. The CDSC on Class B
shares will also be waived in the case of redemptions by any employee or
registered representative of any dealer or other financial institution which has
a sales agreement with MFD, by certain family members of such employee or
representative and their spouses, by any trust, pension, profit-sharing or other
retirement plan for the sole benefit of such employee or representative and by
clients of MFS Asset Management, Inc. A retirement plan qualified under Section
401(a) of the Code a ("Retirement Plan") that has invested its assets in Class B
shares of one or more of the MFS Funds Family of Funds (the "MFS Funds") for
more than 10 years from the later to occur of (i) January 1, 1993 or (ii) the
date the Retirement Plan first invests its assets in Class B shares of one or
more of the funds in the MFS Funds, will have the CDSC on Class B shares waived
in the case of a redemption of all the Retirement Plan's shares (including any
shares of any other class) in all MFS Funds (i.e., all the assets of the
Retirement Plan invested in the MFS Funds are withdrawn), except that if,
immediately prior to the redemption, the aggregate amount invested by the
Retirement Plan in Class B shares of the MFS Funds (excluding the reinvestment
of distributions) during the prior four year period equals 50% or more of the
total value of the Retirement Plan's assets in the MFS Funds, then the CDSC will
not be waived. The CDSC on Class B shares will be waived upon redemption by a
Retirement Plan where the redemption proceeds are used to pay expenses of the
Retirement Plan or certain expenses of participants under the Retirement Plan
(e.g., participant account fees), provided that the Retirement Plan's sponsor
subscribes to the MFS Fundamental 401(k) Plan\s/\m/ or another similar
recordkeeping system made available by the Shareholder Servicing Agent. The CDSC
on Class B shares will be waived upon the transfer of registration from shares
held by a Retirement Plan through a single account maintained by the Shareholder
Servicing Agent to multiple Class B share accounts maintained by the Shareholder
Servicing Agent on behalf of individual participants in the Retirement Plan,
provided that the Retirement Plan's sponsor subscribes to the MFS Fundamental
401(k) Plan\s/\m/ or another similar recordkeeping system made available by the
Shareholder Servicing Agent. The CDSC on Class B shares may also be waived in
connection with the acquisition or liquidation of the assets of other investment
companies or personal holding companies.
CONVERSION FEATURE CLASS B SHARES. Class B shares of the Fund will convert
to Class A shares of the Fund approximately eight years after the purchase date.
Shares purchased through the reinvestment of distributions paid in respect of
Class B shares will be treated as Class B shares for purposes of the payment of
the distribution and service fees under the Distribution Plan applicable to
Class B shares. However, for purposes of conversion to Class A shares, all
shares in a shareholder's account that were purchased through the reinvestment
of dividends and distributions paid in respect of Class B shares (and which have
not converted to Class A shares as provided in the following sentence) will be
held in a separate sub-account. Each time any Class B shares in the
shareholder's account (other than those in the sub-account) convert to Class A
shares, a portion of the Class B shares then in the sub-account will also
convert to Class A shares. The portion will be determined by the ratio that the
shareholder's Class B shares not acquired through reinvestment of dividends and
distributions that are converting to Class A shares bear to the shareholder's
total Class B shares not acquired through reinvestment. The conversion of Class
B shares to Class A shares is subject to the continuing availability of a ruling
from the Internal Revenue Service or an opinion of counsel that such conversion
will not constitute a taxable event for Federal tax purposes. There can be no
assurance that such ruling or opinion will be available, and the conversion of
Class B shares to Class A shares will not occur if such ruling or opinion is not
available. In such event, Class B shares would continue to be subject to higher
expenses than Class A shares for an indefinite period.
CLASS C SHARES: Class C shares are offered at net asset value without an initial
sales charge or a CDSC. Class C shares do not convert to any other class of
shares of the Fund. The maximum investment in Class C shares that may be made is
$5,000,000 per transaction.
Class C shares are not currently available for purchase by any retirement plan
qualified under Section 401(a) or 403(b) of the Code if the retirement plan
and/or the sponsoring organization subscribe to the MFS FUNDamental 401(k) Plan
or another similar 401(a) or 403(b) recordkeeping program made available by the
Shareholder Servicing Agent.
GENERAL: Except as described below, the minimum initial investment is $1,000 per
account and the minimum additional investment is $50 per account. Accounts being
established for monthly automatic investments and under payroll savings programs
and tax-deferred retirement programs (other than IRAs) involving the submission
of investments by means of group remittal statements are subject to a $50
minimum on initial and additional investments per account. The minimum initial
investment for IRAs is $250 per account and the minimum additional investment is
$50 per account. Accounts being established for participation in the Automatic
Exchange Plan are subject to a $50 minimum on initial and additional investments
per account. There are also other limited exceptions to these minimums for
certain tax-deferred retirement programs. Any minimums may be changed at any
time at the discretion of MFD. The Fund reserves the right to cease offering its
shares for sale at any time.
For shareholders who elect to participate in certain investment programs (e.g.,
the automatic investment plan) or other shareholder services, MFD or its
affiliates may either (i) give a gift of nominal value, such as a hand-held
calculator, or (ii) make a nominal charitable contribution on their behalf.
A shareholder whose shares are held in the name of, or controlled by, an
investment dealer, might not receive many of the privileges and services from
the Fund (such as Right of Accumulation, Letter of Intent and certain
recordkeeping services) that the Fund ordinarily provides.
Purchases and exchanges should be made for investment purposes only. The Fund
and MFD each reserve the right to reject any specific purchase order or to
restrict purchases by a particular purchaser (or group of related purchasers).
The Fund or MFD may reject or restrict any purchases by a particular purchaser
or group, for example, when such purchase is contrary to the best interests of
the Fund's other shareholders or otherwise would disrupt the management of the
Fund.
MFD may enter into an agreement with shareholders who intend to make exchanges
among certain classes of certain MFS Funds (as determined by MFD) which follow a
timing pattern, and with individuals or entities acting on such shareholders'
behalf (collectively, "market timers"), setting forth the terms, procedures and
restrictions with respect to such exchanges. In the absence of such an
agreement, it is the policy of the Fund and MFD to reject or restrict purchases
by market timers if (i) more than two exchange purchases are effected in a timed
account in the same calendar quarter or (ii) a purchase would result in shares
being held in timed accounts by market timers representing more than (x) one
percent of the Fund's net assets or (y) specified dollar amounts in the case of
certain MFS Funds which may include the Fund and which may change from time to
time. The Fund and MFD each reserve the right to request market timers to redeem
their shares at net asset value, less any applicable CDSC, if either of these
restrictions is violated.
Securities dealers and other financial institutions may receive different
compensation with respect to sales of Class A, Class B and Class C shares. In
some instances, these concessions may be offered to dealers or only to certain
dealers who have sold or may sell, during specified periods, certain minimum
amounts of Fund shares. From time to time, MFD may pay dealers 100% of the
applicable sales charge on sales of Class A shares of certain specified MFS
Funds sold by such dealer during a specified sales period. In addition, MFD or
its affiliates may, from time to time, pay dealers an additional commission
equal to 0.50% of the net asset value of all of the Class B shares of certain
specified MFS Funds sold by such dealer during a specified sales period. In
addition, from time to time MFD, at its expense, may provide additional
commissions, compensation or promotional incentives ("concessions") to dealers
which sell shares of the Fund. The staff of the SEC has indicated that dealers
who receive more than 90% of the sales charge may be considered underwriters.
Such concessions provided by MFD may include financial assistance to dealers in
connection with preapproved conferences or seminars, sales or training programs
for invited registered representatives, payment for travel expenses, including
lodging, incurred by registered representatives and members of their families or
other invited guests to various locations for such seminars or training
programs, seminars for the public, advertising and sales campaigns regarding one
or more MFS Funds, and/or other dealer-sponsored events. From time to time, MFD
may make expense reimbursements for special training of a dealer's registered
representatives in group meetings or to help pay the expenses of sales contests.
Other concessions will not be offered to the extent prohibited by the laws of
any state or any self-regulatory agency, such as the NASD.
The Glass-Steagall Act prohibits national banks from engaging in the business of
underwriting, selling or distributing securities. Although the scope of the
prohibition has not been clearly defined, MFD believes that such Act should not
preclude banks from entering into agency agreements with MFD (as described
above). If, however, a bank were prohibited from so acting, the Trustees would
consider what actions, if any, would be necessary to continue to provide
efficient and effective shareholder services. It is not expected that
shareholders would suffer any adverse financial consequence as a result of these
occurrences. In addition, state securities laws on this issue may differ from
the interpretation of federal law expressed herein, and banks and financial
institutions may be required to register as broker-dealers pursuant to state
law.
EXCHANGES
Subject to the requirements set forth below, some or all of the shares in an
account with the Fund for which payment has been received by the Fund (i.e., an
established account) may be exchanged for shares of the same class of any of the
other MFS Funds (if available for sale) at net asset value. In addition, Class C
shares may be exchanged for shares of the MFS Money Market Fund at net asset
value. Shares of one class may not be exchanged for shares of any other class.
Exchanges will be made only after instructions in writing or by telephone (an
"Exchange Request") are received for an established account by the Shareholder
Servicing Agent in proper form (i.e., if in writing - signed by the record
owner(s) exactly as the shares are registered; if by telephone - proper account
identification is given by the dealer or shareholder of record) and each
exchange must involve either shares having an aggregate value of at least $1,000
or all the shares in the account (except that the minimum is $50 for accounts of
retirement plan participants whose sponsoring organizations subscribe to the MFS
FUNDamental 401(k) Plan or another similar 401(k) recordkeeping system made
available by the Shareholder Servicing Agent or all the shares in the account.
If the Exchange Request is received by the Shareholder Servicing Agent on any
business day prior to the close of regular trading on the Exchange, the exchange
usually will occur on that day if all the requirements set forth above have been
complied with at that time. No more than five exchanges may be made in any one
Exchange Request by telephone. Additional information concerning this exchange
privilege and prospectuses for any of the other MFS Funds may be obtained from
investment dealers or the Shareholder Servicing Agent. A shareholder should read
the prospectus of the other fund and consider the differences in objectives and
policies before making any exchange. For federal and (generally) state income
tax purposes, an exchange is treated as a sale of the shares exchanged and,
therefore, an exchange could result in a gain or loss to the shareholder making
the exchange. Exchanges by telephone are automatically available to most
non-retirement plan accounts and certain retirement plan accounts. For further
information regarding exchanges by telephone, see "Redemptions By Telephone."
The exchange privilege (or any aspect of it) may be changed or discontinued and
is subject to certain limitations, including certain restrictions on purchases
by market timers. Special procedures, privileges and restrictions with respect
to exchanges may apply to market timers who enter into an agreement with MFD, as
set forth in such agreement (see "Purchases").
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the amount in his account on
any date on which the Fund is open for business by redeeming shares at their net
asset value or by selling such shares to the Fund through a dealer (a
repurchase). Since the net asset value of shares of the account fluctuate,
redemptions or repurchases, which are taxable transactions, are likely to result
in gains or losses to the shareholder. When a shareholder withdraws an amount
from his account, the shareholder is deemed to have tendered for redemption a
sufficient number of full and fractional shares in his account to cover the
amount withdrawn. The proceeds of a redemption (except, in certain cases,
redemptions of shares made by check, see below) or repurchase will normally be
available within seven days, except that for shares purchased, or received in
exchange for shares purchased, by check (including certified checks or cashier's
checks), payment of redemption proceeds may be delayed for 15 days from the
purchase date in an effort to assure that such check has cleared. Payment of
redemption proceeds may be delayed for up to seven days from the redemption date
if the Fund determines that such a delay would be in the best interest of all
its shareholders.
A. REDEMPTION BY MAIL -- Each shareholder has the right to redeem all or any
portion of the shares in his account by mailing or delivering to the Shareholder
Servicing Agent (see back cover for address) a stock power with a written
request for redemption, or letter of instruction, together with his share
certificates (if any were issued) all in "good order" for transfer. "Good order
"generally means that the stock power, written request for redemption, letter of
instruction or certificate must be endorsed by the record owner(s) exactly as
the shares are registered and the signature(s) must be guaranteed in the manner
set forth below under the caption "Signature Guarantee." In addition, in some
cases, "good order" may require the furnishing of additional documents. The
Shareholder Servicing Agent may make certain de minimis exceptions to the above
requirements for redemption. Within seven days after receipt of a redemption
request by the Shareholder Servicing Agent in "good order," the Fund will make
payment in cash of the net asset value of the shares next determined after such
redemption request was received, reduced by the amount of any applicable CDSC
described above and the amount of any income tax required to be withheld, except
during any period in which the right of redemption is suspended or date of
payment is postponed because the Exchange is closed or trading on such Exchange
is restricted, or, to the extent otherwise permitted by the 1940 Act, if an
emergency exists.
B. REDEMPTION BY TELEPHONE -- Each shareholder may redeem an amount from his
account by telephoning toll-free at (800) 225-2606. Shareholders wishing to
avail themselves of this telephone redemption privilege must so elect on their
Account Application, designate thereon a commercial bank and account number to
receive the proceeds of such redemption, and sign the Account Application Form
with the signature(s) guaranteed in the manner set forth below under the caption
"Signature Guarantee." The proceeds of such a redemption, reduced by the amount
of any applicable CDSC described above and the amount of any income tax required
to be withheld, are mailed by check to the designated account, without charge.
As a special service, investors may arrange to have proceeds in excess of $1,000
wired in federal funds to the designated account. If a telephone redemption
request is received by the Shareholder Servicing Agent by the close of regular
trading on the Exchange on any business day, shares will be redeemed at the
closing net asset value of the Fund on that day. Subject to the conditions
described in this section, proceeds of a redemption are normally mailed or wired
on the next business day following the date of receipt of the order for
redemption. The Shareholder Servicing Agent will not be responsible for any
losses resulting from unauthorized telephone transactions if it follows
reasonable procedures designed to verify the identity of the caller. The
Shareholder Servicing Agent will request personal or other information from the
caller, and will normally also record calls. Shareholders should verify the
accuracy of confirmation statements immediately after their receipt.
C. REPURCHASE THROUGH A DEALER -- If a shareholder desires to sell his shares at
their net asset value through his securities dealer (a repurchase), the
shareholder can place a repurchase order with his dealer, who may charge the
shareholder a fee. IF THE DEALER RECEIVES THE SHAREHOLDER'S ORDER PRIOR TO THE
CLOSE OF REGULAR TRADING ON THE EXCHANGE AND COMMUNICATES IT TO MFD ON THE SAME
DAY BEFORE MFD CLOSES FOR BUSINESS, THE SHAREHOLDER WILL RECEIVE THE NET ASSET
VALUE CALCULATED ON THAT DAY.
GENERAL: Shareholders of the Fund who have redeemed their shares have a one-
time right to reinvest the redemption proceeds in the same class of shares of
any of the MFS Funds (if shares of such Fund are available for sale) at net
asset value (with a credit for any CDSC paid) within 90 days of the redemption
pursuant to the Reinstatement Privilege. If the shares credited for any CDSC
paid are then redeemed within six years of the initial purchase in the case of
Class B shares, or within 12 months for certain Class A share purchases, a CDSC
will be imposed upon redemption. Such purchases under the Reinstatement
Privilege are subject to all limitations in the Statement of Additional
Information regarding this privilege.
Subject to the Fund's compliance with applicable regulations, the Fund has
reserved the right to pay the redemption or repurchase price of shares of the
Fund, either totally or partially, by a distribution in kind of portfolio
securities (instead of cash). The securities so distributed would be valued at
the same amount as that assigned to them in calculating the net asset value for
the shares being sold. If a shareholder received a distribution in kind, the
shareholder could incur brokerage or transaction charges in converting the
securities to cash.
Due to the relatively high cost of maintaining small accounts, the Fund reserves
the right to redeem shares in any account for their then-current value (which
will be promptly paid to the shareholder) if at any time the total investment in
such account drops below $500 because of redemptions, except in the case of
accounts established for monthly automatic investments and certain payroll
savings programs, Automatic Exchange Plan accounts and tax-deferred retirement
plans, for which there is a lower minimum investment requirement (see
"Purchases"). Shareholders will be notified that the value of their account is
less than the minimum investment requirement and allowed 60 days to make an
additional investment before the redemption is processed. No CDSC will be
imposed with respect to such involuntary redemptions.
SIGNATURE GUARANTEE: In order to protect shareholders against fraud to the
greatest extent possible, the Fund requires in certain instances as indicated
above that the shareholder's signature be guaranteed. In these cases the
shareholder's signature must be guaranteed by an eligible bank, broker, dealer,
credit union, national securities exchange, registered securities association,
clearing agency or savings association. Signature guarantees shall be accepted
in accordance with policies established by the Shareholder Servicing Agent.
CONTINGENT DEFERRED SALES CHARGE. Investments ("Direct Purchases") in Class A
and B shares will be subject to a CDSC for a period of one year (in the case of
purchases of $1 million or more of Class A shares) or six years (in the case of
purchases of Class B shares). Purchases of Class A shares made during a calendar
month, regardless of when during the month the investment occurred, will age one
month on the last day of the month and each subsequent month. Class B shares
will be aggregated on a calendar month basis -- all transactions made during a
calendar month, regardless of when during the month they have occurred, will age
one year at the close of business on the last day of such month in the following
calendar year and each subsequent year. For Class B shares of the Fund purchased
prior to January 1, 1993, transactions will be aggregated on a calendar year
basis -- all transactions made during a calendar year, regardless of when during
the year they have occurred, will age one year at the close of business on
December 31 of that year and each subsequent year. At the time of a redemption,
the amount by which the value of a shareholder's account for a particular class
represented by Direct Purchases exceeds the sum of the six calendar year
aggregations (12 months in the case of $1 million or more of Class A share
purchases) of Direct Purchases may be redeemed without charge ("Free Amount").
Moreover, no CDSC is ever assessed on additional shares acquired through the
automatic reinvestment of dividends or capital gain distributions ("Reinvested
Shares").
Therefore, at the time of redemption of shares of a particular class, (i) any
Free Amount is not subject to the CDSC, and (ii) the amount of redemption equal
to the then-current value of Reinvested Shares is not subject to the CDSC, but
(iii) any amount of redemption in excess of the aggregate of the then-current
value of Reinvested Shares and the Free Amount is subject to a CDSC. The CDSC
will first be applied against the amount of Direct Purchases which will result
in any such charge being imposed at the lowest possible rate. The CDSC to be
imposed upon redemptions will be calculated as set forth in "Purchases" above.
The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except that, with respect to transfers of registration to an IRA
rollover account, the CDSC will be waived if the shares being reregistered would
have been eligible for a CDSC waiver had they been redeemed.
DISTRIBUTION PLANS
The Trustees have adopted separate distribution plans for Class A, Class B and
Class C shares pursuant to Section 12(b) of the 1940 Act and Rule 12b-1
thereunder (the "Rule"), after having concluded that there is a reasonable
likelihood that the plans would benefit the Fund and its shareholders.
CLASS A DISTRIBUTION PLAN. The Class A Distribution Plan provides that the
Fund will pay MFD a distribution/service fee aggregating up to (but not
necessarily all of) 0.35% of the average daily net assets attributable to Class
A shares annually in order that MFD may pay expenses on behalf of the Fund
related to the distribution and servicing of Class A shares. The expenses to be
paid by MFD on behalf of the Fund include a service fee to securities dealers
which enter into a sales agreement with MFD of up to 0.25% of the Fund's average
daily net assets attributable to Class A shares that are owned by investors for
whom such securities dealer is the dealer of record. This fee is intended to be
partial consideration for all personal services and/or account maintenance
services rendered by the dealer with respect to Class A shares. MFD may from
time to time reduce the amount of the service fee paid for shares sold prior to
a certain date. MFD will also retain a distribution fee of 0.10% of the Fund's
average daily net assets attributable to Class A shares as partial consideration
for services performed and expenses incurred in the performance of MFD's
obligations under its distribution agreement with the Fund. In addition, to the
extent that the aggregate of the foregoing fees does not exceed 0.35% per annum
of the average daily net assets of the Fund attributable to Class A shares, the
Fund is permitted to pay other distribution-related expenses, including
commissions to dealers and payments to wholesalers employed by MFD for sales at
or above a certain dollar level. Fees payable under the Class A Distribution
Plan are charged to, and therefore reduce, income allocated to Class A shares.
Such payments commenced as of March 4, 1993. Service fees may be reduced for a
securities dealer that is the holder or dealer of record for an investor who
owns shares of the Fund having a net asset value at or above a certain dollar
level. Dealers may from time to time be required to meet certain criteria in
order to receive service fees. MFD shall be entitled to receive any service fee
payable under the Class A Distribution Plan for which there is no dealer of
record or for which qualification standards have not been met as partial
consideration for personal services and/or account maintenance services
performed by MFD to shareholders accounts. Any amounts paid by the Fund to MFD
and not paid to dealers may be retained by MFD as partial compensation for
personal services and/or account maintenance services performed by MFD. Certain
banks and other financial institutions that have agency agreements with MFD will
receive service fees that are the same as service fees to dealers.
CLASS B DISTRIBUTION PLAN. The Class B Distribution Plan provides that the
Fund will pay MFD a daily distribution fee payable monthly and equal on an
annual basis to 0.75% of the Fund's average daily net assets attributable to
Class B shares and will pay MFD a service fee of up to 0.25% of the Fund's
average daily net assets attributable to Class B shares (which MFD will in turn
pay to securities dealers which enter into a sales agreement with MFD and which
are the holders of record of the Fund's Class B shares). This service fee is
intended to be additional consideration for all personal services and/or account
maintenance services rendered by the dealer with respect to Class B shares. Fees
payable under the Class B Distribution Plan are charged to, and therefore
reduce, income allocated to Class B shares. The Class B Distribution Plan also
provides that MFD will receive all CDSCs attributable to Class B shares (see
"Redemptions and Repurchases" above), which do not reduce the distribution fee.
MFD will pay commissions to dealers of 3.75% of the purchase price of Class B
shares purchased through dealers. MFD will also advance to dealers the first
year service fee at a rate equal to 0.25% of the purchase price of such shares
and, as compensation therefore, MFD may retain the service fee paid by the Fund
with respect to such shares for the first year after purchase. Therefore, the
total amount paid to a dealer upon the sale of shares is 4.00% of the purchase
price of the shares (commission rate of 3.75% plus service fee equal to 0.25% of
the purchase price). Dealers will become eligible for additional service fees
with respect to such shares commencing in the thirteenth month following the
purchase. Dealers may from time to time be required to meet certain criteria in
order to receive service fees. MFD shall be entitled to receive any service fee
payable under the Class B Distribution Plan for which there is no dealer of
record or for which qualification standards have not been met as partial
consideration for personal services and/or account maintenance services
performed by MFD to shareholder accounts. The purpose of the distribution
payments to MFD under the Class B Distribution Plan is to compensate MFD for its
distribution services to the Fund. Since MFD's compensation is not directly tied
to its expenses, the amount of compensation received by MFD during any year may
be more or less than its actual expenses. For this reason, this type of
distribution fee arrangement is characterized by the staff of the SEC as being
of the "compensation" variety. However, the Fund is not liable for any expenses
incurred by MFD in excess of the amount of compensation it receives. The
expenses incurred by MFD, including commissions to dealers, are likely to be
greater than the distribution fees for the next several years, but thereafter
such expenses may be less than the amount of the distribution fees. Certain
banks and other financial institutions that have agency agreements with MFD will
receive agency transaction and service fees that are the same as commissions and
service fees to dealers.
CLASS C DISTRIBUTION PLAN. The Class C Distribution Plan provides that the
Fund will pay MFD a distribution fee of up to 0.75% per annum of the Fund's
average daily net assets attributable to Class C shares and will pay MFD a
service fee of up to 0.25% per annum of the Fund's average daily net assets
attributable to Class C shares (which MFD in turn pays to securities dealers
which enter into a sales agreement with MFD at a rate of up to 0.25% per annum
of the Fund's daily net assets attributable to Class C shares owned by investors
for whom that securities dealer is the holder or dealer of record). The
distribution/service fees attributable to Class C shares are designed to permit
an investor to purchase such shares through a broker-dealer without the
assessment of an initial sales charge or a CDSC while allowing MFD to compensate
broker-dealers in connection with the sale of such shares. The service fee is
intended to be additional consideration for all personal services and/or account
maintenance services rendered with respect to Class C shares. MFD or its
affiliates are entitled to retain all service fees payable under the Class C
Distribution Plan with respect to accounts for which there is no dealer of
record as partial consideration for personal services and/or account maintenance
services performed by MFD or its affiliates for shareholder accounts. The
purpose of the distribution payments to MFD under the Class C Distribution Plan
is to compensate MFD for its distribution services to the Fund. Distribution
payments under the Plan will be used by MFD to pay securities dealers a
distribution fee in an amount equal on an annual basis to 0.75% of the Fund's
average daily net assets attributable to Class C shares owned by investors for
whom that securities dealer is the holder or dealer of record. (Therefore, the
total amount of distribution/service fees paid to a dealer on an annual basis is
1.00% of the Fund's average daily net assets attributable to Class C shares
owned by investors for whom the securities dealer is the holder or dealer of
record.) MFD also pays expenses of printing prospectuses and reports used for
sales purposes, expenses with respect to the preparation and printing of sales
literature and other distribution related expenses, including, without
limitation, the compensation of personnel and all costs of travel, office
expense and equipment. Since MFD's compensation is not directly tied to its
expenses, the amount of compensation received by MFD during any year may be more
or less than its actual expenses. For this reason, this type of distribution fee
arrangement is characterized by the staff of the SEC as being of the
"compensation" variety. However, the Fund is not liable for any expenses
incurred by MFD in excess of the amount of compensation it receives. Certain
banks and other financial institutions that have agency agreements with MFD will
receive agency transaction and service fees that are the same as distribution
fees and service fees to dealers. Fees payable under the Class C Distribution
Plan are charged to, and therefore reduce, income allocated to Class C shares.
DISTRIBUTIONS
The Fund intends to pay substantially all of its net investment income to its
shareholders as dividends on a semi-annual basis. In determining the net
investment income available for distributions, the Fund may rely on projections
of its anticipated net investment income over a longer term, rather than its
actual net investment income for the period. The Fund may make one or more
distributions during the calendar year to its shareholders from any long-term
capital gains, and may also make one or more distributions during the calendar
year to its shareholders from short-term capital gains. Shareholders may elect
to receive dividends and capital gain distributions in either cash or additional
shares of the same class with respect to which a distribution is made. See "Tax
Status" and "Shareholder Services -- Distribution Options below". Distributions
paid by the Fund with respect to Class A shares will generally be greater than
those paid with respect to Class B and Class C shares because expenses
attributable to Class B and Class C shares will generally be higher.
TAX STATUS
The Fund is treated as an entity separate from the other series of the Trust for
federal income tax purposes. In order to minimize the taxes the Fund would
otherwise be required to pay, the Fund intends to qualify each year as a
"regulated investment company" under Subchapter M of the Code, and to make
distributions to its shareholders in accordance with the timing requirements
imposed by the Code. It is expected that the Fund will not be required to pay
entity level federal income or excise taxes, although foreign-source income
received by the Fund may be subject to foreign withholding taxes. Shareholders
of the Fund normally will have to pay federal income taxes, (and any state or
local taxes) on the dividends and capital gain distributions they receive from
the Fund, whether paid in cash or additional shares. A portion of the dividends
received from the Fund (but none of the Fund's capital gain distributions) may
qualify for the dividends-received deduction for corporations.
A statement setting forth the federal income tax status of all dividends and
distributions for that year, including the portion taxable as ordinary income,
the portion taxable as long-term capital gain, the portion, if any, representing
a return of capital (which is free of current taxes but results in a basis
reduction) and the amount, if any, of federal income tax withheld, will be sent
to each shareholder promptly after the end of such year. In certain
circumstances, the Fund may elect to "pass through" to shareholders foreign
income taxes paid by the Fund. Under those circumstances, the Fund will notify
shareholders of their pro rata portion of the foreign income taxes paid by the
Fund; shareholders may be eligible for foreign tax credits or deductions with
respect to those taxes, but will be required to treat the amount of the taxes as
an amount distributed to them and thus includable in their gross income for
federal income tax purposes.
Fund distributions will reduce the Fund's net asset value per share.
Shareholders who buy shares just before the Fund makes a distribution of net
capital gains or net short-term capital gains may thus pay the full price for
the shares and then effectively receive a portion of the purchase price back as
a taxable distribution.
The Fund intends to withhold U.S. federal income tax at a rate of 30% on
dividends and certain other payments that are subject to such withholding and
that are made to persons who are neither citizens nor residents of the U.S.,
regardless of whether a lower rate may be permitted under an applicable law or
treaty. The Fund is also required in certain circumstances to apply backup
withholding of 31% on 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. However,
backup withholding will not be applied to payments which have had 30%
withholding taken. Prospective shareholders should read the Account Application
for information regarding backup withholding of federal income tax and should
consult their own tax advisers as to the tax consequences of an investment in
the Fund.
NET ASSET VALUE
The net asset value per share of each class of shares of the Fund is determined
each day during which the Exchange is open for trading. This determination is
made once each day as of the close of regular trading on such Exchange by
deducting the amount of the liabilities attributable to the class from the value
of the assets attributable to the class and dividing the difference by the
number of shares of the class outstanding. Assets in the portfolio are valued on
the basis of their market values or otherwise at their fair values, as described
in the Statement of Additional Information. All investments and assets are
expressed in U.S. dollars based upon current currency exchange rates. The net
asset value of each class of shares is effective for orders received by the
dealer prior to its calculation and received by MFD prior to the close of that
business day.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund, one of three series of the Trust, has three classes of shares,
entitled Class A, Class B and Class C Shares of Beneficial Interest (without par
value). The Trust has reserved the right to create and issue additional classes
and series of shares, in which case each class of shares of a series would
participate equally in the earnings, dividends and assets attributable to that
class of that particular series. Shareholders are entitled to one vote for each
share held and shares of each series would be entitled to vote separately to
approve investment advisory agreements or changes in investment restrictions,
but shares of all series would vote together in the election or selection of
Trustees and accountants. Additionally, each class of shares of a series will
vote separately on any material increases in the fees under its Distribution
Plan or on any other matter that affects solely that class of shares, but will
otherwise vote together with all other classes of shares of the series on all
other matters.
Each share of a class of the Fund represents an equal proportionate interest in
the Fund with each other class share, subject to the liabilities of the
particular class. Shares have no pre-emptive or conversion rights (except as set
forth above in "Purchases -- Conversion of Class B Shares"). Shares are fully
paid and non-assessable. Should the Fund be liquidated, shareholders of each
class are entitled to share pro rata in the net assets attributable to that
class available for distribution to shareholders. Shares will remain on deposit
with the Shareholder Servicing Agent and certificates will not be issued except
in connection with pledges and assignments and in certain other limited
circumstances. The Trust does not intend to hold annual shareholder meetings.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which both inadequate
insurance existed (e.g., fidelity bonding and omission insurance) and the Trust
itself was unable to meet its obligations.
PERFORMANCE INFORMATION
From time to time, the Fund will provide yield, current distribution rate and
total rate of return quotations for each class of shares and may also quote fund
rankings in the relevant fund category from various sources, such as Lipper
Analytical Services, Inc., Morningstar, Inc. and Wiesenberger Investment
Companies Service. Yield quotations are based on the annualized net investment
income per class share over a 30-day period stated as a percent of the maximum
public offering price on the last day of that period. Yield calculations for
Class B shares assume no CDSC is paid. The current distribution rate for each
class is generally based upon the total amount of dividends per share paid by
the Fund to shareholders of that class during the past 12 months and is computed
by dividing the amount of such dividends by the maximum public offering price of
that class at the end of such period. Current distribution rate calculations for
Class B shares assume no CDSC is paid. The current distribution rate differs
from the yield calculation because it may include distributions to shareholders
from sources other than dividends and interest, such as premium income from
option writing, short-term capital gains, and return of invested capital, and is
calculated over a different period of time. Total rate of return quotations will
reflect the average annual percentage change over stated periods in the value of
an investment in each class of shares of the Fund made at the maximum public
offering price of shares of that class and with all distributions reinvested and
which, if quoted for periods of six years or less, will give effect to the
imposition of the CDSC assessed upon redemptions of the Fund's Class B shares.
Such total rate of return quotations may be accompanied by quotations which do
not reflect the reduction in value of the initial investment due to the sales
charge or the deduction of a CDSC, and which will thus be higher. All
performance quotations are based on historical performance and are not intended
to indicate future performance. Yield reflects only net portfolio income as of a
stated period of time and current distribution rate reflects only the rate of
distributions paid by the Fund over a stated period of time, while total rate of
return reflects all components of investment return over a stated period of
time. The Fund's quotations may from time to time be used in advertisements,
shareholder reports or other communications to shareholders. For a discussion of
the manner in which the Fund will calculate its yield, current distribution rate
and total rate of return, see the Statement of Additional Information. For
further information about the Fund's performance for the fiscal year ended
October 31, 1994, please see the Fund's Annual Report. A copy of the Annual
Report may be obtained without charge by contacting the Shareholder Serving
Agent (see back cover for address and phone number). In addition to information
provided in shareholder reports, the Fund may, in its discretion, from time to
time, make a list of all or a portion of its holdings available to investors
upon request.
7. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described below
or concerning other aspects of the Fund should contact the Shareholder Servicing
Agent (see back cover for address and phone number).
ACCOUNT AND CONFIRMATION STATEMENTS -- Each shareholder will receive
confirmation statements showing the transaction activity in his account. At the
end of each calendar year, each shareholder will receive income tax information
regarding reportable dividends and distributions for that year, including
whether any portion represents a return of capital (see "Tax Status" above).
DISTRIBUTION OPTIONS -- The following options are available to all accounts
(except Systematic Withdrawal Plan accounts) and may be changed as often as
desired by notifying the Shareholder Servicing Agent:
-- Dividends and capital gain distributions reinvested in additional shares.
This option will be assigned if no other option is specified;
-- Dividends in cash; long-term distributions reinvested in additional
shares;
-- Dividends and capital gain distributions in cash.
Reinvestments (net of any tax withholding) will be made in additional full and
fractional shares of the same class of shares at the net asset value in effect
at the close of business on the last business day of the semi-annual period.
Dividends and capital gain distributions in amounts less than $10 will
automatically be reinvested in additional shares of the Fund. If a shareholder
has elected to receive dividends and/or capital gain distributions in cash and
the postal or other delivery service is unable to deliver checks to the
shareholder's address of record, such shareholder's distribution option will
automatically be converted to having all dividends and other distributions
reinvested in additional shares. Any request to change a distribution option
must be received by the Shareholder Servicing Agent by the record date for a
dividend or distribution in order to be effective for that dividend or
distribution. No interest will accrue on amounts represented by uncashed
distribution or redemption checks.
INVESTMENT AND WITHDRAWAL PROGRAMS -- For the convenience of shareholders, the
Fund makes available the following programs designed to enable shareholders to
add to their investment in an account with the Fund or withdraw from it with a
minimum of paper work. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or the Fund.
LETTER OF INTENT: If a shareholder (other than a group purchaser as
described in the Statement of Additional Information) anticipates purchasing
$100,000 or more of Class A shares of the Fund alone or in combination with
shares of Class B or Class C of the Fund or any of the classes of other MFS
Funds or MFS Fixed Fund (a bank collective investment Fund) within a 13-month
period (or 36-month period for purchases of $1 million or more), the shareholder
may obtain such shares of the Fund at the same reduced sales charge as though
the total quantity were invested in one lump sum, subject to escrow agreements
and the appointment of an attorney for redemptions from the escrow amount if the
intended purchases are not completed, by completing the Letter of Intent section
of the Account Application.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on purchases 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 (a bank collective
investment Fund) reaches a discount level.
DISTRIBUTION INVESTMENT PROGRAM: Shares of a particular class of the Fund
may be sold at net asset value (and without any applicable CDSC) through the
automatic reinvestment of dividend and capital gain distributions from the same
class of another MFS Fund. Furthermore, distributions made by the Fund may be
automatically invested at net asset value (and without any applicble CDSC) in
shares of the same class of another MFS Fund, if shares of such Fund are
available for sale.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder
Servicing Agent to send him (or anyone he designates) regular periodic payments,
as designated on the Account Application and based upon the value of his
account. Each payment under a Systematic Withdrawal Plan (a "SWP") must be at
least $100 except in certain limited circumstances. The aggregate withdrawals of
Class B shares in any year pursuant to a SWP will not be subject to a CDSC and
are generally limited to 10% of the value of the account at the time of the
establishment of the SWP. The CDSC will not be waived in the case of SWP
redemptions of Class A shares which are subject to a CDSC.
DOLLAR COST AVERAGING PROGRAMS --
AUTOMATIC INVESTMENT PLAN: Cash investments of $50 or more may be made
through a shareholder's checking account twice monthly, monthly or quarterly.
Required forms are available from the Shareholder Servicing Agent or investment
dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may participate in the Automatic Exchange Plan. 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 other
MFS Funds selected by the shareholder. Under the Automatic Exchange Plan,
exchanges of at least $50 each may be made to up to four different funds. A
shareholder should consider the objectives and policies of a fund and review its
prospectus before electing to exchange money into such fund through the
Automatic Exchange Plan. No transaction fee is imposed in connection with
exchange transactions under the Automatic Exchange Plan. However, exchanges from
MFS Money Market Fund, MFS Government Money Market Fund or Class A shares of MFS
Cash Reserve Fund will be subject to any applicable sales charge. For federal
and (generally) state income tax purposes, an exchange is treated as a sale of
the shares exchanged and, therefore, could result in a capital gain or loss to
the shareholder making the exchange. See the Statement of Additional Information
for further information concerning the Automatic Exchange Plan. Investors should
consult their tax advisers for information regarding the potential capital gain
and loss consequences of transactions under the Automatic Exchange Plan.
Because a dollar cost averaging program involves periodic purchases of shares
regardless of fluctuating share offering prices, a shareholder should consider
his financial ability to continue his purchases through periods of low price
levels. Maintaining a dollar cost averaging program concurrently with a
withdrawal program could be disadvantageous because of the sales charges
included in share purchases in the case of Class A shares, and because of
assessment of the CDSC for certain share redemptions in the case of Class A and
Class B shares.
TAX-DEFERRED RETIREMENT PLANS -- Except as noted under "Purchases -- Class C
Shares," Shares of the Fund may be purchased by all types of tax-deferred
retirement plans, including IRAs, SEP-IRA plans, 401(k) plans, 403(b) plans and
other corporate pension and profit-sharing plans. Investors should consult with
their tax adviser before establishing any of the tax-deferred retirement plans
described above.
-----------------
The Fund's Statement of Additional Information, dated March 1, 1995, contains
more detailed information about the Trust and the Fund, including information
related to (i) the Fund's investment policies and restrictions, including the
purchase and sale of options, Futures Contracts, Options on Futures Contracts,
Forward Contracts and Options on Foreign Currencies; (ii) the Trustees, officers
and investment adviser; (iii) portfolio trading; (iv) the Fund's shares,
including rights and liabilities of shareholders; (v) tax status of dividends
and distributions; (vi) the Distribution Plans; (vii) the method used to
calculate total rate of return quotations; and (viii) various services and
privileges provided by the Fund for the benefit of its shareholders, including
additional information with respect to the exchange privilege.
<PAGE>
THE MFS FAMILY OF FUNDS(R) -- America's Oldest Mutual Fund Group
<TABLE>
The members of the MFS Family of Funds are grouped below according to the types of
securities in their portfolios. For free prospectuses containing more complete
information, including the exchange privilege and all charges and expenses, please
contact your financial adviser or call the MFS Service Center at 1-800-225-2606 any
business day from 8 a.m. to 8 p.m. Eastern time. This material should be read carefully
before investing or sending money.
<CAPTION>
<S> <C>
STOCK LIMITED MATURITY BOND
Massachusetts Investors Trust MFS(R) Government Limited Maturity Fund
Massachusetts Investors Growth Stock Fund MFS(R) Limited Maturity Fund
MFS(R) Capital Growth Fund MFS(R) Municipal Limited Maturity Fund
MFS(R) Emerging Growth Fund WORLD
MFS(R) Gold & Natural Resources Fund MFS(R) World Asset Allocation Fund
MFS(R) Growth Opportunities Fund MFS(R) World Equity Fund
MFS(R) Managed Sectors Fund MFS(R) World Governments Fund
MFS(R) OTC Fund MFS(R) World Growth Fund
MFS(R) Research Fund MFS(R) World Total Return Fund
MFS(R) Value Fund NATIONAL TAX-FREE BOND
STOCK AND BOND MFS(R) Municipal Bond Fund
MFS(R) Total Return Fund MFS(R) Municipal High Income Fund
MFS(R) Utilities Fund (closed to new investors)
BOND MFS(R) Municipal Income Fund
MFS(R) Bond Fund STATE TAX-FREE BOND
MFS(R) Government Mortgage Fund Alabama, Arkansas, California, Florida,
MFS(R) Government Securities Fund Georgia, Louisiana, Maryland, Massachusetts,
MFS(R) High Income Fund Mississippi, New York, North Carolina,
MFS(R) Intermediate Income Fund Pennsylvania, South Carolina, Tennessee, Texas,
MFS(R) Strategic Income Fund Virginia, Washington, West Virginia
(formerly MFS(R) Income & Opportunity Fund) MONEY MARKET
MFS(R) Cash Reserve Fund
MFS(R) Government Money Market Fund
MFS(R) Money Market Fund
</TABLE>
<PAGE>
Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116 MFS(R) WORLD TOTAL RETURN FUND
(617) 954-5000
Distributor Prospectus
MFS Fund Distributors, Inc. March 1, 1995
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Custodian and Dividend Disbursing Agent
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Shareholder Servicing Agent
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116
Toll-free: (800) 225-2606
Mailing Address:
P.O. Box 2281
Boston, MA 02107-9906
Independent Accountants
Ernts & Young LLP
200 Clarendon Street
Boston, MA 02116
[Logo]
THE FIRST NAME IN MUTUAL FUNDS
MFS(R) WORLD TOTAL RETURN FUND
500 Boylston Street
Boston, MA 02116
MWT-1 3/95/120M 24/224/324
<PAGE>
MFS(R) WORLD STATEMENT OF
TOTAL RETURN FUND ADDITIONAL INFORMATION
(A member of the MFS Family of Funds(R)) March 1, 1995
- ------------------------------------------------------------------------------
Page
----
1. Definitions .......................................................... 2
2. Investment Objective, Policies and Restrictions ...................... 2
3. Management of the Fund ............................................... 12
Trustees .......................................................... 12
Officers .......................................................... 12
Investment Adviser ................................................ 12
Custodian ......................................................... 13
Shareholder Servicing Agent ....................................... 14
Distributor ....................................................... 14
4. Portfolio Transactions and Brokerage Commissions ..................... 15
5. Shareholder Services ................................................. 16
Investment and Withdrawal Programs ................................ 16
Exchange Privilege ................................................ 18
Tax-Deferred Retirement Plans ..................................... 18
6. Tax Status ........................................................... 19
7. Determination of Net Asset Value and Performance ..................... 20
8. Distribution Plans ................................................... 22
9. Description of Shares, Voting Rights and Liabilities ................. 24
10. Independent Auditors and Financial Statements ........................ 24
Appendix -- Description of Bond Ratings .............................. 25
MFS WORLD TOTAL RETURN FUND
A Series of MFS Series Trust VI
500 Boylston Street, Boston, Massachusetts 02116
(617) 954-5000
This Statement of Additional Information sets forth information which may be of
interest to investors but which is not necessarily included in the Fund's
Prospectus, dated March 1, 1995. This Statement of Additional Information should
be read in conjunction with the Prospectus, a copy of which may be obtained
without charge by contacting the Shareholder Servicing Agent (see back cover for
address and phone number).
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A
CURRENT PROSPECTUS.
<PAGE>
1. DEFINITIONS
"Fund" -- MFS(R) World Total Return Fund, a non-diversified
series of MFS Series Trust VI (the "Trust"), a
Massachusetts business trust, formerly known as
MFS Worldwide Total Return Fund until June 29,
1993. Prior to August 3, 1992, the Trust was
known as MFS Worldwide Total Return Trust.
"MFS" or the "Adviser" -- Massachusetts Financial Services Company, a
Delaware corporation.
"MFD" -- MFS Fund Distributors, Inc., a Delaware
corporation.
"Prospectus" -- The Prospectus, dated March 1, 1995.
2. INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVE. The Fund's investment objective is to seek total return by
investing in securities which will provide above-average current income
(compared to a portfolio invested entirely in equity securities) and
opportunities for long-term growth of capital and income. The Fund will invest
primarily in global equity and fixed income securities (i.e., those of U.S. and
non-U.S. issuers). Any investment involves risk and there can be no assurance
that the Fund will achieve its investment objective.
The Fund is designed to provide investors easy access to the exciting potential
of global investing and, at the same time, offer the professional management,
liquidity and flexibility that have made mutual funds one of America's most
popular investment choices. The Fund seeks to capitalize on what the Adviser
believes are some of the best investment opportunities in today's global
economy. In this regard, the Fund offers investors an opportunity to take part
in the growth potential of some of America's finest multinational companies
while simultaneously capitalizing on the promise of overseas growth.
INVESTMENT POLICIES. The Fund seeks to achieve its investment objective through
a professionally managed, internationally diversified portfolio consisting of
equity and debt securities. The Prospectus contains a discussion of the various
types of securities in which the Fund may invest and certain risks involved in
such investments. Some of these policies are discussed further below.
While the Fund will invest no less than 40% of its assets in equity securities
under normal economic and market conditions, the Fund expects that 60% of its
assets will most likely be so invested. The remaining portion of the Fund's
assets will be invested in fixed income securities. The Adviser believes that
the equity portion of the Fund's portfolio will consist of securities considered
to be of high or improving investment quality. Many such securities are commonly
referred to as "blue chip" stocks. Blue chip stocks are defined as nationally
known common stocks with a lengthy history of profit, growth and quality
management.
The percentage of the Fund's assets invested in securities issued abroad and
denominated in foreign currencies ("non-dollar securities") will vary depending
on the state of the economies of the various countries of the world, their
financial markets and, in the case of fixed income securities, the relationship
of their currencies to the U.S. dollar. The Prospectus contains a discussion of
the various risks associated with investments in non-dollar securities. The Fund
will invest in investment grade U.S. and non-U.S. fixed income securities.
Assets invested in fixed income securities of non-U.S. issuers will be
diversified among countries where opportunities for total return are expected to
be most attractive. It is expected that fixed income investments within foreign
countries will be primarily in government securities, including those of
political subdivisions, authorities, agencies and instrumentalities, to minimize
credit risks. The Adviser does not believe that the credit risk inherent in the
obligations of stable foreign governments is significantly greater than that of
U.S. Government obligations.
The Fund may invest up to 90% (and expects generally to invest between 25% to
90%) of its total assets in foreign securities (not including American
Depositary Receipts ("ADRs")). The Adviser will determine the amount of the
Fund's assets to be invested in the United States and the amount to be invested
abroad. The Adviser believes that while excellent opportunities are still
plentiful in the United States, outstanding opportunities for growth exist
outside the United States. The United States today accounts for approximately
one-third of the world equity market, while approximately 67% of the world
equity market exists outside the United States. Moreover, in only one of the
past 11 years did the United States place in the world's five best performing
equity markets. Similarly, the United States accounts for only approximately 45%
of the world fixed income market and only once in the past eleven years did the
United States have the best performing fixed income market.
The Fund has registered as a "non-diversified" investment company. As a result,
the Fund is limited as to the percentage of its assets which may be invested in
the securities of any one issuer only by its own investment restrictions and the
diversification requirements imposed by the Internal Revenue Code of 1986, as
amended (the "Code"). U.S. Government securities, which are generally considered
free of credit risk and are assured as to payment of principal and interest if
held to maturity, are not subject to any investment limitation. (A "diversified"
investment company would be required under the Investment Company Act of 1940,
as amended (the "1940 Act"), to maintain at least 75% of its assets in cash
(including foreign currencies), cash items, U.S. Government securities and other
securities, limited per issuer to blocks of less than 5% of the investment
company's total assets.) The portfolio will be managed actively and the asset
allocations modified as the Adviser deems necessary.
The Fund may invest in equity securities issued by U.S. as well as foreign
companies. Investments in foreign companies involve considerations and possible
risks not typically associated with investments in equity securities issued by
domestic companies or with debt securities issued by foreign governments. There
may be less publicly available information about a foreign company than about a
domestic company, and foreign companies are generally not subject to accounting,
auditing and financial reporting standards and requirements comparable to those
to which U.S. companies are subject. Foreign securities markets, while growing
in volume, have substantially less volume than U.S. markets, and securities of
many foreign companies are less liquid and their prices more volatile than
securities of comparable domestic companies. Fixed brokerage commissions and
other transaction costs on foreign securities exchanges are generally higher
than in the United States. There is also less government supervision and
regulation of exchanges, brokers and issuers in foreign countries than there is
in the United States.
AMERICAN DEPOSITARY RECEIPTS: ADRs are certificates issued by a U.S. depository
(usually a bank) and which represent a specified quantity of shares of an
underlying non-U.S. stock on deposit with a custodian bank as collateral. ADRs
may be sponsored or unsponsored. A sponsored ADR is issued by a depository which
has an exclusive relationship with the issuer of the underlying security. An
unsponsored ADR may be issued by any number of U.S. depositories. The Fund may
invest in either type of ADR. Although the U.S. investor holds a substitute
receipt of ownership rather than direct stock certificates, the use of the
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 depository of an ADR agent bank in the foreign country. Simultaneously,
the ADR agents create a certificate which settles at the Fund's custodian in
five days. The Fund may also execute trades on the U.S. markets using existing
ADRs. A foreign issuer of the security underlying an ADR is generally not
subject to the same reporting requirements in the United States as a domestic
issuer. Accordingly the information available to a U.S. investor will be limited
to the information the foreign issuer is required to disclose in its own country
and the market value of an ADR may not reflect undisclosed material information
concerning the issuer of the underlying security. ADRs may also be subject to
exchange rate risks if the underlying foreign securities are denominated in
foreign currency.
RISKS OF INVESTING IN LOWER RATED SECURITIES: The Fund may invest in fixed
income securities rated Baa by Moody's Investors Service, Inc. ("Moody's") or
BBB by Standard & Poor's Ratings Group ("S&P") or by Fitch Investors Service,
Inc. ("Fitch"), and comparable unrated securities. These securities, while
normally exhibiting adequate protection parameters, have speculative
characteristics and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments than in the case of higher grade fixed income securities.
The Fund may also invest up to 5% of its assets in convertible securities rated
Ba or lower by Moody's or BB or below by S&P or Fitch (securities rated below
BBB or Baa are commonly known as "Junk Bonds"). Such securities are considered
speculative and may be questionable as to principal and interest payments. The
Fund may have difficulty disposing of such securities because there may be a
thin trading market for them. Because not all dealers maintain markets in all
lower-rated convertible securities, there is no established retail secondary
market for many of these securities and the Fund anticipates that such
securities could only be sold to a limited number of dealers or institutional
investors. To the extent a secondary market for these securities does exist, it
is generally not as liquid as the secondary market for higher-rated securities.
The lack of a liquid secondary market may have an adverse impact on market price
and the Fund's ability to dispose of a particular security when necessary to
meet the Fund's liquidity needs or in response to a specific event like the
deterioration of the issuer's creditworthiness. The lack of a liquid secondary
market for some lower-rated convertible securities may make it more difficult
for the Fund to obtain accurate market quotations for the purpose of valuing
such securities. Market quotations are generally only available from a limited
number of dealers and may not necessarily represent firm bids of such dealers or
prices for actual sales. The market value of lower-rated convertible securities
tends to reflect individual corporate developments to a greater extent than
higher-rated securities, which react primarily to the general level of interest
rates. Such lower-rated securities also tend to be more sensitive to economic
conditions than are higher-rated securities.
NON-DOLLAR FIXED INCOME SECURITIES: The Fund will purchase non-dollar fixed
income securities denominated in the currency of countries where the interest
rate environment as well as the general economic climate provide an opportunity
for declining interest rates and currency appreciation. If interest rates
decline, such non-dollar fixed income securities will appreciate in value. If
the currency also appreciates against the dollar, the total investment in such
non-dollar fixed income securities would be enhanced further. (For example, if
United Kingdom bonds yield 14% during a year when interest rates decline causing
the bonds to appreciate by 5% and the pound rises 3% versus the dollar, then the
annual total return of such bonds would be 22%. This example is illustrative
only.) Conversely, a rise in interest rates or decline in currency exchange
rates would adversely affect the Fund's return.
Investments in non-dollar fixed income securities are evaluated primarily on the
strength of a particular currency against the dollar and on the interest rate
climate of that country. Currency is judged on the basis of fundamental economic
criteria (e.g., relative inflation levels and trends, growth rate forecasts,
balance of payments status, economic policies) as well as technical and
political data. In addition to the foregoing, interest rates are evaluated on
the basis of differentials or anomalies that may exist between different
countries.
PORTFOLIO TRADING: Although the Fund does not intend to seek short-term profits,
securities in its portfolio will be sold whenever the Adviser believes it is
appropriate to do so without regard to the length of time the particular asset
may have been held. A high turnover rate involves greater expenses, including
higher brokerage and transactions costs, to the Fund. The Fund engages in
portfolio trading if it believes a transaction net of costs (including custodian
charges) will help in achieving its investment objective (see "Portfolio
Transactions and Brokerage Commissions" below).
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements with
sellers who are member firms (or subsidiaries thereof) of the New York Stock
Exchange (the "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 U.S. Government securities.
The repurchase agreement provides that in the event the seller fails to pay the
price agreed upon on the agreed upon delivery date or upon demand, as the case
may be, the Fund will have the right to liquidate the securities. If at the time
the Fund is contractually entitled to exercise its right to liquidate the
securities, the seller is subject to a proceeding under the bankruptcy laws or
its assets are otherwise subject to a stay order, the Fund's exercise of its
right to liquidate the securities may be delayed and result in certain losses
and costs to the Fund. The Fund has adopted and follows procedures which are
intended to minimize the risks of repurchase agreements. For example, the Fund
only enters into repurchase agreements after the Adviser has determined that the
seller is creditworthy, and the Adviser monitors the seller's creditworthiness
on an ongoing basis. Moreover, under such agreements, the value of the
securities (which are marked to market every business day) is required to be
greater than the repurchase price, and the Fund has the right to make margin
calls at any time if the value of the securities falls below the agreed upon
margin.
"WHEN-ISSUED" SECURITIES: When the Fund commits to purchase a security on a
"when-issued" or "forward delivery" basis, it will set up procedures consistent
with the General Statement of Policy of the Securities and Exchange Commission
(the "SEC") concerning such purchases. Since that policy currently recommends
that an amount of the Fund's assets equal to the amount of the purchase be held
aside or segregated to be used to pay for the commitment, the Fund will always
have cash, short-term money market instruments or high quality debt securities
sufficient to cover any commitments or to limit any potential risk. However,
although the Fund does not intend to make such purchases for speculative
purposes and intends to adhere to the provisions of the SEC policy, purchases of
securities on such bases may involve more risk than other types of purchases.
For example, the Fund may have to sell assets which have been set aside in order
to meet redemptions. Also, if the Fund determines it necessary to sell the
"when-issued" or "forward delivery" securities before delivery, it may incur a
loss because of market fluctuations since the time the commitment to purchase
such securities was made. The Fund does not intend to invest more than 5% of the
value of its total assets in such securities.
SECURITIES LENDING: The Fund may seek to increase its income by lending fixed
income portfolio securities. Such loans will usually be made only to member
banks of the Federal Reserve System and to member firms (or subsidiaries
thereof) of the Exchange and would be required to be secured continuously by
collateral in cash, cash equivalents or U.S. Government securities maintained on
a current basis at an amount at least equal to the market value of the
securities loaned. The Fund would have the right to call a loan and obtain the
securities loaned at any time on customary industry settlement notice (which
will usually not exceed five days). During the existence of a loan, the Fund
would continue to receive the equivalent of the interest paid by the issuer on
the securities loaned and would also receive compensation based on investment of
the collateral. The Fund would not, however, have the right to vote any
securities having voting rights during the existence of the loan, but would call
the loan in anticipation of an important vote to be taken among holders of the
securities or of the giving or withholding of their consent on a material matter
affecting the investment. As with other extensions of credit, there are risks of
delay in recovery or even loss of rights in the collateral should the borrower
of the securities fail financially. However, the loans would be made only to
firms deemed by the Adviser to be of good standing, and when, in the judgment of
the Adviser, the consideration which could be earned currently from securities
loans of this type justifies the attendant risk. If the Adviser determines to
make securities loans, it is not intended that the value of the securities
loaned would exceed 30% of the value of the Fund's total assets. The Fund does
not currently intend during the coming year to lend more than 5% of the value of
its total assets.
MORTGAGE PASS-THROUGH SECURITIES: The Fund may invest in mortgage pass-through
securities as described in the Prospectus. 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 Government National
Mortgage Association ("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 the
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 Authority-insured or Veterans Administration-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 the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("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) from 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
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.
CORPORATE ASSET-BACKED SECURITIES: The Fund may invest in corporate asset-
backed securities. These securities, issued by trusts and special purpose
corporations, are backed by a pool of assets, such as credit card and automobile
loan receivables, representing the obligations of a number of different parties.
Corporate asset-backed securities present certain risks. For instance, in the
case of credit card receivables, these securities may not have the benefit of
any security interest in the related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the servicers to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore, there is
the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities.
Corporate asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection; and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
resulting from ultimate default ensures payment through insurance policies or
letters of credit obtained by the issuer or sponsor from third parties. The Fund
will not pay any additional or separate fees for credit support. The degree of
credit support provided for each issue is generally based on historical
information respecting the level of credit risk associated with the underlying
assets. Delinquency or loss in excess of that anticipated or failure of the
credit support could adversely affect the return on an instrument in such a
security.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: As described in the Prospectus, the Fund
may enter into mortgage "dollar roll" transactions pursuant to which it sells
mortgage-backed securities for delivery in the future and simultaneously
contracts to repurchase substantially similar securities on a specified future
date. During the roll period, the Fund foregoes principal and interest paid on
the mortgage-backed securities. The Fund is compensated for the lost interest by
the difference between the current sales price and the lower price for the
future purchase (often referred to as the "drop") as well as by the interest
earned on the cash proceeds of the initial sale. The Fund may also be
compensated by receipt of a commitment fee.
OPTIONS ON FIXED INCOME SECURITIES: The Fund may write (sell) covered call and
put options on fixed income securities and purchase call and put options. An
option provides the purchaser, or "holder," with the right, but not the
obligation, to purchase, in the case of a "call" option, or sell, in the case of
a "put" option, the fixed income security or securities in connection with which
the option was written, for a fixed exercise price up to a stated expiration
date or, in the case of certain options, on such date. The holder pays a
non-refundable purchase price for the option, known as the "premium." The
maximum amount of risk the purchaser of the option assumes is equal to the
premium plus related transaction costs, although this entire amount may be lost.
The risk of the seller, or "writer," however, is potentially unlimited, unless
the option is "covered." A call option written by the Fund is "covered" if the
Fund owns the security underlying the call or has an absolute and immediate
right to acquire that security without additional cash consideration (or for
additional cash consideration held in a segregated account by its custodian)
upon conversion or exchange of other securities held in its portfolio. A call
option is also covered if the Fund holds a call on the same fixed income
security and in the same principal amount as the call written where the exercise
price of the call held (a) is equal to or less than the exercise price of the
call written or (b) is greater than the exercise price of the call written if
the difference is maintained by the Fund in cash, short-term money market
instruments or high quality government securities in a segregated account with
its custodian. A put option written by the Fund is "covered" if the Fund
maintains cash, short-term money market instruments or high quality government
securities with a value equal to the exercise price in a segregated account with
its custodian, or else holds a put on the same security and in the same
principal amount as the put written where the exercise price of the put held is
(a) equal to or greater than the exercise price of the put written or (b) is
less than the exercise price of the put written if the difference is maintained
by the Fund in cash or short-term money market instruments in a segregated
account with its custodian. Put and call options written by the Fund may also be
covered in such other manner as may be in accordance with the requirements of
the exchange on which, or the counter party with which, the option is traded,
and applicable laws and regulations. If the writer's obligation is not so
covered, it is subject to the risk of the full change in value of the underlying
security from the time the option is written until exercise.
The Fund may write options for the purpose of increasing its return and for
hedging purposes. In particular, if the Fund writes an option which expires
unexercised or is closed out by the Fund at a profit, the Fund retains the
premium paid for the option less related transaction costs, which increases its
gross income and offsets in part the reduced value of the portfolio security in
connection with which the option is written, or the increased cost of portfolio
securities to be acquired. In contrast, however, if the price of the security
underlying the option moves adversely to the Fund's position, the option may be
exercised and the Fund will then be required to purchase or sell the security at
a disadvantageous price, which might only partially be offset by the amount of
the premium.
The Fund may write options in connection with buy-and-write transactions; that
is, the Fund may purchase a security and then write a call option against that
security. The exercise price of the call option the Fund determines to write
depends upon the expected price movement of the underlying security. The
exercise price of a call option may be below ("in-the-money"), equal to ("at-
the-money") or above ("out-of-the-money") the current value of the underlying
security at the time the option is written.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. Put options may be used by the
Fund in the same market environments in which call options are used in
equivalent buy-and-write transactions.
The Fund may also write combinations of put and call options on the same
security, a practice known as a "straddle." By writing a straddle, the Fund
undertakes a simultaneous obligation to sell or purchase the same security in
the event that one of the options is exercised. If the price of the security
subsequently rises sufficiently above the exercise price to cover the amount of
the premium and transaction costs, the call will likely be exercised and the
Fund will be required to sell the underlying security at a below market price.
This loss may be offset, however, in whole or in part, by the premiums received
on the writing of the two options. Conversely, if the price of the security
declines by a sufficient amount, the put will likely be exercised. The writing
of straddles will likely be effective, therefore, only where the price of a
security remains stable and neither the call nor the put is exercised. In an
instance where one of the options is exercised, the loss on the purchase or sale
of the underlying security may exceed the amount of the premiums received.
By writing a call option on a portfolio security, the Fund limits its
opportunity to profit from any increase in the market value of the underlying
security above the exercise price of the option. By writing a put option, the
Fund assumes the risk that it may be required to purchase the underlying
security for an exercise price above its then current market value, resulting in
a loss unless the security subsequently appreciates in value. The writing of
options will not be undertaken by the Fund solely for hedging purposes, and may
involve certain risks which are not present in the case of hedging transactions.
Moreover, even where options are written for hedging purposes, such transactions
will constitute only a partial hedge against declines in the value of portfolio
securities or against increases in the value of securities to be acquired, up to
the amount of the premium.
The Fund may also purchase put and call options. Put options are purchased to
hedge against a decline in the value of securities held in the Fund's portfolio.
If such a decline occurs, the put options will permit the Fund to sell the
securities underlying such options at the exercise price, or to close out the
options at a profit. The Fund will purchase call options to hedge against an
increase in the price of securities that the Fund anticipates purchasing in the
future. If such an increase occurs, the call option will permit the Fund to
purchase the securities underlying such option at the exercise price or to close
out the option at a profit. The premium paid for a call or put option plus any
transaction costs will reduce the benefit, if any, realized by the Fund upon
exercise of the option, and, unless the price of the underlying security rises
or declines sufficiently, the option may expire worthless to the Fund. In
addition, in the event that the price of the security in connection with which
an option was purchased moves in a direction favorable to the Fund, the benefits
realized by the Fund as a result of such favorable movement will be reduced by
the amount of the premium paid for the option and related transaction costs.
The staff of the SEC has taken the position that purchased over-the-counter
options and assets used to cover written over-the-counter options are illiquid
and, therefore, together with other illiquid securities, cannot exceed a certain
percentage of the Fund's assets (the "SEC illiquidity ceiling"). Although the
Adviser disagrees with this position, the Adviser intends to limit the Fund's
writing of over-the-counter options in accordance with the following procedure.
Except as provided below, the Fund intends to write over-the-counter options
only with primary U.S. Government securities dealers recognized by the Federal
Reserve Bank of New York. Also, the contracts the Fund has in place with such
primary dealers will provide that the Fund has the absolute right to repurchase
an option it writes at any time at a price which represents the fair market
value, as determined in good faith through negotiation between the parties, but
which in no event will exceed a price determined pursuant to a formula in the
contract. Although the specific formula may vary between contracts with
different primary dealers, the formula will generally be based on a multiple of
the premium received by the Fund for writing the option, plus the amount, if
any, of the option's intrinsic value (i.e., the amount that the option is
in-the-money). The formula may also include a factor to account for the
difference between the price of the security and the strike price of the option
if the option is written out-of-the-money. The Fund will treat all or a portion
of the formula as illiquid for purposes of the SEC illiquidity ceiling. The Fund
may also write over-the-counter options with non-primary dealers, including
foreign dealers, and will treat the assets used to cover these options as
illiquid for purposes of such SEC illiquidity ceiling.
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 maintains
in a segregated account with its custodian cash or cash equivalents sufficient
to cover the Fund's net liability under the two options. Therefore, the Fund's
liability for such a covered option is generally limited to the difference
between the amount of the Fund's liability under the option written by the Fund
less the value of the option held by the Fund. Yield curve options may also be
covered in such other manner as may be in accordance with the requirements of
the counterparty with which the option is traded and applicable laws and
regulations. Yield curve options are traded over-the-counter and because they
have been only recently introduced, established trading markets for these
securities have not yet developed.
FUTURES CONTRACTS: The Fund may enter into contracts for the purchase or sale
for future delivery of fixed income securities or foreign currencies or
contracts based on indexes of fixed income securities as such instruments become
available for trading ("Futures Contracts"). This investment technique is
designed to hedge (i.e., to protect) against anticipated future changes in
interest or exchange rates which otherwise might adversely affect the value of
the Fund's portfolio securities or adversely affect the prices of long-term
bonds or other securities which the Fund intends to purchase at a later date. A
"sale" of a Futures Contract means a contractual obligation to deliver the
securities or foreign currency called for by the contract at a fixed price at a
specified time in the future. A "purchase" of a Futures Contract means a
contractual obligation to acquire the securities or foreign currency at a fixed
price at a specified time in the future. The Fund may also enter into such
transactions for non-hedging purposes, to the extent permitted by applicable
law, which involves greater risk.
While Futures Contracts provide for the delivery of securities or currencies,
such deliveries are very seldom made. Generally, a Futures Contract is
terminated by entering into an offsetting transaction. The Fund will incur
brokerage fees when it purchases and sells Futures Contracts. At the time such a
purchase or sale is made, the Fund must allocate cash or securities as a margin
deposit ("initial deposit"). It is expected that the initial deposit will vary
but may be as low as 5% or less of the value of the contract. The Futures
Contract is valued daily thereafter and the payment of "variation margin" may be
required to be paid or received, so that each day the Fund may provide or
receive cash that reflects the decline or increase in the value of the contract.
The purpose of the purchase or sale of a Futures Contract, in the case of a
portfolio holding long-term debt securities, is to protect the Fund from
fluctuations in interest rates without actually buying or selling long-term debt
securities. For example, if the Fund owned long-term bonds and interest rates
were expected to increase, the Fund might enter into Futures Contracts for the
sale of debt securities. If interest rates did increase, the value of the debt
securities in the portfolio would decline, but the value of the Fund's Futures
Contracts should increase at approximately the same rate, thereby keeping the
net asset value of the Fund from declining as much as it otherwise would have.
The Fund could accomplish similar results by selling bonds with long maturities
and investing in bonds with short maturities when interest rates are expected to
increase or by buying bonds with long maturities and selling bonds with short
maturities when interest rates are expected to decline. However, since the
futures market is more liquid than the cash market, the use of Futures Contracts
as an investment technique allows the Fund to maintain a defensive position
without having to sell its portfolio securities.
Similarly, when it is expected that interest rates may decline, Futures
Contracts may be purchased to hedge against anticipated purchases of long-term
bonds at higher prices. Since the fluctuations in the value of Futures Contracts
should be similar to that of long-term bonds, the Fund could take advantage of
the anticipated rise in the value of long-term bonds without actually buying
them until the market had stabilized. At that time, the Futures Contracts could
be liquidated and the Fund could buy long-term bonds on the cash market.
Purchases of Futures Contracts would be particularly appropriate when the cash
flow from the sale of new shares of the Fund could have the effect of diluting
dividend earnings. To the extent the Fund enters into Futures Contracts for this
purpose, the assets in the segregated asset account maintained to cover the
Fund's obligations with respect to such Futures Contracts will consist of cash,
cash equivalents or short-term money market instruments from the portfolio of
the Fund in an amount equal to the difference between the fluctuating market
value of such Futures Contracts and the aggregate value of the initial and
variation margin payments made by the Fund with respect to such Futures
Contracts, thereby assuring that the transactions are unleveraged.
Futures Contracts on foreign currencies may be used in a similar manner, in
order to protect against declines in the dollar value of portfolio securities
denominated in foreign currencies, or increases in the dollar value of
securities to be acquired.
A Futures Contract on an index of fixed income securities provides for the
making and acceptance of a cash settlement based on changes in value of the
underlying index. The index underlying such a Futures Contract will generally be
a broad based index of fixed income securities designed to reflect movements in
the relevant market as a whole.
OPTIONS ON FUTURES CONTRACTS: The Fund may write and purchase options to buy or
sell Futures Contracts ("Options on Futures Contracts"). The writing of a call
Option on a Futures Contract may constitute a partial hedge against declining
prices of the fixed income security or currency underlying the Futures Contract.
If the futures price at expiration of the option is below the exercise price,
the Fund will retain the full amount of the option premium, less related
transaction costs, which provides a partial hedge against any decline that may
have occurred in the Fund's portfolio holdings. The writing of a put Option on a
Futures Contract may constitute a partial hedge against increasing prices of the
security or currency underlying the Futures Contract. If the futures price at
expiration of the option is higher than the exercise price, the Fund will retain
the full amount of the option premium, less related transaction costs, which
provides a partial hedge against any increase in the price of securities which
the Fund intends to purchase. If a put or call option the Fund has written is
exercised, the Fund will incur a loss which will be reduced by the amount of the
premium it receives. Depending on the degree of correlation between changes in
the value of its portfolio securities and changes in the value of its futures
positions, the Fund's losses from existing Options on Futures Contracts may to
some extent be reduced or increased by changes in the value of portfolio
securities. The Fund may also enter into such transactions for non-hedging
purposes, to the extent permitted by applicable law, which involves greater
risk.
The Fund may purchase Options on Futures Contracts for hedging purposes as an
alternative to purchasing or selling the underlying Futures Contracts. For
example, where a decrease in the value of portfolio securities is anticipated as
a result of a projected market-wide decline, a rise in interest rates or a
decline in the dollar value of foreign currencies in which portfolio securities
are denominated, the Fund may, in lieu of selling Futures Contracts, purchase
put options thereon. In the event that such decrease in portfolio value occurs,
it may be offset, in whole or part, by a profit on the option. Conversely, where
it is projected that the value of securities to be acquired by the Fund will
increase prior to acquisition, due to a market advance, or a decline in interest
rates or a rise in the dollar value of foreign currencies in which securities to
be acquired are denominated, the Fund may purchase call Options on Futures
Contracts, rather than purchasing the underlying Futures Contracts. As in the
case of Options, the writing of Options on Futures Contracts may require the
Fund to forego all or a portion of the benefits of favorable movements in the
price of portfolio securities, and the purchase of Options on Futures Contracts
may require the Fund to forego all or a portion of such benefits up to the
amount of the premium paid and related transaction costs. The Fund may also
enter into transactions in Options on Futures Contracts for non-hedging purposes
to the extent permitted by applicable law.
The Fund may cover the writing of call Options on Futures Contracts (a) through
purchases of the underlying Futures Contract, (b) through ownership of the
instrument, or instruments included in the index, underlying the Futures
Contract, or (c) through the holding of a call on the same Futures Contract and
in the same principal amount as the call written where the exercise price of the
call held (i) is equal to or less than the exercise price of the call written or
(ii) is greater than the exercise price of the call written if the difference is
maintained by the Fund in cash, short-term money market instruments or high
quality government securities in a segregated account with its custodian. The
Fund may cover the writing of put Options on Futures Contracts (a) through sales
of the underlying Futures Contract, (b) through segregation of cash, short-term
money market instruments or high quality government securities in an amount
equal to the value of the security or index underlying the Futures Contract, or
(c) through the holding of a put on the same Futures Contract and in the same
principal amount as the put written where the exercise price of the put held is
equal to or greater than the exercise price of the put written, or is less than
the exercise price of the put written if the difference is maintained by the
Fund in cash, short-term money market instruments or high quality government
securities in a segregated account with its custodian. Put and call Options on
Futures Contracts may also be covered in such other manner as may be in
accordance with the rules of the exchange on which the option is traded and
applicable laws and regulations. Upon the exercise of a call Option on a Futures
Contract written by the Fund, the Fund will be required to sell the underlying
Futures Contract which, if the Fund has covered its obligation through the
purchase of such Contract, will serve to liquidate its futures position.
Similarly, where a put Option on a Futures Contract written by the Fund is
exercised, the Fund will be required to purchase the underlying Futures Contract
which, if the Fund has covered its obligation through the sale of such Contract,
will close out its futures position. An Option on a Futures Contract is traded
on the same contract market as the underlying Futures Contact, subject to
regulation by the Commodity Futures Trading Commission ("CFTC") and the
performance guarantee of the exchange clearing house. Options on Futures
Contracts, as noted in the Prospectus, are also traded on foreign exchanges.
FORWARD CONTRACTS: The Fund may enter into forward foreign currency exchange
contracts for the purchase or sale of a specific currency at a future date at a
price set at the time of the contract (a "Forward Contract"). The Fund may enter
into Forward Contracts for hedging purposes as well as for non-hedging purposes.
The Fund may also enter into Forward Contracts for "cross hedging" as noted in
the Prospectus. Transactions in Forward Contracts entered into for hedging
purposes will include forward purchases or sales of foreign currencies for the
purpose of protecting the dollar value of fixed income securities denominated in
a foreign currency or protecting the dollar equivalent of interest or dividends
to be paid on such securities. By entering into such transactions, however, the
Fund may be required to forego the benefits of advantageous changes in exchange
rates. The Fund may also enter into transactions in Forward Contracts for other
than hedging purposes which presents greater profit potential but also involves
increased risk. For example, if the Adviser believes that the value of a
particular foreign currency will increase or decrease relative to the value of
the U.S. dollar, the Fund may purchase or sell such currency, respectively,
through a Forward Contract. If the expected changes in the value of the currency
occur, the Fund will realize profits which will increase its gross income. Where
exchange rates do not move in the direction or to the extent anticipated,
however, the Fund may sustain losses which will reduce its gross income. Such
transactions, therefore, could be considered speculative.
The Fund has established procedures consistent with statements by the SEC and
its staff regarding the use of Forward Contracts by registered investment
companies, which require the use of segregated assets or "cover" in connection
with the purchase and sale of such contracts. In those instances in which the
Fund satisfies this requirement through segregation of assets, it will maintain,
in a segregated account, cash, cash equivalents or high grade debt securities,
which will be marked to market on a daily basis, in an amount equal to the value
of its commitments under Forward Contracts.
OPTIONS ON FOREIGN CURRENCIES: The Fund may purchase and write put and call
options on foreign currencies ("Options on Foreign Currencies") for the purpose
of protecting against declines in the dollar value of foreign fixed income
portfolio securities and against increases in the dollar cost of foreign fixed
income securities to be acquired. For example, a decline in the dollar value of
a foreign currency in which portfolio securities are denominated will reduce the
dollar value of such securities, even if their value in the foreign currency
remains constant. In order to protect against such diminutions in the value of
portfolio securities, the Fund may purchase put Options on the Foreign Currency.
If the value of the currency did decline, the Fund would have the right to sell
such currency for a fixed amount in dollars and would thereby offset, in whole
or in part, the adverse effect on its portfolio which otherwise would have
resulted.
Conversely, where a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby increasing the cost of such
securities, the Fund may purchase call options thereon. The purchase of such
options could offset, at least partially, the effects of the adverse movements
in exchange rates. As in the case of other types of options, however, the
benefit to the Fund deriving from purchases of foreign currency options would be
reduced by the amount of the premium and related transaction costs. In addition,
where currency exchange rates do not move in the direction or to the extent
anticipated, the Fund could sustain losses on transactions in Options on Foreign
Currency 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 may, instead of purchasing a put option, write a call option on the relevant
currency. If the expected decline occurred, the option would most likely not be
exercised, and the diminution in value of portfolio securities would be offset
by the amount of the premium received less related transaction costs. As in the
case of other types of options, therefore, the writing of Options on Foreign
Currencies will constitute only a partial hedge.
SWAPS AND RELATED TRANSACTIONS: The Fund may enter into interest rate swaps,
currency swaps and other types of available swap agreements, such as caps,
collars and floors.
Swap agreements may be individually negotiated and structured to include
exposure to a variety of different types of investments or market factors.
Depending on their structure, swap agreements may increase or decrease the
Fund's exposure to long or short-term interest rates (in the U.S. or abroad),
foreign currency values, mortgage securities, corporate borrowing rates, or
other factors such as securities prices or inflation rates. Swap agreements can
take many different forms and are known by a variety of names. The Fund is not
limited to any particular form or variety of swap agreements if MFS determines
it is consistent with the Fund's investment objective and policies.
The Fund will maintain cash or appropriate liquid assets with its custodian to
cover its current obligations under swap transactions. If the Fund enters into a
swap agreement on a net basis (i.e., the two payment streams are netted out,
with the Fund receiving or paying, as the case may be, only the net amount of
the two payments), the Fund will maintain cash or liquid assets with its
Custodian with a daily value at least equal to the excess, if any, of the Fund's
accrued obligations under the swap agreement over the accrued amount the Fund is
entitled to receive under the agreement. If the Fund enters into a swap
agreement on other than a net basis, it will maintain cash or liquid assets with
a value equal to the full amount of the Fund's accrued obligations under the
agreement.
The most significant factor in the performance of swaps, caps, floors and
collars is the change in the specific interest rate, currency or other factor
that determines the amount of payments to be made under the arrangement. If MFS
is incorrect in its forecasts of such factors, the investment performance of the
Fund would be less than what it would have been if these investment techniques
had not been used. If a swap agreement calls for payments by the Fund, the Fund
must be prepared to make such payments when due. In addition, if the
counterparty's creditworthiness declines, 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.
RISK FACTORS: IMPERFECT CORRELATION OF HEDGING INSTRUMENTS WITH THE FUND'S
PORTFOLIO -- The Fund's ability effectively to hedge all or a portion of its
portfolio through transactions in options, Futures Contracts, and Forward
Contracts will depend on the degree to which price movements in the underlying
instruments correlate with price movements in the relevant portion of the Fund's
portfolio. If the values of fixed income portfolio securities being hedged do
not move in the same amount or direction as the instruments underlying options,
Futures Contracts or Forward Contracts traded, the Fund's hedging strategy may
not be successful and the Fund could sustain losses on its hedging strategy
which would not be offset by gains on its portfolio. It is also possible that
there may be a negative correlation between the instrument underlying an option,
Futures Contract or Forward Contract traded and the portfolio securities being
hedged, which could result in losses both on the hedging transaction and the
portfolio securities. In such instances, the Fund's overall return could be less
than if the hedging transaction had not been undertaken. In the case of Futures
and options on fixed income securities, the portfolio securities which are being
hedged may not be the same type of obligation underlying such contract. As a
result, the correlation probably will not be exact. Consequently, the Fund bears
the risk that the price of the fixed income portfolio securities being hedged
will not move in the same amount or direction as the underlying index or
obligation. Where the Fund enters into Forward Contracts as a "cross hedge"
(i.e., the purchase or sale of a Forward Contract on one currency to hedge
against risk of loss arising from changes in value of a second currency), the
Fund incurs the risk of imperfect correlation between changes in the values of
the two currencies, which could result in losses.
The correlation between prices of fixed income securities and prices of options,
Futures Contracts or Forward Contracts may be distorted due to differences in
the nature of the markets, such as differences in margin requirements, the
liquidity of such markets and the participation of speculators in the option,
Futures Contract and Forward Contract markets. Due to the possibility of
distortion, a correct forecast of general interest rate trends by the Adviser
may still not result in a successful transaction. The trading of Options on
Futures Contracts also entails the risk that changes in the value of the
underlying Futures Contract will not be fully reflected in the value of the
option. The risk of imperfect correlation, however, generally tends to diminish
as the maturity or termination date of the option, Futures Contract or Forward
Contract approaches.
The trading of options, Futures Contracts and Forward Contracts also entails the
risk that, if the Adviser's judgment as to the general direction of interest or
exchange rates is incorrect, the Fund's overall performance may be poorer than
if it had not entered into any such contract. For example, if the Fund has
hedged against the possibility of an increase in interest rates, and rates
instead decline, the Fund will lose part or all of the benefit of the increased
value of the fixed income securities being hedged, and may be required to meet
ongoing daily variation margin payments.
It should be noted that the Fund may purchase and write Options, Futures
Contracts, Options on Futures Contracts and Forward Contracts not only for
hedging purposes, but also for non-hedging purposes to the extent permitted by
applicable law for the purpose of increasing its return. As a result, the Fund
will incur the risk that losses on such transactions will not be offset by
corresponding increases in the value of fixed income portfolio securities or
decreases in the cost of fixed income securities to be acquired.
RISK FACTORS: POTENTIAL LACK OF A LIQUID SECONDARY MARKET -- Prior to exercise
or expiration, a position in an exchange-traded option, Futures Contract, Option
on a Futures Contract or Option on a Foreign Currency can only be terminated by
entering into a closing purchase or sale transaction, which requires a secondary
market for such instruments on the exchange on which the initial transaction was
entered into. If no such market exists, it may not be possible to close out a
position, and the Fund could be required to purchase or sell the underlying
instrument or meet ongoing variation margin requirements. The inability to close
out option or futures positions also could have an adverse effect on the Fund's
ability effectively to hedge its portfolio.
The liquidity of a secondary market in an option or Futures Contract may be
adversely affected by "daily price fluctuation limits," established by the
exchanges, which limit the amount of fluctuation in the price of a contract
during a single trading day and prohibit trading beyond such limits once they
have been reached. Such limits could prevent the Fund from liquidating open
positions, which could render its hedging strategy unsuccessful and result in
trading losses. The exchanges on which options and Futures Contracts are traded
have also established a number of limitations governing the maximum number of
positions which may be traded by a trader, whether acting alone or in concert
with others. Further, the purchase and sale of exchange-traded options and
Futures Contracts is subject to the risk of trading halts, suspensions, exchange
or clearing corporation equipment failures, government intervention, insolvency
of a brokerage firm, intervening broker or clearing corporation or other
disruptions of normal trading activity, which could make it difficult or
impossible to liquidate existing positions or to recover excess variation margin
payments.
RISK FACTORS: OPTIONS ON FUTURES CONTRACTS -- In order to profit from the
purchase of an Option on a Futures Contract, it may be necessary to exercise the
option and liquidate the underlying Futures Contract, subject to all of the
risks of futures trading. The writer of an Option on a Futures Contract is
subject to the risks of futures trading, including the requirement of initial
and variation margin deposits.
ADDITIONAL RISKS OF TRANSACTIONS RELATED TO FOREIGN CURRENCIES AND TRANSACTIONS
NOT CONDUCTED ON UNITED STATES EXCHANGES -- The available information on which
the Fund will make trading decisions concerning transactions related to foreign
currencies or foreign securities may not be as complete as the comparable data
on which the Fund makes investment and trading decisions in connection with
other transactions. Moreover, because the foreign currency market is a global,
24-hour market, and the markets for foreign securities as well as markets in
foreign countries may be operating during non-business hours in the United
States, events could occur in such markets which would not be reflected until
the following day, thereby rendering it more difficult for the Fund to respond
in a timely manner.
In addition, over-the-counter transactions can only be entered into with a
financial institution willing to take the opposite side, as principal, of the
Fund's position, unless the institution acts as broker and is able to find
another counterparty willing to enter into the transaction with the Fund. This
could make it difficult or impossible to enter into a desired transaction or
liquidate open positions, and could therefore result in trading losses. Further,
over-the-counter transactions are not subject to the performance guarantee of an
exchange clearing house and the Fund will therefore be subject to the risk of
default by, or the bankruptcy of, a financial institution or other counterparty.
Transactions on exchanges located in foreign countries may not be conducted in
the same manner as those entered into on United States exchanges, and may be
subject to different margin, exercise, settlement or expiration procedures.
As a result, many of the risks of over-the-counter trading may be present in
connection with such transactions. Moreover, the SEC or CFTC have jurisdiction
over the trading in the United States of many types of over-the-counter and
foreign instruments, and such agencies could adopt regulations or
interpretations which would make it difficult or impossible for the Fund to
enter into the trading strategies identified herein or to liquidate existing
positions.
As a result of its investments in foreign securities, the Fund may receive
interest or dividend payments, or the proceeds of the sale or redemption of such
securities, in foreign currencies. The Fund may also be required to receive
delivery of the foreign currencies underlying Options on Foreign Currencies or
Forward Contracts it has entered into. This could occur, for example, if an
option written by the Fund is exercised or the Fund is unable to close out a
Forward Contract it has entered into. In addition, the Fund may elect to take
delivery of such currencies. Under such circumstances, the Fund may promptly
convert the foreign currencies into dollars at the then current exchange rate.
Alternatively, the Fund may hold such currencies for an indefinite period of
time if the Adviser believes that the exchange rate at the time of delivery is
unfavorable or if, for any other reason, the Adviser anticipates favorable
movements in such rates.
While the holding of currencies will permit the Fund to take advantage of
favorable movements in the applicable exchange rate, it also exposes the Fund to
risk of loss if such rates move in a direction adverse to the Fund's position.
Such losses could also adversely affect the Fund's hedging strategies. Certain
tax requirements may limit the extent to which the Fund will be able to hold
currencies.
ADDITIONAL POLICIES ON THE USE OF OPTIONS AND FUTURES: In order to assure that
the Fund will not be deemed to be a "commodity pool" for purposes of the
Commodity Exchange Act, regulations of the CFTC require that the Fund enter into
transactions in Futures Contracts and Options on Futures Contracts only (i) for
bona fide hedging purposes (as defined in CFTC regulations), or (ii) for
non-hedging purposes, provided that the aggregate initial margin and premiums on
such non-hedging positions does not exceed 5% of the liquidation value of the
Fund's assets. In addition, the Fund must comply with the requirements of
various state securities laws in connection with such transactions.
The Fund has adopted the additional policy that it will not enter into a Futures
Contract if, immediately thereafter, the value of securities and other
obligations underlying all such Futures Contracts would exceed 50% of the value
of the Fund's total assets. Moreover, the Fund will not purchase put and call
Options if, as a result, more than 5% of its total assets would be invested in
such Options.
When the Fund purchases a Futures Contract, an amount of cash and cash
equivalents will be deposited in a segregated account with the Fund's custodian
so that the amount so segregated will at all times equal the value of the
Futures Contract, thereby insuring that the use of such Futures is unleveraged.
-----------------
The investment objective and policies described above are not fundamental and
may be changed without shareholder approval.
INVESTMENT RESTRICTIONS. The Fund has adopted the following restrictions which
cannot be changed without the approval of the holders of a majority of the
Fund's shares (which, as used in this Statement of Additional Information, means
the lesser of (i) more than 50% of the outstanding shares of the Trust or a
series or class, as applicable, or (ii) 67% or more of the outstanding shares of
the Trust or a series or class, as applicable, present at a meeting at which
holders of more than 50% of the outstanding shares of the Trust or a series or
class, as applicable, are represented in person or by proxy):
The Fund may not:
(1) Borrow amounts in excess of 10% of its gross assets, and then only
as a temporary measure for extraordinary or emergency purposes, or pledge,
mortgage or hypothecate its assets (taken at market value) to an extent
greater than 33 1/3% of its gross assets, in each case taken at the lower of
cost or market value and subject to a 300% asset coverage requirement (for
the purpose of this restriction, collateral arrangements with respect to
options, Futures Contracts, Options on Futures Contracts, Forward Contracts
and Options on Foreign Currencies and payments of initial and variation
margin in connection therewith are not considered a pledge of assets). While
such 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) 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) Invest 25% or more of the market value of its total assets in
securities of issuers in any one industry;
(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 foreign currencies, Forward Contracts, Futures Contracts,
options, Options on Futures Contracts and Options on Foreign Currencies) in
the ordinary course of its business. The Fund reserves the freedom of action
to hold and to sell real estate and commodities acquired as a result of the
ownership of securities;
(5) Make loans to other persons except through the lending of its
portfolio securities and except through repurchase agreements. Not more than
10% of the Fund's assets will be invested in repurchase agreements maturing
in more than seven days. For these purposes the purchase of commercial paper
or a portion of an issue of debt securities shall not be considered the
making of a loan;
(6) Purchase voting securities of any issuer if such purchase, at the
time thereof, would cause more than 10% of the outstanding voting securities
of such issuer to be held by the Fund; or purchase securities of any issuer
if such purchase, at the time thereof, would cause more than 10% of any
class of securities of such issuer to be held by the Fund. For this purpose,
all indebtedness of an issuer shall be deemed a single class and all
preferred stock of an issuer shall be deemed a single class;
(7) Invest for the purpose of exercising control or management;
(8) Purchase securities issued by any closed-end investment company
except by purchase in the open market where no commission or profit to a
sponsor or dealer results from such purchase other than the customary
broker's commission, or except when such purchase, though not made in the
open market, is part of a plan of merger or consolidation; provided,
however, that the Fund shall not purchase such securities if such purchase
at the time thereof would cause more than 10% of its total assets (taken at
market value) to be invested in the securities of such issuers, or more than
3% of the total outstanding voting securities of any closed-end investment
company to be held by the Fund. The Fund shall not purchase securities
issued by any open-end investment company;
(9) Invest more than 5% of its assets in companies which, including
predecessors, have a record of less than three years' continuous operation;
(10) Purchase or retain in its portfolio any securities issued by an
issuer any of whose officers, directors, trustees or security holders is
an officer or Trustee of the Fund, or is a partner, officer, Director or
Trustee of the Adviser, if after the purchase of the securities of such
issuer by the Fund one or more of such persons owns beneficially more than
1/2 of 1% of the shares or securities, or both, of such issuer, and such
persons owning more than 1/2 of 1% of such shares or securities together
own beneficially more than 5% of such shares or securities, or both;
(11) Purchase any securities, gold 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 transactions and except that the Fund may
make margin deposits in connection with Futures Contracts, Options on
Futures Contracts, options and Options on Foreign Currencies;
(12) 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;
(13) Purchase or sell any put or call option or any combination thereof,
provided, that this shall not prevent the purchase, ownership, holding or
sale of contracts for the future delivery of securities, currencies or
warrants where the grantor of the warrants is the issuer of the underlying
securities or the writing and purchasing of puts, calls or combinations
thereof with respect to securities, Futures Contracts and foreign
currencies; or
In addition, the Fund will not invest in illiquid investments, including
securities subject to legal or contractual restrictions on resale or for which
there is no readily available market (e.g., trading in the security is
suspended, or, in the case of unlisted securities, where no market exists) 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. Securities that are not registered under the Securities Act
of 1933, as amended, and sold in reliance on Rule 144A thereunder, but are
determined to be liquid by the Trust's Board of Trustees (or its delegee), will
not be subject to this 15% limitation.
According to certain state securities commissions, the term "illiquid
investments" includes all foreign equity securities that are not listed on a
recognized foreign or U.S. stock exchange. Except with respect to Investment
Restriction (1), these investment restrictions are adhered to at the time of
purchase or utilization of assets; a subsequent change in circumstances will not
be considered to result in a violation of policy. As a non-fundamental policy,
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. During the coming year, less than 5% of the Fund's assets will be
used to engage in short sales permitted by Investment Restriction (12). In
addition, purchases of warrants will not exceed 5% of the Fund's net assets.
Included within that amount, but not exceeding 2% of the Fund's net assets, may
be warrants not listed on the New York or American Stock Exchange.
3. MANAGEMENT OF THE FUND
The Board of Trustees provides broad supervision over the affairs of the Fund.
The Adviser is responsible for the investment management of the Fund's assets,
and the officers of the Trust are responsible for its operations. The Trustees
and officers are listed below, together with their principal occupations during
the past five years. (Their titles may have varied during that period.)
TRUSTEES
A. KEITH BRODKIN,* Chairman and President
Massachusetts Financial Services Company, Chairman
RICHARD B. BAILEY*
Private Investor; Massachusetts Financial Services Company, former Chairman
(until September 30, 1991)
MARSHALL N. COHAN
Private Investor
Address: 2524 Bedford Mews Drive, Wellington, Florida
LAWRENCE H. COHN, M.D.
Brigham and Women's Hospital, Chief of Cardiac Surgery; Harvard Medical School,
Professor of Surgery
Address: 75 Francis Street, Boston, Massachusetts
THE HON. SIR J. DAVID GIBBONS, KBE
Edmund Gibbons Limited, Chief Executive Officer; The Bank of N.T. Butterfield &
Son Ltd., Chairman
Address: 21 Reid Street, Hamilton, Bermuda
ABBY M. O'NEILL
Private Investor; Rockefeller Financial Services, Inc. (investment advisers),
Director
Address: 30 Rockefeller Plaza, Room 5600, New York, New York
WALTER E. ROBB, III
Benchmark Advisors, Inc. (corporate financial consultants), President and
Treasurer
Address: 110 Broad Street, Boston, Massachusetts
ARNOLD D. SCOTT*
Massachusetts Financial Services Company, Senior Executive Vice President and
Secretary
JEFFREY L. SHAMES*
Massachusetts Financial Services Company, President
J. DALE SHERRATT
Insight Resources, Inc. (acquisition planning specialists), President (since
January, 1990); The Kendall Company (health care products), Chairman and Chief
Executive Officer (prior to January, 1990); Colgate-Palmolive Company, Senior
Executive Vice President (prior to January, 1990)
Address: One Liberty Square, 10th Floor, Boston, Massachusetts
WARD SMITH
NACCO Industries (holding company), Chairman (prior to June, 1994); Sundstrand
Corporation (diversified mechanical manufacturer), Director; Society
Corporation (bank holding company), Director (prior to April, 1992); Society
National Bank (commercial bank), Director (1986 to April, 1992)
Address: 5875 Landerbrook Drive, Mayfield Heights, Ohio
OFFICERS
A. KEITH BRODKIN,* President
Massachusetts Financial Services Company, Chairman
W. THOMAS LONDON,* Treasurer
Massachusetts Financial Services Company, Senior Vice President and Assistant
Treasurer
STEPHEN E. CAVAN,* Secretary and Clerk
Massachusetts Financial Services Company, Senior Vice President, General Counsel
and Assistant Secretary
JAMES O. YOST*, Assistant Treasurer
Massachusetts Financial Services Company, Vice President
JAMES R. BORDEWICK, JR.,* Assistant Secretary
Massachusetts Financial Services Company, Vice President and Associate General
Counsel (since September 1990); associated with a major law firm (prior to
August 1990)
- ---------
*"Interested persons" (as defined in the 1940 Act) of the Adviser, whose
address is 500 Boylston Street, Boston, Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain affiliates of
MFS or with certain other funds of which MFS or a subsidiary is the investment
adviser or distributor. Mr. Brodkin, the Chairman of MFD, Messrs. Shames and
Scott, Directors of MFD, and Mr. Cavan, the Secretary of MFD, hold similar
positions with certain other MFS affiliates.
The Trust has adopted a retirement plan for non-interested Trustees and Mr.
Bailey. Under this plan, a Trustee will retire upon reaching age 72 and if the
Trustee has completed at least five years of service, he would be entitled to
annual payments during his lifetime of up to 50% of such Trustee's average
annual compensation (based on the three years prior to his retirement) depending
on his length of service. A Trustee may also retire prior to age 72 and receive
reduced payments if he has completed at least five years of service. Under the
plan, a Trustee (or his beneficiaries) will also receive benefits for a period
of time in the event the Trustee is disabled or dies. These benefits will also
be based on the Trustee's average annual compensation and length of service.
There is no retirement plan provided by the Trust for the interested Trustees,
except Mr. Bailey. The Fund will accrue its allocable share of compensation
expenses each year to cover current year's service and amortize past service
cost.
As of November 30, 1994, all Trustees and officers as a group owned less than 1%
of the Fund's shares outstanding on that date, not including 193,016.211 shares
(which represent approximately 1.2% of the outstanding shares of the Fund) owned
of record by certain employee benefit plans of MFS for which Mr. Brodkin is a
Trustee.
As of November 30, 1994, Merrill Lynch Pierce Fenner & Smith, Inc., P.O. Box
45286, Jacksonville, Florida, was the owner of 15.19% of the outstanding Class C
shares of the Fund.
The Declaration of Trust provides that the Trust will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the Trust, unless as
to liability to 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
MFS and its predecessor organizations have a history of money management dating
from 1924. MFS is a subsidiary of Sun Life of Canada (U.S.) which is a
subsidiary of Sun Life Assurance Company of Canada ("Sun Life").
The Adviser manages the Fund pursuant to an Investment Advisory Agreement dated
August 10, 1990 (the "Advisory Agreement"). The Adviser provides the Fund with
overall investment advisory and administrative services, as well as general
office facilities. Subject to such policies as the Trustees may determine, the
Adviser makes investment decisions for the Fund. For these services and
facilities, the Adviser receives a management fee computed and paid monthly in
an amount equal to the sum of 0.65% of the Fund's average daily net assets and
5% of its gross income (i.e., income other than gains from the sale of
securities, gains from options and futures transactions, premium income from
options written and gains from foreign exchange transactions).
For the Fund's fiscal year ended October 31, 1994, MFS received management fees
under the Advisory Agreement of $1,074,047 (of which $792,505 was based on
average daily net assets and $281,542 on gross income), equivalent, on an
annualized basis to 0.90% of the Fund's average daily net assets. For the Fund's
fiscal year ended October 31, 1993, MFS received management fees under the
Advisory Agreement of $492,724 (of which $358,037 was based on average daily net
assets and $134,687 on gross income), equivalent, on an annualized basis to
0.90% of the Fund's average daily net assets. For the Fund's fiscal year ended
October 31, 1992, MFS received management fees under the Advisory Agreement of
$349,553 (of which $246,071 was based on average daily net assets and $103,482
on gross income), equivalent, on an annualized basis to 0.92% of the Fund's
average daily net assets.
In order to comply with the expense limitations of certain state securities
commissions, the Adviser will reduce its management fee or otherwise reimburse
the Fund for any expenses, exclusive of interest, taxes and brokerage
commissions, incurred by the Fund in any fiscal year to the extent such expenses
exceed the most restrictive of such state expense limitations. The Adviser will
make appropriate adjustments to such reimbursements in response to any amendment
or rescission of the various state requirements.
The Fund pays the compensation of the Trustees who are not officers of MFS (who
will each receive from $1,300 to $2,600 annually, depending on attendance at
meetings, plus fees for meetings of special committees, such as the Audit
Committee) and all the Fund's expenses (other than those assumed by the Adviser
or MFD, the Fund's distributor), including: governmental fees; interest charges;
taxes; membership dues in the Investment Company Institute allocable to the
Fund; fees and expenses of independent auditors, of legal counsel, and of any
transfer agent, registrar or dividend disbursing agent of the Fund; expenses of
repurchasing and redeeming shares; expenses of preparing, printing and mailing
share certificates, shareholder reports, notices, proxy statements and reports
to governmental officers and commissions; brokerage and other expenses connected
with the execution, recording and settlement of portfolio security transactions;
insurance premiums; fees and expenses of State Street Bank and Trust Company,
the Fund's Custodian, for all services to the Fund, including safekeeping of
funds and securities and maintaining required books and accounts; expenses of
calculating the net asset value of shares of the Fund; and expenses of
shareholder meetings. Expenses relating to the issuance, registration and
qualification of shares of the Fund and the preparation, printing and mailing of
prospectuses for such purposes are borne by the Fund except that the Fund's
Distribution Agreement with MFD requires MFD to pay for prospectuses that are to
be used for sales purposes. Expenses of the Trust which are not attributable to
a specific series are allocated among the series in a manner believed by
management of the Trust to be fair and equitable. For a list of the Fund's
expenses, including the compensation paid to the Trustees who are not officers
of MFS, during its fiscal year ended October 31, 1994 see "Financial Statements
- -- Statement of Operations" in the Fund's Annual Report to shareholders dated
October 31, 1994 incorporated by reference into this Statement of Additional
Information. Payment by the Fund of brokerage commissions for brokerage and
research services of value to the Adviser in serving its clients is discussed
under the caption "Portfolio Transactions and Brokerage Commissions" below.
The Adviser pays the compensation of the Trust's officers and of any Trustee who
is an officer of MFS. The Adviser also furnishes at its own expense all
necessary administrative services, including office space, equipment, clerical
personnel, investment advisory facilities, and all executive and supervisory
personnel necessary for managing the Fund's investments, effecting its portfolio
transactions, and, in general, administering its affairs.
The Advisory Agreement will remain in effect until August 1, 1995 and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Fund's shares (as defined in "Investment Objective, Policies and Restrictions")
and, in either case, by a majority of the Trustees who are not parties to the
Advisory Agreement or interested persons of any such party. The Advisory
Agreement terminates automatically if it is assigned and may be terminated
without penalty by vote of a majority of the Fund's shares (as defined in
"Investment Objective, Policies and Restrictions"), or by either party on not
more than 60 days' nor less than 30 days' written notice. The Advisory Agreement
provides that if MFS ceases to serve as the Adviser to the Fund, the Fund will
change its name so as to delete the term "MFS" and that MFS may render services
to others and may permit other fund clients to use the term "MFS" in their
names. The Advisory Agreement also provides that neither the Adviser nor its
personnel shall be liable for any error of judgment or mistake of law or for any
loss arising out of any investment or for any act or omission in the execution
and management of the Fund, except for willful misfeasance, bad faith or gross
negligence in the performance of its or their duties or by reason of reckless
disregard of its or their obligations and duties under the Advisory Agreement.
CUSTODIAN
State Street Bank and Trust Company (the "Custodian") is the custodian of the
Fund's assets. The Custodian's responsibilities include safekeeping and
controlling the Fund's cash and securities, handling the receipt and delivery of
securities, determining income and collecting interest and dividends on the
Fund's investments, maintaining books of original entry for portfolio and fund
accounting and other required books and accounts, and calculating the daily net
asset value of each class of shares of the Fund. The Custodian does not
determine the investment policies of the Fund or decide which securities the
Fund will buy or sell. The Fund may, however, invest in securities of the
Custodian and may deal with the Custodian as principal in securities
transactions. The Trustees have reviewed and approved as in the best interests
of the Fund and the shareholders subcustodial arrangements with the Chase
Manhattan Bank, N.A. for securities of the Fund held outside the United States.
The Custodian also acts as the dividend disbursing agent of the Fund. The
Custodian has contracted with the Adviser for the Adviser to perform certain
accounting functions related to options transactions for which the Adviser
receives remuneration on a cost basis.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (the "Shareholder Servicing Agent"), a wholly-owned
subsidiary of MFS , is the Fund's shareholder servicing agent, pursuant to a
Shareholder Servicing Agreement, effective August 10, 1990 (the "Agency
Agreement") with the Trust. The Shareholder Servicing Agent's responsibilities
under the Agency Agreement include administering and performing transfer agent
functions and the keeping of records in connection with the issuance, transfer
and redemption of each Class of shares of the Fund. For these services, the
Shareholder Servicing Agent will receive a fee based on the net assets of each
Class of the Fund, computed and paid monthly. In addition, the Shareholder
Servicing Agent will be reimbursed by the Fund for certain expenses incurred by
the Shareholder Servicing Agent on behalf of the Fund. For the fiscal year ended
October 31, 1994 the Fund paid the Shareholder Servicing Agent fees of $205,834
under the Agency Agreement. State Street Bank and Trust Company, the dividend
and distribution disbursing agent of the Fund, has contracted with the
Shareholder Servicing Agent to perform certain dividend and distribution
disbursing functions for the Fund.
DISTRIBUTOR
MFD, a wholly-owned subsidiary of MFS, serves as the distributor for the
continuous offering of shares of the Fund pursuant to a Distribution Agreement
dated as of January 1, 1995 (the "Distribution Agreement"). Prior to January 1,
1995, MFS Financial Services Inc. ("FSI"), another wholly-owned subsidiary of
MFS, was the Fund's distributor. Where this SAI refers to MFD in relation to the
receipt or payment of money with respect to a period or periods prior to January
1, 1995, such reference shall be deemed to include FSI, as the predecessor in
interest to MFD.
CLASS A SHARES: MFD acts as agent in selling Class A shares of the Fund to
dealers. The public offering price of Class A shares of the Fund is their net
asset value next computed after the sale plus a sales charge which varies based
upon the quantity purchased. The public offering price of a Class A share of the
Fund is calculated by dividing the net asset value of a Class A share by the
difference (expressed as a decimal) between 100% and the sales charge percentage
of offering price applicable to the purchase (see "Purchases" in the
Prospectus). The sales charge scale set forth in the Prospectus applies to
purchases of Class A shares of the Fund alone or in combination with shares of
all classes of certain other funds in the MFS Family of Funds (the "MFS Funds")
and other Funds (as noted under Right of Accumulation) by any person, including
members of a family unit (e.g., husband, wife and minor children) and bona fide
trustees, and also applies to purchases made under the Right of Accumulation or
a Letter of Intent (see "Investment and Withdrawal Programs" in this Statement
of Additional Information). A group might qualify to obtain quantity sales
charge discounts (see "Investment and Withdrawal Programs" in this Statement of
Additional Information).
Class A shares of the Fund may be sold at their net asset value to certain
persons or in certain transactions as described in the Prospectus. Such sales
are made without a sales charge to promote good will with employees and others
with whom MFS, MFD and/or the Fund have business relationships, and because the
sales effort, if any, involved in making such sales is negligible.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price of the Class A shares. Dealer allowances
expressed as a percentage of offering price for all offering prices are set
forth in the Prospectus (see "Purchases"). The difference between the total
amount invested and the sum of (a) the net proceeds to the Fund and (b) the
dealer commission is the commission paid to the underwriter. Because of rounding
in the computation of offering price, the portion of the sales charge paid to
the underwriter may vary and the total sales charge may be more or less than the
sales charge calculated using the sales charge expressed as a percentage of the
offering price or as a percentage of the net amount invested as listed in the
Prospectus. In the case of the maximum sales charge the dealer retains 4% and
MFD retains approximately 3/4 of 1% of the public offering price. In addition,
MFD pays a commission to dealers who initiate and are responsible for purchases
of $1 million or more as described in the Prospectus.
CLASS B AND CLASS C SHARES: MFD acts as agent in selling Class B and Class C
shares of the Fund. The public offering price of Class B and Class C shares in
their net asset value next computed after the sale (see "Purchases" in the
Prospectus).
GENERAL: Neither MFD nor dealers are permitted to delay placing orders to
benefit themselves by a price change. On occasion, MFD may obtain brokers loans
from various banks, including the custodian banks for the MFS Funds, to
facilitate the settlement of sales of shares of the Fund to dealers. MFD may
benefit from its temporary holding of funds paid to it by investment dealers for
the purchase of Fund shares.
During the Fund's fiscal year ended October 31, 1994, gross sales charges on
sales of Class A shares of the Fund amounted to $833,238, of which $133,802 was
retained by MFD and $699,436 by dealers and certain banks and other financial
institutions; the Fund received $29,472,764 representing the aggregate net asset
value of such shares. During the Fund's fiscal year ended October 31, 1993,
gross sales charges on sales of Class A shares of the Fund amounted to $649,349,
of which $108,242 was retained by MFD and $541,107 by dealers and certain banks
and other financial institutions; the Fund received $19,869,783, representing
the aggregate net asset value of such shares. During the Fund's fiscal year
ended October 31, 1992, gross sales charges on sales of Class A shares of the
Fund amounted to $470,782, of which $77,266 was retained by MFD and $393,516 by
dealers and certain banks and other financial institutions; the Fund received
$13,074,875 representing the aggregate net asset value of such shares. During
the Fund's fiscal year ended October 31, 1994, the CDSC imposed on the
redemption of Class B shares was $35,156. During the period from September 7,
1993 through October 31, 1993, the CDSC imposed on the redemption of Class B
shares was $1,901.
The Distribution Agreement will remain in effect until August 1, 1995 and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Trust's shares (as defined in "Investment Restrictions") and in either case, by
a majority of the Trustees who are not parties to the Distribution Agreement or
interested persons of any such party. The Distribution Agreement terminates
automatically if it is assigned and may be terminated without penalty by either
party on not more than 60 days' nor less than 30 days' notice.
4. PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are made by
persons affiliated with the Adviser. Any such person may serve other clients of
the Adviser, or any subsidiary of the Adviser in a similar capacity. Changes in
the Fund's investments are reviewed by the Board of Trustees.
The primary consideration in placing portfolio security transactions is
execution at the most favorable prices. The Adviser has complete freedom as to
the markets in and broker-dealers through which it seeks this result. In the
United States 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 transactions may,
as authorized by the Advisory Agreement, be bought from or sold to dealers who
have furnished statistical, research and other information or services to the
Adviser. At present no arrangements for the recapture of commission payments are
in effect.
Consistent with the foregoing primary consideration, the Rules of Fair Practice
of the NASD and such other policies as the Trustees may determine, the Adviser
may consider sales of shares of the Fund and of the other investment company
clients of MFD as a factor in the selection of broker- dealers to execute the
Fund's portfolio transactions.
Under the Advisory Agreement and as permitted by Section 28(e) of the Securities
Exchange Act of 1934, the Adviser may cause the Fund to pay a broker-dealer
which provides brokerage and research services to the Adviser an amount of
commission for effecting a securities transaction for the Fund in excess of the
amount other broker-dealers would have charged for the transaction if the
Adviser determines in good faith that the greater commission is reasonable in
relation to the value of the brokerage and research services provided by the
executing broker-dealer viewed in terms of either a particular transaction or
their respective overall responsibilities to the Fund or to their other clients.
Not all of such services are useful or of value in advising the Fund.
The term "brokerage and research services" includes advice as to the value of
securities, the advisability of investing in, purchasing or selling securities,
and the availability of securities or of purchasers or sellers of securities;
furnishing analyses and reports concerning issues, industries, securities,
economic factors and trends, portfolio strategy and the performance of accounts;
and effecting securities transactions and performing functions incidental
thereto, such as clearance and settlement.
Although commissions paid on every transaction will, in the judgment of the
Adviser, be reasonable in relation to the value of the brokerage services
provided, commissions exceeding those which another broker might charge may be
paid to broker-dealers who were selected to execute transactions on behalf of
the Fund and the Adviser's other clients in part for providing advice as to the
availability of securities or of purchasers or sellers of securities and
services in effecting securities transactions and performing functions
incidental thereto, such as clearance and settlement.
Broker-dealers may be willing to furnish statistical, research and other factual
information or services ("Research") to the Adviser for no consideration other
than brokerage or underwriting commissions. Securities may be bought or sold
through such broker-dealers, but at present, unless otherwise directed by the
Fund, a commission higher than one charged elsewhere will not be paid to such a
firm solely because it provided such Research. The Trustees (together with the
Trustees of the other MFS Funds) have directed the Adviser to allocate a total
of $20,000 of commission business from the MFS Funds to the Pershing Division of
Donaldson Lufkin & Jenrette as consideration for the annual renewal of the
Lipper Directors' Analytical Data Service (which provides information useful to
the Trustees in reviewing the relationship between the Fund and the Adviser).
The Adviser's investment management personnel attempt to evaluate the quality of
Research provided by brokers. Results of this effort are sometimes used by the
Adviser as a consideration in the selection of brokers to execute portfolio
transactions. However, the Adviser is unable to quantify the amount of
commissions set forth below which were paid as a result of such Research because
a substantial number of transactions were effected through brokers which provide
Research but which were selected principally because of their execution
capabilities.
The management fee that the Fund pays to the Adviser will not be reduced as a
consequence of the Adviser's receipt of brokerage and Research services. To the
extent the Fund's portfolio transactions are used to obtain brokerage and
research services, the brokerage commissions paid by the Fund will exceed those
that might otherwise be paid for such portfolio transactions, or for such
portfolio transactions and Research, by an amount which cannot be presently
determined. Such services would be useful and of value to the Adviser in serving
both the Fund and other clients and, conversely, such services obtained by the
placement of brokerage business of other clients would be useful to the Adviser
in carrying out its obligations to the Fund. While such services are not
expected to reduce the expenses of the Adviser, the Adviser would, through use
of the services, avoid the additional expenses which would be incurred if it
should attempt to develop comparable information through its own staff.
For the Fund's fiscal year ended October 31, 1994, total brokerage commissions
of $210,216 were paid on transactions of $331,692,927. For the Fund's fiscal
year ended October 31, 1993, total brokerage commissions of $95,257 were paid on
total transactions of $134,942,094. For the Fund's fiscal year ended October 31,
1992, total brokerage commissions of $55,741 were paid on transactions (other
than U.S. Government securities, purchased options transactions and short-term
obligations) of $54,830,346. Not all of the Fund's transactions are equity
security transactions which involve the payment of brokerage commissions. During
the Fund's fiscal year ended October 31, 1994, the Fund sold securities issued
by Kidder, Peabody & Co., Inc. and Dean Witter Discover, regular broker-dealers
of the Fund.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for that of one or more of the other clients of the Adviser
or any subsidiary of the Adviser. Investment decisions for the Fund and for such
other clients are made with a view to achieving their respective investment
objectives. It may develop that a particular security is bought or sold for only
one client even though it might be held by, or bought or sold for, other
clients. Likewise, a particular security may be bought for one or more clients
when one or more other clients are selling that same security. Some simultaneous
transactions are inevitable when several clients receive investment advice from
the same investment adviser, particularly when the same security is suitable for
the investment objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed to be equitable to
each. It is recognized that in some cases this system could have a detrimental
effect on the price or volume of the security as far as the Fund is concerned.
In other cases, however, the Fund believes that its ability to participate in
volume transactions will produce better executions for the Fund.
5. SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS -- The Fund makes available the following
programs designed to enable shareholders to add to their investment or withdraw
from it with a minimum of paper work. These are described below and, in certain
cases, in the Prospectus. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain 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
above) anticipates purchasing $100,000 or more of Class A shares of the Fund
alone or in combination with shares of Class B or Class C of the Fund or any of
the classes of other MFS Funds or MFS Fixed Fund (a bank collective investment
fund) within a 13-month period (or 36-month period in the case of purchases of
$1 million or more), the shareholder may obtain Class A shares of the Fund at
the same reduced sales charge as though the total quantity were invested in one
lump sum by completing the Letter of Intent section of the Fund's Account
Application or filing a separate Letter of Intent application (available from
the Shareholder Servicing Agent) within 90 days of the commencement of
purchases. Subject to acceptance by MFD and the conditions mentioned below, each
purchase will be made at a public offering price applicable to a single
transaction of the dollar amount specified in the Letter of Intent application.
The shareholder or his dealer must inform MFD that the Letter of Intent is in
effect each time shares are purchased. The shareholder makes no commitment to
purchase additional shares, but if his purchases within 13 months (or 36 months
in the case of purchases of $1 million or more) plus the value of shares
credited toward completion of the Letter of Intent do not total the sum
specified, he will pay the increased amount of the sales charge as described
below. Instructions for issuance of shares in the name of a person other than
the person signing the Letter of Intent application must be accompanied by a
written statement from the dealer stating that the shares were paid for by the
person signing such Letter. Neither income dividends nor capital gain
distributions taken in additional shares will apply toward the completion of the
Letter of Intent. Dividends and distributions of other MFS Funds automatically
reinvested in shares of the Fund pursuant to the Distribution Investment Program
will also not apply toward completion of the Letter of Intent.
Out of the shareholder's initial purchase (or subsequent purchases if
necessary), 5% of the dollar amount specified in the Letter of Intent
application shall be held in escrow by the Shareholder Servicing Agent in the
form of shares registered in the shareholder's name. All income dividends and
capital gain distributions on escrowed shares will be paid to the shareholder or
to his order. When the minimum investment so specified is completed (either
prior to or by the end of the 13-month or 36-month period, as applicable), the
shareholder will be notified and the escrowed shares will be released.
If the intended investment is not completed, the Shareholder Servicing Agent
will redeem an appropriate number of the escrowed shares in order to realize
such difference. Shares remaining after any such redemption will be released by
the Shareholder Servicing Agent. By completing and signing the Account
Application or separate Letter of Intent application, the shareholder
irrevocably appoints the Shareholder Servicing Agent his attorney to surrender
for redemption any or all escrowed shares with full power of substitution in the
premises.
INVEST BY MAIL: Additional investments of $50 or more may be made at any time
by mailing a check payable to the Fund directly to the Shareholder Servicing
Agent. The shareholder's account number and the name of his investment dealer
must be included with each investment.
GROUP PURCHASES: A bona fide group (and all its members) may be treated as a
single purchaser and, under the Right of Accumulation (but not a 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.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on the purchase of Class A shares when that shareholder's new
investment, together with the current offering price value of all the holdings
of all classes of shares of that shareholder in the MFS Funds or MFS Fixed Fund
(a bank collective investment Fund) reaches a discount level (see "Purchases" in
the Prospectus for the sales charges on quantity purchases). For example, if a
shareholder owns shares valued at $75,000 and purchases an additional $25,000 of
Class A shares of the Fund, the sales charge for the $25,000 purchase would be
at the rate of 4% (the rate applicable to single transactions of $100,000). A
shareholder must provide the Shareholder Servicing Agent (or his investment
dealer must provide MFD) with information to verify that the quantity sales
charge discount is applicable at the time the investment is made.
DISTRIBUTION INVESTMENT PROGRAM: Distributions of dividends and capital gains
made by the Fund with respect to a particular class of shares may be
automatically invested in shares of the same class of one of the other MFS
Funds, if shares of the fund are available for sale. Such investments will be
subject to additional purchase minimums. Distributions will be invested at net
asset value (exclusive of any sales charge) and will not be subject to a CDSC.
Distributions will be invested at the close of business on the payable date for
the distribution. A shareholder considering the Distribution Investment Program
should obtain and read the prospectus of the other fund and consider the
differences in objectives and policies before making any investment.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder
Servicing Agent to send him (or anyone he designates) regular periodic payments,
as designated on the Account Application and based upon the value of his
account. Each payment under a Systematic Withdrawal Plan (a "SWP") must be at
least $100 (except in certain limited circumstances). The aggregate withdrawals
of Class B shares in any year pursuant to a SWP generally are limited to 10% of
the value of the account at the time of establishment of the SWP. Such payments
are drawn from the proceeds of the redemption of shares held in the
shareholder's account (which would be a return of principal and, if reflecting a
gain, would be taxable). Redemptions of Class B shares will be made in the
following order: (i) any "Free Amount"; (ii) to the extent necessary, any
"Reinvested Shares"; (iii) to the extent necessary, the "Direct Purchase"
subject to the lowest CDSC (as such terms are defined in "Contingent Deferred
Sales Charge" in the Prospectus). The CDSC will be waived in the case of
redemptions of Class B shares pursuant to a SWP, but will not be waived in the
case of SWP redemptions of Class A shares. 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 reinvested in full and fractional shares of the Fund
at the net asset value in effect at the close of business on the record date for
such distributions. To initiate this service, shares having an aggregate value
of at least $10,000 either must be held on deposit by, or certificates for such
shares must be deposited with, the Shareholder Servicing Agent. Maintaining a
withdrawal plan concurrently with an investment program would be disadvantageous
because of the sales charges included in share purchases in the case of Class A
shares, and because of the assessment of the CDSC for certain share redemptions
in the case of Class A shares. The shareholder by written instruction to the
Shareholder Servicing Agent may deposit into the account additional shares of
the Fund, change the payee or change the dollar amount of each payment. The
Shareholder Servicing Agent may charge the account for services rendered and
expenses incurred beyond those normally assumed by the Fund with respect to the
liquidation of shares. No charge is currently assessed against the account, but
one could be instituted by the Shareholder Servicing Agent on 60 days' notice in
writing to the shareholder in the event that the Fund ceases to assume the cost
of these services. The Fund may terminate any SWP for an account if the value of
the account falls below $5,000 as a result of share redemptions (other than as a
result of a SWP) or an exchange of shares of the Fund for shares of another MFS
Fund. Any such plan may also be terminated at any time by either the shareholder
or the Fund.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may exchange their shares for the same class of shares of
other MFS Funds (if available for sale) (and, in the case of Class C shares, for
shares of MFS Money Market Fund) under the Automatic Exchange Plan, a dollar
cost averaging program. The Automatic Exchange Plan provides for automatic
exchanges of funds from the shareholder's account in an MFS Fund for investment
in the same class of shares of other MFS Funds selected by the shareholder.
Under the Automatic Exchange Plan, exchanges of at least $50 each may be made to
up to four different funds effective on the seventh day of each month or of
every third month, depending whether monthly or quarterly exchanges are elected
by the shareholder. If the seventh day of the month is not a business day, the
transaction will be processed on the next business day. Generally, the initial
exchange will occur after receipt and processing by the Shareholder Servicing
Agent of an application in good order. Exchanges will continue to be made from a
shareholder's account in any MFS Fund, as long as the balance of the account is
sufficient to complete the exchanges. Additional payments made to a
shareholder's account will extend the period that exchanges will continue to be
made under the Automatic Exchange Plan. However, if additional payments are
added to an account subject to the Automatic Exchange Plan shortly before a
exchange is scheduled, such funds may not be available for exchange until the
following month; therefore, care should be used to avoid inadvertently
terminating the Automatic Exchange Plan through exhaustion of the account
balance.
No transaction fee for exchanges will be charged in connection with the
Automatic Exchange Plan. However, transfers of shares of MFS Money Market Fund,
MFS Government Money Market Fund and Class A shares of MFS Cash Reserve Fund
will be subject to any applicable sales charge. Changes in amounts to be
exchanged to each fund, the funds to which exchanges are to be made and the
timing of exchanges (monthly or quarterly), or termination of a shareholder's
participation in the Automatic Exchange Plan will be made after instructions in
writing or by telephone (a "Exchange Change Request") are received by the
Shareholder Servicing Agent in proper form (i.e., if in writing -- signed by the
record owner(s) exactly as shares are registered; if by telephone -- proper
account identification is given by the dealer or shareholder of record). Each
Exchange Change Request (other than termination of participation in the program)
must involve at least $50. Generally, if an Exchange Change Request is received
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 Class A shares of MFS Cash Reserve Fund in the case where the shares are
acquired through direct purchase or reinvested dividends) who have redeemed
their shares have a one-time right to reinvest the redemption proceeds in the
same class of shares of any of the MFS Funds (if shares of the fund are
available for sale) at net asset value (without a sales charge) and, if
applicable, with credit for any CDSC paid. In the case of proceeds reinvested in
shares of MFS Money Market Fund, MFS Government Money Market Fund and Class A
shares of MFS Cash Reserve Fund, the shareholder has the right to exchange the
acquired shares for shares of the same class 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 within 12 months of the initial purchase of certain Class A shares, a CDSC
will be imposed upon redemption. Although redemptions and repurchases of shares
are taxable events, a reinvestment within such 90-day period in the same fund
may be considered a "wash sale" and may result in the inability to recognize
currently all or a portion of any loss realized on the original redemption for
federal income tax purposes. Please see your tax advisor for further
information.
EXCHANGE PRIVILEGE -- Subject to the requirements set forth below, some or all
of the shares for which payment has been received by the Fund (i.e., an
established account) may be exchanged for shares of the same class of any of the
other MFS Funds (if available for sale) at net asset value. In addition, Class C
shares may be exchanged for shares of MFS Money Market Fund at net asset value.
Exchanges will be made only after instructions in writing or by telephone (an
"Exchange Request") are received for an established account by the Shareholder
Servicing Agent.
Each Exchange Request must be in proper form (i.e., if in writing -- signed by
the record owner(s) exactly as the shares are registered; if by telephone --
proper account identification is given by the dealer or shareholder of record),
and each exchange must involve either shares having an aggregate value of at
least $1,000 or all the shares in the account (except that the minimum is $50
for accounts of retirement plan participants whose sponsoring organizations
subscribe to the MFS FUNDamental 401(k) Plan or another similar 401(k)
recordkeeping system made available by the Shareholder Servicing Agent) or all
the shares in the account. Each exchange involves the redemption of shares of
the Fund to be exchanged and the purchase at net asset value (i.e., without a
sales charge) of shares of the same class of the other MFS Fund. Any gain or
loss on the redemption of the shares exchanged is reportable on the
shareholder's federal income tax return, unless both the shares received and the
shares surrendered in the exchange are held in a tax-deferred retirement plan or
other tax-exempt account. No more than five exchanges may be made in any one
Exchange Request by telephone. If the Exchange Request is received by the
Shareholder Servicing Agent prior to the close of regular trading on the
Exchange, the exchange usually will occur on that day if all the requirements
set forth above have been complied with at that time. However, payment of the
redemption proceeds by the Fund, and thus the purchase of shares of the other
MFS Fund, may be delayed for up to seven days if the Fund determines that such a
delay would be in the best interest of all its shareholders. Investment dealers
which have satisfied criteria established by MFD may also communicate a
shareholder's Exchange Request to MFD by facsimile subject to the requirements
set forth above.
No CDSC is imposed on exchanges among the MFS Funds, although liability for the
CDSC is carried forward to the exchanged shares. For purposes of calculating the
CDSC upon redemption of shares acquired in an exchange, the purchase of shares
acquired in one or more exchanges is deemed to have occurred at the time of the
original purchase of the exchanged shares. Any gain or loss on the redemption of
the shares exchanged is reportable on the shareholder's federal income tax
return, unless such shares were held in a tax-deferred retirement plan.
Additional information with respect to any of the MFS Funds, including a copy of
its current prospectus, may be obtained from investment dealers or the
Shareholder Servicing Agent. A shareholder considering an exchange should obtain
and read the prospectus of the other MFS Fund and consider the differences in
objectives and policies before making any exchange. Shareholders of the other
MFS Funds (except shares of MFS Money Market Fund and MFS Government Money
Market Fund acquired through direct purchase and dividends reinvested prior to
June 1, 1992) have the right to exchange their shares for shares of the Fund,
subject to the conditions, if any, set forth in their respective prospectuses.
In addition, unitholders of the MFS Fixed Fund (a bank collective investment
Fund) have the right to exchange their units (except units acquired through
direct purchases) for shares of the Fund, subject to the conditions, if any,
imposed upon such unitholders by the MFS Fixed Fund.
Any state income tax advantages for investment in shares of each state- specific
series of MFS Municipal Series Trust may only benefit residents of such states.
Investors should consult with their own tax advisers to be sure this is an
appropriate investment, based on their residency and each state's income tax
laws.
The exchange privilege (or any aspect of it) may be changed or discontinued and
is subject to certain limitations, including certain restrictions on purchases
by market timer accounts (see "Purchases" in the Prospectus).
TAX-DEFERRED RETIREMENT PLANS -- Except as noted below, shares of the Fund may
be purchased by all types of tax-deferred retirement plans. MFD makes available
through investment dealers plans and/or custody agreements for the following:
Individual Retirement Accounts (IRAs) (for individuals and their non-
employed spouses who desire to make limited contributions to a tax- deferred
retirement program and, if eligible, to receive a federal income tax
deduction for amounts contributed);
Simplified Employee Pension (SEP-IRA) Plans;
Retirement Plans Qualified under Section 401(k) of the Code, as amended;
403(b) Plans (deferred compensation arrangements for employees of public
school systems and certain non-profit organizations); and
Certain other qualified pension and profit-sharing plans.
The plan documents provided by MFD designate a trustee or custodian (unless
another trustee or custodian is designated by the individual or group
establishing the plan) and contain specific information about the plans. Each
plan provides that dividends and distributions will be reinvested automatically.
For further details with respect to any plan, including fees charged by the
trustee, custodian or MFD, tax consequences and redemption information, see the
specific documents for that plan. Plan documents other than those provided by
MFD may be used to establish any of the plans described above. Third party
administrative services, available for some corporate plans, may limit or delay
the processing of transactions.
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 section 401(a) or 403(b) of the Code if the retirement plan
and/or the sponsoring organization subscribe to the MFS FUNDamental 401(k) Plan
or another similar 401(a) or 403(b) recordkeeping program made available by the
Shareholder Servicing Agent.
6. TAX STATUS
The Fund has elected to be treated and intends to qualify each year as a
"regulated investment company" under Subchapter M of the Code, by meeting all
applicable requirements of Subchapter M, including requirements as to the nature
of the Fund's gross income, the amount of Fund distributions, and the
composition and holding period of the Fund's portfolio assets. Because the Fund
intends to distribute all of its net investment income and net realized capital
gains to shareholders in accordance with the timing requirements imposed by the
Code, it is not expected that the Fund will be required to pay any federal
income or excise taxes, although the Fund's foreign-source income may be subject
to foreign withholding taxes. If the Fund should fail to qualify as a "regulated
investment company" in any year, the Fund would incur a regular corporate
federal income tax upon its taxable income and Fund distributions would
generally be taxable as ordinary dividend income to shareholders.
Shareholders of the Fund normally will have to pay federal income taxes, and any
state or local taxes, on the dividends and capital gain distributions they
receive from the Fund. Dividends from income (including certain foreign currency
gains) and any distributions from net short-term capital gains (whether received
in cash or reinvested in additional shares) are taxable to shareholders as
ordinary income for federal income tax purposes. A portion of the Fund's
ordinary income dividends (but none of the capital gains) is eligible for the
dividends-received deduction for corporations if the recipient otherwise
qualifies for that deduction with respect to its holding of Fund shares.
Availability of the deduction for particular corporate shareholders is subject
to certain limitations, and deducted amounts may be subject to the alternative
minimum tax or result in certain basis adjustments. Distributions from net
capital gains (i.e., the excess of the net long-term capital gains over the
short-term capital losses), whether received in cash or invested in additional
shares, are taxable to the Fund's shareholders as long-term capital gains for
federal income tax purposes regardless of how long they have owned shares in the
Fund. Fund dividends declared in October, November or December and paid the
following January will be taxable to shareholders as if received on December 31
of the year in which they are declared.
Any dividend or distribution will have the effect of reducing the per share net
asset value of shares in the Fund by the amount of the dividend or distribution.
Shareholders purchasing shares shortly before the record date of any
distribution may thus pay the full price for the shares and then effectively
receive a portion of the purchase price back as a taxable distribution.
In general, any gain or loss realized upon a taxable disposition of shares of
the Fund by a shareholder that holds such shares as a capital asset will be
treated as long-term capital gain or loss if the shares have been held for more
than 12 months and otherwise as a short-term capital gain or loss. However, any
loss realized upon a disposition of shares in the Fund held for six months or
less will be treated as a long-term capital loss to the extent of any
distributions of net capital gain made with respect to those shares. Any loss
realized upon a redemption of shares may also be disallowed under rules relating
to wash sales. Gain may be increased (or loss reduced) upon a redemption of
Class A shares of the Fund within ninety days after their purchase followed by
any purchase (including purchases by exchanges or by reinvestment) of the Fund
or of another MFS Fund (or any other shares of an MFS Fund generally sold
subject to a sales charge) without payment of an additional sales charge of
Class A shares.
The Fund's transactions in options, Futures Contracts and Forward Contracts will
be subject to special tax rules that may affect the amount, timing and character
of Fund income and distributions to shareholders. For example, certain positions
held by the Fund on the last business day of each taxable year will be marked to
market (i.e., treated as if closed out) on such day, and any gain or loss
associated with such positions will be treated as 60% long-term and 40%
short-term capital gain or loss. Certain positions held by the Fund that
substantially diminish its risk of loss with respect to other positions in its
portfolio may constitute "straddles," and may be subject to special tax rules
that would cause deferral of Fund losses, adjustments in the holding periods of
Fund securities and conversion of short-term into long-term capital losses.
Certain tax elections exist for straddles that may alter the effects of these
rules. The Fund will limit its activities in options, Futures Contracts, Forward
Contracts, and swaps and related transactions to the extent necessary to meet
the requirements of Subchapter M of the Code.
The Fund's current dividend and accounting policies will affect the amount,
timing, and character of distributions to shareholders, and may, under certain
circumstances, make an economic return of capital taxable to shareholders. The
Fund's investment in zero coupon securities and certain securities purchased at
a market discount will cause it to realize income prior to the receipt of cash
payments with respect to those securities. In order to distribute this income
and avoid a tax on the Fund, the Fund may be required to liquidate portfolio
securities that it might otherwise have continued to hold, potentially resulting
in additional taxable gain or loss to the Fund.
Special tax considerations apply with respect to foreign investments of the
Fund. Foreign exchange gains and losses realized by the Fund will generally be
treated as ordinary income or losses. The holding of foreign currencies and
foreign currency options for nonhedging purposes and investment by the Fund in
certain "passive foreign investment companies" may be limited in order to avoid
a tax on the Fund. The Fund may elect to mark to market any investments in
"passive foreign investment companies" on the last day of each year. This
election may cause the Fund to recognize income prior to the receipt of cash
payments with respect to those investments; in order to distribute this income
and avoid a tax on the Fund, the Fund may be required to liquidate portfolio
securities that it might otherwise have continued to hold.
Investment income received by the Fund from sources within foreign countries may
be subject to foreign income taxes withheld at the source. The 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 of tax where available. It is
impossible to determine the effective rate of foreign tax in advance since the
amount of the Fund's assets to be invested within various countries is not
known.
If the Fund holds more than 50% of its assets in foreign securities at the close
of its taxable year, the Fund may elect to "pass through" to the Fund's
shareholders foreign income taxes paid. If the Fund so elects, shareholders will
be required to treat their pro-rata portion of the foreign income taxes paid by
the Fund as part of the amounts distributed to them by the Fund and thus
includable in their gross income for federal income tax purposes. Shareholders
who itemize deductions would then be allowed to claim a deduction or credit (but
not both) on their federal income tax returns for such amounts, subject to
certain limitations. Shareholders who do not itemize deductions would be able
(subject to such limitations) to claim a credit but not a deduction.
Dividends and certain other payments to persons who are not citizens or
residents of the United States or U.S. enities ("Non-U.S. Persons") are
generally subject to U.S. tax withholding at a rate of 30%. The Fund intends to
withhold U.S. federal income tax at the rate of 30% on taxable dividends and
other payments made to Non-U.S. Persons that are subject to such withholding,
regardless of whether a lower treaty rate may be permitted. Any amounts
overwithheld may be recovered by such persons by filing a claim for refund with
the U.S. Internal Revenue Service within the time period appropriate to such
claims. The Fund is also required in certain circumstances to apply backup
withholding of 31% of taxable dividends and redemption proceeds paid to any
shareholder who does not furnish to the Fund certain information and
certifications or who is otherwise subject to backup withholding. Backup
withholding will not, however, be applied to payments that have been subject to
30% withholding. Distributions received from the Fund by Non-U.S. Persons may
also be subject to tax under the laws of their own jurisdiction.
As long as it qualifies as a regulated investment company under the Code, the
Fund will not be required to pay Massachusetts income or excise taxes.
Distributions of the Fund that are derived from interest on obligations of the
U.S. Government and certain of its agencies and instrumentalities (but generally
not from capital gains realized upon the disposition of such obligations) may be
exempt from state and local taxes in certain states. The Fund intends to advise
shareholders of the extent, if any, to which its distributions consist of such
interest. Shareholders are urged to consult their tax advisers regarding the
possible exclusion of such portion of their dividends for state and local income
tax purposes as well as regarding the tax consequences of an investment in the
Fund.
7. DETERMINATION OF NET ASSET VALUE AND PERFORMANCE
NET ASSET VALUE: The net asset value per share of each class of the Fund is
determined each day during which the Exchange is open for trading. (As of the
date of this Statement of Additional Information, such Exchange is open for
trading every weekday except for the following holidays or the days on which
they are observed: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.) This
determination is made once each day as of the close of regular trading on such
Exchange by deducting the amount of the liabilities attributable to the class
from the value of the assets attributable to the class and dividing the
difference by the number of shares of the class outstanding. Equity securities
in the Fund's portfolio are valued at the last sale price on the exchange on
which they are primarily traded or on the NASDAQ system for unlisted national
market issues, or at the last quoted bid price for securities in which there
were no sales during the day or for unlisted securities not reported on the
NASDAQ system. Bonds and other fixed income securities (other than short-term
obligations) of U.S. issuers in the Fund's portfolio are valued on the basis of
valuations furnished by a pricing service which utilizes both dealer- supplied
valuations and electronic data processing techniques which take into account
appropriate factors such as institutional-size trading in similar groups of
securities, yield, quality, coupon rate, maturity, type of issue, trading
characteristics and other market data without exclusive reliance upon quoted
prices or exchange or over-the-counter prices, since such valuations are
believed to reflect the fair value of such securities. Forward Contracts will be
valued using a pricing model taking into consideration market data from an
external pricing source. Use of the pricing services has been approved by the
Board of Trustees. All other securities, futures contracts and options in the
Fund's portfolio (other than short-term obligations) for which the principal
market is one or more securities or commodities exchanges (whether domestic or
foreign) will be valued at the last reported sale price or at the settlement
price prior to the determination (or if there has been no current sale, at the
closing bid price) on the primary exchange on which such securities, futures
contracts or options are traded; but if a securities exchange is not the
principal market for securities, such securities will, if market quotations are
readily available, be valued at current bid prices, unless such securities are
reported on the NASDAQ system, in which case they are valued at the last sale
price or, if no sales occurred during the day, at the last quoted bid price.
Short-term obligations with a remaining maturity in excess of 60 days will be
valued upon dealer supplied valuations. Other short-term obligations in the
Fund's portfolio are valued at amortized cost, which constitutes fair value as
determined by the Board of Trustees. 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.
TOTAL RATE OF RETURN: The Fund will calculate its total rate of return for each
class of shares for certain periods by determining the average annual compounded
rates of return over those periods that would cause an investment of $1,000
(made with all distributions reinvested and reflecting the CDSC or the maximum
public offering price) to reach the value of that investment at the end of the
periods. The Fund may also calculate (i) a total rate of return, which is not
reduced by the CDSC (4% maximum for Class B shares) and therefore may result in
a higher rate of return, (ii) a total rate of return assuming an initial account
value of $1,000, which will result in a higher rate of return with respect to
Class A shares since the value of the initial account will not be reduced by the
sales charge (4.75% maximum for Class A Shares) and/or (iii) total rates of
return which represent aggregate performance over a period or year-by-year
performance, and which may or may not reflect the effect of the maximum or other
sales charge or CDSC. The Fund's average annual total rate of return for Class A
shares reflecting the initial investment at the public offering price for the
one-year period ended October 31, 1994 and for the period from September 4, 1990
(the commencement of investment operations) to October 31, 1994 was -0.86% and
10.71%, respectively. The Fund's average annual total rate of return for Class A
shares, not giving effect to the sales charge on the initial investment, for the
same periods was 4.10% and 12.10%, respectively. The Fund's average total rate
of return for Class B shares, reflecting the CDSC for the one-year period ended
October 31, 1994 and for the period September 7, 1993 (commencement of offering
of this class of shares) to October 31, 1994 was -0.39% and 2.97%. The Fund's
average annual total rate of return for Class B shares, not giving effect to the
CDSC, for the same periods was 3.38% and 6.33%. The Fund's aggregate total rate
of return for Class C shares from January 3, 1994 (commencement of offering of
this class of shares) to October 31, 1994 was -0.15%. The figures presented for
Class C are not calculated on an annualized basis. The aggregate total rate of
return represents a limited time frame and like the total rates of return
presented above for Class A and Class B shares, may not be indicative of future
performance.
PERFORMANCE RESULTS: The performance results for Class A shares below, based on
an assumed initial investment of $10,000, cover the period from September 4,
1990 through December 31, 1994. It has been assumed that dividends and capital
gains were reinvested in additional shares. These performance results, as well
as 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 and public offering price of shares of the Fund will vary
based not only on the type, quality and maturities of the securities held in the
Fund's portfolio, but also on changes in the current value of such securities
and on changes in the expenses of the Fund. These factors and possible
differences in the methods used to calculate 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. The
current net asset value and account balance information may be obtained by
calling 1-800-MFS-TALK (637-8255).
MFS WORLD TOTAL RETURN FUND
------------------------------------------------------------------
VALUE OF SHARES
------------------------------------------------------------------
CAP. GAIN DIVIDEND
DIRECT REINVEST- REINVEST- TOTAL
DATE INVESTMENT MENT MENT VALUE
- ------ ------ ------ ----- ---
12/31/90 $ 9,764 $ 0 $ 106 $ 9,870
12/31/91 11,244 203 487 11,934
12/31/92 10,986 527 1,021 12,534
12/31/93 12,421 851 1,957 15,229
12/31/94 11,412 1,214 2,136 14,762
*The Fund commenced investment operations on September 4, 1990.
EXPLANATORY NOTES: The results assume that the initial $10,000 investment on
September 4, 1990 has been reduced by the current maximum applicable sales
charge of 4.75%. No adjustment has been made for any income taxes payable by
shareholders.
YIELD: Any yield quotation of a class of shares of the Fund will be based on the
annualized net investment income per share of that class over a 30-day period.
The yield is calculated by dividing the net investment income per share
allocated to a particular class of the Fund earned during the period by the
maximum public offering price per share of such class on the last day of that
period. The resulting figure is then annualized. Net investment income per share
of a class is determined by dividing (i) the dividends and interest earned by
the Fund allocated to the class during the period, minus accrued expenses of
such class for the period, by (ii) the average number of shares of such class
entitled to receive dividends during the period multiplied by the maximum public
offering price per share of such class on the last day of the period. The Fund's
yield calculations for Class A shares assume a maximum sales charge of 4.75%.
The Fund's yield calculation for Class B shares assumes no CDSC is paid. The
yield calculation for Class A shares for the 30-day period ended October 31,
1994 was 3.16%. The yield calculation for Class B shares for the 30-day period
ended October 31, 1994 was 2.51%. The yield calculation for Class C shares for
the 30-day period ended October 31, 1994 was 2.59%.
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 computed by
dividing the total amount of dividends per share paid by the Fund to
shareholders of that class during the past twelve months by the maximum public
offering price of that class at the end of such period. Under certain
circumstances, such as when there has been a change in the amount of dividend
payout, or a fundamental change in investment policies, it might be appropriate
to annualize the dividends paid over the period such policies were in effect,
rather than using the dividends paid during the past twelve months. The current
distribution rate differs from the yield computation because it may include
distributions to shareholders from sources other than dividends and interest,
such as premium income for option writing, short-term capital gains and return
of invested capital, and is calculated over a different period of time. The
Fund's current distribution rate calculation for Class A shares assumes a
maximum sales charge of 4.75%. The Fund's current distribution rate calculation
for Class B shares assumes no CDSC is paid. The current distribution rate for
Class A shares of the Fund for the twelve-month period ended on October 31, 1994
was 3.25%. The current distribution rate for Class B shares of the Fund for the
twelve-month period ended October 31, 1994 was 3.09%. The annualized current
distribution rate since inception for the Class C shares is 2.35%.
From time to time each Fund may, as appropriate, quote Fund rankings or reprint
all or a portion of evaluations of fund performance and operations appearing in
various independent publications, including but not limited to the following:
Money, Fortune, U.S. News and World Report, Kiplinger's Personal Finance, The
Wall Street Journal, Barron's, Investors Business Daily, Newsweek, Financial
World, Financial Planning, Investment Advisor, USA Today, Pensions and
Investments, SmartMoney, Forbes, Global Finance, Registered Representative,
Institutional Investor, the Investment Company Institute, Johnson's Charts,
Morningstar, Lipper Analytical Services, Inc., CDA Wiesenberger, Shearson Lehman
and Salomon Bros. Indices, Ibbotson, Business Week, Lowry Associates, Media
General, Investment Company Data, The New York Times, Your Money, Strangers
Investment Advisor, Financial Planning on Wall Street, Standard and Poor's,
Individual Investor, The 100 Best Mutual Funds You Can Buy, by Gordon K.
Williamson, Consumer Price Index, and Sanford C. Bernstein & Co. Fund
performance may also be compared to the performance of other mutual funds
tracked by financial or business publications or periodicals.
The Fund may also quote evaluations mentioned in independent radio or television
broadcasts.
From time to time the Fund may use charts and graphs to illustrate the past
performance of various indices such as those mentioned above and illustrations
using hypothetical rates of return to illustrate the effects of compounding and
tax-deferral.
The Fund may advertise examples of the effects of periodic investment plans,
including the principle of dollar cost averaging. In such a program, an investor
invests a fixed dollar amount in a fund at periodic intervals, thereby
purchasing fewer shares when prices are high and more shares when prices are
low. While such a strategy does not assure a profit or guard against a loss in a
declining market, the investor's average cost per share can be lower than if
fixed numbers of shares are purchased at the same intervals.
MFS has a long history of innovations.
-- 1924 -- Massachusetts Investors Trust is established as the first
mutual fund in America.
-- 1924 -- Massachusetts Investors Trust is the first mutual fund to
make full public disclosure of its operations in shareholder reports.
-- 1932 -- One of the first internal research departments is established
to provide in-house analytical capability for an investment
management firm.
-- 1933 -- Massachusetts Investors Trust is the first mutual fund to
register under the Securities Act of 1933 ("Truth in Securities Act"
or "Full Disclosure Act").
-- 1936 -- Massachusetts Investors Trust is the first mutual fund to let
shareholders take capital gain distributions either in additional
shares or in cash.
-- 1976 -- MFS(R) Municipal Bond Fund is among the first municipal bond
funds established.
-- 1979 -- Spectrum becomes the first combination fixed/ variable
annuity with no initial sales charge.
-- 1981 -- MFS(R) World Governments Fund is established as America's
first globally diversified fixed-income mutual fund.
-- 1984 -- MFS(R) Municipal High Income Fund is the first mutual fund to
seek high tax-free income from lower- rated municipal securities.
-- 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual fund to
target and shift investments among industry sectors for shareholders.
-- 1986 -- MFS(R) Municipal Income Trust is the first closed-end,
high-yield municipal bond fund traded on the New York Stock Exchange.
-- 1987 -- MFS(R) Multimarket Income Trust is the first closed-end,
multimarket high income fund listed on the New York Stock Exchange.
-- 1989 -- MFS Regatta becomes America's first non- qualified
market-value-adjusted fixed-variable annuity.
-- 1990 -- MFS(R) World Total Return Fund is the first global balanced
fund.
-- 1993 -- MFS(R) World Growth Fund is the first global emerging markets
fund to offer the expertise of two sub-advisers.
-- 1993 -- MFS becomes money manager of MFS(R) Union Stan- dard Trust,
the first trust to invest in companies deemed to be union- friendly
by an Advisory Board of senior labor officials, senior managers of
companies with significant labor contracts, academics and other
national labor leaders of experts.
8. DISTRIBUTION PLANS
The Trustees have adopted a Distribution Plan for each of Class A, Class B and
Class C shares (the "Distribution Plans") 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 each Distribution Plan would benefit the Fund and
the respective class of shareholders. The Distribution Plans are designed to
promote sales, thereby increasing the net assets of the Fund. Such an increase
may reduce the expense ratio to the extent the Fund's fixed costs are spread
over a larger net asset base. Also, an increase in net assets may lessen the
adverse effects that could result were the Fund required to liquidate portfolio
securities to meet redemptions. There is, however, no assurance that the net
assets of the Fund will increase or that the other benefits referred to above
will be realized.
CLASS A DISTRIBUTION PLAN: The Distribution Plan relating to Class A shares (the
"Class A Distribution Plan") provides that the Fund will pay MFD up to (but not
necessarily all of) an aggregate of 0.35% of the average daily net assets
attributable to the Class A shares annually in order that MFD may pay expenses
on behalf of the Fund related to the distribution and servicing of its Class A
shares. The expenses to be paid by MFD on behalf of the Fund include a service
fee to securities dealers which enter into a sales agreement with MFD of up to
0.25% of the portion of the Fund's average daily net assets attributable to the
Class A shares owned by investors for whom that securities dealer is the holder
or dealer of record. These payments are partial consideration for personal
services and/or account maintenance performed by such dealers with respect to
Class A shares. MFD may from time to time reduce the amount of the service fee
paid for shares sold prior to a certain date. MFD may also retain a distribution
fee of 0.10% of the Fund's average daily net assets attributable to Class A
shares as partial consideration for services performed and expenses incurred in
the performance of MFD's obligations as to Class A shares under the Distribution
Agreement with the Fund. Any remaining funds may be used to pay for other
distribution related expenses as described in the Prospectus. Such payments
commenced on March 4, 1993. Service fees may be reduced for a securities dealer
that is the holder or dealer of record for an investor who owns shares of the
Fund having a net asset value at or above a certain dollar level. No service fee
will be paid (i) to any securities dealer who is the holder or dealer of record
for investors who own Class A shares having an aggregate net asset value less
than $750,000, or such other amount as may be determined from time to time by
MFD (MFD, however, may waive this minimum amount requirement from time to time
if the dealer satisfies certain criteria), or (ii) to any insurance company
which has entered into an agreement with the Fund and MFD that permits such
insurance company to purchase shares from the Fund at their net asset value in
connection with annuity agreements issued in connection with the insurance
company's separate accounts. Dealers may from time to time be required to meet
certain other criteria in order to receive service fees. MFD or its affiliates
shall be entitled to receive any service fee payable under the Class A
Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by MFD or its affiliates
for shareholder accounts. Certain banks and other financial institutions that
have agency agreements will MFD will receive agency transaction and service fees
that are the same as commissions and service fees to dealers.
During the fiscal year ended October 31, 1994, the Fund incurred expenses of
$307,809 (equal to 0.35% of the average daily net assets attributable to Class A
shares), relating to the distribution and servicing of its Class A shares, of
which FSI retained $87,562 and securities dealers of the Fund and certain banks
and other financial institutions received $220,247.
CLASS B DISTRIBUTION PLAN: The Class B Distribution Plan relating to Class B
shares (the "Class B Distribution Plan") provides that the Fund shall pay MFD,
as the Fund's distributor for its Class B shares, a daily distribution fee equal
on an annual basis to 0.75% of the Fund's average daily net assets attributable
to Class B shares and will pay MFD a Service fee of up to 0.25% per annum of the
Fund's average daily net assets attributable to Class B shares (which MFD will
in turn pay to securities dealers which enter into a sales agreement with MFD
and which are the holders of record of the Fund's Class B shares). This service
fee is intended to be additional consideration for all personal services and/or
account maintenance services rendered by the dealer with respect to Class B
shares. MFD will advance to dealers the first- year service fee at a rate equal
to 0.25% of the amount invested. As compensation therefor, MFD may retain the
service fee paid by the Fund with respect to such shares for the first year
after purchase. Dealers will become eligible for additional service fees with
respect to such shares commencing in the thirteenth month following purchase.
Except in the case of the first year service fee, no service fee will be paid to
any securities dealer who is the holder or dealer of record for investors who
own Class B shares having an aggregate net asset value of less than $750,000 or
such other amount as may be determined from time to time. MFD, however, may
waive this minimum amount requirement from time to time if the dealer satisfies
certain criteria. Dealers may from time to time be required to meet certain
other criteria in order to receive service fees. MFD or its affiliates shall be
entitled to receive any service fee payable under the Class B Distribution Plan
for which there is no dealer of record or for which qualification standards have
not been met as partial consideration for personal services and/or account
maintenance services performed by MFD or its affiliates to shareholder accounts.
The purpose of distribution payments to MFD under the Class B Distribution Plan
is to compensate MFD for its distribution services to the Fund. MFD pays
commissions to dealers as well as expenses of printing prospectuses and reports
used for sales purposes, expenses with respect to the preparation and printing
of sales literature and other distribution related expenses, including, without
limitation, the cost necessary to provide distribution- related services, or
personnel, travel office expenses and equipment. The Class B Distribution Plan
also provides that MFD will receive all CDSCs attributable to Class B shares
(see "Distribution Plan" and "Purchase of Shares" in the Prospectus).
During the fiscal year ended October 31, 1994, the Fund incurred expenses of
$300,363 (equal to 1.0% of the average daily net assets attributable to Class B
shares), relating to distribution and servicing of its Class B shares, of which
FSI received $225,217 and securities dealers of the Fund and certain banks and
other financial institutions received $75,146.
CLASS C DISTRIBUTION PLAN: The Distribution Plan relating to Class C shares (the
"Class C Distribution Plan") provides that the Fund will pay MFD a distribution
fee of up to 0.75% per annum of the Fund's average daily net assets attributable
to Class C shares and will annually pay MFD a service fee of up to 0.25% per
annum of the Fund's average daily net assets attibutable to Class C shares
(which MFD will in turn pay to securities dealers which enter into a sales
agreement with MFD at a rate of up to 0.25% per annum of the Fund's daily net
assets attributable to Class C shares owned by investors for whom that
securities dealer is the holder or dealer of record).
The distribution/service fees attributable to Class C shares are designed to
permit an investor to purchase such shares through a broker-dealer without the
assessment of an initial sales charge or a CDSC while allowing MFD to compensate
broker-dealers in connection with the sale of such shares.
The service fee is intended to be additional consideration for all personal
services and/or account maintenance services rendered by the dealer with respect
to Class C shares. MFD or its affiliates are entitled to retain all service fees
payable under the Class C Distribution Plan with respect to accounts for which
there is no dealer of record as partial consideration for personal services
and/or account maintenance services performed by MFD or its affiliates for
shareholder accounts.
The purpose of the distribution payments to MFD under the Class C Distribution
Plan is to compensate MFD for its distribution services to the Fund.
Distribution payments under the Plan will be used by MFD to pay securities
dealers a distribution fee in an amount equal on an annual basis to 0.75% of the
Fund's average daily net assets attributable to Class C shares owned by
investors for whom securities dealer is the holder or dealer of record.
(Therefore, the total amount of distribution/service fees paid to a dealer on an
annual basis is 1.00% of the Fund's average daily net assets attributable to
Class C shares owned by investors for whom the securities dealer is the holder
or dealer of record.) MFD also pays expenses of printing prospectuses and
reports used for sales purposes, expenses with respect to the preparation and
printing of sales literature and other distribution-related expenses, including,
without limitation, the compensation of personnel and all costs of travel,
office expense and equipment. Since MFD's compensation is not directly tied to
its expenses, the amount of compensation received by MFD during any year may be
more or less than its actual expenses. For this reason, this type of
distribution fee arrangement is characterized by the staff of the SEC as being
of the "compensation" variety. However, the Fund is not liable for any expenses
incurred by MFD in excess of the amount of compensation it receives. Certain
banks and other financial institutions that have agency agreements with MFD will
receive agency transaction and service fees that are the same as distribution
and service fees to dealers. Fees payable under the Class C Distribution Plan
are charged to, and therefore reduce, income allocated to Class C shares.
For the period March 1, 1994 to October 31, 1994, the Fund incurred expenses of
$56,179 (equal to 1.0% of its average daily net assets attributable to Class C
shares) relating to the distribution and servicing of Class C shares, all of
which was paid to securities dealers of the Fund and certain banks and other
financial institutions.
GENERAL: Each of the Distribution Plans will remain in effect until August 1,
1995, and will continue in effect thereafter only if such continuance is
specifically approved at least annually by vote of both the Trustees and a
majority of the Trustees who are not "interested persons" or financially
interested parties to such Plan ("Distribution Plan Qualified Trustees"). Each
of the Distribution Plans also requires that the Fund and MFD each shall provide
to the Trustees, and the Trustees shall review, at least quarterly, a written
report of the amounts expended (and purposes therefor) under such Plan. Each of
the Distribution Plans may be terminated at any time by vote of a majority of
the Distribution Plan Qualified Trustees or by vote of the holders of a majority
of the respective class of the Fund's shares (as defined in "Investment
Restrictions"). All agreements relating to any of the Distribution Plans entered
into between the Fund or MFD and other organizations must be approved by the
Board of Trustees, including a majority of the Distribution Plan Qualified
Trustees. Agreements under any of the Distribution Plans must be in writing,
will be terminated automatically if assigned, and may be terminated at any time
without payment of any penalty, by vote of a majority of the Distribution Plan
Qualified Trustees or by vote of the holders of a majority of the respective
class of the Fund's shares. None of the Distribution Plans may be amended to
increase materially the amount of permitted distribution expenses without the
approval of a majority of the respective class of the Fund's shares (as defined
in "Investment Restrictions") or may be materially amended in any case without a
vote of the Trustees and a majority of the Distribution Plan Qualified Trustees.
The selection and nomination of Distribution Plan Qualified Trustees shall be
committed to the discretion of the non-interested Trustees then in office. No
Trustee who is not an "interested person" has any financial interest in any of
the Distribution Plans or in any related agreement.
9. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional Shares of Beneficial Interest (without par value) of one or
more separate series and to divide or combine the shares of any series into a
greater or lesser number of shares without thereby changing the proportionate
beneficial interests in that series. The Trustees have currently authorized
shares of the Fund and two other series. The Declaration of Trust further
authorizes the Trustees to classify or reclassify any series of shares into one
or more classes. Pursuant thereto, the Trustees have authorized the issuance of
three classes of shares of each of the Trust's three series, Class A, Class B
and Class C shares. Each share of a class of the Fund represents an equal
proportionate interest in the assets of the Fund allocable to that class. Upon
liquidation of the Fund, shareholders of each class of the Fund are entitled to
share pro rata in the net assets allocable to such class available for
distribution to shareholders. The Trust reserves the right to create and issue
additional series or classes of shares, in which case the shares of each series
or class would participate equally in the earnings, dividends and assets of the
particular series or class.
Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to meetings of shareholders.
Although Trustees are not elected annually by the shareholders, shareholders
have the right to remove one or more Trustees. No material amendment may be made
to the Declaration of Trust without the affirmative vote of a majority of its
outstanding shares of the Trust (as defined in "Investment Restrictions"). The
Trust may enter into a merger or consolidation, or sell all or substantially all
of its assets (or all or substantially all of the assets belonging to any series
of the Trust), if approved by the vote of the holders of two-thirds of the
Trust's outstanding shares voting as a single class, or of the affected series
of the Trust, as the case may be, except that if the Trustees of the Trust
recommend such merger, consolidation or sale, the approval by vote of the
holders of a majority of the Trust's or the affected series' outstanding shares
(as defined in "Investment Restrictions") will be sufficient. The Trust or any
series of the Trust may also be terminated (i) upon liquidation and distribution
of its assets, if approved by the vote of the holders of two-thirds of its
outstanding shares, or (ii) by the Trustees by written notice to the
shareholders of the Trust or the affected series. If not so terminated the Trust
will continue indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Trust and provides for indemnification
and reimbursement of expenses out of Trust property for any shareholder held
personally liable for the obligations of the Trust. The Declaration of Trust
also provides that the Trust shall maintain appropriate insurance (for example,
fidelity bonding and errors and omissions insurance) for the protection of the
Trust and its shareholders and the Trustees, officers, employees and agents of
the Trust covering possible tort and other liabilities. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which both inadequate insurance existed and the
Trust itself was unable to meet its obligations.
The Declaration of Trust further provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust
and that the Trustees will not be liable for any action or failure to act, but
nothing in the Declaration of Trust protects a Trustee against any liability to
which he would otherwise be subject by reason of his willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties involved in the
conduct of his office.
10. INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS
Ernst & Young LLP were the Fund's independent auditors, providing audit
services, tax return preparation, and assistance and consultation with respect
to the preparation of filings with the SEC for the fiscal year ended October 31,
1994.
The financial statements of the Fund, including the Portfolio of Investments and
Statement of Assets and Liabilities at October 31, 1994, and the Statement of
Operations, Statement of Changes in Net Assets and Financial Highlights for the
year then ended, each of which is included in the Annual Report to Shareholders
of the Fund, have been audited by Ernst & Young LLP, independent auditors, as
set forth in their report therein. Such financial statements are incorporated by
reference into this Statement of Additional Information in reliance upon the
report of Ernst & Young LLP given upon their authority as experts in accounting
and auditing.
Coopers & Lybrand were the Fund's independent accountants from the commencement
of operations on September 4, 1990 to October 31, 1993 and were responsible for
providing audit services, tax return preparation, and assistance and
consultation with respect to the preparation of filings with the SEC. The
Statement of Changes in Net Assets for the year ended October 31, 1993 and the
Financial Highlights table for the period from September 4, 1990 (commencement
of operations) to October 31, 1993 each of which is included in the Annual
Report to Shareholders, were audited by Coopers & Lybrand and are incorporated
by reference into this Statement of Additional Information in reliance upon the
report of Coopers & Lybrand, independent accountant of the Fund through October
31, 1993.
<PAGE>
APPENDIX
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the quality
of various bonds. IT SHOULD BE EMPHASIZED, HOWEVER, THAT RATINGS ARE NOT
ABSOLUTE STANDARDS OF QUALITY. CONSEQUENTLY, BONDS WITH THE SAME MATURITY,
COUPON AND RATING MAY HAVE DIFFERENT YIELDS WHILE BONDS OF THE SAME MATURITY AND
COUPON WITH DIFFERENT RATINGS MAY HAVE THE SAME YIELD.
MOODY'S INVESTORS SERVICE, INC.
AAA: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
BAA: Bonds which are rated Baa are considered as medium grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
CA: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of over attaining any
real investment standing.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated
as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
STANDARD & POOR'S RATINGS GROUP
AAA: Debt rated "AAA" has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A: Debt rated "A" has a very strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated "BBB" is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than in higher rated categories.
BB, B, CCC, CC, AND C: Debt rated "BB", "B", "CCC", "CC", and "C" is regarded,
on balance, as predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligation.
"BB" indicates the lowest degree of speculation and "C" the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposure to adverse conditions.
BB: Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
B: Debt rated "B" has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The "B" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "BB" or "BB-"
rating.
CCC: The rating "CCC" has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.
CC: The rating "CC" is typically applied to debt subordinated to senior debt
which is assigned an actual or implied "CCC" rating.
C: The rating "C" is typically applied to debt subordinated to senior debt which
is assigned an actual or implied "CCC-" debt rating. The "C" rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI: The rating"CI" is reserved for income bonds on which no interest is being
paid.
D: Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The "D" rating also will be used upon
filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
NR: Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
FITCH INVESTORS SERVICE, INC.
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA". Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated "F-l +".
A: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin safety
and the need for reasonable business and economic activity throughout the life
of the issue.
CCC: Bonds have certain identifiable characteristics which if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
PLUS (+) MINUS (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "AAA" category.
NR: Indicates that Fitch does not rate the specific issue.
CONDITIONAL: A conditional rating is premised on the successful completion of a
project or the occurrence of a specific event.
SUSPENDED: A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
WITHDRAWN: A rating will be withdrawn when an issue matures or is called or
refinanced and at Fitch's discretion when an issuer fails to furnish proper and
timely information.
FITCHALERT: Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the likely direction
of such change. These are designated as "Positive", indicating a potential
upgrade, "Negative", for potential downgrade, or "Evolving", where ratings may
be lowered, FitchAlert is relatively short-term, and should be resolved within
12 months.
<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(R)
WORLD TOTAL
RETURN FUND
500 BOYLSTON STREET
BOSTON, MA 02116
MWT-13-3/95/500 24/224/324
<PAGE>
<PAGE>
<TABLE>
PORTFOLIO OF INVESTMENTS - October 31, 1994
Common Stocks - 53.7%
- -----------------------------------------------------------------------------
<CAPTION>
Issuer Shares Value
- -----------------------------------------------------------------------------
<S> <C> <C>
Foreign - 33.9%
Argentina - 1.4%
Banco Frances Rio Plata, ADR (Banks and
Credit Companies) 8,000 $ 205,000
Central Costanera, ADR (Utilities -
Electric)<F2> 13,167 460,845
Central Puerto, S.A., ADR (Utilities -
Electric) 5,000 161,250
Mirgor Sacifia, ADR (Auto Parts)<F1><F2> 53,100 477,900
YPF S.A., ADR, (Oils) 36,000 868,500
------------
$ 2,173,495
------------
Australia - 1.8%
Australia & New Zealand Bank Group Ltd. (Finance) 140,000 $ 405,255
Broken Hill Proprietary Co. (Metals) 60,000 919,172
CSR Limited (Building Materials) 135,000 469,940
Woolworth Ltd., ADR (Retail)<F2> 49,500 1,051,875
------------
$ 2,846,242
------------
Canada - 0.7%
Hudsons Bay Co. (Retail) 30,000 $ 598,891
Transcanada Pipelines Ltd. (Oils) 35,000 455,000
------------
$ 1,053,891
------------
Chile - 0.3%
Empresas Telex - Chile S.A., ADR
(Telecommunications)<F1> 5,600 $ 102,900
Enersis S.A., ADR (Utilities - Electric) 10,000 293,750
------------
$ 396,650
------------
Denmark - 1.0%
Tele Denmark A/S, ADR (Telecommunications)<F1> 54,000 $ 1,552,500
------------
France - 2.2%
Elf Aquitaine, ADR (Oils) 24,200 $ 886,325
LFMH Moet - Hennessy (Food and Beverage) 2,000 322,643
Michelin "B" (Tire and Rubber)<F1> 21,000 879,592
Pinault - Printemps S.A. (Retail) 2,500 451,409
Total S.A., ADR (Oils) 31,000 1,023,000
------------
$ 3,562,969
------------
Germany - 2.7%
BASF AG (Chemicals) 2,200 $ 465,846
Daimler Benz AKT, ADR (Automotive) 16,100 819,087
Deutsche Bank AG (Banks and Credit Companies) 1,600 788,717
Hornback Baumarkt AG (Retail) 320 173,496
Schering AG (Pharmaceuticals) 1,650 1,102,597
Volkswagen AG (Automotive) 2,900 851,749
------------
$ 4,201,492
------------
Hong Kong - 1.8%
Consol Electric Power Asia Ltd., ADR
(Utilities - Electric)<F1><F2> 13,600 $ 312,800
China Light & Power (Utilities - Electric) 72,000 374,607
Dairy Farm International Holdings Ltd.
(Supermarkets) 362,190 471,107
National Mutual Asia Ltd. (Insurance) 950,000 614,767
Oriental Press Group (Publishing) 900,000 556,202
Sun Hung Kai Properties (Real Estate) 10,000 76,361
Wharf Holdings Ltd. (Real Estate) 100,000 394,745
------------
$ 2,800,589
------------
Indonesia - 0.3%
PT Indosat, ADR (Telecommunications)<F1> 13,700 $ 537,725
------------
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Common Stocks - continued
- -------------------------------------------------------------------------------
Issuer Shares Value
- -------------------------------------------------------------------------------
Foreign - continued
Italy - 0.7%
Instituto Mobiliare Italiano S.P.A., ADR
(Banks and Credit Companies) 30,600 $ 612,000
Istituto Nazionale Assicuraz (Insurance)<F1> 392,000 567,469
------------
$ 1,179,469
------------
Japan - 3.6%
Asatsu, Inc. (Advertising) 12,000 $ 617,355
DAI Nippon Printing Co., Ltd. (Office Equipment) 29,000 539,256
Daiwa House Industry Co. (Manufacturer - Housing) 37,000 512,190
East Japan Railway Co. (Railroad) 135 673,605
ITO Yokado Co. (Retail) 8,000 437,190
Matsushita Electric Industrial Co.
(Electrical Equipment) 45,000 748,450
MOS Food Services (Food Services) 10,000 371,901
Nippondenso Co., Ltd. (Auto Parts) 19,000 406,302
Nissen Corp. (Retail) 11,000 450,000
Senko (Trucking and Leasing) 41,000 294,370
Sony Corp., ADR (Electronics) 12,000 724,500
------------
$ 5,775,119
------------
Korea - 0.4%
Korea Electric Power Corp.
(Utilities - Electric)<F1> 17,000 $ 646,299
------------
Luxembourg - 0.1%
Espirito Santo Financial Holdings,
S.A., ADR (Banks and Credit Companies) 10,000 $ 136,250
------------
Mexico - 1.1%
Grupo Casa Autrey, (Wholesale Distributors) 14,000 $ 427,000
Grupo Iusacell, ADR (Telecommunications)<F1> 5,040 154,980
Grupo Iusacell S.A., "D", ADR
(Telecommunications)<F1> 2,160 60,480
Telefonos de Mexico, "A", ADR
(Utilities - Telephone) 19,000 1,047,375
------------
$ 1,689,835
------------
Netherlands - 2.5%
DSM (Chemicals) 9,000 $ 779,914
Royal Dutch Petroleum Co., ADR (Oils) 8,800 1,025,200
Royal PTT Nederland N.V. (Commercial Services) 36,000 1,147,436
Wolters Klumer (Publishing)<F1> 14,500 1,049,116
------------
$ 4,001,666
------------
New Zealand - 0.8%
Lion Nathan Ltd. (Food and Beverage) 415,000 $ 786,584
Telecom of New Zealand, ADR (Telecommunications) 9,300 517,312
------------
$ 1,303,896
------------
Spain - 1.5%
Acerinox (Iron and Steel) 5,000 $ 554,178
Aumar (aut Del Mar) (Toll Road) 43,000 431,547
Fabrica Autom Renault De Esp (Automotive)<F1> 9,000 431,827
Iberdrola S.A. (Utility - Electric) 152,000 1,002,799
------------
$ 2,420,351
------------
Sweden - 2.7%
Asea, "B" (Electrical Equipment) 8,500 $ 618,544
Astra AB, "B" (Pharmaceuticals) 45,500 1,217,849
Autoliv AB (Auto Parts)<F1> 20,000 708,182
Hennes & Mauritz AB, "B" (Retail) 9,300 515,997
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Common Stocks - continued
- -------------------------------------------------------------------------------
Issuer Shares Value
- -------------------------------------------------------------------------------
Foreign - continued
Sweden - continued
Kalmar Industries (Manufacturing)<F1> 30,000 $ 363,849
Stadshypoteki AB, "A" (Banks and
Credit Companies)<F1> 38,000 521,796
Svenska Handelsbanken, "A"
(Banks and Credit Companies) 20,000 270,447
------------
$ 4,216,664
------------
Switzerland - 1.7%
CS Holdings, Registered Shares (Finance) 4,375 $ 371,561
Nestle S.A. (Food and Beverage) 1,600 1,497,927
Publicitas Holdings (Advertising)<F1> 400 339,712
Schweiz Bankverein (Bank and Credit Companies) 4,000 553,429
------------
$ 2,762,629
------------
United Kingdom - 6.5%
Allied - Lyons (Food and Beverage) 86,538 $ 845,413
Barclays (Banks and Credit Companies) 50,000 476,190
British Petroleum PLC, ADR (Oils) 12,000 1,020,000
British Steel PLC, ADR (Iron and Steel) 49,500 1,287,000
London Electricity PLC (Utilities - Electric) 60,000 712,322
PowerGen PLC, ADR (Utilities - Electric)<F2> 18,000 1,671,750
Sears PLC (Retail) 330,000 577,540
Southern Electric PLC (Utilities - Electric) 60,000 785,960
Storehouse PLC (Retail) 150,000 532,646
Takare PLC (Medical and Health Technology
and Services)<F2> 175,000 648,625
Unilever N.V. (Food - Processing) 53,000 986,974
Williams Holdings (Conglomerate) 127,857 723,916
------------
$ 10,268,336
------------
Venezuela - 0.1%
Mavesa S.A., ADR (Food and Beverage)<F1><F2> 33,333 $ 183,332
------------
Total Foreign Common Stocks $ 53,709,399
------------
U.S. Common Stocks - 19.8%
Aerospace - 0.4%
Allied Signal, Inc. 19,000 $ 657,875
------------
Apparel and Textiles - 0.5%
V.F. Corp. 17,000 $ 860,625
------------
Automotive - 0.3%
General Motors Corp. 12,000 $ 474,000
------------
Banks and Credit Companies - 0.5%
Barnett Banks, Inc. 15,000 $ 622,500
Norwest Corp. 10,000 245,000
------------
$ 867,500
------------
Broadcasting - 0.1%
Central European Media Enterprises Ltd. "A"<F1> 4,900 $ 79,625
------------
Business Machines - 1.4%
International Business Machines Corp. 15,000 $ 1,117,500
Xerox Corp. 10,000 1,025,000
------------
$ 2,142,500
------------
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Common Stocks - continued
- -------------------------------------------------------------------------------
Issuer Shares Value
- -------------------------------------------------------------------------------
U.S. Common Stocks - continued
Chemicals - 0.7%
Dow Chemical Co. 6,000 $ 441,000
Grace (W.R.) & Co. 15,000 594,375
------------
$ 1,035,375
------------
Consumer Goods and Services - 1.1%
Pacific Enterprises 25,000 $ 537,500
Philip Morris Cos., Inc. 20,500 1,255,625
------------
$ 1,793,125
------------
Electrical Equipment - 0.6%
General Electric Co. 19,600 $ 957,950
------------
Electronics - 0.6%
E-Systems, Inc. 22,000 $ 913,000
------------
Financial Institutions - 2.6%
Avalon Properties, Inc. 12,000 $ 234,000
Bay Apartment Communities, Inc. 15,000 292,500
Chateau Properties, Inc. 15,000 300,000
Evans Withycombe Residential, Inc. 20,000 395,000
Factory Stores America, Inc. 13,000 269,750
Federal Home Loan Mortgage Corp. 18,800 1,024,600
Highwoods Properties, Inc. 19,000 391,875
Liberty Property Trust 15,000 285,000
Oasis Residential, Inc. 9,000 210,375
PMC Commercial Trust 20,000 260,000
ROC Communities, Inc. 8,000 160,000
Walden Residential Properties, Inc. 16,400 315,700
------------
$ 4,138,800
------------
Insurance - 1.4%
General Re Corp. 9,000 $ 1,008,000
MBIA, Inc. 9,500 514,188
Transamerica Corp. 13,000 638,625
------------
$ 2,160,813
------------
Machinery - 0.9%
Caterpillar, Inc. 12,000 $ 717,000
Deere & Co. 10,000 717,500
------------
$ 1,434,500
------------
Medical and Health Products - 1.5%
Lilly Eli & Co. 14,000 $ 868,000
Schering Plough Corp. 9,000 641,250
Warner - Lambert Co. 12,000 915,000
------------
$ 2,424,250
------------
Metals and Minerals - 1.2%
Allegheny Ludlum Corp. 50,000 $ 993,750
Phelps Dodge Corp. 15,000 920,625
------------
$ 1,914,375
------------
Precious Metals and Minerals - 0.1%
Santa Fe Pacific Gold Corp.<F1> 16,200 $ 232,875
------------
Oils - 2.6%
Amoco Corp. 13,500 $ 855,563
Atlantic Richfield Co. 7,600 823,650
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Common Stocks - continued
- -------------------------------------------------------------------------------
Issuer Shares Value
- -------------------------------------------------------------------------------
U.S. Common Stocks - continued
Oils - continued
Chevron Corp. 22,500 $ 1,012,500
Exxon Corp. 10,600 666,475
Mobil Corp. 9,000 774,000
------------
$ 4,132,188
------------
Photographic Products - 0.7%
Eastman Kodak Co. 24,000 $ 1,155,000
------------
Pollution Control - 0.5%
WMX Technologies, Inc. 26,000 $ 763,750
------------
Printing and Publishing - 0.3%
Donnelley (R.R.) & Sons, Inc. 15,000 $ 470,625
------------
Railroads - 0.3%
Santa Fe Pacific Corp. 27,000 $ 415,125
------------
Retail - 0.3%
Federated Department Stores, Inc.<F1> 20,200 $ 419,150
------------
Utilities - Electric - 0.7%
DPL, Inc. 30,000 $ 611,250
Entergy Corp. 18,000 420,750
------------
$ 1,032,000
------------
Utilities - Gas - 0.5%
Tenneco, Inc. 10,000 $ 442,500
Westcoast Energy, Inc. 25,000 409,375
------------
$ 851,875
- -------------------------------------------------------------------------------
Total U.S. Common Stocks $ 31,326,901
- -------------------------------------------------------------------------------
Total Common Stocks (Identified Cost, $76,932,113) $ 85,036,300
- -------------------------------------------------------------------------------
Convertible Preferred Stocks - 1.6%
- -------------------------------------------------------------------------------
Issuer Shares Value
- -------------------------------------------------------------------------------
AMR Corp., $3.00 (Airlines)<F2> 6,000 $ 258,750
Atlantic Richfield Co., 9s, (Oils) 16,000 434,000
Chrysler Corp., $4.625 (Automotive)<F2> 4,500 614,250
Conitel, 7s, Prides (Utilities - Telephone)<F2> 6,000 370,500
RJR Nabisco Holdings, $0.6012 (Food and Beverage) 70,000 481,250
Reynolds Metals, $3.31 Prides (Metals and Minerals) 6,000 315,000
------------
Total Convertible Preferred Stocks
(Identified Cost, $2,457,182) $ 2,473,750
------------
Bonds - 40.0%
- -------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------
Foreign Bonds - 23.4%
Australia - 1.9%
Australian Government, 12s, 1999 AUD 1,750 $ 1,394,363
Australian Government, 13s, 2000 1,200 996,215
Australian Government, 8,75s, 2001 1,000 690,640
------------
$ 3,081,218
- -------------------------------------------------------------------------------
Denmark - 1.7
Kingdom of Denmark, 9s, 1998 DKK 10,500 $ 1,799,668
Kingdom of Denmark, 9s, 2000 4,800 821,319
------------
$ 2,620,987
- -------------------------------------------------------------------------------
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Bonds - continued
- -------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------
Foreign Bonds - continued
Finland - 0.3%
Finnish Export Credit Ltd.,
Principal Linked Note,
5.5s, 1995<F3> FIM 2,575 $ 455,919
- -------------------------------------------------------------------------------
France - 2.2%
Government of France, 6.5s, 1996 FRF 6,860 $ 1,322,000
Government of France, 8s, 1998 7,600 1,495,626
Government of France, 7s, 1999 3,390 638,137
Michelin, 2.5s, 2001 800 38,173
------------
$ 3,493,936
- -------------------------------------------------------------------------------
Germany - 4.7%
Deutschland Republic, 6.5s, 2003 DEM 4,590 $ 2,830,581
Deutschland Republic, 6.75s, 2004 1,250 783,329
Treuhandenstalt - Obligationen,
6.375s, 1999 5,950 3,835,518
------------
$ 7,449,428
- -------------------------------------------------------------------------------
Ireland - 1.2%
Republic of Ireland, 9s, 2001 IEP 1,200 $ 1,950,748
- -------------------------------------------------------------------------------
Italy - 1.0%
Italian Government, 10s, 1996 ITL 925,000 $ 594,294
Italian Government, 8.5s, 1999 1,555,000 912,054
------------
$ 1,506,348
- -------------------------------------------------------------------------------
Japanese Yen - 1.8%
Italian Government Euroyen,
3.5s, 2001 JPY 31,000 $ 293,667
Japanese Development Bank, 5s, 1999 169,000 1,792,132
Sallie Mae Euroyen, 3.2s, 1997 50,000 513,171
World Bank Global Bonds, 4.5s, 2000 27,000 282,691
------------
$ 2,881,661
- -------------------------------------------------------------------------------
Netherlands - 3.0%
Dutch State Loan, 6.25s, 1998 NLG 2,030 $ 1,172,600
Dutch State Loan, 7s, 1999 4,200 2,470,441
Netherlands Government, 7.5s, 1999 1,770 1,061,075
------------
$ 4,704,116
- -------------------------------------------------------------------------------
New Zealand Dollars - 1.8%
Government of New Zealand, 8s, 1995 NZD 4,640 $ 2,836,824
- -------------------------------------------------------------------------------
Spanish Pesetas - 1.3%
Spanish Government, 8.3s, 1998 ESP 234,900 $ 1,716,525
Spanish Government, 7.4s, 1999 60,000 419,112
------------
$ 2,135,637
- -------------------------------------------------------------------------------
Sweden - 0.5%
Sallie Mae, Swedish Index
Note, 0s, 1995<F3> SEK 800 $ 797,040
- -------------------------------------------------------------------------------
United Kingdom - 2.0%
United Kingdom Gilts, 9s, 2000 GBP 400 $ 662,333
United Kingdom Gilts, 10s, 2001 590 1,015,860
United Kingdom Treasury, 6s, 1999 1,000 1,468,663
------------
$ 3,146,856
- -------------------------------------------------------------------------------
Total Foreign Bonds $ 37,060,718
- -------------------------------------------------------------------------------
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Bonds - continued
- -------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------
U.S. Bonds - 14.7%
U.S. Treasury Obligations - 14.2%
U.S. Treasury Notes, 11.625s, 1994 $ 19,000 $ 19,047,500
U.S. Treasury Notes, 5.875s, 1996 1,775 1,755,315
U.S. Treasury Notes, 7.125s, 1999 1,785 1,759,617
------------
$ 22,562,432
- -------------------------------------------------------------------------------
U.S. Government Guaranteed - 0.5%
Government National Mortgage Assn., 8.5s,
due 2021 $ 841 $ 830,563
- -------------------------------------------------------------------------------
Total U.S. Bonds $ 23,392,995
- -------------------------------------------------------------------------------
Convertibles - 1.9%
Banco Nacional de Mexico, 7s, 1999<F2> $ 250 $ 275,000
Carter Hawley Hale Stores, Inc., 6.25s, 2000 200 218,000
Cemex S.A., 4.25s, 1997<F2> 400 412,000
Land & General Berhad, 4.5s, 2004 400 496,000
Peregrine, 4.5s, 2000<F2> 455 353,762
Rogers Communications, Inc., 2s, 2005 520 293,800
Telecomm Malaysia Berhad, 4s, 2004 1,000 997,500
- -------------------------------------------------------------------------------
Total Convertible Bonds $ 3,046,062
- -------------------------------------------------------------------------------
Total Bonds (Identified Cost, $63,711,043) $ 63,499,775
- -------------------------------------------------------------------------------
Call Options Purchased - 0.1%
- -------------------------------------------------------------------------------
Principal Amount
of Contracts
Expiration Month/Strike Price (000 Omitted)
- -------------------------------------------------------------------------------
Japanese Government Bonds
January/96.5458 JPY 477,000 $ 13,356
December/105.826 311,000 9,330
February/104.19 321,000 40,446
German Marks
November/1.45 DEM 4,826 --
Japanese Yen
December/95 JPY 675,845 33,116
- -------------------------------------------------------------------------------
Total Call Options Purchased
(Premiums Paid, $168,858) $ 96,248
- -------------------------------------------------------------------------------
Put Options Purchased - 0%
- -------------------------------------------------------------------------------
Japanese Yen
November/103.05 JPY 664,635 $ --
------------------------------------------------------------------------------
Total Put Options Purchased (Premiums Paid, $69,011)
- -------------------------------------------------------------------------------
Short - Term Obligations - 5.5%
- -------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted)
- -------------------------------------------------------------------------------
Federal Home Loan Bank Corp., due 11/01/94 $ 4,000 $ 4,000,000
Federal Home Loan Mortgage Corp., due 11/01/94 2,500 2,500,000
- -------------------------------------------------------------------------------
Total U.S. Short-Term Obligations $ 6,500,000
- -------------------------------------------------------------------------------
Foreign
Mexico
Government of Mexico, due 12/08/94 MXP 400,535 $ 1,158,943
Government of Mexico, due 1/19/95 356,301 1,009,072
- -------------------------------------------------------------------------------
Total Foreign Short-Term Obligations $ 2,168,015
- -------------------------------------------------------------------------------
Total Short-Term Obligations, at Amortized Cost $ 8,668,015
- -------------------------------------------------------------------------------
Total Investments (Identified Cost, $152,006,222) $159,774,088
- -------------------------------------------------------------------------------
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Call Options Written
- -------------------------------------------------------------------------------
Principal Amount
of Contracts
Expiration Month/Strike Price (000) Omitted) Value
- -------------------------------------------------------------------------------
German Marks
December/1.63 DEM (14,075) $ (726,576)
Japanese Yen
December/100 JPY (151,142) (55,167)
May/90 (580,467) (54,564)
- --------------------------------------------------------------------------------
Total Call Options Written (Premiums Received, $271,780) $ (836,307)
- --------------------------------------------------------------------------------
Put Options Written - (0.6)%
- --------------------------------------------------------------------------------
Japanese Government Bonds
February/104.19 JPY (321,000) $ (28,651)
German Marks
December/94 DEM (7,555) --
- --------------------------------------------------------------------------------
Total Put Options Written (Premiums Received, $56,086) $ (28,651)
- --------------------------------------------------------------------------------
Total Written Options $ (864,958)
- --------------------------------------------------------------------------------
Other Assets, Less Liabilities - (0.3)% $ (459,530)
- --------------------------------------------------------------------------------
Net Assets - 100.0% $158,449,600
- --------------------------------------------------------------------------------
<FN>
<F1>+Non-income producing security.
<F2>*Restricted security.
<F3>#Indexed security.
</TABLE>
Abbreviations have been used throughout this report to indicate amounts shown in
currencies other than the U.S. dollar. A list of abbreviations is shown below.
AUD = Australian Dollars FIM = Finish Markka JPY = Japanese Yen
CHF = Swiss Francs FRF = French Francs MXP = Mexican Pesos
DEM = Deutsche Marks GBP = British Pounds NLG = Dutch Guilders
DKK = Danish Kroner IEP = Irish Punts NZD = New Zealand Dollars
ESP = Spanish Pesetas ITL = Italian Lire SEK = Swedish Krone
See notes to financial statements
<PAGE>
Financial Statements
Statement of Assets and Liabilities
- ------------------------------------------------------------------------------
October 31, 1994
- ------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $152,006,222) $159,774,088
Cash 425,143
Net receivable for forward foreign currency exchange
contracts purchased 1,957,713
Net receivable for forward foreign currency exchange
contracts 146,782
Premiums receivable on options written 18,451
Receivable for investments sold 837,997
Receivable for Fund shares sold 600,617
Interest and dividends receivable 2,383,724
Other assets 10,964
------------
Total assets $166,155,479
------------
Liabilities:
Payable for investments purchased $ 4,213,042
Payable for Fund shares reacquired 242,199
Net payable for forward foreign currency exchange
contracts sold 1,686,675
Written options outstanding, at value
(premiums received, $327,866) 864,958
Distribution payable 522,833
Payable to affiliates -
Management fee 13,006
Shareholder servicing agent fee 2,225
Distribution fee 36,171
Accrued expenses and other liabilities 124,770
------------
Total liabilities $ 7,705,879
------------
Net assets $158,449,600
------------
Net assets consist of:
Paid-in capital $152,915,812
Unrealized appreciation on investments and translation of
assets and liabilities in foreign currencies 7,660,101
Accumulated distribution in excess of net realized gain on
investments and foreign currency transactions (1,791,093)
Accumulated distributions in excess of net investment income (335,220)
------------
Total $158,449,600
------------
Shares of beneficial interest outstanding 14,998,894
------------
Class A shares:
Net asset value and redemption price per share
(net assets of $99,869,766 / 9,439,318 shares of beneficial
interest outstanding) $10.58
-----
Offering price per share (100/95.25) of net asset value
per share $11.11
-----
Class B shares:
Net asset value, redemption price and offering price
per share
(net assets of $47,677,134 / 4,524,392
shares of beneficial interest outstanding) $10.54
-----
Class C shares:
Net asset value, redemption price and offering price
per share
(net assets of $10,902,700 / 1,035,184
shares of beneficial interest outstanding) $10.53
-----
On sales of $100,000 or more, the offering price of Class A shares is reduced. A
contingent deferred sales charge may be imposed on redemptions of Class A and
Class B shares.
See notes to financial statements
<PAGE>
Financial Statements - continued
Statement of Operations
- ------------------------------------------------------------------------------
Year Ended October 31, 1994
- ------------------------------------------------------------------------------
Net investment income:
Income -
Interest $ 3,975,709
Dividends 1,702,726
------------
Total investment income $ 5,678,435
------------
Expenses -
Management fee $ 1,086,953
Trustees' compensation 39,646
Shareholder servicing agent fee (Class A) 131,343
Shareholder servicing agent fee (Class B) 66,064
Shareholder servicing agent fee (Class C) 8,427
Distribution and service fee (Class A) 307,809
Distribution and service fee (Class B) 300,363
Distribution and service fee (Class C) 56,179
Custodian fee 100,739
Printing 48,260
Auditing fees 42,927
Postage 21,077
Amortization of organization expenses 17,783
Legal fees 15,010
Miscellaneous 161,887
------------
Total expenses $ 2,404,467
------------
Net investment income $ 3,273,968
------------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ (1,084,982)
Written option transactions 148,061
Foreign currency transactions 1,573,594
------------
Net realized gain on investments $ 636,673
------------
Change in unrealized appreciation (depreciation) -
Investments $ 142,423
Written options (665,760)
Translation of assets and liabilities in foreign currencies 696,680
------------
Net unrealized gain on investments $ 173,343
------------
Net realized and unrealized gain on investments and
foreign currency $ 810,016
------------
Net increase in net assets from operations $ 4,083,984
------------
See notes to financial statements
<PAGE>
Financial Statements - continued
Statements of Changes in Net Assets
- -----------------------------------------------------------------------------
Year Ended Year Ended
October 31, 1994 October 31, 1993
- ------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
Net investment income $ 3,273,968 $ 1,631,084
Net realized gain on investments
and foreign currency transactions 636,673 4,107,365
Net unrealized gain (loss) on
investments and foreign
currency 173,343 3,996,053
----------- -----------
Increase (decrease) in net
assets from operations $ 4,083,984 $ 9,734,502
----------- -----------
Distributions declared to
shareholders -
From net investment income and
foreign currency
transactions (Class A) $ (1,963,576) $ (2,305,890)
From net investment income and
foreign currency
transactions (Class B) (497,186) (5,188)
From net investment income and
foreign currency
transactions (Class C) (102,055) --
From net realized gain on
investments (Class A) (2,611,400) (1,227,483)
From net realized gain on
investments (Class B) (661,218) --
From net realized gain on
investments (Class C) (135,725) --
In excess of net realized gain
on investments and foreign
currency transactions (Class A) (3,060,839) --
In excess of net realized gain
on investments and foreign
currency transactions (Class B) (775,018) --
In excess of net realized gain
on investments and foreign
currency transactions (Class C) (159,084) --
From paid-in capital (Class A) (774,051) --
From paid-in capital (Class B) (195,993) --
From paid-in capital (Class C) (40,231) --
----------- -----------
Total distributions declared
to shareholders $(10,976,376) $ (3,538,561)
----------- -----------
Fund share (principal)
transactions -
Net proceeds from sale of shares $109,302,626 $ 32,457,244
Net asset value of shares issued
to shareholders in
reinvestment of distributions 9,514,906 2,947,333
Cost of shares reacquired (29,119,416) (10,663,686)
----------- -----------
Increase in net assets from
Fund share transactions $ 89,698,116 $ 24,740,891
----------- -----------
Total increase in net assets $ 82,805,724 $ 30,936,832
Net assets:
At beginning of year 75,643,876 44,707,044
----------- -----------
At end of year (including accumulated
undistributed net investment income
(accumulated distributions in
excess of net investment income)
of $(335,220) and $60,483,
respectively) $158,449,600 $ 75,643,876
----------- -----------
See notes to financial statements
<PAGE>
<TABLE>
Financial Statements -continued
Financial Highlights
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended October 31,
- --------------------------------------------------------------------------------------------------------------------------------
1994<F6> 1993 1992 1991 1990<F5> 1994<F6> 1993<F2> 1994<F3><F6>
- --------------------------------------------------------------------------------------------------------------------------------
Class A Class B Class C
- --------------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value -
beginning of period $11.19 $10.21 $ 9.42 $ 8.55 $ 8.50 $11.19 $10.84 $11.06
----- ----- ----- ----- ----- ----- ----- -----
Income from investment
operations -
Net investment income $ 0.30 $ 0.28 $ 0.36 $ 0.37 $ 0.08 $ 0.25 $ 0.06 $ 0.27
Net realized and unrealized
gain (loss) on investments 0.15 1.42 0.86 0.88 (0.03) 0.13 0.35 (0.29)
----- ----- ----- ----- ----- ----- ----- -----
Total from investment
operations $ 0.45 $ 1.70 $ 1.22 $ 1.25 $ 0.05 $ 0.38 $ 0.41 $(0.02)
----- ----- ----- ----- ----- ----- ----- -----
Less distributions declared to
shareholders -
From net investment
income $(0.25) $ (0.45) $(0.26) $(0.38) $ -- $(0.24) $(0.06) $(0.12)
From net realized gain on
investments (0.33) (0.27) (0.17) -- -- (0.32) -- (0.16)
In excess of net realized
gain on investments (0.38) -- -- -- -- (0.38) -- (0.18)
From paid-in capital (0.10) -- -- -- -- (0.09) -- (0.05)
----- ----- ----- ----- ----- ----- ----- -----
Total distributions
declared to shareholders $(1.06) $(0.72) $(0.43) $(0.38) $ -- $(1.03) $(0.06) $(0.51)
----- ----- ----- ----- ----- ----- ----- -----
Net asset value - end of period $10.58 $11.19 $10.21 $ 9.42 $ 8.55 $10.54 $11.19 $10.53
----- ----- ----- ----- ----- ----- ----- -----
Total return<F4> 4.10% 17.78% 13.14% 14.94% 3.76%<F1> 3.38% 3.79% (0.15)%
Ratios (to average net assets)/Supplemental data:
Expenses 1.76% 1.92% 1.84% 2.18% 1.57%<F1> 2.49% 2.77%<F1> 2.39%<F1>
Net investment income 2.81% 2.96% 3.65% 4.05% 3.14%<F1> 2.33% 2.15%<F1> 2.51%<F1>
Portfolio turnover 118% 112% 72% 134% 2% 118% 112% 118%
Net assets at end of period
(000 omitted) $99,870 $71,262 $44,707 $30,847 $12,510 $47,677 $4,381 $10,903
<FN>
<F1> Annualized.
<F2> For the period from commencement of offering of Class B shares,
September 7,1993 to October 31, 1993.
<F3> For the period from commencement of offering of Class C shares, January 3,
1994 to October 31, 1994.
<F4> Total return does not include the applicable sales charge. If the sales
charge had been included the results would have been lower.
<F5> For the period from the commencement of investment operations, September 4,
1990 to October 31, 1990.
<F6> Per share data for the period was calculated using average share method.
</TABLE>
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS World Total Return Fund (the Fund) is a non-diversified series of MFS Series
Trust VI (the Trust). The Trust is organized as a Massachusetts business trust
and registered under the Investment Company Act of 1940, as amended, as an
open-end management company.
(2) Significant Accounting Policies
Investment Valuations - Equity securities listed on securities exchanges or
reported through the NASDAQ system are valued at last sale prices. Unlisted
equity securities or listed equity securities for which last sale prices are not
available are valued at last quoted bid prices. Debt securities (other than
short-term obligations which mature in 60 days or less), including listed issues
and forward contracts, are valued on the basis of valuations furnished by
dealers or by a pricing service with consideration to factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data, without exclusive reliance upon exchange or over-the-counter prices.
Short-term obligations, which mature in 60 days or less, are valued at amortized
cost, which approximates value. Non-U.S. dollar denominated short-term
obligations are valued at amortized cost as calculated in the base currency and
translated into U.S. dollars at the closing daily exchange rate. Futures
contracts, options and options on futures contracts listed on commodities
exchanges are valued at closing settlement prices. Over-the- counter options are
valued by brokers through the use of a pricing model which takes into account
closing bond valuations, implied volatility and short-term repurchase rates.
Securities for which there are no such quotations or valuations are valued at
fair value as determined in good faith by or at the direction of the Trustees.
Repurchase Agreements - The Fund may enter into repurchase agreements with
institutions that the Fund's investment adviser has determined are creditworthy.
Each repurchase agreement is recorded at cost. The Fund requires that the
securities purchased in a repurchase transaction be transferred to the custodian
in a manner sufficient to enable the Fund to obtain those securities in the
event of a default under the repurchase agreement. The Fund monitors, on a daily
basis, the value of the securities transferred to ensure that the value,
including accrued interest, of the securities under each repurchase agreement is
greater than amounts owed to the Fund under each such repurchase agreement.
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases and
sales of foreign investments and income and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates of
such transactions. Gains and losses attributable to foreign currency exchange
rates on sales of securities are recorded for financial statement purposes as
net realized gains and losses on investments. Gains and losses attributable to
foreign exchange rate movements on income and expenses are recorded for
financial statement purposes as foreign currency transaction gains and losses.
That portion of both realized and unrealized gains and losses on investments
that results from fluctuations in foreign currency exchange rates is not
separately disclosed.
Deferred Organization Expenses - Costs incurred by the Fund in connection with
its organization have been deferred and are being amortized on a straight-line
basis over a five-year period beginning on the date of commencement of
operations of the Fund.
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
Written Options - The Fund may write covered call or put options for which
premiums are received and are recorded as liabilities, and are subsequently
adjusted to the current value of the options written. Premiums received from
writing options which expire are treated as realized gains. Premiums received
from writing options which are exercised or are closed are offset against the
proceeds or amount paid on the transaction to determine the realized gain or
loss. If a put option is exercised, the premium reduces the cost basis of the
securities purchased by the Fund. The Fund, as writer of an option, may have no
control over whether the underlying securities may be sold (call) or purchased
(put) and, as a result, bears the market risk of an unfavorable change in the
price of the securities underlying the written option.
Futures Contracts - The Fund may enter into financial futures contracts for the
delayed delivery of securities, currency or contracts based on financial indices
at a fixed price on a future date. In entering such contracts, the Fund is
required to deposit either in cash or securities an amount equal to a certain
percentage of the contract amount. Subsequent payments are made or received by
the Fund each day, depending on the daily fluctuations in the value of the
underlying security, and are recorded for financial statement purposes as
unrealized gains or losses by the Fund. The Fund's investment in financial
futures contracts is designed to hedge against anticipated future changes in
interest, exchange rates, securities prices or for non-hedging purposes. Should
interest or exchange rates or securities prices move unexpectedly, the Fund may
not achieve the anticipated benefits of the financial futures contracts and may
realize a loss.
Security Loans - The Fund may lend its securities to member banks of the Federal
Reserve System and to member firms of the New York Stock Exchange or
subsidiaries thereof. The loans are collateralized at all times by cash or
securities with a market value at least equal to the market value of securities
loaned. As with other extensions of credit, the Fund may bear the risk of delay
in recovery or even loss of rights in the collateral should the borrower of the
securities fail financially. The Fund receives compensation for lending its
securities in the form of fees or from all or a portion of the income from
investment of the collateral. The Fund also continues to earn income on the
securities loaned. At October 31, 1994, the Fund had no securities on loan.
Forward Foreign Currency Exchange Contracts - The Fund may enter into forward
currency exchange contracts for the purchase or sale of a specific foreign
currency at a fixed price on a future date. Risks may arise upon entering these
contracts from the potential inability of counterparties to meet the terms of
their contracts and from unanticipated movements in the value of a foreign
currency relative to the U.S. dollar. The Fund will enter into forward contracts
for hedging purposes as well as for non-hedging purposes. The forward foreign
currency exchange contracts are adjusted by the daily exchange rate of the
underlying currency and any gains or losses are recorded for financial statement
purposes as unrealized until the contract settlement date.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
original issue discount are amortized or accreted for both financial statement
and tax reporting purposes as required by federal income tax regulations.
Dividend income is recorded on the ex-dividend date for dividends received in
cash. Dividend and interest payments received in additional securities are
recorded on the ex-dividend or ex-interest date in an amount equal to the value
of the security on such date.
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
The Fund uses the effective interest method for reporting interest income on
payment-in-kind (PIK) bonds, whereby interest income on PIK bonds is recorded
ratably by the Fund at a constant yield to maturity. Legal fees and other
related expenses incurred to preserve and protect the value of a security owned
are added to the cost of the security, other legal fees are expensed. Capital
infusions, which are generally non-recurring, incurred to protect or enhance the
value of high-yield debt securities, are reported as an addition to the cost
basis of the security. Costs that are incurred to negotiate the terms or
conditions of capital infusions or that are expected to result in a plan of
reorganization are considered workout expenses and are reported as realized
losses. Ongoing costs incurred to protect or enhance an investment, or costs
incurred to pursue other claims or legal actions, are reported as operating
expenses.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided.
The Fund files a tax return annually using tax accounting methods required under
provisions of the Code which may differ from generally accepted accounting
principles, the basis on which these financial statements are prepared.
Accordingly, the amount of net investment income and net realized gain reported
on these financial statements may differ from that reported on the Fund's tax
return, and consequently, the character of distributions to shareholders
reported in the financial highlights may differ from that reported to
shareholders on Form 1099-DIV. Foreign taxes have been provided for on interest
and dividend income earned on foreign investments in accordance with the
applicable country's tax rates and to the extent unrecoverable are recorded as a
reduction of investment income. Distributions to shareholders are recorded on
the ex-dividend date.
The Fund distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits be reported in the financial statements as a return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits which result in temporary
over-distributions for financial statement purposes are classified as
distributions in excess of net investment income or accumulated net realized
gains. During the year ended October 31, 1994, accumulated distributions in
excess of net investment income was increased $1,106,854, accumulated
distributions in excess of net realized gain on investments and foreign currency
transactions was decreased by $1,261,985 and paid-in-capital was decreased by
$155,131 due to differences between book and tax accounting for mortgage-backed
securities and currency transactions. This change had no effect on the net asset
value per share.
Multiple Classes of Shares of Beneficial Interest - The Fund offers Class A,
Class B and Class C shares. Class B and Class C shares were first offered to the
public on September 7, 1993 and January 3, 1994, respectively. The three classes
of shares differ in their respective shareholder servicing agent, distribution
and service fees. Shareholders of each class also bear certain expenses that
pertain only to that particular class. All shareholders bear the common expenses
of the Fund pro rata based on the average daily net assets of each class,
without distinction between share classes. Dividends are declared separately for
each class. No class has preferential dividend rights; differences in per share
dividend rates are generally due to differences in separate class expenses,
including distribution and shareholder service fees.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee, computed daily and paid monthly at an annual rate of 0.65% of
average daily net assets and 5% of investment income, amounted to $1,086,953,
for the year ended October 31, 1994. The Fund pays no compensation directly to
its Trustees who are officers of the investment adviser, or to officers of the
Fund, all of whom receive remuneration for their services to the Fund from MFS.
Certain of the officers and Trustees of the Fund are officers or directors of
MFS, MFS Financial Services, Inc. (FSI) and MFS Service Center, Inc. (MFSC). The
Fund has an unfunded defined benefit plan for all its independent Trustees.
Included in Trustees' compensation is a net periodic pension expense of $6,988
for the year ended October 31, 1994.
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
Distributor - FSI, a wholly owned subsidiary of MFS, as distributor, received
$133,801 as its portion of the sales charge on sales of Class A shares of the
Fund. The Trustees have adopted separate distribution plans for Class A, Class
B, and Class C shares pursuant to Rule 12b-1 of the Investment Company Act of
1940 as follows:
The Class A Distribution Plan provides that the Fund will pay FSI, up to 0.35%
of its average daily net assets attributable to Class A shares annually in order
that FSI may pay expenses on behalf of the Fund related to the distribution and
servicing of its shares. These expenses include a service fee to each securities
dealer that enters into a sales agreement with FSI of up to 0.25% per annum of
the Fund's average daily net assets attributable to Class A shares which are
attributable to that securities dealer, a distribution fee to FSI of up to 0.10%
per annum of the Fund's average daily net assets attributable to Class A shares,
commissions to dealers and payments to FSI wholesalers for sales at or above a
certain dollar level, and other such distribution-related expenses that are
approved by the Fund. Fees incurred under the distribution plan during the year
ended October 31, 1994 were 0.35% of average daily net assets attributable to
Class A shares on an annualized basis and amounted to $307,809 of which FSI
retained $39,258.
The Class B and Class C Distribution Plans provide that the Fund will pay FSI a
monthly distribution fee, equal to 0.75% per annum, and a quarterly service fee
of up to 0.25% per annum, of the Fund's average daily net assets attributable to
Class B and Class C shares. FSI will pay to securities dealers that enter into a
sales agreement with FSI, all or a portion of the service fee, attributable to
Class B and Class C shares, and will pay to such securities dealers all of the
distribution fee attributable to Class C shares. The service fee is intended to
be additional consideration for services rendered by the dealer with respect to
Class B and Class C shares. Fees incurred under the Distribution Plan during the
year ended October 31, 1994 were 1.00% of average daily net assets attributable
to Class B and Class C shares on an annualized basis and amounted to $300,363
and $56,179, respectively (of which FSI retained $3,536 and $6,955 for Class B
and Class C shares, respectively).
A contingent deferred sales charge is imposed on shareholder redemptions of
Class A shares, on purchases of $1 million or more, in the event of a share
redemption within 12 months following the share purchase. A contingent deferred
sales charge is imposed on shareholder redemptions of Class B shares in the
event of a shareholder redemption within six years of purchase. FSI receives all
contingent deferred sales charges. Contingent deferred sales charges imposed
during the year ended October 31, 1994 were $1,641 and $35,156 for Class A and
Class B shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earned
$131,343, $66,064 and $8,427 for Class A, Class B shares and Class C shares,
respectively, for its services as shareholder servicing agent. The fee is
calculated as a percentage of the average daily net assets of each class of
shares at an effective annual rate of up to 0.15%, up to 0.22% and up to 0.15%,
attributable to Class A, Class B, and Class C shares, respectively.
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
(4) Portfolio Securities
Purchases and sales of investments, other than purchased option transactions and
short-term obligations, were as follows:
Purchases Sales
- ------------------------------------------------------------------------------
U.S. government securities $ 32,076,085 $ 9,862,179
------------ ------------
Investments (non-U.S. government securities) $173,011,826 $117,560,186
------------ ------------
The cost and unrealized appreciation or depreciation in value of the investments
owned by the Fund, as computed on a federal income tax basis, are as follows:
Aggregate cost $152,010,745
-----------
Gross unrealized appreciation 10,092,152
Gross unrealized depreciation (2,328,809)
-----------
Net unrealized appreciation $ 7,763,343
-----------
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
Class A Shares
Year Ended Year Ended
October 31, 1994 September 30, 1993
------------------------- --------------------------
Shares Amount Shares Amount
- ----------------------------------------------------------------------------
Shares sold 4,057,858 $ 44,108,242 2,707,550 $ 28,000,259
Shares issued to
shareholders in
reinvestment of
distributions 650,058 7,016,535 293,773 2,942,918
Shares reacquired (1,634,278) (17,703,592) (1,016,152) (10,517,431)
----------- ------------ ----------- ------------
Net increase 3,073,638 $ 33,421,185 1,985,171 $ 20,425,746
----------- ------------ ----------- ------------
Class B Shares
For the period from the date
of issue of Class B shares,
Year Ended September 7, 1993 to October
October 31, 1994 31, 1993
------------------------- --------------------------
Shares Amount Shares Amount
- ----------------------------------------------------------------------------
Shares sold 4,787,651 $ 52,159,264 404,399 $ 4,456,985
Shares issued to
shareholders in
reinvestment of
distributions 201,731 2,142,482 406 4,415
Shares reacquired (856,456) (9,240,107) (13,340) (146,255)
----------- ------------ ----------- ------------
Net increase 4,132,926 $ 45,061,639 391,465 $ 4,315,145
----------- ------------ ----------- ------------
Class C Shares
For the period from the date
of issue of Class C shares
of January 3, 1994 to October,
1994
--------------------------
Shares Amount
- -------------------------------------------------
Shares sold 1,206,568 $ 13,035,120
Shares issued to
shareholders in
reinvestment of
distributions 33,846 355,889
Shares reacquired (205,230) (2,175,717)
----------- ------------
Net increase 1,035,184 $ 11,215,292
----------- ------------
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS, or an affiliate of MFS, in an unsecured line of credit
with a bank which permits borrowings up to $300 million, collectively.
Borrowings may be made to temporarily finance the repurchase of Fund shares.
Interest is charged to each fund, based on its borrowings, at a rate equal to
the bank's base rate. In addition, a commitment fee, based on the average daily
unused portion of the line of credit, is allocated among the participating funds
at the end of each quarter. The commitment fee allocated to the Fund for the
year ended October 31, 1994 was $2,007.
(7) Financial Instruments
The Fund regularly trades financial instruments with off-balance sheet risk in
the normal course of its investing activities in order to manage exposure to
market risks such as interest rates and foreign currency exchange rates. These
financial instruments include written options and forward foreign currency
exchange contracts. The notional or contractual amounts of these instruments
represent the investment the Fund has in particular classes of financial
instruments and does not necessarily represent the amounts potentially subject
to risk. The measurement of the risks associated with these instruments is
meaningful only when all related and offsetting transactions are considered. A
summary of obligations under these financial instruments at October 31, 1994 is
as follows:
Written
Options 1994 Calls 1994 Puts
Transactions ------------------------------- -----------------------------
Principal Amounts Principal Amounts
of Contracts of Contracts
(000 Omitted) Premiums (000 Omitted) Premiums
- ------------------------------------------------------------------------------
Outstanding, beginning of period --
Australian Dollars 1,642 $ 4,437 1,642 $ 4,250
British Pounds/
Deutsche Marks -- -- 766 17,167
Canadian Dollars -- -- 2,869 16,860
Deutsche Marks 2,296 25,351 4,346 26,545
Japanese Yen 298,851 41,443 -- --
Swedish Krone/
Deutsche Marks -- -- 15,167 15,037
Swiss Francs 4,633 72,333 -- --
Options Written --
Australian Dollars 3,020 14,609 1,500 9,077
Canadian Dollars 700 2,870 700 5,600
Deutsche Marks 83,538 731,955 44,022 168,142
Deutsche Marks/
British Pounds -- -- 4,252 27,179
Deutsche Marks/
Italian Lire 909 5,883 -- --
Italian Lire -- -- 1,412,034 5,973
Italian Lire/
Deutsche Marks 2,825,818 4,746 6,230,446 21,606
Japanese Yen 1,682,751 223,197 2,461,382 338,004
Japanese Yen/
Deutsche Marks 538,712 123,904 -- --
Spanish Pesetas/
Deutsche Marks -- -- 337,060 24,156
Swedish Krone/
Deutsche Marks -- -- 28,815 28,321
Options terminated in
closing transactions --
Australian Dollars (2,126) (7,850) -- --
Canadian Dollars -- -- (700) (5,600)
Deutsche Marks (24,657) (236,927) (13,778) (82,850)
Deutsche Marks/
British Pounds -- -- (4,252) (27,179)
Italian Lire/
Deutsche Marks -- -- (3,376,370) (16,769)
Japanese Yen (1,074,993) (140,629) (1,541,370) (213,387)
Japanese Yen/
Deutsche Marks (538,712) (123,904) -- --
Spanish Pesetas/
Deutsche Marks -- -- (337,060) (24,156)
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
Written Options
Transactions 1994 Calls 1994 Puts
------------------------------- -----------------------------
Principal Amounts Principal Amounts
of Contracts of Contracts
(000 Omitted) Premiums (000 Omitted) Premiums
- ------------------------------------------------------------------------------
Options exercised --
Australian Dollars (1,036) $ (6,879) -- $ --
Deutsche Marks (33,829) (171,210) (1,160) (7,773)
Italian Lire/
Deutsche Marks -- -- (2,854,076) (4,837)
Japanese Yen -- -- (183,578) (51,814)
Swedish Krone/
Deutsche Marks -- -- (16,006) (20,300)
Options Expired --
Australian Dollars (1,500) (4,317) (3,142) (13,327)
British Pounds/
Deutsche Marks -- -- (766) (17,167)
Canadian Dollars (700) (2,870) (2,869) (16,860)
Deutsche Marks (13,273) (170,430) (25,875) (82,477)
Deutsche Marks/
Italian Lire (909) (5,883) -- --
Italian Lire -- -- (1,412,034) (5,973)
Italian Lire/
Deutsche Marks (2,825,818) (4,746) -- --
Japanese Yen (175,000) (30,968) (415,434) (38,304)
Swedish Krone/
Deutsche Marks -- -- (27,976) (23,058)
Swiss Francs (4,633) (72,335) -- --
OUTSTANDING,
END OF PERIOD --
Deutsche Marks 14,075 $178,737 7,555 $ 21,587
Japanese Yen 731,609 93,043 321,000 34,499
At October 31, 1994, the Fund had sufficient cash and/or securities at least
equal to the value of the written options.
Forward Foreign Currency Exchange Contracts
Net Unrealized
Settlement Contracts to Contracts Appreciation
Date Deliver/Receive In Exchange for at Value (Depreciation)
- ------------------------------------------------------------------------------
Sales
12/19/94 AUD 1,416,765 $ 1,052,656 $ 1,049,653 $ 3,004
11/04/94 -
02/06/95 CHF 1,275,887 1,006,481 1,019,713 (13,232)
11/14/94 -
01/23/95 DEM 42,068,964 27,508,014 28,002,114 (494,100)
12/16/94 -
01/03/95 DKK 9,882,230 1,638,904 1,677,816 (38,912)
12/09/94 -
01/31/95 ESP 280,912,546 2,156,301 2,239,425 (83,124)
12/09/94 -
12/22/94 FIM 2,357,091 469,537 512,258 (42,722)
11/23/94 -
05/02/95 FRF 26,710,275 5,076,157 5,191,563 (115,406)
11/21/94 -
01/18/95 GBP 2,454,599 3,819,883 4,014,886 (195,003)
01/31/95 -
IEP 1,113,699 1,769,890 1,792,506 (22,616)
11/04/94 -
12/06/94 ITL 7,694,019,296 4,787,834 5,000,290 (212,457)
11/21/94 -
01/24/95 NLG 10,488,656 6,133,479 6,230,003 (96,524)
11/14/94 -
12/20/94 SEK 43,653,782 5,695,287 6,070,871 (375,583)
---------- ---------- ---------
$61,114,423 $62,801,098 $(1,686,675)
---------- ---------- ---------
Purchases
01/23/95 CAD 2,597,788 $ 1,921,347 $ 1,921,371 $ 24
11/04/94 -
01/09/95 CHF 4,810,877 3,762,081 3,846,686 84,605
11/14/94 -
01/30/95 DEM 57,880,753 37,702,755 38,532,204 829,449
11/30/94 FIM 2,343,684 448,209 509,271 61,062
11/23/94 -
12/05/94 FRF 8,561,787 1,670,514 1,663,693 (6,821)
11/15/94 -
01/17/95 GBP 3,031,000 4,669,361 4,958,161 288,800
12/02/94 -
12/30/94 IEP 1,573,295 2,419,022 2,532,086 113,064
11/04/94 -
01/23/95 ITL 10,684,205,854 6,760,282 6,926,608 166,326
11/21/94 -
02/06/95 JPY 1,064,275,642 10,800,430 11,053,024 252,594
11/21/94 -
12/15/94 NLG 1,970,613 1,172,378 1,169,880 (2,497)
11/14/94 -
12/20/94 SEK 29,625,201 3,950,351 4,121,458 171,107
---------- ---------- ---------
$75,276,730 $77,234,442 $ 1,957,713
---------- ---------- ---------
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
Forward foreign currency purchases and sales under master netting arrangements
and closed forward foreign currency exchange contracts excluded from above
amounted to a net payable of $146,782 at October 31, 1994.
At October 31, 1994, the Fund had sufficient cash and/or securities to cover any
commitments under these contracts.
The Fund also invests in indexed securities whose value may be linked to foreign
currencies, interest rates, commodities, indices or other financial indicators.
Indexed securities are fixed-income securities whose proceeds at maturity
(principal-indexed securities) or interest rates (coupon-indexed securities)
rise and fall according to the change in one or more specified underlying
instruments. Indexed securities may be more volatile than the underlying
instrument itself. The following is a summary of such securities held at October
31, 1994.
Unrealized
Description Index Principal Value Depreciation
- --------------------------------------------------------------------------------
Finnish Export Credit
Ltd., Principal
Linked Note, 3-year Finnish
5.5s, 1995 interest swap rate 2,575,000 $ 455,919 $ (8,254)
Sallie Mae, Swedish
Index Note, 1-year Swedish
0s, 1995 interest swap rate 800,000 797,040 (2,960)
--------- -------
$1,252,959 $(11,214)
--------- -------
(8) Restricted Securities
The Fund may not invest more than 15% of its net assets in securities which are
subject to legal or contractual restrictions on resale. At October 31, 1994, the
Fund owned the following restricted securities (constituting 4.5% of net assets)
which may not be publicly sold without registration under the Securities Act of
1933. The Fund does not have the right to demand that such securities be
registered. The value of these securities is determined by valuations supplied
by a pricing service or brokers. Certain of these securities may be offered and
sold to qualified institutional buyers under Rule 144A of the 1933 Act.
Date of
Description Acquisition Share/Par Amount Cost Value
- ------------------------------------------------------------------------------
AMR Corp., $3.00 05/03/93 6,000 $325,500 $ 258,750
Banco Nacionale
de Mexico,
7s, 1999 12/01/92 250,000 249,687 275,000
Takare PLC 08/27/93-04/13/94 175,000 595,734 648,625
Cemex S.A.,
4.25s, 1997 09/28/94 400,000 400,000 412,000
Central
Costanera, ADR 12/17/93 13,167 316,008 460,845
Chrysler
Corp., $4.625 08/24/93 4,500 541,935 614,250
Conitel
7s, Prides 02/24/94 6,000 432,000 370,500
Consol Electric
Power Asia
Ltd., ADR 11/29/93 13,600 220,364 312,800
Mavesa, S.A., ADR 10/27/93 33,333 204,000 183,332
Mirgor
Sacifia, ADR 10/20/94 53,100 477,900 477,900
Peregrine,
4.5s, 2000 01/26/94 455,000 413,600 353,762
PowerGen
PLC, ADR 01/22/92-04/10/92 18,000 923,402 1,671,750
Woolworth
Ltd., ADR 07/12/93 49,500 1,010,427 1,051,875
---------
$7,091,389
---------
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Series Trust VI and Shareholders of MFS World Total
Return Fund:
We have audited the accompanying statement of assets and liabilities of MFS
World Total Return Fund including the schedule of portfolio investments as of
October 31, 1994, and the related statement of operations, changes in net assets
and financial highlights for the year then ended for Class A shares and Class B
shares, and for the period from January 3, 1994 (commencement of operations) to
October 31, 1994 for Class C shares. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audit. The financial statements of MFS World Total Return Fund for
the year ended October 31, 1993, and the financial highlights for each of the
three years in the period then ended and for the period from September 4, 1990
(commencement of operations) to October 31, 1990 for Class A shares, and for the
period from September 7, 1993 (commencement of investment operations) to October
31, 1993 for Class B shares, were audited by other auditors whose report dated
December 16, 1993 expressed an unqualified opinion on those statements and
financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1994, by correspondence with the custodian and brokers or by other
appropriate auditing procedures where replies from brokers were not received. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of MFS
World Total Return Fund as of October 31, 1994 and the results of its
operations, the changes in its net assets, and the financial highlights for the
year then ended for Class A shares and Class B shares, and for the period from
January 3, 1994 to October 31, 1994 for Class C shares, in conformity with
generally accepted accounting principles.
Boston, Massachusetts
December 16, 1994
---------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
