<PAGE>
As filed with the Securities and Exchange Commission on February 28, 1997
1933 Act File No. 33-34502
1940 Act File No. 811-6102
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 11
AND
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 13
MFS SERIES TRUST VI
(Exact Name of Registrant as Specified in Charter)
500 Boylston, Street, Boston, Massachusetts 02116
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: 617-954-5000
Stephen E. Cavan, Massachusetts Financial Services Company
500 Boylston Street, Boston, Massachusetts 02116
(Name and Address of Agent for Service)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
It is proposed that this filing will become effective (check appropriate box)
|_| immediately upon filing pursuant to paragraph (b)
|X| on February 28, 1997 pursuant to paragraph (b)
|_| 60 days after filing pursuant to paragraph (a)(i)
|_| on [date] pursuant to paragraph (a)(i)
|_| 75 days after filing pursuant to paragraph (a)(ii)
|_| on [date] pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
|_| this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
Pursuant to Rule 24f-2, the Registrant has registered an indefinite number of
its Shares of Beneficial Interest, without par value, under the Securities Act
of 1933. The Registrant filed a Rule 24f-2 Notice on behalf of all of its series
for its fiscal year ended October 31, 1996 on December 26, 1996.
================================================================================
<PAGE>
MFS SERIES TRUST VI
MFS World Total Return Fund
MFS Utilities Fund
MFS World Equity Fund
CROSS REFERENCE SHEET
(Pursuant to Rule 404 showing location in Prospectus and/or Statement of
Additional Information of the responses to the Items in Parts A and B of Form
N-1A)
<TABLE>
<CAPTION>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C>
1 (a),(b) Front Cover Page *
2 (a) Expense Summary *
(b),(c) * *
3 (a) Condensed Financial Information *
(b) * *
(c) Information Concerning Shares *
of the Fund - Performance
Information
(d) Condensed Financial Information *
4 (a) Front Cover Page; The Fund; *
Investment Objective and
Policies; Investment Techniques
(b) Investment Objective and *
Policies; Investment Techniques
(c) Investment Objective and *
Policies; Additional Risk Factors
5 (a) The Fund; Management of the *
Fund - Investment Adviser
(b) Front Cover Page; Management *
of the Fund - Investment
Adviser; Back Cover Page
(c) Management of the Fund - *
Investment Adviser
(d) * *
(e) Management of the Fund - *
Shareholder Servicing Agent;
Back Cover Page
(f) Information Concerning the Fund - *
Expenses; Condensed Financial
Information; Expense Summary
(g) Additional Risk Factors - Portfolio *
Trading
5A (a) ** **
(b) ** **
6 (a) Information Concerning Shares *
of the Fund - Description
of Shares, Voting Rights
and Liabilities;
Information Concerning
Shares of the Fund -
Redemptions and
Repurchases; Information
Concerning Shares of the
Fund - Purchases;
Information Concerning
Shares of the Fund -
Exchanges
(b),(c),(d) * *
(e) Shareholder Services *
(f) Information Concerning Shares *
of the Fund - Distributions;
Shareholder Services -
Distribution Options
(g) Information Concerning Shares *
of the Fund - Tax Status;
Information Concerning Shares
of the Fund - Distributions
(h) * *
7 (a) Front Cover Page; Management *
of the Fund - Distributor; Back
Cover Page
(b) Information Concerning Shares *
of the Fund - Purchases;
Information Concerning Shares
of the Fund - Net Asset Value
(c) Information Concerning Shares *
of the Fund - Purchases;
Shareholder Services;
Information Concerning Shares
of the Fund - Exchanges
(d) Front Cover Page; Information *
Concerning Shares of the Fund -
Purchases; Shareholder Services
(e) Information Concerning Shares *
of the Fund - Distribution Plan;
Expense Summary
(f) Information Concerning Shares *
of the Fund - Distribution Plan
8 (a) Information Concerning Shares *
of the Fund - Redemptions and
Repurchases; Information
Concerning Shares of the
Fund - Purchases; Shareholder
Services
(b) Information Concerning Shares *
of the Fund - Redemptions and
Repurchases
(c) Information Concerning Shares *
of the Fund - Redemptions and
Repurchases
(d) Information Concerning Shares *
of the Fund - Redemptions and
Repurchases
9 * *
<PAGE>
<CAPTION>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART B PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C>
10 (a),(b) * Front Cover Page
11 * Front Cover Page
12 The Fund Definitions
13 (a),(b),(c) * Investment Objective, Policies
and Restrictions; Investment
Techniques; Investment Restrictions
(d) * *
14 (a),(b) * Management of the Fund -
Trustees and Officer
(c) * *
15 (a) * *
(b),(c) * Management of the Fund -
Trustees and Officers
16 (a) Management of the Fund - Management of the Fund -
Investment Adviser Investment Adviser;
Management of the Fund -
Trustees and Officers
(b) Management of the Fund - Management of the Fund -
Investment Adviser; Investment Adviser
Expenses
(c) * *
(d) * Management of the Fund -
Investment Adviser
(e) * Portfolio Transactions and
Brokerage Commissions
(f) Information Concerning Shares Distribution Plans
of the Fund - Distribution
Plans
(g) * *
(h) * Management of the Fund -
Custodian; Independent
Auditors and Financial
Statements; Back Cover Page
(i) * Management of the Fund -
Shareholder Servicing Agent
17 (a),(b),(c), * Portfolio Transactions and
(d), (e) Brokerage Commissions
18 (a) Information Concerning Shares Description of Shares Voting
of the Fund - Description of Rights and Liabilities
Shares, Voting Rights and
Liabilities
(b) * *
19 (a) Information Concerning Shares Shareholder Services
of the Fund - Purchases;
Shareholder Services
(b) Information Concerning Shares Management of the Fund -
of the Fund - Net Asset Value; Distributor; Determination
Information Concerning Shares of Net Asset Value and
of the Fund - Purchases Performance - Net Asset Value
(c) * *
20 * Tax Status
21 (a) * Management of the Fund -
Distributor; Distribution Plan
(b) * Management of the Fund -
Distributor; Distribution Plan
(c) * *
22 (a) * *
(b) * Determination of Net Asset
Value and Performance
23 * Independent Auditors
and Financial Statements
- -----------------------
* Not Applicable
** Contained in Annual Report
</TABLE>
<PAGE>
MFS WORLD TOTAL RETURN FUND
SUPPLEMENT TO THE MARCH 1, 1997
PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION
THE FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE FUND'S
PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION ("SAI"), DATED MARCH 1, 1997,
AND CONTAINS A DESCRIPTION OF CLASS I SHARES.
CLASS I SHARES ARE AVAILABLE FOR PURCHASE ONLY BY CERTAIN INVESTORS AS
DESCRIBED UNDER THE CAPTION "ELIGIBLE PURCHASERS" BELOW.
<TABLE>
<CAPTION>
EXPENSE SUMMARY
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES: CLASS I
Maximum Initial Sales Charge Imposed on Purchases of Fund -------
Shares (as a percentage of offering price)........................................... None
Maximum Contingent Deferred Sales Charge (as a percentage
of original purchase price or redemption proceeds, as applicable).................... None
ANNUAL OPERATING EXPENSES OF THE FUND (AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees........................................................................ 0.87%
Rule 12b-1 Fees........................................................................ None
Other Expenses(1)(2)................................................................... 0.53%
-----
Total Operating Expenses............................................................... 1.26%
- ----------
(1) "Other Expenses" is based on Class A expenses incurred during the fiscal year ended October 31,
1996.
(2) The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the
amount of cash maintained by the Fund with its custodian and dividend disbursing agent, and may
enter into other such arrangements and directed brokerage arrangements (which would also have the
effect of reducing the Fund's expenses). Any such fee reductions are not reflected under "Other
Expenses."
</TABLE>
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a $1,000
investment in Class I shares of the Fund, assuming (a) a 5% annual return and
(b) redemption at the end of each of the time periods indicated:
PERIOD CLASS I
------ -------
1 year........................................ $13
3 years....................................... 40
The purpose of the expense table above is to assist investors in
understanding the various costs and expenses that a shareholder of the Fund will
bear directly or indirectly. A more complete description of the Fund's
management fee is set forth under the caption "Management of the Fund" in the
Prospectus.
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
ELIGIBLE PURCHASERS
Class I shares are available for purchase only by the following purchasers
("Eligible Purchasers"):
(i) certain retirement plans established for the benefit of employees of
Massachusetts Financial Services Company ("MFS"), the Fund's investment
adviser, and employees of MFS' affiliates; and
(ii) any fund distributed by MFS Fund Distributors, Inc. ("MFD"), the Fund's
distributor, if the fund seeks to achieve its investment objective by
investing primarily in shares of the Fund and other funds distributed by
MFD.
In no event will the Fund, MFS, MFD or any of their affiliates pay any sales
commissions or compensation to any third party in connection with the sale of
Class I shares; the payment of any such sales commission or compensation would,
under the Fund's policies, disqualify the purchaser as an eligible investor of
Class I shares.
SHARE CLASSES OFFERED BY THE FUND
Four classes of shares of the Fund currently are offered for sale, Class A
shares, Class B shares, Class C shares and Class I shares. Class I shares are
available for purchase only by Eligible Purchasers, as defined above, and are
described in this Supplement. Class A shares, Class B shares and Class C shares
are described in the Fund's Prospectus and are available for purchase by the
general public.
Class A shares are offered at net asset value plus an initial sales charge
up to a maximum of 4.75% of the offering price (or a contingent deferred sales
charge (a "CDSC") upon redemption of 1.00% during the first year in the case of
purchases of $1 million or more and certain purchases by retirement plans), and
are subject to an annual distribution fee and service fee up to a maximum of
0.35% per annum. Class B shares are offered at net asset value without an
initial sales charge but are subject to a CDSC upon redemption (declining from
4.00% during the first year to 0% after six years) and an annual distribution
fee and service fee up to a maximum of 1.00% per annum; Class B shares convert
to Class A shares approximately eight years after purchase. Class C shares are
offered at net asset value without an initial sales charge but are subject to a
CDSC upon redemption of 1.00% during the first year and an annual distribution
fee and service fee up to a maximum of 1.00% per annum. Class I shares are
offered at net asset value without an initial sales charge or CDSC and are not
subject to a distribution or service fee. Class C and Class I shares do not
convert to any other class of shares of the Fund.
OTHER INFORMATION
Eligible Purchasers may purchase Class I shares only directly through MFD.
Eligible Purchasers may exchange Class I shares of the Fund for Class I shares
of any other MFS Fund available for purchase by such Eligible Purchasers at
their net asset value (if available for sale), and may exchange Class I shares
of the Fund for shares of the MFS Money Market Fund (if available for sale), and
may redeem Class I shares of the Fund at net asset value. Distributions paid by
the Fund with respect to Class I shares generally will be greater than those
paid with respect to Class A shares, Class B shares and Class C shares because
expenses attributable to Class A shares, Class B shares and Class C shares
generally will be higher.
THE DATE OF THIS SUPPLEMENT IS MARCH 1, 1997
<PAGE>
PROSPECTUS
March 1, 1997
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 .................................. 5
5. Investment Techniques .............................................. 7
6. Additional Risk Factors ............................................ 12
7. Management of the Fund ............................................. 14
8. Information Concerning Shares of the Fund .......................... 15
Purchases ....................................................... 15
Exchanges ....................................................... 20
Redemptions and Repurchases ..................................... 21
Distribution Plan ............................................... 23
Distributions ................................................... 25
Tax Status ...................................................... 25
Net Asset Value ................................................. 25
Description of Shares, Voting Rights and Liabilities ............ 26
Performance Information ......................................... 26
9. Shareholder Services ............................................... 27
Appendix A ............................................................ A-1
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
MFS WORLD TOTAL RETURN FUND
500 Boylston Street, Boston, Massachusetts 02116 (617) 954-5000
This Prospectus pertains to MFS World Total Return Fund (the "Fund") a
non-diversified series of MFS Series Trust VI (the "Trust"), an open-end
management investment company presently consisting of three series. 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). 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 "Information Concerning Shares of the Fund -- Purchases"). The
Fund's investment adviser and distributor are Massachusetts Financial Services
Company ("MFS" or the "Adviser") and MFS Fund Distributors, Inc. ("MFD"),
respectively, both of which are located at 500 Boylston Street, Boston,
Massachusetts 02116.
INVESTMENT PRODUCTS ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY,
AND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY FINANCIAL
INSTITUTION. SHARES OF MUTUAL FUNDS ARE SUBJECT TO INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED, AND WILL FLUCTUATE IN VALUE. YOU
MAY RECEIVE MORE OR LESS THAN YOU PAID WHEN YOU REDEEM YOUR SHARES.
This Prospectus sets forth concisely the information concerning the Fund and the
Trust that a prospective investor ought to know before investing. The Trust, on
behalf of the Fund, has filed with the Securities and Exchange Commission (the
"SEC") a Statement of Additional Information, dated March 1, 1997, as amended or
supplemented from time to time (the "SAI"), which contains more detailed
information about the 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 SAI. A copy of the SAI may be obtained without
charge by contacting the Shareholder Servicing Agent (see back cover for address
and phone number). The SEC maintains an Internet World Wide Web site that
contains the SAI, materials that are incorporated by reference into this
Prospectus and the SAI, and other information regarding the Fund. This
Prospectus is available on the Adviser's Internet World Wide Web site at
http://www.mfs.com.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE>
<TABLE>
<CAPTION>
1. EXPENSE SUMMARY
CLASS A CLASS B CLASS C
------- ------- -------
SHAREHOLDER TRANSACTION EXPENSES:
<S> <C> <C> <C>
Maximum Initial Sales Charge Imposed on Purchases of Fund Shares (as a
percentage of offering price) .......................................... 4.75% 0.00% 0.00%
Maximum Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable) .................. See Below(1) 4.00% 1.00%
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees .......................................................... 0.87% 0.87% 0.87%
Rule 12b-1 Fees .......................................................... 0.35%(2) 1.00%(3) 1.00%(3)
Other Expenses(4) ........................................................ 0.39% 0.39% 0.39%
---- ---- ----
Total Operating Expenses ................................................. 1.61% 2.26% 2.26%
</TABLE>
- ------------
(1) Purchases of $1 million or more and certain purchases by retirement plans
are not subject to an initial sales charge; however, a contingent deferred
sales charge ("CDSC") of 1% will be imposed on such purchases in the event
of certain redemption transactions within 12 months following such purchases
(see "Information Concerning Shares of the Fund -- Purchases" below).
(2) The Fund has adopted a distribution plan for its shares in accordance with
Rule 12b-1 under the Investment Company Act of 1940, as amended (the "1940
Act") (the "Distribution Plan"), which provides that it will pay
distribution/service fees aggregating up to (but not necessarily all of)
0.35% per annum of the average daily net assets attributable to the Class A
shares. Distribution expenses under this Plan, together with the initial
sales charge, may cause long-term shareholders to pay more than the maximum
sales charge that would have been permissible if imposed entirely as an
initial sales charge. See "Information Concerning Shares of the Fund --
Distribution Plan" below.
(3) The Fund's Distribution Plan provides that it will pay distribution/ service
fees aggregating up to (but not necessarily all of) 1.00% per annum of the
average daily net assets attributable to Class B shares and Class C shares,
respectively. Distribution expenses paid under the Distribution Plan, with
respect to Class B or Class C shares, together with any CDSC payable upon
redemption of Class B and Class C shares, may cause long-term shareholders
to pay more than the maximum sales charge that would have been permissible
if imposed entirely as an initial sales charge.
(4) The Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its
custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the
effect of reducing the Fund's expenses). Any such fee reductions are not
reflected under "Other Expenses."
<PAGE>
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a $1,000
investment in the Fund, assuming (a) 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(3)
------------ ------------
<S> <C> <C> <C> <C> <C>
(1) (1)
1 year ............................... $ 63 $ 63 $ 23 $ 33 $ 23
3 years .............................. 96 101 71 71 71
5 years .............................. 131 141 121 121 121
10 years .............................. 230 243(2) 243(2) 260 260
</TABLE>
- ------------
(1) Assumes no redemption.
(2) Class B shares convert to Class A shares approximately eight years after
purchase; therefore, years nine and ten reflect Class A expenses.
(3) Purchases subsequent to April 1, 1996 which are redeemed within 12 months of
purchase are subject to a 1% CDSC.
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 Plan."
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS
THAN THOSE SHOWN.
2. THE FUND
The Fund is a non-diversified series of the Trust, an open-end management
investment company which was organized as a business trust under the laws of The
Commonwealth of Massachusetts on April 30, 1990. The Trust presently consists of
three series, each of which represents a portfolio with separate investment
objectives and policies. Shares of the Fund are continuously sold to the public
and the Fund then uses the proceeds to buy securities (primarily equity and debt
securities) for its portfolio. Three classes of shares of the Fund currently are
offered for sale to the general public. Class A shares are offered at net asset
value plus an initial sales charge up to a maximum of 4.75% of the offering
price (or a CDSC of 1.00% upon redemption during the first year in the case of
purchases of $1 million or more and certain purchases by retirement plans) and
are subject to an annual distribution fee and service fee up to a maximum of
0.35% per annum. Class B shares are offered at net asset value without an
initial sales charge but are subject to a CDSC upon redemption (declining from
4.00% during the first year to 0% after six years) and an annual distribution
fee and service fee up to a maximum of 1.00% per annum; Class B shares will
convert to Class A shares approximately eight years after purchase. Class C
shares are offered at net asset value without an initial sales charge but are
subject to a CDSC of 1.00% upon redemption during the first year and an annual
distribution fee and service fee up to a maximum of 1.00% per annum. Class C
shares do not convert to any other class of shares of the Fund. In addition, the
Fund offers an additional class of shares, Class I shares, exclusively to
certain institutional investors. Class I shares are made available by means of a
separate Prospectus supplement provided to institutional investors eligible to
purchase Class I shares and are offered at net asset value without an initial
sales charge or CDSC upon redemption and without an annual distribution and
service fee.
The Trust's Board of Trustees provides broad supervision over the affairs of the
Fund. The Adviser is responsible for the management of the Fund's assets and the
officers of the Trust are responsible for the Fund's operations. The Adviser
manages the portfolio from day to day in accordance with the Fund's investment
objective and policies. A majority of the Trustees are not affiliated with the
Adviser. The selection of investments and the way they are managed depend on the
conditions and trends in the economies of the various countries of the world,
their financial markets and the relationship of their currencies to the U.S.
dollar. The Fund also offers to buy back (redeem) its shares from its
shareholders at any time at net asset value, less any applicable CDSC.
<PAGE>
3. CONDENSED FINANCIAL INFORMATION
The following information has been audited for at least the latest five fiscal
years of the Fund and should be read in conjunction with financial statements
included in the Fund's Annual Report to shareholders which are incorporated by
reference into the SAI in reliance upon the report of the Fund's independent
auditors, given upon their authority as experts in accounting and auditing.
The Fund's independent auditors are Ernst & Young LLP.
FINANCIAL HIGHLIGHTS
CLASS A, CLASS B AND CLASS C SHARES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1996 1995 1994 1993 1992 1991 1990*
- -----------------------------------------------------------------------------------------------------------------------------------
CLASS A
- -----------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value - beginning of period ...... $11.57 $10.58 $11.19 $10.21 $ 9.42 $ 8.55 $ 8.50
------ ------ ------ ------ ------ ------ ------
Income from investment operations# -
Net investment income .................... $ 0.34 $ 0.33 $ 0.30 $ 0.28 $ 0.36 $ 0.37 $ 0.08
Net realized and unrealized gain (loss) on
investments and foreign
currency transactions .................. 1.46 0.79 0.15 1.42 0.86 0.88 (0.03)
------ ------ ------ ------ ------ ------ ------
Total from investment operations ....... $ 1.80 $ 1.12 $(0.45) $ 1.70 $ 1.22 $ 1.25 $ 0.05
------ ------ ------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income ............... $(0.63) $(0.08) $(0.25) $(0.45) $(0.26) $(0.38) $ --
From net realized gain on investments and
foreign currency transactions .......... (0.01) (0.05) (0.33) (0.27) (0.17) -- --
In excess of net realized gain on
investments and foreign currency
transactions ........................... -- -- (0.38) -- -- -- --
From paid-in capital ..................... -- -- (0.10) -- -- -- --
------ ------ ------ ------ ------ ------ ------
Total distributions declared to
shareholders ....................... $(0.62) $(0.13) $(1.06) $(0.72) $(0.43) $(0.38) $ --
------ ------ ------ ------ ------ ------ ------
Net asset value - end of period ............ $12.73 $11.57 $10.58 $11.19 $10.21 $ 9.42 $ 8.55
====== ====== ====== ====== ====== ====== ======
Total return(+) ............................ 16.06% 10.63% 4.10% 17.78% 13.14% 14.94% 3.76%+
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses## ............................... 1.63% 1.77% 1.76% 1.92% 1.84% 2.18% 1.57%+
Net investment income .................... 2.79% 3.06% 2.81% 2.96% 3.65% 4.05% 3.14%+
PORTFOLIO TURNOVER ......................... 167% 160% 118% 112% 72% 134% 2%
Average commission rate### ................. $0.0187 -- -- -- -- -- --
NET ASSETS AT END OF PERIOD (000 OMITTED) .. $129,843 $110,294 $99,870 $71,262 $44,707 $30,847 $12,510
- ------------
*For the period from September 4, 1990 (commencement of investment operations) to October 31, 1990.
+Annualized.
#Per share data for the periods subsequent to October 31, 1993 is based on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid indirectly.
(+)Total returns do not include the applicable sales charge. If the sales charge had been included, the results would have
been lower.
###Average commission rate is calculated for funds with fiscal years beginning on or after September 1, 1995.
</TABLE>
Continued on next page.
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS - CONTINUED
- --------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1996 1995 1994 1993** 1996 1995 1994***
- -------------------------------------------------------------------------------------------- --------------------------------
CLASS B CLASS C
- -------------------------------------------------------------------------------------------- --------------------------------
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value - beginning of period .... $11.52 $10.54 $11.19 $10.84 $11.52 $10.53 $11.06
------ ------ ------ ------ ------ ------ ------
Income from investment operation# -
Net investment income .................. $ 0.25 $ 0.25 $ 0.25 $ 0.06 $ 0.26 $ 0.27 $ 0.27
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions ......................... 1.46 0.77 0.13 0.35 1.46 0.76 (0.29)
------ ------ ------ ------ ------ ------ ------
Total from investment operations ..... $ 1.71 $ 1.02 $ 0.38 $ 0.41 $ 1.72 $ 1.03 $(0.02)
------ ------ ------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income ............. $(0.47) $(0.03) $(0.24) $(0.06) $(0.51) $(0.03) $(0.12)
In excess of net investment income ....... (0.04) 0.00 0.00 0.00
From net realized gain on investments
and foreign currency transactions .... (0.01) (0.01) (0.32) 0.00 (0.01) (0.01) (0.16)
In excess of net realized gain on
investments and foreign currency
transactions ......................... 0.00 0.00 (0.38) 0.00 0.00 0.00 (0.18)
From paid-in capital ................... 0.00 0.00 (0.09) 0.00 0.00 0.00 (0.05)
------ ------ ------ ------ ------ ------ ------
Total distribution declared to
shareholder ...................... $(0.52) $(0.04) $(1.03) $(0.06) $(0.52) $(0.04) $(0.51)
------ ------ ------ ------ ------ ------ ------
Net asset value - end of period .......... $12.71 $11.52 $10.54 $11.19 $12.72 $11.52 $10.53
====== ====== ====== ====== ====== ====== ======
TOTAL RETURN(+) .......................... 15.29% 9.75% 3.38% 3.79%++ 15.41% 9.84% (0.15)%++
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses## ............................. 2.34% 2.49% 2.49% 2.77% + 2.27% 2.42% 2.39% +
Net investment income .................. 2.07% 2.34% 2.33% 2.15% + 2.14% 2.41% 2.51% +
PORTFOLIO TURNOVER ....................... 167% 160% 118% 112% 167% 160% 118%
AVERAGE COMMISSION RATE### ............... $0.0187 -- -- -- $0.0187 -- --
NET ASSETS AT END OF PERIOD (000 OMITTED) $71,788 $57,214 $47,677 $ 4,381 $14,248 $10,894 $10,903
- ------------
**For the period from the commencement of offering of Class B shares, September 7, 1993 to October 31, 1993. ***For the period
from the commencement of offering of Class C shares, January 3, 1994 to October 31, 1994.
+Annualized.
++Not annualized.
#Per share data for the periods subsequent to October 31, 1993 is based on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid indirectly.
(+)Total returns do not include the applicable sales charge. If the sales charge had been included the results would have been
lower.
###Average commission rate is calculated for funds with fiscal years beginning on or after September 1, 1995.
</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 temporary
defensive reasons or during times of international political or economic
uncertainty or turmoil, most or all of the Fund's investments may be in the
United States.
Under normal economic and market conditions, the Fund will invest not less than
40% and not more than 75% of its assets in equity securities. See "Investment
Techniques -- Equity Securities" below. 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. See "Investment Techniques -- American Depositary Receipts" below.
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, at least 25% of the Fund's assets
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. See "Investment Techniques --
Zero Coupon Bonds" below.
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 Standard & Poor's
Ratings Services ("S&P") or Fitch Investors Services, Inc. ("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 Australia, Canada,
Europe, Japan or the United States and in the debt securities of issuers located
in any of such regions or countries or New Zealand. 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.
5. INVESTMENT TECHNIQUES
Consistent with the Fund's investment objective and policies, the Fund may
engage in the following investment techniques, many of which are described more
fully in the SAI. See "Investment Objective, Policies and Restrictions" in the
SAI.
EQUITY SECURITIES: The Fund may invest in all types of equity securities,
including the following: common stocks, preferred stocks and preference stocks;
securities such as bonds, warrants or rights that are convertible into stocks;
and depository receipts for those securities. These securities may be listed on
securities exchanges, traded in various over-the-counter markets or have no
organized markets.
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements in order to
earn income on available cash or as a temporary defensive measure. Under a
repurchase agreement, the Fund acquires securities subject to the seller's
agreement to repurchase at a specified time and price. If the seller becomes
subject to a proceeding under the bankruptcy laws or its assets are otherwise
subject to a stay order, the Fund's right to liquidate the securities may be
restricted (during which time the value of the securities could decline). As
discussed in the SAI, the Fund has adopted certain procedures intended to
minimize risk.
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.
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, U.S. Government securities or an irrevocable
letter of credit maintained on a current basis at an amount at least equal to
the market value of the securities loaned. The Fund 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 or a letter of credit). 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 SECURITIES: Consistent with the Fund's objective and policies,
the Fund may invest in securities of issuers whose principal activities are
located in emerging market countries. Emerging market countries include any
country determined by the Adviser to have an emerging market economy, taking
into account a number of factors, including whether the country has a low-to
middle-income economy according to the International Bank for Reconstruction and
Development, the country's foreign currency debt rating, its political and
economic stability and the development of its financial and capital markets. The
Adviser determines whether an issuer's principal activities are located in an
emerging market country by considering such factors as its country of
organization, the principal trading market for its securities and the source of
its revenues and assets. The issuer's principal activities generally are deemed
to be located in a particular country if: (a) the security is issued or
guaranteed by the government of that country or any of its agencies, authorities
or instrumentalities; (b) the issuer is organized under the laws of, and
maintains a principal office in, that country; (c) the issuer has its principal
securities trading market in that country; (d) the issuer derives 50% or more of
its total revenues from goods sold or services performed in that country; or (e)
the issuer has 50% or more of its assets in that country.
BRADY BONDS: The Fund may invest in Brady Bonds, which are securities created
through the exchange of existing commercial bank loans to public and private
entities in certain emerging markets for new bonds in connection with debt
restructurings under a debt restructuring plan introduced by former U.S.
Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan debt
restructurings have been implemented to date in Argentina, Brazil, Bulgaria,
Costa Rica, Dominican Republic, Ecuador, Jordan, Mexico, Nigeria, Panama, the
Philippines, Poland, Uruguay and Venezuela. Brady Bonds have been issued only
recently, and for that reason do not have a long payment history. Brady Bonds
may be collateralized or uncollateralized, are issued in various currencies (but
primarily the U.S. dollar) and are actively traded in over-the-counter secondary
markets. U.S. dollar-denominated, collateralized Brady Bonds, which may be
fixed-rate bonds or floating-rate bonds, are generally collateralized in full as
to principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds. Brady Bonds are often viewed as having three or four valuation
components: the collateralized repayment of principal at final maturity; the
collateralized interest 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"). A determination is made based upon a continuing review of the
trading markets for a specific Rule 144A security, whether such security is
liquid and thus not subject to a Fund's limitation on investing not more than
15% of its net assets in illiquid investments. The Board of Trustees has adopted
guidelines and delegated to MFS the daily function of determining and monitoring
the liquidity of Rule 144A securities. The Board, however, retains oversight
focusing on factors, such as valuation, liquidity and availability of
information. Investing in Rule 144A securities could have the effect of
decreasing the level of liquidity in 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 SAI 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.
INDEXED SECURITIES: The Fund may invest in indexed securities whose value is
linked to foreign currencies, interest rates, commodities, indices, or other
financial indicators. Most indexed securities are short to intermediate term
fixed-income securities whose values at maturity (i.e., principal value) or
interest rates rise or fall according to the change in one or more specified
underlying instruments. Indexed securities may be positively or negatively
indexed (i.e., their principal value or interest rates may increase or decrease
if the underlying instrument appreciates), and may have return characteristics
similar to direct investments in the underlying instrument or to one or more
options on the underlying instrument. Indexed securities may be more volatile
than the underlying instrument itself.
OPTIONS ON 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 SAI. The trading of yield curve options is subject to all the risks
associated with trading other types of options, as discussed below under
"Additional Risk Factors" and in the SAI. In addition, such options present
risks of loss even if the yield on one of the underlying securities remains
constant, if the spread moves in a direction or to an extent which was not
anticipated.
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 indices 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 securities and other obligations underlying 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 indices, 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 SAI on the risks involved in these activities.
6. ADDITIONAL RISK FACTORS
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 SAI contains a description of the nature and trading
mechanics of options, Futures Contracts, Options on Futures Contracts, Forward
Contracts and Options on Foreign Currencies, and includes a discussion of the
risks related to transactions therein.
Transactions in Forward Contracts may be entered into only in the
over-the-counter market. Futures Contracts and Options on Futures Contracts may
be entered into on 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.
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.
EMERGING MARKET SECURITIES: The risks of investing in foreign securities may be
intensified in the case of investments in emerging markets. Securities of many
issuers in emerging markets may be less liquid and more volatile than securities
of comparable domestic issuers. Emerging markets also have different clearance
and settlement procedures, and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when a portion of the assets of the
Fund is uninvested and no return is earned thereon. The inability of the Fund to
make intended security purchases due to settlement problems could cause the Fund
to miss attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result in losses to the Fund due to
subsequent declines in value of the portfolio security, a decrease in the level
of liquidity in the Fund's portfolio, or, if the Fund has entered into a
contract to sell the security, in possible liability to the purchaser. Certain
markets may require payment for securities before delivery and in such markets
the Fund bears the risk that the securities will not be delivered and that the
Fund's payments will not be returned. Securities prices in emerging markets can
be significantly more volatile than in the more developed nations of the world,
reflecting the greater uncertainties of investing in less established markets
and economies. In particular, countries with emerging markets may have
relatively unstable governments, present the risk of nationalization of
businesses, restrictions on foreign ownership, or prohibitions against
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.
------------------------
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.
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. For the
fiscal year ended October 31, 1996, the Fund had a portfolio turnover rate in
excess of 100%. Transaction costs incurred by the Fund and the realized capital
gains and losses of the Fund may be greater than that of a Fund with a lesser
portfolio turnover rate.
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 SAI.
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 SAI includes a discussion of other investment policies and a listing of
specific investment restrictions which govern the Fund's investment policies.
The specific investment restrictions listed in the SAI may be changed without
shareholder approval unless otherwise indicated (see "Investment Restrictions"
in the SAI).
The Fund's investment limitations, policies and rating standards are adhered to
at the time of purchase or utilization of assets; a subsequent change in
circumstances will not be considered to result in a violation of policy.
7. MANAGEMENT OF THE FUND
INVESTMENT ADVISER -- The Adviser manages the Fund pursuant to an Investment
Advisory Agreement dated August 10, 1990 (the "Advisory Agreement"). Under the
Advisory Agreement the Adviser provides the Fund with overall investment
advisory services. Frederick J. Simmons, a Senior Vice President of the Adviser,
has been the Fund's portfolio manager since 1991. Mr. Simmons has been employed
as a portfolio manager 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, 1996, MFS received fees under the
Advisory Agreement of $1,716,121 (of which $1,279,166 was based on average daily
net assets and $436,955 on gross income), equivalent on an annualized basis to
0.87% 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 and seven variable accounts, each of which is a
registered investment company established by Sun Life Assurance Company of
Canada (U.S.) ("Sun Life of Canada (U.S.)") in connection with the sale of
various fixed/variable annuity contracts. MFS and its wholly owned subsidiary,
MFS Institutional Advisors, Inc., provide investment advice to substantial
private clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the United States, Massachusetts Investors
Trust. Net assets under the management of the MFS organization were
approximately $54 billion on behalf of approximately 2.3 million investor
accounts as of January 31, 1997. As of such date, the MFS organization managed
approximately $30.3 billion of assets invested in equity securities and
approximately $20.1 billion of assets invested in fixed income securities.
Approximately $3.9 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 wholly owned subsidiary of Sun Life Assurance Company of
Canada ("Sun Life"). The Directors of MFS are A. Keith Brodkin, Jeffrey L.
Shames, Arnold D. Scott, John D. McNeil and Donald A. Stewart. Mr. Brodkin is
the Chairman, Mr. Shames is the President and Mr. Scott is the Secretary and a
Senior Executive Vice President of MFS. Messrs. McNeil and Stewart are the
Chairman and President, respectively, of Sun Life. Sun Life, a mutual life
insurance company, is one of the largest international life insurance companies
and has been operating in the United States since 1895, establishing a
headquarters office here in 1973. The executive officers of MFS report to the
Chairman of Sun Life.
A. Keith Brodkin, the Chairman of MFS, is also the Chairman and President of
the Trust. W. Thomas London, Stephen E. Cavan, James O. Yost and James R.
Bordewick, Jr., all of whom are officers of MFS, are officers of the Trust.
MFS has established a strategic alliance with Foreign & Colonial Management Ltd.
("Foreign & Colonial"). Foreign & Colonial is a subsidiary of two of the world's
oldest financial services institutions, the London-based Foreign & Colonial
Investment Trust PLC, which pioneered the idea of investment management in 1868,
and HYPO-BANK (Bayerische Hypotheken-und Wechsel-Bank AG), the oldest publicly
listed bank in Germany, founded in 1835. As part of this alliance, the portfolio
managers and investment analysts of MFS and Foreign & Colonial share their views
on a variety of investment related issues, such as the economy, securities
markets, portfolio securities and their issuers, investment recommendations,
strategies and techniques, risk analysis, trading strategies and other portfolio
management matters. MFS has access to the extensive international equity
investment expertise of Foreign & Colonial, and Foreign & Colonial has access to
the extensive U.S. equity investment expertise of MFS. MFS and Foreign &
Colonial each have investment personnel working in each other's offices in
Boston and London, respectively.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for portfolios of other clients of MFS or clients of
Foreign & Colonial. Some simultaneous transactions are inevitable when several
clients receive investment advice from MFS and Foreign & Colonial, particularly
when the same security is suitable for more than one client. While in some cases
this arrangement could have a detrimental effect on the price or availability of
the security as far as the Fund is concerned, in other cases, however, it may
produce increased investment opportunities for the Fund.
ADMINISTRATOR -- MFS provides the Fund with certain administrative services
pursuant to a Master Administrative Services Agreement dated March 1, 1997.
Under this Agreement, MFS provides the Fund with certain financial, legal,
compliance, shareholder communications and other administrative services. As a
partial reimbursement for the cost of providing these services, the Fund pays
MFS an administrative fee up to 0.015% per annum of the Fund's average daily net
assets, provided that the administrative fee is not assessed on Fund assets that
exceed $3 billion.
DISTRIBUTOR -- MFD, a wholly owned subsidiary of MFS, is the distributor of
shares of the Fund and each of the other MFS Funds.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. (the "Shareholder
Servicing Agent"), a wholly owned subsidiary of MFS, performs transfer agency,
certain dividend disbursing agency and other services for the Fund.
8. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Class A, B and C shares of the Fund may be purchased at the public offering
price through any dealer and other financial institutions ("dealers") having a
selling agreement with MFD. Dealers may also charge their customers fees
relating to investments in the Fund.
This Prospectus offers three classes to the general public (Class A, Class B and
Class C shares), which bear sales charges and distribution fees in different
forms and amounts, as described below:
CLASS A SHARES: Class A shares are generally offered at net asset value plus an
initial sales charge, but in certain cases are offered at net asset value
without an initial sales charge but subject to a CDSC.
PURCHASES SUBJECT TO INITIAL SALES CHARGE. Class A shares are offered at
net asset value plus an initial sales charge as follows:
<TABLE>
<CAPTION>
SALES CHARGE* AS
PERCENTAGE OF:
-------------------------------- DEALER ALLOWANCE
NET AMOUNT AS A PERCENTAGE
AMOUNT OF PURCHASE OFFERING PRICE INVESTED OF OFFERING PRICE
- ------------------ -------------- ----------- -----------------
<S> <C> <C> <C>
Less than $100,000 ......................................................... 4.75% 4.99% 4.00%
$100,000 but less than $250,000 ............................................ 4.00 4.17 3.20
$250,000 but less than $500,000 ............................................ 2.95 3.04 2.25
$500,000 but less than $1,000,000 .......................................... 2.20 2.25 1.70
$1,000,000 or more ......................................................... None** None** See Below**
</TABLE>
- ----------
*Because of rounding in the calculation of offering price, actual sales charges
may be more or less than those calculated using the percentages above.
**A CDSC will apply to such purchases, as discussed below.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price, as shown in the above table. In the case of
the maximum sales charge, the dealer retains 4% and MFD retains approximately
3/4 of 1% of the public offering price. The sales charge may vary depending on
the number of shares of the Fund as well as certain other MFS Funds owned or
being purchased, the existence of an agreement to purchase additional shares
during a 13-month period (or 36-month period for purchases of $1 million or
more) or other special purchase programs. A description of the Right of
Accumulation, Letter of Intent and Group Purchase privileges by which the sales
charge may be reduced is set forth in the SAI.
PURCHASES SUBJECT TO A CDSC (but not subject to an initial sales charge). In the
following four circumstances, Class A shares are offered at net asset value
without an initial sales charge but subject to a CDSC, equal to 1% of the lesser
of the value of the shares redeemed (exclusive of reinvested dividend and
capital gain distributions) or the total cost of such shares, in the event of a
share redemption within 12 months following the purchase:
(i) on investments of $1 million or more in Class A shares;
(ii) on investments in Class A shares by certain retirement plans subject
to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), if, prior to July 1, 1996: (a) the plan had established
an account with the Shareholder Servicing Agent and (b) the
sponsoring organization had demonstrated to the satisfaction of MFD
that either (i) the employer had at least 25 employees or (ii) the
aggregate purchases by the retirement plan of Class A shares of
Funds in the MFS Funds would be in an aggregate amount of at least
$250,000 within a reasonable period of time, as determined by MFD in
its sole discretion;
(iii) on investments in Class A shares by certain retirement plans subject
to ERISA, if: (a) the retirement plan and/or sponsoring organization
subscribes to the MFS FUNDamental 401(k) Program or any similar
recordkeeping system made available by the Shareholder Servicing Agent
(the "MFS Participant Recordkeeping System"); (b) the plan establishes
an account with the Shareholder Servicing Agent on or after July 1,
1996; and (c) the aggregate purchases by the retirement plan of Class
A shares of the MFS Funds will be in an aggregate amount of at least
$500,000 within a reasonable period of time, as determined by MFD in
its sole discretion; and
(iv) on investments in Class A shares by certain retirement plans subject to
ERISA, if: (a) the plan establishes an account with the Shareholder
Servicing Agent on or after July 1, 1996 and (b) the plan has, at the
time of purchase, a market value of $500,000 or more invested in shares
of any class or classes of the MFS Funds. THE RETIREMENT PLAN WILL
QUALIFY UNDER THIS CATEGORY ONLY IF THE PLAN OR ITS SPONSORING
ORGANIZATION INFORMS THE SHAREHOLDER SERVICING AGENT PRIOR TO THE
PURCHASE THAT THE PLAN HAS A MARKET VALUE OF $500,000 OR MORE INVESTED
IN SHARES OF ANY CLASS OR CLASSES OF THE MFS FUNDS. THE SHAREHOLDER
SERVICING AGENT HAS NO OBLIGATION INDEPENDENTLY TO DETERMINE WHETHER
SUCH A PLAN QUALIFIES UNDER THIS CATEGORY.
In the case of all such purchases, MFD will pay commissions to dealers on new
investments in Class A shares made through such dealers as follows:
COMMISSION PAID BY MFD TO DEALERS CUMULATIVE PURCHASE AMOUNT
1.00% On the first $2,000,000, plus
0.80% Over $2,000,000 to $3,000,000, plus
0.50% Over $3,000,000 to $50,000,000, plus
0.25% Over $50,000,000
For purposes of determining the level of commissions to be paid to dealers with
respect to a shareholder's new investment in Class A shares made on or after
April 1, 1996, purchases for each shareholder account (and certain other
accounts for which the shareholder is a record or beneficial holder) will be
aggregated over a 12-month period (commencing from the date of the first such
purchase).
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" in the
Prospectus for further discussion of the CDSC.
WAIVERS OF INITIAL SALES CHARGE AND CDSC. In certain circumstances, the
initial sales charge imposed upon purchases of Class A shares and the CDSC
imposed upon redemption of Class A shares is waived. These circumstances are
described in Appendix A to this Prospectus. In addition to these circumstances,
the CDSC imposed upon the redemption of Class A shares is waived with respect to
shares held by certain retirement plans qualified under Section 401(a) or 403(b)
of the Code and subject to ERISA, where:
(i) the retirement plan and/or sponsoring organization does not subscribe
to the MFS Participant Recordkeeping System; and
(ii) the retirement plan and/or sponsoring organization demonstrates to the
satisfaction of, and certifies to, the Shareholder Servicing Agent that
the retirement plan has, at the time of certification or will have
pursuant to a purchase order placed with the certification, a market
value of $500,000 or more invested in shares of any class or classes of
the MFS Funds and aggregate assets of at least $10 million;
provided, however, that the CDSC will not be waived (i.e., it will be imposed)
in the event that there is a change in law or regulations which results in a
material adverse change to the tax advantaged nature of the plan, or in the
event that the plan and/or sponsoring organization: (i) becomes insolvent or
bankrupt; (ii) is terminated or partially terminated under ERISA or is
liquidated or dissolved; or (iii) is acquired by, merged into, or consolidated
with, any other entity.
CLASS B SHARES: Class B shares are offered at net asset value without an initial
sales charge but subject to a CDSC upon redemption as follows:
YEAR OF CONTINGENT
REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
First ........................................................ 4%
Second ....................................................... 4%
Third ........................................................ 3%
Fourth ....................................................... 3%
Fifth ........................................................ 2%
Sixth ........................................................ 1%
Seventh and following ........................................ 0%
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividends or capital gain distributions.
See "Redemption and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
Except as described below, MFD will pay commissions to dealers of 3.75% of the
purchase price of Class B shares purchased through dealers. MFD will also
advance to dealers the first year service fee payable under the Fund's
Distribution Plan (see "Distribution Plan" below) at a rate equal to 0.25% of
the purchase price of such shares. Therefore, the total amount paid to a dealer
upon the sale of Class B shares is 4% of the purchase price of the shares
(commission rate of 3.75% plus a service fee equal to 0.25% of the purchase
price).
Class B shares purchased by a retirement plan whose sponsoring organization
subscribes to the MFS Participant Recordkeeping System and which has established
its account with the Shareholder Servicing Agent on or after July 1, 1996, will
be subject to the CDSC described above, only under limited circumstances, as
explained below under "Waivers of CDSC." With respect to such purchases, MFD
pays an amount to dealers equal to 3.00% of the amount purchased through such
dealers (rather than the 4.00% payment described above), which is comprised of a
commission of 2.75% plus the advancement of the first year service fee equal to
0.25% of the purchase price payable under Fund's Distribution Plan. As discussed
above, such retirement plans are eligible to purchase Class A shares of the Fund
at net asset value without an initial sales charge but subject to a 1% CDSC if
the plan has, at the time of purchase, a market value of $500,000 or more
invested in shares of any class or classes of the MFS Funds. IN THIS EVENT, THE
PLAN OR ITS SPONSORING ORGANIZATION SHOULD INFORM THE SHAREHOLDER SERVICING
AGENT THAT THE PLAN IS ELIGIBLE TO PURCHASE CLASS A SHARES UNDER THIS CATEGORY;
THE SHAREHOLDER SERVICING AGENT HAS NO OBLIGATION INDEPENDENTLY TO DETERMINE
WHETHER SUCH A PLAN QUALIFIES UNDER THIS CATEGORY FOR THE PURCHASE OF CLASS A
SHARES.
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon redemption
of Class B shares is waived. These circumstances are described in Appendix A to
this Prospectus. In addition to these circumstances, the CDSC imposed upon the
redemption of Class B shares is waived with respect to shares held by a
retirement plan whose sponsoring organization subscribes to the MFS Participant
Recordkeeping System and which has established an account with the Shareholder
Servicing Agent on or after July 1, 1996; provided, however, that the CDSC will
not be waived (i.e., it will be imposed) in the event that there is a change in
law or regulations which results in a material adverse change to the tax
advantaged nature of the plan, or in the event that the plan and/or sponsoring
organization: (i) becomes insolvent or bankrupt; (ii) is terminated or partially
terminated under ERISA or is liquidated or dissolved; or (iii) is acquired by,
merged into, or consolidated with, any other entity.
CONVERSION OF CLASS B SHARES. Class B shares of the Fund that remain
outstanding for approximately eight years will convert to Class A shares of the
same Fund. Shares purchased through the reinvestment of distributions paid in
respect of Class B shares will be treated as Class B shares for purposes of the
payment of the distribution and service fees under the Fund's Distribution Plan.
See "Distribution Plan" below. However, for purposes of conversion to Class A
shares, all shares in a shareholder's account that were purchased through the
reinvestment of dividends and distributions paid in respect of Class B shares
(and which have not converted to Class A shares as provided in the following
sentence) will be held in a separate sub-account. Each time any Class B shares
in the shareholder's account (other than those in the sub-account) convert to
Class A shares, a portion of the Class B shares then in the sub-account will
also convert to Class A shares. The portion will be determined by the ratio that
the shareholder's Class B shares not acquired through reinvestment of dividends
and distributions that are converting to Class A shares bear to the
shareholder's total Class B shares not acquired through reinvestment. The
conversion of Class B shares to Class A shares is subject to the continuing
availability of a ruling from the Internal Revenue Service or an opinion of
counsel that such conversion will not constitute a taxable event for federal tax
purposes. There can be no assurance that such ruling or opinion will be
available, and the conversion of Class B shares to Class A shares will not occur
if such ruling or opinion is not available. In such event, Class B shares would
continue to be subject to higher expenses than Class A shares for an indefinite
period.
CLASS C SHARES: Class C shares are offered at net asset value without an initial
sales charge but are subject to a CDSC of 1.00% upon redemption during the first
year. Class C shares do not convert to any other class of shares of the Fund.
The maximum investment in Class C shares that may be made is up to $1,000,000
per transaction.
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividend and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividend or capital gain distributions.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" below
for further discussion of the CDSC.
MFD will pay dealers 1.00% of the purchase price of Class C shares purchased
through dealers and, as compensation therefor. MFD will retain 1.00% per annum
distribution and service fee paid under the Fund's Distribution Plan to MFD for
the first year after purchase (see "Distribution Plan" below).
Class C shares are not currently available for purchase by any retirement plan
qualified under Sections 401(a) or 403(b) of the Code if the retirement plan
and/or the sponsoring organization subscribe to the MFS FUNDamental 401(k) Plan
or another similar recordkeeping program made available by the Shareholder
Servicing Agent.
WAIVERS OF CDSC: In certain circumstances, the CDSC imposed upon
redemption of Class C shares is waived. These circumstances are described in
Appendix A to the Prospectus.
GENERAL: The following information applies to purchases of all classes of the
Fund's shares.
MINIMUM INVESTMENT. Except as described below, the minimum initial
investment is $1,000 per account and the minimum additional investment is $50
per account. Accounts being established for monthly automatic investments and
under payroll savings programs and tax-deferred retirement programs (other than
IRAs) involving the submission of investments by means of group remittal
statements are subject to a $50 minimum on initial and additional investments
per account. The minimum initial investment for IRAs is $250 per account and the
minimum additional investment is $50 per account. Accounts being established for
participation in the Automatic Exchange Plan are subject to a $50 minimum on
initial and additional investments per account. There are also other limited
exceptions to these minimums for certain tax-deferred retirement programs. Any
minimums may be changed at any time at the discretion of MFD. The Fund reserves
the right to cease offering its shares at any time.
SUBSEQUENT INVESTMENT BY TELEPHONE: Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-free
at (800) 225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this telephone
purchase privilege must so elect on their Account Application and designate
thereon a bank and account number from which purchases will be made. If a
telephone purchase request is received by the Shareholder Servicing Agent on any
business day prior to the close of regular trading on the Exchange (generally,
4:00 p.m., Eastern time), the purchase will occur at the closing net asset value
of the shares purchased on that day. The Shareholder Servicing Agent may be
liable for any losses resulting from unauthorized telephone transactions if it
does not follow reasonable procedures designed to verify the identity of the
caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
RIGHT TO REJECT PURCHASE ORDERS/MARKET TIMING. Purchases and exchanges
should be made for investment purposes only. The Fund and MFD each reserve the
right to reject or restrict any specific purchase or exchange request. In the
event that the Fund or MFD rejects an exchange request, neither the redemption
nor the purchase side of the exchange will be processed.
The Fund is not designed for professional market timing organizations or other
entities using programmed or frequent exchanges. The Fund defines a "market
timer" as an individual, or organization acting on behalf of one or more
individuals, if (i) the individual or organization makes three or more exchange
requests out of the Fund per calender year and (ii) any one of such exchange
requests represents shares equal in value to 1/2 of 1% or more of the Fund's net
assets at the time of the request. Accounts under common ownership or control,
including accounts administered by market timers, will be aggregated for
purposes of this definition.
As noted above, the Fund and MFD each reserve the right to reject or restrict
any specific purchase and exchange request and, in addition, may impose specific
limitations with respect to market timers, including delaying for up to seven
days on the purchase side of an exchange request by market timers or
specifically rejecting or otherwise restricting purchase or exchange requests by
market timers. Other MFS Funds may have different and/or more or less
restrictive policies with respect to market timers than the Fund. These policies
are disclosed in the prospectuses of these other MFS Funds.
DEALER CONCESSIONS. Dealers may receive different compensation with respect
to sales of Class A, Class B and Class C shares. In addition, from time to time,
MFD may pay dealers 100% of the applicable sales charge on sales of Class A
shares of certain specified MFS Funds sold by such dealer during a specified
sales period. In addition, MFD or its affiliates may, from time to time, pay
dealers an additional commission equal to 0.50% of the net asset value of all of
the Class B and/or Class C shares of certain specified MFS Funds sold by such
dealer during a specified sales period. In addition, from time to time, MFD, at
its expense, may provide additional commissions, compensation or promotional
incentives ("concessions") to dealers which sell shares of the Fund. Such
concessions provided by MFD may include financial assistance to dealers in
connection with preapproved conferences or seminars, sales or training programs
for invited registered representatives, payment for travel expenses, including
lodging, incurred by registered representatives for such seminars or training
programs, seminars for the public, advertising and sales campaigns regarding one
or more MFS Funds, and/or other dealer-sponsored events. From time to time, MFD
may make expense reimbursements for special training of a dealer's registered
representatives in group meetings or to help pay the expenses of sales contests.
Other concessions may be offered to the extent not prohibited by state laws or
any self-regulatory agency, such as the NASD.
SPECIAL INVESTMENT PROGRAMS. For shareholders who elect to participate in
certain investment programs (e.g., the Automatic Investment Plan) or other
shareholder services, MFD or its affiliates may either (i) give a gift of
nominal value, such as a hand-held calculator, or (ii) make a nominal charitable
contribution on their behalf.
RESTRICTIONS ON ACTIVITIES OF NATIONAL BANKS. The Glass-Steagall Act
prohibits national banks from engaging in the business of underwriting,
selling or distributing securities. Although the scope of the prohibition has
not been clearly defined, MFD believes that such Act should not preclude banks
from entering into agency agreements with MFD. If, however, a bank were
prohibited from so acting, the Trustees would consider what actions, if any,
would be necessary to continue to provide efficient and effective shareholder
services in respect of Shareholders who invested in the Fund through a
national bank. It is not expected that shareholders would suffer any adverse
financial consequence as a result of these occurrences. In addition, state
securities laws on this issue may differ from the interpretation of federal
law expressed herein and banks and financial institutions may be required to
register as broker-dealers pursuant to state law.
------------------------
A shareholder whose shares are held in the name of, or controlled by, a dealer
might not receive many of the privileges and services from the Fund (such as
Right of Accumulation, Letter of Intent and certain recordkeeping services) that
the Fund ordinarily provides.
EXCHANGES
Subject to the requirements set forth below, some or all of the shares in an
account with the Fund for which payment has been received by the Fund (i.e., an
established account) may be exchanged for shares of the same class of any of the
other MFS Funds at net asset value (if available for sale).Shares of one class
may not be exchanged for shares of any other class.
EXCHANGES AMONG MFS FUNDS (EXCLUDING MFS MONEY MARKET FUNDS): No initial sales
charges or CDSC will be imposed in connection with an exchange from shares of an
MFS Fund to shares of any other MFS Fund, except with respect to exchanges from
an MFS money market fund to another MFS Fund which is not an MFS money market
fund (discussed below). With respect to an exchange involving shares subject to
a CDSC, the CDSC will be unaffected by the exchange and the holding period for
purposes of calculating the CDSC will carry over to the acquired shares.
EXCHANGES FROM AN MFS MONEY MARKET FUND: Special rules apply with respect to the
imposition of an initial sales charge or a CDSC for exchanges from an MFS money
market fund to another MFS Fund which is not an MFS money market fund. These
rules are described under the caption "Exchanges" in the Prospectuses of those
MFS money market funds.
EXCHANGES INVOLVING THE MFS FIXED FUND: Class A shares of any MFS Fund held by
certain qualified retirement plans may be exchanged for units of participation
of the MFS Fixed Fund (a bank collective investment fund) (the "Units"), and
Units may be exchanged for Class A shares of any MFS Fund. With respect to
exchanges between Class A shares subject to a CDSC and Units, the CDSC will
carry over to the acquired shares or Units and will be deducted from the
redemption proceeds when such shares or Units are subsequently redeemed,
assuming the CDSC is then payable (the period during which the Class A shares
and the Units were held will be aggregated for purposes of calculating the
applicable CDSC). In the event that a shareholder initially purchases Units and
then exchanges into Class A shares subject to an initial sales charge of an MFS
Fund, the initial sales charge shall be due upon such exchange, but will not be
imposed with respect to any subsequent exchanges between such Class A shares and
Units with respect to shares on which the initial sales charge has already been
paid. In the event that a shareholder initially purchases Units and then
exchanges into Class A shares subject to a CDSC of an MFS Fund, the CDSC period
will commence upon such exchange, and the applicability of the CDSC with respect
to subsequent exchanges shall be governed by the rules set forth above in this
paragraph.
GENERAL: A shareholder should read the prospectus of the other MFS Fund into
which an exchange is made and consider the differences in objectives, policies
and restrictions before making any exchange. Exchanges will be made only after
instructions in writing or by telephone (an "Exchange Request") are received for
an established account by the Shareholder Servicing Agent in proper form (i.e.,
if in writing -- signed by the record owner(s) exactly as the shares are
registered; if by telephone -- proper account identification is given by the
dealer or shareholder of record) and each exchange must involve either shares
having an aggregate value of at least $1,000 ($50 in the case of retirement plan
participants whose sponsoring organizations subscribe to the MFS FUNDamental
401(k) Plan or another similar 401(k) recordkeeping system made available by the
Shareholder Servicing Agent) or all the shares in the account. If an Exchange
Request is received by the Shareholder Servicing Agent on any business day prior
to the close of regular trading on the Exchange (generally, 4:00 p.m., Eastern
time), the exchange will occur on that day if all the requirements set forth
above have been complied with at that time and subject to the Fund's right to
reject purchase orders. No more than five exchanges may be made in any one
Exchange Request by telephone. Additional information concerning this exchange
privilege and prospectuses for any of the other MFS Funds may be obtained from
dealers or the Shareholder Servicing Agent. For federal and (generally) state
income tax purposes, an exchange is treated as a sale of the shares exchanged
and, therefore, an exchange could result in a gain or loss to the shareholder
making the exchange. Exchanges by telephone are automatically available to most
non-retirement plan accounts and certain retirement plan accounts. For further
information regarding exchanges by telephone, see "Redemptions by Telephone."
The exchange privilege (or any aspect of it) may be changed or discontinued and
is subject to certain limitations, including certain restrictions on purchases
by market timers.
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the value of his account on any
date on which the Fund is open for business by redeeming shares at their net
asset value (a redemption) or by selling such shares to the Fund through a
dealer (a repurchase). Certain redemptions and repurchases are, however, subject
to a CDSC. See "Contingent Deferred Sales Charge" below. Because the net asset
value of shares of the account fluctuates, redemptions or repurchases, which are
taxable transactions, are likely to result in gains or losses to the
shareholder. When a shareholder withdraws an amount from his account, the
shareholder is deemed to have tendered for redemption a sufficient number of
full and fractional shares in his account to cover the amount withdrawn. The
proceeds of a redemption or repurchase will normally be available within seven
days, except for shares purchased or received in exchange for shares purchased
by check (including certified checks or cashier's checks). Payment of redemption
proceeds may be delayed for up to 15 days from the purchase date in an effort to
assure that such check has cleared.
REDEMPTION BY MAIL: Each shareholder may redeem all or any portion of the shares
in his account by mailing or delivering to the Shareholder Servicing Agent (see
back cover for address) a stock power with a written request for redemption or
letter of instruction, together with his share certificates (if any were
issued), all in "good order" for transfer. "Good order" generally means that the
stock power, written request for redemption, letter of instruction or
certificate must be endorsed by the record owner(s) exactly as the shares are
registered and the signature(s) must be guaranteed in the manner set forth below
under the caption "Signature Guarantee." In addition, in some cases "good order"
will require the furnishing of additional documents. The Shareholder Servicing
Agent may make certain de minimis exceptions to the above requirements for
redemption. Within seven days after receipt of a redemption request in "good
order" by the Shareholder Servicing Agent, the Fund will make payment in cash of
the net asset value of the shares next determined after such redemption request
was received, reduced by the amount of any applicable CDSC described above and
the amount of any income tax required to be withheld, except during any period
in which the right of redemption is suspended or date of payment is postponed
because the Exchange is closed or trading on such Exchange is restricted or to
the extent otherwise permitted by the 1940 Act if an emergency exists. See "Tax
Status" below.
REDEMPTION BY TELEPHONE: Each shareholder may redeem an amount from his account
by telephoning the Shareholder Servicing Agent toll-free at (800) 225-2606.
Shareholders wishing to avail themselves of this telephone redemption privilege
must so elect on their Account Application, designate thereon a bank and account
number to receive the proceeds of such redemption, and sign the Account
Application Form with the signature(s) guaranteed in the manner set forth below
under the caption "Signature Guarantee." The proceeds of such a redemption,
reduced by the amount of any applicable CDSC and the amount of any income tax
required to be withheld, are mailed by check to the designated account, without
charge, if the redemption proceeds do not exceed $1,000, and are wired in
federal funds to the designated account if the redemption proceeds exceed
$1,000. If a telephone redemption request is received by the Shareholder
Servicing Agent by the close of regular trading on the Exchange on any business
day, shares will be redeemed at the closing net asset value of the Fund on that
day. Subject to the conditions described in this section, proceeds of a
redemption are normally mailed or wired on the next business day following the
date of receipt of the order for redemption. The Shareholder Servicing Agent
will not be liable for any losses resulting from unauthorized telephone
transactions if it follows reasonable procedures designed to verify the identity
of the caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
REPURCHASE THROUGH A DEALER: If a shareholder desires to sell his shares through
his dealer (a repurchase), the shareholder can place a repurchase order with his
dealer, who may charge the shareholder a fee. IF THE DEALER RECEIVES THE
SHAREHOLDER'S ORDER PRIOR TO THE CLOSE OF REGULAR TRADING ON THE EXCHANGE AND
COMMUNICATES IT TO MFD BEFORE THE CLOSE OF BUSINESS ON THE SAME DAY, THE
SHAREHOLDER WILL RECEIVE THE NET ASSET VALUE CALCULATED ON THAT DAY, REDUCED BY
THE AMOUNT OF ANY APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME TAX REQUIRED TO
BE WITHHELD.
CONTINGENT DEFERRED SALES CHARGE: Investments in Class A, Class B and Class C
shares ("Direct Purchases") will be subject to a CDSC for a period of: (i) with
respect to Class A and Class C shares, 12 months, (however, the CDSC on Class A
shares is only imposed with respect to purchases of $1 million or more of Class
A shares or purchases by certain retirement plans of Class A shares); or (ii)
with respect to Class B shares, six years. Purchases of Class A shares made
during a calendar month, regardless of when during the month the investment
occurred, will age one month on the last day of the month and each subsequent
month. Class C and Class B shares purchased on or after January 1, 1993 will be
aggregated on a calendar month basis -- all transactions made during a calendar
month, regardless of when during the month they have occurred, will age one year
at the close of business on the last day of such month in the following calendar
year and each subsequent year. For Class B shares of the Fund purchased prior to
January 1, 1993, transactions will be aggregated on a calendar year basis -- all
transactions made during a calendar year, regardless of when during the year
they have occurred, will age one year at the close of business on December 31 of
that year and each subsequent year. Prior to April 1, 1996, Class C shares of
the MFS Funds were not subject to a CDSC upon redemption. In no event will Class
C shares of the MFS Funds purchased prior to this date be subject to a CDSC. For
the purpose of calculating the CDSC upon redemption of shares acquired in an
exchange on or after April 1, 1996, the purchase of shares acquired in one or
more exchanges is deemed to have occurred at the time of the original purchase
of the exchanged shares (if such original purchase occurred prior to April 1,
1996, then no CDSC would be imposed upon such a redemption).
At the time of a redemption, the amount by which the value of a shareholder's
account for a particular class of shares represented by Direct Purchases exceeds
the sum of the six calendar year aggregations (12 months in the case of
purchases of Class C shares and of purchases of $1 million or more of Class A
shares or purchases by certain retirement plans of Class A shares) of Direct
Purchases may be redeemed without charge ("Free Amount"). Moreover, no CDSC is
ever assessed on additional shares acquired through the automatic reinvestment
of dividends or capital gain distributions ("Reinvested Shares"). Therefore, at
the time of redemption of a particular class, (i) any Free Amount is not subject
to the CDSC and (ii) the amount of the redemption equal to the then-current
value of Reinvested Shares is not subject to the CDSC, but (iii) any amount of
the redemption in excess of the aggregate of the then-current value of
Reinvested Shares and the Free Amount is subject to a CDSC. The CDSC will first
be applied against the amount of Direct Purchases which will result in any such
charge being imposed at the lowest possible rate. The CDSC to be imposed upon
redemptions of shares will be calculated as set forth in "Purchases" above.
The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except as described in Appendix A hereto.
GENERAL: The following information applies to redemptions and repurchases of
all classes of the Fund's shares.
SIGNATURE GUARANTEE. In order to protect shareholders against fraud, the
Fund requires, in certain instances as indicated above, that the shareholder's
signature be guaranteed. In these cases the shareholder's signature must be
guaranteed by an eligible bank, broker, dealer, credit union, national
securities exchange, registered securities association, clearing agency or
savings association. Signature guarantees shall be accepted in accordance with
policies established by the Shareholder Servicing Agent.
REINSTATEMENT PRIVILEGE. Shareholders of the Fund who have redeemed their
shares have a one-time right to reinvest the redemption proceeds in the same
class of shares of any of the MFS Funds (if shares of such Fund are available
for sale) at net asset value (with a credit for any CDSC paid) within 90 days of
the redemption pursuant to the Reinstatement Privilege. If the shares credited
for any CDSC paid are then redeemed within six years of the initial purchase in
the case of Class B shares or within 12 months of the initial purchase for Class
C shares and certain Class A share purchases, a CDSC will be imposed upon
redemption. Such purchases under the Reinstatement Privilege are subject to all
limitations in the SAI regarding this privilege.
IN-KIND DISTRIBUTIONS. The Trust agrees to redeem shares of the Fund solely
in cash up to the lesser of $250,000 or 1% of the net asset value of the Fund
during any 90-day period for any one shareholder. The Fund has reserved the
right to pay other redemptions, either totally or partially, by a distribution
in-kind of securities (instead of cash) from the Fund's portfolio. The
securities distributed in such a distribution would be valued at the same amount
as that assigned to them in calculating the net asset value for the shares being
sold. If a shareholder received a distribution in-kind, the shareholder could
incur brokerage or transaction charges when converting the securities to cash.
INVOLUNTARY REDEMPTIONS/SMALL ACCOUNTS. Due to the relatively high cost of
maintaining small accounts, the Fund reserves the right to redeem shares in any
account for their then-current value if at any time the total investment in such
account drops below $500 because of redemptions, except in the case of accounts
being established for monthly automatic investments and certain payroll savings
programs, Automatic Exchange Plan accounts and tax-deferred retirement plans,
for which there is a lower minimum investment requirement. See "Purchases --
General -- Minimum Investment." Shareholders will be notified that the value of
their account is less than the minimum investment requirement and allowed 60
days to make an additional investment before the redemption is processed.
DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class A, Class B and Class C
shares pursuant to Section 12(b) of the 1940 Act and Rule 12b-1 thereunder (the
"Distribution Plan"), after having concluded that there is a reasonable
likelihood that the Plan would benefit the Fund and its shareholders.
In certain circumstances, the fees described below may not be imposed or are
being waived. These circumstances, if any, are described below under the heading
"Current Level of Distribution and Service Fees."
FEATURES COMMON TO EACH CLASS OF SHARES: There are features of the Distribution
Plan that are common to each class of shares as described below.
SERVICE FEES. The Distribution Plan provides that the Fund may pay MFD a
service fee of up to 0.25% of the average daily net assets attributable to the
class of shares to which the Distribution Plan relates (i.e., Class A, Class B
or Class C shares, as appropriate) (the "Designated Class") annually in order
that MFD may pay expenses on behalf of the Fund relating to the servicing of
shares of the Designated Class. The service fee is used by MFD to compensate
dealers which enter into a sales agreement with MFD in consideration for all
personal services and/or account maintenance services rendered by the dealer
with respect to shares of the Designated Class owned by investors for whom such
dealer is the dealer or holder of record. MFD may from time to time reduce the
amount of the service fees paid for shares sold prior to a certain date. Service
fees may be reduced for a dealer that is the holder or dealer of record for an
investor who owns shares of the Fund having an aggregate net asset value at or
above a certain dollar level. Dealers may from time to time be required to meet
certain criteria in order to receive service fees. MFD or its affiliates are
entitled to retain all service fees payable under the Distribution Plan for
which there is no dealer of record or for which qualification standards have not
been met as partial consideration for personal services and/or account
maintenance services performed by MFD or its affiliates to shareholder accounts.
DISTRIBUTION FEES. The Distribution Plan provides that the Fund may pay MFD
a distribution fee based on the average daily net assets attributable to the
Designated Class as partial consideration for distribution services performed
and expenses incurred in the performance of MFD's obligations under its
distribution agreement with the Fund. See "Management of the Fund --
Distributor" in the SAI. The amount of the distribution fee paid by the Fund
with respect to each class differs under the Distribution Plan, as does the use
by MFD of such distribution fees. Such amounts and uses are described below in
the discussion of the provisions of the Distribution Plan relating to each class
of shares. While the amount of compensation received by MFD in the form of
distribution fees during any year may be more or less than the expense incurred
by MFD under its distribution agreement with the Fund, the Fund is not liable to
MFD for any losses MFD may incur in performing services under its distribution
agreement with the Fund.
OTHER COMMON FEATURES. Fees payable under the Distribution Plan are charged
to, and therefore reduce, income allocated to shares of the Designated Class.
The provisions of the Distribution Plan relating to operating policies as well
as initial approval, renewal, amendment and termination are substantially
identical as they relate to each class of shares covered by the Distribution
Plan.
FEATURES UNIQUE TO EACH CLASS OF SHARES: There are certain features of the
Distribution Plan that are unique to each class of shares, as described below.
CLASS A SHARES. Class A shares are generally offered with an initial sales
charge, a substantial portion of which is paid to or retained by the dealer
making the sale (and the remainder of which is paid to MFD). See "Purchases --
Class A Shares" above. In addition to the initial sales charge, the dealer also
generally receives the ongoing 0.25% per annum service fee, as discussed above.
The distribution fee paid to MFD under the Distribution Plan is equal, on an
annual basis, to 0.10% of the Fund's average daily net assets attributable to
Class A shares. As noted above, MFD may use the distribution fee to cover
distribution-related expenses incurred by it under its distribution agreement
with the Fund, including commissions to dealers and payments to wholesalers
employed by MFD (e.g., MFD pays commission to dealers with respect to purchases
of $1 million or more and purchases by certain retirement plans of Class A
shares which are sold at net asset value but which are subject to a 1% CDSC for
one year after purchase). See "Purchases -- Class A Shares" above. In addition,
to the extent that the aggregate service and distribution fees paid under the
Distribution Plan do not exceed 0.35% per annum of the average daily net assets
of the Fund attributable to Class A shares, the Fund is permitted to pay such
distribution-related expenses or other distribution-related expenses.
CLASS B SHARES. Class B shares are offered at net asset value without an
initial sales charge but subject to a CDSC. See "Purchases -- Class B Shares"
above. MFD will advance to dealers the first year service fee described above at
a rate equal to 0.25% of the purchase price of such shares and, as compensation
therefor, MFD may retain the service fee paid by the Fund with respect to such
shares for the first year after purchase. Dealers will become eligible to
receive the ongoing 0.25% per annum service fee with respect to such shares
commencing in the thirteenth month following purchase.
Under the Distribution Plan, the Fund pays MFD a distribution fee equal, on an
annual basis, to 0.75% of the Fund's average daily net assets attributable to
Class B shares. As noted above, this distribution fee may be used by MFD to
cover its distribution-related expenses under its distribution agreement with
the Fund (including the 3.75% commission it pays to dealers upon purchase of
Class B shares, as described under "Purchases -- Class B Shares" above).
CLASS C SHARES. Class C shares are offered at net asset value without an
initial sales charge but subject to a CDSC. See "Purchases -- Class C shares"
above. MFD will pay a commission to dealers of 1.00% of the purchase price of
Class C shares purchased through dealers at the time of purchase. In
compensation for this 1.00% commission paid by MFD to dealers, MFD will retain
the 1.00% per annum Class C distribution and service fees paid by the Fund with
respect to such shares for the first year after purchase, and dealers will
become eligible to receive from MFD the ongoing 1.00% per annum distribution and
service fees paid by the Fund to MFD with respect to such shares commencing in
the thirteenth month following purchase.
This ongoing 1.00% fee is comprised of the 0.25% per annum service fee paid to
MFD under the Distribution Plan (which MFD in turn pays to dealers), as
discussed above, and a distribution fee paid to MFD (which MFD also in turn pays
to dealers) under the Distribution Plan equal, on an annual basis, to 0.75% of
the Fund's average daily net assets attributable to Class C shares.
CURRENT LEVEL OF DISTRIBUTION AND SERVICE FEES: The Fund's Class A, Class B and
Class C distribution and service fees for its current fiscal year are 0.35%,
1.00% and 1.00% per annum, respectively.
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 generally will be higher.
TAX STATUS
The Fund is treated as an entity separate from the other series of the Trust for
federal income tax purposes. In order to minimize the taxes the Fund would
otherwise be required to pay, the Fund intends to qualify each year as a
"regulated investment company" under Subchapter M of the Code. Because the Fund
intends to distribute all of its net investment income and net realized capital
gains to its shareholders in accordance with the timing requirements imposed by
the Code, it is not expected that the Fund will be required to pay any federal
income or excise taxes, although the Fund's foreign-source income may be subject
to foreign withholding taxes.
Shareholders of the Fund normally will have to pay federal income taxes (and any
state or local taxes) on the dividends and capital gain distributions they
receive from the Fund, whether the distribution is paid in cash or in additional
shares. A portion of the dividends received from the Fund (but none of the
Fund's capital gain distributions) may qualify for the dividends received
deduction for corporations. Shortly after the end of each calendar year, each
Fund shareholder will be sent a statement setting forth the federal income tax
status of all dividends and distributions for that year, including the portion
taxable as ordinary income, the portion taxable as long-term capital gain, the
portion, if any, representing a return of capital (which is free of current
taxes but results in a basis reduction), and the amount, if any, of federal
income tax withheld. In certain circumstances, the Fund may also elect to "pass
through" to shareholders foreign income taxes paid by the Fund. Under those
circumstances, the Fund will notify shareholders of their pro rata portion of
the foreign income taxes paid by the Fund; shareholders may be eligible for
foreign tax credits or deductions with respect to those taxes, but will be
required to treat the amount of the taxes as an amount distributed to them and
thus 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 shortly before the Fund makes a distribution may
thus pay the full price for the shares and then effectively receive a portion of
the purchase price back as a taxable distribution.
The Fund intends to withhold U.S. federal income tax at the rate of 30% on
dividends and other payments that are subject to such withholding and that are
made to persons who are neither citizens nor residents of the U.S., regardless
of whether a lower rate may be permitted under an applicable treaty. The Fund is
also required in certain circumstances to apply backup withholding at the rate
of 31% on taxable dividends and redemption proceeds paid to any shareholder
(including a shareholder who is neither a citizen nor a resident of the U.S.)
who does not furnish to the Fund certain information and certifications or who
is otherwise subject to backup withholding. Backup withholding will not,
however, be applied to payments that have been subject to 30% withholding.
Prospective investors should read the Fund's Account Application for additional
information regarding backup withholding of federal income tax and should
consult their own tax advisers as to the tax consequences to them of an
investment in the Fund.
NET ASSET VALUE
The net asset value per share of each class of 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 the Exchange by
deducting the amount of the liabilities attributable to the class from the value
of the assets attributable to the class and dividing the difference by the
number of shares of the class outstanding. Assets in the portfolio are valued on
the basis of their market values or otherwise at their fair values, as described
in the SAI. All investments and assets are expressed in U.S. dollars based upon
current currency exchange rates. The net asset value of each class of shares is
effective for orders received by the dealer prior to its calculation and
received by MFD prior to the close of that business day.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund, one of three series of the Trust, has three classes of shares which it
offers to the general public, entitled Class A, Class B and Class C Shares of
Beneficial Interest (without par value). The Fund also has a class of shares
which it offers exclusively to certain retirement plans established for the
benefit of employees of the Adviser and its affiliates, entitled Class I shares.
The Trust has reserved the right to create and issue additional classes and
series of shares, in which case each class of shares of a series would
participate equally in the earnings, dividends and assets attributable to that
class of that particular series. Shareholders are entitled to one vote for each
share held and shares of each series would be entitled to vote separately to
approve investment advisory agreements or changes in investment restrictions,
but shares of all series would vote together in the election or selection of
Trustees and accountants. Additionally, each class of shares of a series will
vote separately on any material increases in the fees under the Distribution
Plan or on any other matter that affects solely that class of shares, but will
otherwise vote together with all other classes of shares of the series on all
other matters.
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 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 omissions 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 the 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 and Class C 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 and Class C shares assume no CDSC is paid. The current
distribution rate differs from the yield calculation because it may include
distributions to shareholders from sources other than dividends and interest,
such as premium income from option writing, short-term capital gains, and return
of invested capital, and is calculated over a different period of time. Total
rate of return quotations will reflect the average annual percentage change over
stated periods in the value of an investment in 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 will give effect to the imposition of any
applicable CDSC assessed upon redemptions of the Fund's Class B and Class C
shares. Such total rate of return quotations may be accompanied by quotations
which do not reflect the reduction in value of the initial investment due to the
sales charge or the deduction of a CDSC, and which will thus be higher. The Fund
offers multiple classes of shares which were initially offered for sale to the
public on different dates. The calculation of total rate of return for a class
of shares which initially was offered for sale to the public subsequent to
another class of shares of the Fund is based both on (i) the performance of the
Fund's newer class from the date it initially was offered for sale to the public
and (ii) the performance of the Fund's oldest class from the date it initially
was offered for sale to the public up to the date that the newer class initially
was offered for sale to the public. See the SAI for further information on the
calculation of total rate of return for share classes initially offered for sale
to the public on different dates.
All performance quotations are based on historical performance and are not
intended to indicate future performance. Yields 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 SAI. For further information
about the Fund's performance for the fiscal year ended October 31, 1996, please
see the Fund's Annual Report. A copy of the Annual Report may be obtained
without charge by contacting the Shareholder Servicing Agent (see back cover for
address and phone number). In addition to information provided in shareholder
reports, the Fund may, in its discretion, from time to time, make a list of all
or a portion of its holdings available to investors upon request.
9. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described below
or concerning other aspects of the Fund should contact the Shareholder Servicing
Agent (see back cover for address and phone number).
ACCOUNT AND CONFIRMATION STATEMENTS -- Each shareholder will receive
confirmation statements showing the transaction activity in his account. At the
end of each calendar year, each shareholder will receive income tax information
regarding reportable dividends and 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 record date. Dividends and capital gain
distributions in amounts less than $10 will automatically be reinvested in
additional shares of the Fund. If a shareholder has elected to receive dividends
and/or capital gain distributions in cash and the postal or other delivery
service is unable to deliver checks to the shareholder's address of record, or
the shareholder does not respond to mailings from the Shareholder Servicing
Agent with regard to uncashed distribution checks, such shareholder's
distribution option will automatically be converted to having all dividends and
other distributions reinvested in additional shares. Any request to change a
distribution option must be received by the Shareholder Servicing Agent by the
record date for a dividend or distribution in order to be effective for that
dividend or distribution. No interest will accrue on amounts represented by
uncashed distribution or redemption checks.
INVESTMENT AND WITHDRAWAL PROGRAMS -- For the convenience of shareholders, the
Fund makes available the following programs designed to enable shareholders to
add to their investment in an account with the Fund or withdraw from it with a
minimum of paper work. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or the Fund.
LETTER OF INTENT: If a shareholder (other than a group purchaser as described in
the SAI) anticipates purchasing $100,000 or more of Class A shares of the Fund
alone or in combination with shares of any class of other MFS Funds or MFS Fixed
Fund (a bank collective investment Fund) within a 13-month period (or 36-month
period for purchases of $1 million or more), the shareholder may obtain such
shares 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 Classes A, B and C shares of
that shareholder in the MFS Funds or MFS Fixed Fund (a bank collective
investment Fund) reaches a discount level.
DISTRIBUTION INVESTMENT PROGRAM: Shares of a particular class of the Fund may be
sold at net asset value (and without any applicable CDSC) through the automatic
reinvestment of dividend and capital gain distributions from the same class of
another MFS Fund. Furthermore, distributions made by the Fund may be
automatically invested at net asset value (and without any 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 based upon
the value of his account. Each payment under a Systematic Withdrawal Plan (a
"SWP") must be at least $100 except in certain limited circumstances. The
aggregate withdrawals of Class B and Class C shares in any year pursuant to a
SWP will not be subject to a CDSC and are generally limited to 10% of the value
of the account at the time of the establishment of the SWP. The CDSC will not be
waived in the case of SWP redemptions of Class A shares which are subject to a
CDSC.
DOLLAR COST AVERAGING PROGRAMS --
AUTOMATIC INVESTMENT PLAN: Cash investments of $50 or more may be made through a
shareholder's checking account on any day of the month. If the Shareholder does
not specify a date, the investment will automatically occur on the first
business day of the month. Required forms are available from the Shareholder
Servicing Agent or investment dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least $5,000
in any MFS Fund may participate in the Automatic Exchange Plan. 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 if such Fund is available for sale. Under the
Automatic Exchange Plan, exchanges of at least $50 each may be made to up to six
different funds. A shareholder should consider the objectives and policies of a
fund and review its prospectus before electing to exchange money into such fund
through the Automatic Exchange Plan. No transaction fee is imposed in connection
with exchange transactions under the Automatic Exchange Plan. However, exchanges
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 SAI for further information
concerning the Automatic Exchange Plan. Investors should consult their tax
advisers for information regarding the potential capital gain and loss
consequences of transactions under the Automatic Exchange Plan.
Because a dollar cost averaging program involves periodic purchases of shares
regardless of fluctuating share offering prices, a shareholder should consider
his financial ability to continue his purchases through periods of low price
levels. Maintaining a dollar cost averaging program concurrently with a
withdrawal program could be disadvantageous because of the sales charges
included in share purchases in the case of Class A shares, and because of
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 SAI, dated March 1, 1997, contains more detailed information about
the Trust and the Fund, including, but not limited to, information related to
(i) the investment objective, policies and restrictions, including the purchase
and sale of options, Futures Contracts, Options on Futures Contracts, Forward
Contracts and Options on Foreign Currencies; (ii) the Trustees, officers and
investment adviser; (iii) portfolio trading; (iv) the Fund's shares, including
rights and liabilities of shareholders; (v) tax status of dividends and
distributions; (vi) the Distribution Plan; (vii) the method used to calculate
total rate of return quotations; and (viii) various services and privileges
provided by the Fund for the benefit of its shareholders, including additional
information with respect to the exchange privilege.
<PAGE>
APPENDIX A
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable sales
charges are waived (Section I), the initial sales charge and the CDSC for Class
A shares is waived (Section II), and the CDSC for Class B and Class C shares is
waived (Section III).
I. WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on
purchases of Class A shares and the CDSC imposed on certain redemptions of
Class A shares and on redemptions of Class B and Class C shares, as
applicable, is waived:
1. DIVIDEND REINVESTMENT
o Shares acquired through dividend or capital gain reinvestment; and
o Shares acquired by automatic reinvestment of distributions of
dividends and capital gains of any MFS Fund pursuant to the
Distribution Investment Program.
2. CERTAIN ACQUISITIONS/LIQUIDATIONS
o Shares acquired on account of the acquisition or liquidation of assets
of other investment companies or personal holding companies.
3. AFFILIATES OF AN MFS FUND/CERTAIN DEALERS. Shares acquired by:
o Officers, eligible directors, employees (including retired employees)
and agents of MFS, Sun Life or any of their subsidiary companies;
o Trustees and retired trustees of any investment company for which MFD
serves as distributor;
o Employees, directors, partners, officers and trustees of any sub-
adviser to any MFS Fund;
o Employees or registered representatives of dealers and other financial
institution ("dealers") which have a sales agreement with MFD;
o Certain family members of any such individual and their spouses
identified above and certain trusts, pension, profit-sharing or other
retirement plans for the sole benefit of such persons, provided the
shares are not resold except to the MFS Fund which issued the shares;
and
o Institutional Clients of MFS or MFS Institutional Advisors, Inc.
4. INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
o Shares redeemed at an MFS Fund's direction due to the small size of a
shareholder's account. See "Redemptions and Repurchases -- General --
Involuntary Redemptions/ Small Accounts" in the Prospectus.
5. RETIREMENT PLANS (CDSC WAIVER ONLY). Shares redeemed on account of
distributions made under the following circumstances:
INDIVIDUAL RETIREMENT ACCOUNTS ("IRA'S")
o Death or disability of the IRA owner.
SECTION 401(A) PLANS ("401(A) PLANS") AND SECTION 403(B) EMPLOYER
SPONSORED PLANS ("ESP PLANS")
o Death, disability or retirement of Plan participant;
o Loan from 401(a) Plan or ESP Plans (repayment of loans, however, will
constitute new sales for purposes of assessing sales charges);
o Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1 (d)(2), as amended from time to time);
o Termination of employment of 401(a) or ESP Plan participant
(excluding, however, a partial or other termination of the Plan);
o Tax-free return of excess 401(a) or ESP Plan contributions;
o To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the 401(a) or ESP Plan (e.g.,
participant account fees), provided that the 401(a) or ESP Plan
sponsor subscribes to the MFS FUNDamental 401(k) Plan or another
similar recordkeeping system made available by the Shareholder
Servicing Agent; and
o Distributions from a 401(a) or ESP Plan that has invested its assets
in one or more of the MFS Funds for more than 10 years from the later
to occur of: (i) January 1, 1993 or (ii) the date such 401(a) or ESP
Plan first invests its assets in one or more of the MFS Funds. The
sales charges will be waived in the case of a redemption of all of the
401(a) or ESP Plan's shares in all MFS Funds (i.e., all the assets of
the 401(a) or ESP Plan invested in the MFS Funds are withdrawn),
unless immediately prior to the redemption, the aggregate amount
invested by the 401(a) or ESP Plan in shares of the MFS Funds
(excluding the reinvestment of distributions) during the prior four
years equals 50% or more of the total value of the 401(a) or ESP
Plan's assets in the MFS Funds, in which case the sales charges will
not be waived.
SECTION 403(B) SALARY REDUCTION ONLY PLANS ("SRO PLANS")
o Death or disability of Plan participant.
6. CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY). Shares
transferred:
o To an IRA rollover account where any sales charges with respect to the
shares being reregistered would have been waived had they been
redeemed; and
o From a single account maintained for a 401(a) Plan to multiple
accounts maintained by the Shareholder Servicing Agent on behalf of
individual participants of such Plan, provided that the Plan sponsor
subscribes to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping system made available by the Shareholder Servicing
Agent.
II. WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A
shares and the CDSC imposed on certain redemptions of Class A shares is
waived:
1. INVESTMENT OF REDEMPTION PROCEEDS FROM UNAFFILIATED MUTUAL FUNDS
o Shares acquired through the investment of redemption proceeds from
another open-end management investment company not distributed or
managed by MFD or its affiliates if: (i) the investment is made
through a dealer and appropriate documentation is submitted to MFD;
(ii) the redeemed shares were subject to an initial sales charge or
deferred sales charge (whether or not actually imposed); (iii) the
redemption occurred no more than 90 days prior to the purchase of
Class A shares; and (iv) the MFS Fund, MFD or its affiliates have not
agreed with such company or its affiliates, formally or informally, to
waive sales charges on Class A shares or provide any other incentive
with respect to such redemption and sale.
2. WRAP ACCOUNT INVESTMENTS
o Shares acquired by investments through certain dealers which have
entered into an agreement with MFD which includes a requirement that
such shares be sold for the sole benefit of clients participating in a
"wrap" account or a similar program under which such clients pay a fee
to such dealer.
3. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
o Shares acquired by insurance company separate accounts.
4. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
o Shares acquired by retirement plans whose third party administrators,
or dealers have entered into an administrative services agreement with
MFD or one of its affiliates to perform certain administrative
services, subject to certain operational and minimum size requirements
specified from time to time by MFD or one or more of its affiliates.
REINVESTMENT OF DISTRIBUTIONS FROM QUALIFIED RETIREMENT PLANS
o Shares acquired through the automatic reinvestment in Class A shares
of Class A or Class B distributions which constitute required
withdrawals from qualified retirement plans.
Shares redeemed on account of distributions made under the following
circumstances:
IRA'S
o Distributions made on or after the IRA owner has attained the age of
59 1/2 years old; and
o Tax-free returns of excess IRA contributions.
401(A) PLANS
o Distributions made on or after the Plan participant has attained the
age of 59 1/2 years old; and
o Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a Plan.
ESP PLANS AND SRO PLANS
o Distributions made on or after the Plan participant has attained the
age of 59 1/2 years old.
III. WAIVERS OF CLASS B AND CLASS C SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B and Class C shares
is waived:
1. SYSTEMATIC WITHDRAWAL PLAN
o Systematic Withdrawal Plan redemptions with respect to up to 10% per
year of the account value at the time of establishment.
2. DEATH OF OWNER
o Shares redeemed on account of the death of the account owner if the
shares are held solely in the deceased individual's name or in a
living trust for the benefit of the deceased individual.
3. DISABILITY OF OWNER
o Shares redeemed on account of the disability of the account owner if
shares are held either solely or jointly in the disabled individual's
name or in a living trust for the benefit of the disabled individual
(in which case a disability certification form is required to be
submitted to the Shareholder Servicing Agent).
4. RETIREMENT PLANS. Shares redeemed on account of distributions made
under the following circumstances:
IRA'S, 401(A) PLANS, ESP PLANS AND SRO PLANS
o Distributions made on or after the IRA owner or the 401(a), ESP or SRO
Plan participant, as applicable, has attained the age of 70 1/2 years
old, but only with respect to the minimum distribution under
applicable Code rules.
SALARY REDUCTION SIMPLIFIED EMPLOYEE PENSION PLANS ("SAR-SEP PLANS")
o Distributions made on or after the SAR-SEP Plan participant has
attained the age of 70 1/2 years old, but only with respect to the
minimum distribution under applicable Code rules;
o Death or disability of a SAR-SEP Plan participant.
<PAGE>
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
[logo]
MFS(SM)
INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND(SM)
MFS(R) WORLD TOTAL RETURN FUND
500 Boylston Street
Boston, MA 02116
[LOGO]
MFS(SM)
INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND(SM)
MFS(R) WORLD TOTAL RETURN FUND
PROSPECTUS
MARCH 1, 1997
MWT-1-3/97/150M 24/224/324
<PAGE>
[logo] M F S(SM)
INVESTMENT MANAGEMENT
MFS(R) WORLD STATEMENT OF
TOTAL RETURN FUND ADDITIONAL INFORMATION
(A member of the MFS Family of Funds(R)) March 1, 1997
- ----------------------------------------------------------------------------
Page
----
1. Definitions ............................................... 2
2. Investment Objective, Policies and Restrictions ........... 2
3. Management of the Fund .................................... 11
Trustees ............................................... 11
Officers ............................................... 11
Trustee Compensation Table ............................. 12
Investment Adviser ..................................... 12
Custodian .............................................. 13
Shareholder Servicing Agent ............................ 13
Distributor ............................................ 13
4. Portfolio Transactions and Brokerage Commissions .......... 14
5. Shareholder Services ...................................... 15
Investment and Withdrawal Programs ..................... 15
Exchange Privilege ..................................... 17
Tax-Deferred Retirement Plans .......................... 18
6. Tax Status ................................................ 18
7. Determination of Net Asset Value and Performance .......... 19
8. Distribution Plan ......................................... 22
9. Description of Shares, Voting Rights and Liabilities ...... 22
10. Independent Auditors and Financial Statements ............. 23
Appendix A ................................................ A-1
Appendix B ................................................ B-1
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, as amended or supplemented from time
to time (the "SAI"), sets forth information which may be of interest to
investors but which is not necessarily included in the Fund's Prospectus, dated
March 1, 1997. This SAI should be read in conjunction with the Prospectus, a
copy of which may be obtained without charge by contacting the Shareholder
Servicing Agent (see back cover for address and phone number).
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE
INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
<PAGE>
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 of the Fund, dated March 1, 1997, as
amended or supplemented from time to time.
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.
INVESTMENT POLICIES. The investment policies of the Fund are described in the
Prospectus. In addition, certain of the Fund's investment policies are
described in greater detail below.
AMERICAN DEPOSITARY RECEIPTS ("ADRS"): The Fund may invest in ADRs which are
certificates issued by a U.S. depository (usually a bank) and represent a
specified quantity of shares of an underlying non-U.S. stock on deposit with a
custodian bank as collateral. ADRs may be sponsored or unsponsored. A sponsored
ADR is issued by a depository which has an exclusive relationship with the
issuer of the underlying security. An unsponsored ADR may be issued by any
number of U.S. depositories. Under the terms of most sponsored arrangements,
depositories agree to distribute notices of shareholder meetings and voting
instructions, and to provide shareholder communications and other information to
the ADR holders at the request of the issuer of the deposited securities. The
depository of an unsponsored ADR, on the other hand, is under no obligation to
distribute shareholder communications received from the issuer of the deposited
securities or to pass through voting rights to ADR holders in respect of the
deposited securities. The Fund may invest in either type of ADR. Although the
U.S. investor holds a substitute receipt of ownership rather than direct stock
certificates, the use of the 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, 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 a 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. See Appendix
A for a description of ratings.
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 liquidty 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, U.S. Government securities or an irrevocable letter of
credit maintained on a current basis at an amount at least equal to the market
value of the securities loaned. The Fund would have the right to call a loan and
obtain the securities loaned at any time on customary industry settlement notice
(which will usually not exceed five days). During the existence of a loan, the
Fund would continue to receive the equivalent of the interest paid by the issuer
on the securities loaned and would also receive compensation based on investment
of cash collateral or a fee. The Fund would not, however, have the right to vote
any securities having voting rights during the existence of the loan, but would
call the loan in anticipation of an important vote to be taken among holders of
the securities or of the giving or withholding of their consent on a material
matter affecting the investment. As with other extensions of credit, there are
risks of delay in recovery or even loss of rights in the collateral should the
borrower of the securities fail financially. However, the loans would be made
only to firms deemed by the Adviser to be of good standing, and when, in the
judgment of the Adviser, 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. The GNMA is a wholly owned U.S. Government corporation within the
Department of Housing and Urban Development. The 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 the 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").
The 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. The 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 the FNMA are
guaranteed as to timely payment by the FNMA of principal and interest.
The FHLMC is also a government-sponsored corporation owned by private
stockholders. The FHLMC issues Participation Certificates ("PCs") which
represent interests in conventional mortgages (i.e., not federally insured or
guaranteed) from the FHLMC's national portfolio. The 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. The Fund records these transactions as sale and purchase transactions,
rather than as borrowing transactions. During the roll period, the Fund foregoes
principal and interest paid on the mortgage-backed securities. The Fund is
compensated for the lost interest by the difference between the current sales
price and the lower price for the future purchase (often referred to as the
"drop") as well as by the interest earned on the cash proceeds of the initial
sale. The Fund may also be compensated by receipt of a commitment fee.
INDEXED SECURITIES: The Fund may purchase securities whose prices are indexed to
the prices of other securities, securities indices, currencies, precious metals
or other commodities, or other financial indicators. Indexed securities
typically, but not always, are debt securities or deposits whose value at
maturity (i.e., principal value) or coupon rate is determined by reference to a
specific instrument or statistic. Gold-indexed securities, for example,
typically provide for a maturity value that depends on the price of gold,
resulting in a security whose price tends to rise and fall together with gold
prices. Currency-indexed securities typically are short-term to
intermediate-term debt securities whose maturity values or interest rates are
determined by reference to the values of one or more specified foreign
currencies, and may offer higher yields than U.S. dollar-denominated securities
of equivalent issuers. Currency-indexed securities may be positively or
negatively indexed; that is, their maturity value may increase when the
specified currency value increases, resulting in a security that performs
similarly to a foreign-denominated instrument, or their maturity value may
decline when foreign currencies increase, resulting in a security whose price
characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
Government agencies.
OPTIONS ON 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. Because these securities are traded
over-the-counter, the SEC has taken the position that yield curve options are
illiquid and, therefore, cannot exceed the SEC illiquid ceiling. See "Options on
Fixed Income Securities" above for a discussion of the policies the Adviser
intends to follow to limit the Fund's investment in these securities.
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 liquid
assets from the portfolio of the Fund in an amount equal to the difference
between the fluctuating market value of such Futures Contracts and the aggregate
value of the initial and variation margin payments made by the Fund with respect
to such Futures Contracts, thereby assuring that the transactions are
unleveraged.
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 liquid assets in a segregated account with its
custodian. The Fund may cover the writing of put Options on Futures Contracts
(a) through sales of the underlying Futures Contract, (b) through segregation of
cash, short-term money market instruments or high quality government securities
in an amount equal to the value of the security or index underlying the Futures
Contract, or (c) through the holding of a put on the same Futures Contract and
in the same principal amount as the put written where the exercise price of the
put held is equal to or greater than the exercise price of the put written, or
is less than the exercise price of the put written if the difference is
maintained by the Fund in cash, short-term money market instruments or high
quality government securities in a segregated account with its custodian. Put
and call Options on Futures Contracts may also be covered in such other manner
as may be in accordance with the rules of the exchange on which the option is
traded and applicable laws and regulations. Upon the exercise of a call Option
on a Futures Contract written by the Fund, the Fund will be required to sell the
underlying Futures Contract which, if the Fund has covered its obligation
through the purchase of such Contract, will serve to liquidate its futures
position. Similarly, where a put Option on a Futures Contract written by the
Fund is exercised, the Fund will be required to purchase the underlying Futures
Contract which, if the Fund has covered its obligation through the sale of such
Contract, will close out its futures position. An Option on a Futures Contract
is traded on the same contract market as the underlying Futures Contact, subject
to regulation by the 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 leveraging effect of such
Futures is minimized.
--------------------
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 SAI, means the lesser of (i) more than 50%
of the outstanding shares of the Trust or a series or class, as applicable, or
(ii) 67% or more of the outstanding shares of the Trust or a series or class, as
applicable, present at a meeting at which holders of more than 50% of the
outstanding shares of the Trust or a series or class, as applicable, are
represented in person or by proxy):
The Fund may not:
(1) Borrow amounts in excess of 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.
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 (born 8/4/35)
Massachusetts Financial Services Company, Chairman
RICHARD B. BAILEY* (born 9/14/26)
Private Investor; Massachusetts Financial Services Company, former Chairman
(prior to September 30, 1991); Cambridge Bancorp, Director; Cambridge Trust
Company, Director
MARSHALL N. COHAN (born 11/14/26)
Private Investor
Address: 2524 Bedford Mews Drive, Wellington, Florida
LAWRENCE H. COHN, M.D. (born 3/11/37)
Brigham and Women's Hospital, Chief of Cardiac Surgery; Harvard Medical
School, Professor of Surgery
Address: 75 Francis Street, Boston, Massachusetts
THE HON. SIR J. DAVID GIBBONS, KBE (born 6/15/27)
Edmund Gibbons Limited, Chief Executive Officer; The Bank of N.T. Butterfield
& Son Ltd., Chairman
Address: 21 Reid Street, Hamilton, Bermuda
ABBY M. O'NEILL (born 4/27/28)
Private Investor; Rockefeller Financial Services, Inc. (investment advisers),
Director
Address: 30 Rockefeller Plaza, Room 5600, New York, New York
WALTER E. ROBB, III (born 7/9/27)
Benchmark Advisors, Inc. (corporate financial consultants), President and
Treasurer; Benchmark Consulting Group, Inc. (office services), President;
Landmark Funds (mutual funds), Trustee
Address: 110 Broad Street, Boston, Massachusetts
ARNOLD D. SCOTT* (born 12/16/42)
Massachusetts Financial Services Company, Senior Executive Vice President and
Secretary
JEFFREY L. SHAMES* (born 6/2/55)
Massachusetts Financial Services Company, President
J. DALE SHERRATT (born 9/23/38)
Insight Resources, Inc. (acquisition planning specialists), President
Address: One Liberty Square, 10th Floor, Boston, Massachusetts
WARD SMITH (born 9/13/30)
NACCO Industries (holding company), Chairman (prior to June, 1994); Sundstrand
Corporation (diversified mechanical manufacturer), Director; Society
Corporation (bank holding company), Director (prior to April, 1992); Society
National Bank (commercial bank), Director (prior to April, 1992)
Address: 5875 Landerbrook Drive, Mayfield Heights, Ohio
OFFICERS
A. KEITH BRODKIN,* President (born 8/4/35)
Massachusetts Financial Services Company, Chairman
W. THOMAS LONDON,* Treasurer (born 3/1/44)
Massachusetts Financial Services Company, Senior Vice President
STEPHEN E. CAVAN,* Secretary and Clerk (born 11/6/53)
Massachusetts Financial Services Company, Senior Vice President, General
Counsel and Assistant Secretary
JAMES O. YOST*, Assistant Treasurer (born 6/12/60)
Massachusetts Financial Services Company, Vice President
JAMES R. BORDEWICK, JR.,* Assistant Secretary (born 3/6/59)
Massachusetts Financial Services Company, Senior Vice President and Associate
General Counsel)
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*"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 Fund pays the compensation of non-interested Trustees and Mr. Bailey who
currently receive a fee of $1,250 per year plus $225 per meeting and $225 per
committee meeting attended, together with such Trustee's out-of-pocket expenses.
The Trust has adopted a retirement plan for non-interested Trustees and Mr.
Bailey. Under this plan, a Trustee will retire upon reaching age 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 Messrs. Brodkin, Scott and
Shames. The Fund will accrue its allocable share of compensation expenses each
year to cover current year's service and amortize past service cost.
Set forth below is certain information concerning the cash compensation paid to
the Trustees and benefits accrued, and estimated benefits payable, under the
retirement plan.
<TABLE>
TRUSTEE COMPENSATION TABLE
<CAPTION>
RETIREMENT BENEFIT ESTIMATED TOTAL TRUSTEE FEES
TRUSTEE FEES ACCRUED AS PART OF CREDITED YEARS FROM FUND AND
TRUSTEE FROM FUND(1) FUND EXPENSE(1) OF SERVICE(2) FUND COMPLEX(3)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Bailey.................... $3,050 $ 542 8 $247,168
A. Keith Brodkin..................... 0 0 N/A 0
Marshall N. Cohan.................... 4,175 643 8 149,258
Dr. Lawrence Cohn 3,725 1,260 22 136,508
Sir J. David Gibbons 3,725 559 8 136,508
Abby M. O'Neill...................... 3,275 508 9 123,758
Walter E. Robb, III.................. 4,175 643 8 149,258
Arnold D. Scott...................... 0 0 N/A 0
Jeffrey L. Shames.................... 0 0 N/A 0
J. Dale Sherratt..................... 4,175 1,417 24 149,258
Ward Smith........................... 4,175 643 12 149,258
(1) For fiscal year ended October 31, 1996.
(2) Based on normal retirement age of 75.
(3) For calendar year 1996. All Trustees receiving compensation served as Trustees of 41 funds within the MFS fund complex
(having aggregate net assets at December 31, 1996, of approximately $14,968,833,746) except Mr. Bailey, who served as
Trustee of 81 funds within the MFS fund complex (having aggregate net assets at December 31, 1996, of approximately
$38,479,230,224).
</TABLE>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
YEARS OF SERVICE
--------------------------------------------------
AVERAGE TRUSTEE FEES 3 5 7 10 OR MORE
- --------------------------------------------------------------------------------
$2,745 $412 $ 686 $ 961 $1,373
3,115 467 779 1,090 1,557
3,484 523 871 1,219 1,742
3,854 578 963 1,349 1,927
4,223 633 1,056 1,478 2,112
4,593 689 1,148 1,607 2,296
(4) Other funds in the MFS fund complex provide similar retirement benefits to
the Trustees.
As of January 31, 1997, all Trustees and officers as a group owned less than 1%
of the outstanding shares of the Fund.
As of January 31, 1997, Merrill Lynch Pierce, Fenner & Smith, Inc. for the sole
benefit of its customers, Attn: Fund Administration, 4800 Deer Lake Drive E FL3,
Jacksonville, FL., 32246-6484, was the record owner of approximately 7.15% and
14.43% of the outstanding Class B and Class C shares of the Fund, respectively.
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 wholly
owned 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"). Under the Advisory Agreement, the
Adviser provides the Fund with overall investment advisory services. Subject to
such policies as the Trustees may determine, the Adviser makes investment
decisions for the Fund. For these services and facilities, the Adviser receives
a management fee computed and paid monthly in an amount equal to the sum of
0.65% 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, 1996, MFS received management fees
under the Advisory Agreement of $1,716,121 (of which $1,279,166 was based on
average daily net assets and $436,955 on gross income), equivalent, on an
annualized basis to 0.87% of the Fund's average daily net assets. For the Fund's
fiscal year ended October 31, 1995, MFS received management fees under the
Advisory Agreement of $1,479,587 (of which $1,079,919 was based on average daily
net assets and $399,668 on gross income), equivalent, on an annualized basis to
0.89% of the Fund's average daily net assets. For the Fund's fiscal year ended
October 31, 1994, MFS received management fees under the Advisory Agreement of
$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.
In order to comply with the expense limitations of certain state securities
commissions, the Adviser will reduce its management fee or otherwise reimburse
the Fund for any expenses, exclusive of interest, taxes and brokerage
commissions, incurred by the Fund in any fiscal year to the extent such expenses
exceed the most restrictive of such state expense limitations. The Adviser will
make appropriate adjustments to such reimbursements in response to any amendment
or rescission of the various state requirements.
The Fund pays all of 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, 1996 see "Financial Statements
- -- Statement of Operations" in the Fund's Annual Report to shareholders dated
October 31, 1996 incorporated by reference into this SAI. 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, 1997 and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Fund's shares (as defined in "Investment Objective, Policies and Restrictions")
and, in either case, by a majority of the Trustees who are not parties to the
Advisory Agreement or interested persons of any such party. The Advisory
Agreement terminates automatically if it is assigned and may be terminated
without penalty by vote of a majority of the Fund's shares (as defined in
"Investment Objective, Policies and Restrictions"), or by either party on not
more than 60 days' nor less than 30 days' written notice. The Advisory Agreement
provides that if MFS ceases to serve as the Adviser to the Fund, the Fund will
change its name so as to delete the term "MFS" and that MFS may render services
to others and may permit other fund clients to use the term "MFS" in their
names. The Advisory Agreement also provides that neither the Adviser nor its
personnel shall be liable for any error of judgment or mistake of law or for any
loss arising out of any investment or for any act or omission in the execution
and management of the Fund, except for willful misfeasance, bad faith or gross
negligence in the performance of its or their duties or by reason of reckless
disregard of its or their obligations and duties under the Advisory Agreement.
ADMINISTRATOR
MFS provides the Fund with certain administrative services pursuant to a Master
Administrative Services Agreement dated March 1, 1997. Under this Agreement, MFS
provides the Fund with certain financial, legal, compliance, shareholder
communications and other administrative services. As a partial reimbursement for
the cost of providing these services, the Fund pays MFS an administrative fee up
to 0.015% per annum of the Fund's average daily net assets, provided that the
administrative fee is not assessed on Fund assets that exceed $3 billion.
CUSTODIAN
State Street Bank and Trust Company (the "Custodian") is the custodian of the
Fund's assets. The Custodian's responsibilities include safekeeping and
controlling the Fund's cash and securities, handling the receipt and delivery of
securities, determining income and collecting interest and dividends on the
Fund's investments, maintaining books of original entry for portfolio and fund
accounting and other required books and accounts, and calculating the daily net
asset value of each class of shares of the Fund. The Custodian does not
determine the investment policies of the Fund or decide which securities the
Fund will buy or sell. The Fund may, however, invest in securities of the
Custodian and may deal with the Custodian as principal in securities
transactions. The Custodian also acts as the dividend disbursing agent of the
Fund. The Custodian has contracted with the Adviser for the Adviser to perform
certain accounting functions related to options transactions for which the
Adviser receives remuneration on a cost basis.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (the "Shareholder Servicing Agent"), a wholly owned
subsidiary of MFS , is the Fund's shareholder servicing agent, pursuant to a
Shareholder Servicing Agreement, effective August 10, 1990, as amended (the
"Agency Agreement") with the Trust. The Shareholder Servicing Agent's
responsibilities under the Agency Agreement include administering and performing
transfer agent functions and the keeping of records in connection with the
issuance, transfer and redemption of each Class of shares of the Fund. For these
services, the Shareholder Servicing Agent will receive a fee calculated as a
percentage of the average daily net assets of the Fund at an effective annual
rate of 0.13%. In addition, the Shareholder Servicing Agent will be reimbursed
by the Fund for certain expenses incurred by the Shareholder Servicing Agent on
behalf of the Fund. State Street Bank and Trust Company, the dividend and
distribution disbursing agent of the Fund, has contracted with the Shareholder
Servicing Agent to perform certain dividend and distribution disbursing
functions for the Fund.
DISTRIBUTOR
MFD, a wholly owned subsidiary of MFS, serves as 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 SAI). A
group might qualify to obtain quantity sales charge discounts (see "Investment
and Withdrawal Programs" in this SAI).
Class A shares of the Fund may be sold at their net asset value to certain
persons or in certain transactions as described in the Prospectus. Such sales
are made without a sales charge to promote good will with employees and others
with whom MFS, MFD and/or the Fund have business relationships, and because the
sales effort, if any, involved in making such sales is negligible.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price of the Class A shares. Dealer allowances
expressed as a percentage of offering price for all offering prices are set
forth in the Prospectus (see "Purchases"). 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, CLASS C AND CLASS I SHARES: MFD acts as agent in selling Class B, Class
C and Class I shares of the Fund. The public offering price of Class B, Class C
and Class I shares is their net asset value next computed after the sale (see
"Purchases" in the Prospectus and the Prospectus Supplement pursuant to which
Class I shares are offered).
GENERAL: Neither MFD nor dealers are permitted to delay placing orders to
benefit themselves by a price change. On occasion, MFD may obtain brokers loans
from various banks, including the custodian banks for the MFS Funds, to
facilitate the settlement of sales of shares of the Fund to dealers. MFD may
benefit from its temporary holding of funds paid to it by investment dealers for
the purchase of Fund shares.
During the Fund's fiscal year ended October 31, 1996, gross sales charges on
sales of Class A shares of the Fund amounted to $388,523, of which $53,235 was
retained by MFD and $335,288 by dealers and certain other financial
institutions; the Fund received $24,782,083 representing the aggregate net asset
value of such shares. During the Fund's fiscal year ended October 31, 1995,
gross sales charges on sales of Class A shares of the Fund amounted to $366,111,
of which $48,590 was retained by MFD and $317,521 by dealers and certain other
financial institutions; the Fund received $17,766,340 representing the aggregate
net asset value of such 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 as retained by MFD and $699,436 by dealers and
certain other financial institutions; the Fund received $29,472,764 representing
the aggregate net asset value of such shares. During the Fund's fiscal years
ended October 31, 1994, 1995 and 1996, the CDSC imposed on the redemption of
Class A shares was $1,641, $376 and $2,201, respectively. During the Fund's
fiscal years ended October 31, 1994, 1995 and 1996, the CDSC imposed on the
redemption of Class B shares was $35,156, $91,996 and $88,243, respectively.
During the period from April 1, 1996 through October 31, 1996, the CDSC imposed
on the redemption of Class C shares was $566.
The Distribution Agreement will remain in effect until August 1, 1997 and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Trust's shares (as defined in "Investment 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 National Association of Securities Dealers (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
from time to time through such broker-dealers on behalf of the Fund. The
Trustees (together with the Trustees of the other MFS Funds) have directed the
Adviser to allocate a total of $39,100 of commission business from the MFS Funds
to the Pershing Division of Donaldson Lufkin & Jenrette as consideration for the
annual renewal of certain publications provided by Lipper Analytical Securities
Corporation (which provides information useful to the Trustees in reviewing the
relationship between the Fund and the Adviser).
The Adviser's 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 years ended October 31, 1996, 1995 and 1994 total
brokerage commissions of $263,498, $297,101 and $210,216 were paid on total
transactions of $101,653,688, $112,709,102 and $331,692,927, respectively. 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 any subsidiary of the Adviser. Investment decisions for the Fund and for such
other clients are made with a view to achieving their respective investment
objectives. It may develop that a particular security is bought or sold for only
one client even though it might be held by, or bought or sold for, other
clients. Likewise, a particular security may be bought for one or more clients
when one or more other clients are selling that same security. Some simultaneous
transactions are inevitable when several clients receive investment advice from
the same investment adviser, particularly when the same security is suitable for
the investment objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed by the Adviser to be
equitable to each. It is recognized that in some cases this system could have a
detrimental effect on the price or volume of the security as far as the Fund is
concerned. In other cases, however, the Fund believes that its ability to
participate in volume transactions will produce better executions for the Fund.
5. SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS -- The Fund makes available the following
programs designed to enable shareholders to add to their investment or withdraw
from it with a minimum of paper work. These are described below and, 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
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 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 Class A, B and C shares of that shareholder in the MFS Funds or MFS Fixed
Fund (a bank collective investment Fund) reaches a discount level (see
"Purchases" in the Prospectus for the sales charges on quantity purchases). For
example, if a shareholder owns shares 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.
SUBSEQUENT INVESTMENT BY TELEPHONE: Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-free
at (800) 225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this telephone
purchase privilege must so elect on their Account Application and designate
thereon a bank and account number from which purchases will be made. If a
telephone purchase request is received by the Shareholder Servicing Agent on any
business day prior to the close of regular trading on the Exchange (generally,
4:00 p.m., Eastern time), the purchase will occur at the closing net asset value
of the shares purchased on that day. The Shareholder Servicing Agent may be
liable for any losses resulting from unauthorized telephone transactions if it
does not follow reasonable procedures designed to verify the identity of the
caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
DISTRIBUTION INVESTMENT PROGRAM: Distributions of dividends and capital gains
made by the Fund with respect to a particular class of shares may be
automatically invested in shares of the same class of one of the other MFS
Funds, if shares of the fund are available for sale. Such investments will be
subject to additional purchase minimums. Distributions will be invested at net
asset value (exclusive of any sales charge) and will not be subject to 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 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 and Class C 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 and Class C 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 $5,000 either must be held on
deposit by, or certificates for such shares must be deposited with, the
Shareholder Servicing Agent. Maintaining a withdrawal plan concurrently with an
investment program would be disadvantageous because of the sales charges
included in share purchases 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 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) under the Automatic Exchange Plan, a
dollar cost averaging program. The Automatic Exchange Plan provides for
automatic exchanges of funds from the shareholder's account in an MFS Fund for
investment in the same class of shares of other MFS Funds selected by the
shareholder. Under the Automatic Exchange Plan, exchanges of at least $50 each
may be made to up to six different funds effective on the seventh day of each
month or of every third month, depending whether monthly or quarterly exchanges
are elected by the shareholder. If the seventh day of the month is not a
business day, the transaction will be processed on the next business day.
Generally, the initial exchange will occur after receipt and processing by the
Shareholder Servicing Agent of an application in good order. Exchanges will
continue to be made from a shareholder's account in any MFS Fund, as long as the
balance of the account is sufficient to complete the exchanges. Additional
payments made to a shareholder's account will extend the period that exchanges
will continue to be made under the Automatic Exchange Plan. However, if
additional payments are added to an account subject to the Automatic Exchange
Plan shortly before 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 Class C shares and certain Class
A shares, a CDSC will be imposed upon redemption. Although redemptions and
repurchases of shares are taxable events, a reinvestment within such 90-day
period 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 and if the purchaser is eligible to
purchase the class of shares) at net asset value. Exchanges will be made only
after instructions in writing or by telephone (an "Exchange Request") are
received for an established account by the Shareholder Servicing Agent.
Each Exchange Request must be in proper form (i.e., if in writing -- signed by
the record owner(s) exactly as the shares are registered; if by telephone --
proper account identification is given by the dealer or shareholder of record),
and each exchange must involve either shares having an aggregate value of at
least $1,000 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 Internal Revenue Code
of 1986, as amended (the "Code");
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 the shareholders. As long as
it qualifies as a regulated investment company under the Code, the Fund will not
be required to pay any Massachusetts income or excise 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. Dividends from ordinary income and any distributions from
net short-term capital gains are taxable to shareholders as ordinary income for
federal income tax purposes whether the distributions are paid in cash or in
additional shares. A portion of the Fund's ordinary income dividends is normally
eligible for the dividends received deduction for corporations if the recipient
otherwise qualifies for that deduction with respect to its holding of Fund
shares. Availability of the deduction for particular corporate shareholders is
subject to certain limitations, and deducted amounts may be subject to the
alternative minimum tax or result in certain basis adjustments. Distributions of
net capital gains (i.e., the excess of net long-term capital gains over net
short-term capital losses), whether paid in cash or in additional shares, are
taxable to shareholders as long-term capital gains without regard to the length
of time the shareholders have held their shares. Any Fund dividend that is
declared in October, November or December of any calendar year, that is payable
to shareholders of record in such a month, and that is paid the following
January will be treated as if received by the shareholders on December 31 of the
year in which the dividend is declared. The Fund will notify shareholders
regarding the federal tax status of its distributions after the end of each
calendar year.
Any Fund distribution will have the effect of reducing the per share net asset
value of shares in the Fund by the amount of the distribution. Shareholders
purchasing shares shortly before the record date of any distribution may thus
pay the full price for the shares and then effectively receive a portion of the
purchase price back as a taxable distribution.
In general, any gain or loss realized upon a taxable disposition of shares of
the Fund by a shareholder that holds such shares as a capital asset will be
treated as a long-term capital gain or loss if the shares have been held for
more than 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 disposition of shares may also be disallowed under rules
relating to wash sales. Gain may be increased (or loss reduced) upon a
redemption of Class A shares of the Fund within ninety days after their purchase
followed by any purchase without payment of an additional sales charge
(including purchases by exchanges or by reinvestment) of Class A shares of the
Fund or of another MFS Fund (or any other shares of an MFS Fund generally sold
subject to a sales charge).
The Fund's current dividend and accounting policies will affect the amount,
timing, and character of distributions to shareholders, and may, under certain
circumstances, make an economic return of capital taxable to shareholders. Any
investment in zero coupon bonds and certain securities purchased at a market
discount will cause the Fund to recognize income prior to the receipt of cash
payments with respect to those securities. In order to distribute this income
and avoid a tax on the Fund, the Fund may be required to liquidate portfolio
securities that it might otherwise have continued to hold, potentially resulting
in additional taxable gain or loss to the Fund.
The Fund's transactions in options, Futures Contracts and Forward Contracts will
be subject to special tax rules that may affect the amount, timing and character
of Fund income and distributions to shareholders. For example, certain positions
held by the Fund on the last business day of each taxable year will be marked to
market (i.e., treated as if closed out) on that day, and any gain or loss
associated with the positions will be treated as 60% long-term and 40%
short-term capital gain or loss. Certain positions held by the Fund that
substantially diminish its risk of loss with respect to other positions in its
portfolio may constitute "straddles," and may be subject to special tax rules
that would cause deferral of Fund losses, adjustments in the holding periods of
Fund securities and conversion of short-term into long-term capital losses.
Certain tax elections exist for straddles that may alter the effects of these
rules. The Fund will limit its activities in options, Futures Contracts, Forward
Contracts, and swaps and related transactions to the extent necessary to meet
the requirements of Subchapter M of the Code.
Special tax considerations apply with respect to foreign investments of the
Fund. Foreign exchange gains and losses realized by the Fund will generally be
treated as ordinary income and losses. Use of foreign currencies for non-hedging
purposes and investment by the Fund in certain "passive foreign investment
companies" may be limited in order to avoid taxes on the Fund. Investment income
received by the Fund from foreign securities may be subject to foreign income
taxes withheld at the source. The United States has entered into tax treaties
with many foreign countries that may entitle the Fund to a reduced rate of tax
or an exemption from tax on such income; the Fund intends to qualify for treaty
reduced rates where available. It is not possible to determine the Fund's
effective rate of foreign tax in advance since the amount of the Fund's assets
to be invested within various countries is not known. If the Fund holds more
than 50% of its assets in foreign securities at the close of its taxable year,
the Fund may elect to "pass through" to the Fund's shareholders foreign income
taxes paid. If the Fund so elects, shareholders will be required to treat their
pro rata portion of the foreign income taxes paid by the Fund as part of the
amounts distributed to them by the Fund and thus includable in their gross
income for federal income tax purposes. Shareholders who itemize deductions
would then be allowed to claim a deduction or credit (but not both) on their
federal income tax returns for such amounts, subject to certain limitations.
Shareholders who do not itemize deductions would (subject to such limitations)
be able to claim a credit but not a deduction. No deduction will be permitted to
individuals in computing their alternative minimum tax liability. If the Fund
does not qualify or elect to "pass through" to the Fund's shareholders foreign
income taxes paid by it, shareholders will not be able to claim any deduction or
credit for any part of the foreign taxes paid by the Fund.
Dividends and certain other payments to persons who are not citizens or
residents of the United States or U.S. 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 under an applicable
treaty. Any amounts overwithheld may be recovered by such persons by filing a
claim for refund with the U.S. Internal Revenue Service within the time period
appropriate to such claims. Distributions received from the Fund by Non-U.S.
Persons may also be subject to tax under the laws of their own jurisdictions.
The Fund is also required in certain circumstances to apply backup withholding
at the rate of 31% on taxable dividends and redemption proceeds paid to any
shareholder (including a non-U.S. person) who does not furnish to the Fund
certain information and certifications or who is otherwise subject to backup
withholding. Backup withholding will not, however, be applied to payments that
have been subject to 30% withholding.
Distributions of the Fund that are derived from interest on obligations of the
U.S. Government and certain of its agencies and instrumentalities (but generally
not from capital gains realized upon the disposition of such obligations) may be
exempt from state and local taxes. The Fund intends to advise shareholders of
the extent, if any, to which its distributions consist of such interest.
Shareholders are urged to consult their tax advisers regarding the possible
exclusion of such portion of their dividends for state and local income tax
purposes as well as regarding the tax consequences of an investment in the Fund.
7. DETERMINATION OF NET ASSET VALUE AND PERFORMANCE
NET ASSET VALUE: The net asset value per share of each class of the Fund is
determined each day during which the Exchange is open for trading. (As of the
date of this SAI, 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 in its
capacity as the Fund's distributor, or its agent, the Shareholder Servicing
Agent, 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 1% maximum for Class C
shares purchased after April 1, 1996) and therefore may result in a higher rate
of return, (ii) a total rate of return assuming an initial account value of
$1,000, which will result in a higher rate of return 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 offers multiple classes of shares which were initially offered for sale
to the public on different dates. The calculation of total rate of return for a
class of shares which initially was offered for sale to the public subsequent to
another class of shares of the Fund is based both on (i) the performance of the
Fund's newer class from the date it initially was offered for sale to the public
and (ii) the performance of the Fund's oldest class from the date it initially
was offered for sale to the public up to the date that the newer class initially
was offered for sale to the public.
As discussed in the Prospectus, the sales charges, expenses and expense ratios,
and therefore the performance, of the Fund's classes of shares differ. In
calculating total rate of return for a newer class of shares in accordance with
certain formulas required by the SEC, the performance will be adjusted to take
into account the fact that the newer class is subject to a different sales
charge than the oldest class (e.g., if the newer class is Class A shares, the
total rate of return quoted will reflect the deduction of the initial sales
charge applicable to Class A shares; if the newer class is Class B shares, the
total rate of return quoted will reflect the deduction of the CDSC applicable to
Class B shares). However, the performance will not be adjusted to take into
account the fact that the newer class of shares bears different class specific
expenses than the oldest shares (e.g., Rule 12b-1 fees). Therefore, the total
rate of return quoted for a newer class of shares will differ from the return
that would be quoted had the newer class of shares been outstanding for the
entire period over which the calculation is based (i.e., the total rate of
return quoted for the newer class will be higher than the return that would have
been quoted had the newer class of shares been outstanding for the entire period
over which the calculation is based if the class specific expenses for the newer
class are higher than the class specific expenses of the oldest class, and the
total rate of return quoted for the newer class will be lower than the return
that would be quoted had the newer class of shares been outstanding for this
entire period if the class specific expenses for the newer class are lower than
the class specific expenses of the oldest class).
Total rate of return quotations for each class are presented in Appendix C
attached hereto under the heading "Performance Quotations."
PERFORMANCE RESULTS: The performance results for Class A shares presented in
Appendix B attached hereto under the heading "Performance Results", assume an
initial investment of $10,000 and cover the period from September 4, 1990
through December 31, 1996. 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).
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 yield
calculations assume no CDSC is paid. Yield quotations for each class of shares
is presented in Appendix B attached hereto under the heading "Performance
Quotations."
CURRENT DISTRIBUTION RATE: Yield, which is calculated according to a formula
prescribed by the SEC, is not indicative of the amounts which were or will be
paid to the Fund's shareholders. Amounts paid to shareholders of each class are
reflected in the quoted "current distribution rate" for that class. The current
distribution rate for a class computed by dividing the total amount of dividends
per share paid by the Fund to shareholders of that class during the past 12
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 12
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 and Class C shares assumes no CDSC is paid. Current
distribution rate quotations for each class of shares are presented in Appendix
B attached hereto under the heading "Performance Quotations."
GENERAL: 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.
From time to time, the Fund may discuss or quote its current portfolio manager
as well as other investment personnel, including such persons' views on: the
economy; securities markets; portfolio securities and their issuers; investment
philosophies, strategies, techniques and criteria used in the selection of
securities to be purchased or sold for the Fund; the Fund's portfolio holdings;
the investment research and analysis process; the formulation and evaluation of
investment recommendations; and the assessment and evaluation of credit,
interest rate, market and economic risks, and similar or related matters.
The Fund may also quote evaluations mentioned in independent radio or television
broadcasts.
From time to time the Fund may use charts and graphs to illustrate the past
performance of various indices such as those mentioned above and illustrations
using hypothetical rates of return to illustrate the effects of compounding and
tax-deferral.
From time to time the Fund may also discuss or quote the views of its
distributor, its investment adviser and other financial planning, legal, tax,
accounting, insurance, estate planning and other professionals, or from surveys,
regarding individual and family financial planning. Such views may include
information regarding: retirement planning; tax management strategies; estate
planning; general investment techniques (e.g., asset allocation and disciplined
saving and investing); business succession; ideas and information provided
through the MFS Heritage Planningsm program, an inter-generational financial
planning assistance program; issues with respect to insurance (e.g., disability
and life insurance and Medicare supplemental insurance); issues regarding
financial and health care management for elderly family members; and similar or
related matters.
The Fund may advertise examples of the effects of periodic investment plans,
including the principle of dollar cost averaging. In such a program, an investor
invests a fixed dollar amount in a fund at periodic intervals, thereby
purchasing fewer shares when prices are high and more shares when prices are
low. While such a strategy does not assure a profit or guard against a loss in a
declining market, the investor's average cost per share can be lower than if
fixed numbers of shares are purchased at the same intervals.
MFS FIRSTS: MFS has a long history of innovations.
-- 1924 -- Massachusetts Investors Trust is established as the first
open-end mutual fund in America.
-- 1924 -- Massachusetts Investors Trust is the first mutual fund to make
full public disclosure of its operations in shareholder reports.
-- 1932 -- One of the first internal research departments is established to
provide in-house analytical capability for an investment management
firm.
-- 1933 -- Massachusetts Investors Trust is the first mutual fund to
register under the Securities Act of 1933 ("Truth in Securities Act" or
"Full Disclosure Act").
-- 1936 -- Massachusetts Investors Trust is the first mutual fund to allow
shareholders to take capital gain distributions either in additional
shares or in cash.
-- 1976 -- MFS(R) Municipal Bond Fund is among the first municipal bond
funds established.
-- 1979 -- Spectrum becomes the first combination fixed/ variable annuity
with no initial sales charge.
-- 1981 -- MFS(R) World Governments Fund is established as America's first
globally diversified fixed-income mutual fund.
-- 1984 -- MFS(R) Municipal High Income Fund is the first open-end mutual
fund to seek high tax-free income from lower-rated municipal securities.
-- 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual fund to
target and shift investments among industry sectors for shareholders.
-- 1986 -- MFS(R) Municipal Income Trust is the first closed-end,
high-yield municipal bond fund traded on the New York Stock Exchange.
-- 1987 -- MFS(R) Multimarket Income Trust is the first closed-end,
multimarket high income fund listed on the New York Stock Exchange.
-- 1989 -- MFS Regatta becomes America's first non-qualified
market-value-adjusted fixed-variable annuity.
-- 1990 -- MFS(R) World Total Return Fund is the first global balanced
fund.
-- 1993 -- MFS(R) World Growth Fund is the first global emerging markets
fund to offer the expertise of two sub-advisers.
-- 1993 -- MFS becomes money manager of MFS(R) Union Standard Trust, the
first trust to invest 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. DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class A, Class B and Class C
shares (the "Distribution Plan") pursuant to Section 12(b) of the 1940 Act and
Rule 12b-1 thereunder (the "Rule") after having concluded that there is a
reasonable likelihood that the Distribution Plan would benefit the Fund and each
respective class of shareholders. The provisions of the Distribution Plan are
severable with respect to each class of shares offered by the Fund. The
Distribution Plan is designed to promote sales, thereby increasing the net
assets of the Fund. Such an increase may reduce the expense ratio to the extent
the Fund's fixed costs are spread over a larger net asset base. Also, an
increase in net assets may lessen the adverse effects that could result were the
Fund required to liquidate portfolio securities to meet redemptions. There is,
however, no assurance that the net assets of the Fund will increase or that the
other benefits referred to above will be realized.
The Distribution Plan is described in the Prospectus under the caption
"Distribution Plan," which is incorporated herein by reference. The following
information supplements this Prospectus discussion.
SERVICE FEES: With respect to Class A shares, no service fees will be paid: (i)
to any dealer who is the holder or dealer of record for investors who own Class
A shares having an aggregate net asset value less than $750,000, or such other
amount as may be determined from time to time by MFD (MFD, however, may waive
this minimum amount requirement from time to time); or (ii) to any insurance
company which has entered into an agreement with the Fund and MFD that permits
such insurance company to purchase Class A shares from the Fund at their net
asset value in connection with annuity agreements issued in connection with the
insurance company's separate accounts. Dealers may from time to time be required
to meet certain other criteria in order to receive service fees.
With respect to Class B shares, except in the case of the first year service
fee, no service fees will be paid to any securities dealer who is the holder or
dealer of record for investors who own Class B shares having an aggregate net
asset value of less than $750,000 or such other amount as may be determined by
MFD from time to time. MFD, however, may waive this minimum amount requirement
from time to time. Dealers may from time to time be required to meet certain
other criteria in order to receive service fees.
MFD or its affiliates shall be entitled to receive any service fee payable under
the Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by MFD or its affiliates
for shareholder accounts.
DISTRIBUTION FEES: The purpose of distribution payments to MFD under the
Distribution Plan is to compensate MFD for its distribution services to the
Fund. MFD pays commissions to dealers as well as expenses of printing
prospectuses and reports used for sales purposes, expenses with respect to the
preparation and printing of sales literature and other distribution-related
expenses, including, without limitation, the cost necessary to provide
distribution-related services, or personnel, travel, office expenses and
equipment.
DISTRIBUTION AND SERVICE FEES PAID DURING THE FUND'S LAST FISCAL YEAR: During
the fiscal year ended October 31, 1996, the Fund paid the following Distribution
Plan expenses:
AMOUNT OF AMOUNT OF AMOUNT OF
DISTRIBUTION DISTRIBUTION DISTRIBUTION
AND SERVICE AND SERVICE AND SERVICE
FEES PAID FEES RETAINED FEES RECEIVED
CLASSES OF SHARES BY FUND BY MFD BY DEALERS
- ----------------- ------------ ------------- -------------
Class A Shares $419,948 $166,781 $253,167
Class B Shares $645,054 $502,176 $142,878
Class C Shares $123,045 $ 7,831 $115,214
GENERAL: The Distribution Plan will remain in effect until August 1, 1997, and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by vote of both the Trustees and a majority of the
Trustees who are not "interested persons" or financially interested parties to
such Plan ("Distribution Plan Qualified Trustees"). The Distribution Plan 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. The Distribution Plan may be
terminated at any time by vote of a majority of the Distribution Plan Qualified
Trustees or by vote of the holders of a majority of the respective class of the
Fund's shares (as defined in "Investment Restrictions"). All agreements relating
to the Distribution Plan entered into between the Fund or MFD and other
organizations must be approved by the Board of Trustees, including a majority of
the Distribution Plan Qualified Trustees. Agreements under the Distribution Plan
must be in writing, will be terminated automatically if assigned, and may be
terminated at any time without payment of any penalty, by vote of a majority of
the Distribution Plan Qualified Trustees or by vote of the holders of a majority
of the respective class of the Fund's shares. The Distribution Plan may not be
amended to increase materially the amount of permitted distribution expenses
without the approval of a majority of the respective class of the Fund's shares
(as defined in "Investment Restrictions") or may not be materially amended in
any case without a vote of the Trustees and a majority of the Distribution Plan
Qualified Trustees. The selection and nomination of Distribution Plan Qualified
Trustees shall be committed to the discretion of the non-interested Trustees
then in office. No Trustee who is not an "interested person" has any financial
interest in the Distribution Plan or in any related agreement.
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
four classes of shares of each of the Trust's three series, Class A, Class B,
Class C and Class I shares. Each share of a class of the Fund represents an
equal proportionate interest in the assets of the Fund allocable to that class.
Upon liquidation of the Fund, shareholders of each class of the Fund are
entitled to share pro rata in the 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 are the Fund's independent auditors, providing audit services,
tax services, and assistance and consultation with respect to the preparation of
filings with the SEC.
The Portfolio of Investments and the Statement of Assets and Liabilities at
October 31, 1996, the Statement of Operations for the year ended October 31,
1996, the Statement of Changes in Net Assets for each of the two years in the
period ended October 31, 1996, the Notes to Financial Statements and the Report
of Independent Auditors, each of which is included in the Annual Report to
Shareholders of the Fund, are incorporated by reference into this SAI in
reliance upon the report of Ernst & Young LLP, independent auditors, given upon
their authority as experts in accounting and auditing. A copy of the Annual
Report accompanies this SAI.
<PAGE>
APPENDIX A
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 SERVICES
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>
APPENDIX B
PERFORMANCE INFORMATION
The performance results and quotations below should not be considered as
representative of the performance of the fund in the future since the net asset
value and public offering price of shares of the Fund will vary. See
"Determination of Net Asset Value and Performance" in the SAI.
<TABLE>
PERFORMANCE RESULTS - CLASS A SHARES
<CAPTION>
VALUE OF VALUE OF
VALUE OF INITIAL CAPITAL GAIN REINVESTED
YEAR ENDED $10,000 INVESTMENT DISTRIBUTIONS DIVIDENDS TOTAL VALUE
---------- ------------------ ------------- --------- -----------
<S> <C> <C> <C> <C>
December 31, 1990* $ 9,764 $ 0 $ 106 $ 9,870
December 31, 1991 11,244 203 487 11,934
December 31, 1992 10,986 527 1,021 12,534
December 31, 1993 12,421 851 1,957 15,229
December 31, 1994 11,412 1,214 2,136 14,762
December 31, 1995 13,105 1,402 3,251 17,758
December 31, 1996 14,147 2,088 4,246 20,481
*Class A shares of the Fund commenced investment operations on September 4, 1990.
</TABLE>
Explanatory Notes: The results in the table assume that income dividends and
capital gain distributions were invested in additional shares. The results also
assume that the initial investment in Class A shares was reduced by the current
maximum applicable sales charge. No adjustment has been made for income taxes,
if any, payable by shareholders.
<TABLE>
PERFORMANCE QUOTATIONS
All performance quotations are for the period ended October 31, 1996.
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
---------------------------- CURRENT
LIFE 30-DAY DISTRIBUTION
1 YEAR 5 YEAR OF FUND YIELD RATE
------ ------ ------- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Class A Shares with sales charge ........ 10.52% 11.13% 11.54%(1) 1.41% 4.75%
Class A Shares without sales charge ..... 16.06% 12.22% 12.42%(1) % %
Class B Shares with CDSC ................ 11.29% 11.47%(2) 12.03%(2) % %
Class B Shares without CDSC ............. 15.29% 11.73%(2) 12.03%(2) 0.77% 4.10%
Class C Shares with CDSC ................ 14.41% 11.8 %(3) 12.08%(3) % %
Class C Shares without CDSC ............. 15.41% 11.8 %(3) 12.08%(3) 0.84% 4.12%
(1) From the commencement of investment operations of Class A shares on September 4, 1990 to the period ended
October 31, 1996.
(2) Class B share performance includes the performance of the Fund's Class A shares for periods prior to the
commencement of offering of Class B shares on September 7, 1993. Sales charges, expenses and expense ratios,
and therefore performance, for Class A and Class B shares differ. Class B share performance has been adjusted
to reflect that Class B shares generally are subject to CDSC (unless the performance quotation does not give
effect to the CDSC) whereas Class A shares generally are subject to an initial sales charge. Class B share
performance has not, however, been adjusted to reflect differences in operating expenses (e.g., Rule 12b-1
fees), which generally are lower for Class A shares.
(3) Class C share performance includes the performance of the Fund's Class A shares for periods prior to the
commencement of offering of Class C shares on January 3, 1994. Sales charges, expenses and expense ratios, and
therefore performance, for Class A and Class C shares differ. Class C share performance has been adjusted to
reflect that Class C shares generally are subject to CDSC (unless the performance quotation does not give
effect to the CDSC) whereas Class A shares generally are subject to an initial sales charge. Class C share
performance has not, however, been adjusted to reflect differences in operating expenses (e.g., Rule 12b-1
fees), which generally are lower for Class A shares.
</TABLE>
<PAGE>
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617) 954-5000
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
CUSTODIAN AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800) 225-2606
Mailing Address:
P.O. Box 2281, Boston, MA 02107-9906
INDEPENDENT AUDITORS
Ernst & Young LLP
200 Clarendon Street, Boston, MA 02116
MFS(R)
WORLD TOTAL
RETURN FUND
500 BOYLSTON STREET
BOSTON, MA 02116
[logo] M F S(SM)
INVESTMENT MANAGEMENT
We invented the mutual fund(SM) MWT-13-3/97/500 24/224/324
<PAGE>
<PAGE>
[LOGO]
INVESTMENT MANAGEMENT
ANNUAL REPORT
FOR YEAR ENDED
October 31, 1996
MFS(R) WORLD TOTAL RETURN FUND
[Graphic Omitted]
AMERICA LEARNS HOW "WE INVENTED THE MUTUAL FUND", (see page 35)
<PAGE>
TABLE OF CONTENTS
Letter from the Chairman ................................................... 1
Portfolio Manager's Overview ............................................... 3
Portfolio Manager's Profile ................................................ 5
Fund Facts ................................................................. 6
Performance Summary ........................................................ 6
Portfolio of Investments ................................................... 9
Financial Statements .......................................................17
Notes to Financial Statements ..............................................23
Independent Auditors' Report ...............................................33
MFS Family of Funds ........................................................34
Trustees and Officers ......................................................37
HIGHLIGHTS
* FOR THE 12 MONTHS ENDED OCTOBER 31, 1996, CLASS A SHARES OF THE FUND
PROVIDED A TOTAL RETURN AT NET ASSET VALUE OF 16.06%, CLASS B SHARES
15.29%, AND CLASS C SHARES 15.41%.
* THE EQUITY POSITION OF THE PORTFOLIO IS FULLY INVESTED, WITH 63% OF ITS
ASSETS INVESTED IN U.S. AND FOREIGN STOCKS AND CONVERTIBLE SECURITIES.
FOREIGN HOLDINGS IN 18 COUNTRIES ACCOUNT FOR APPROXIMATELY 66% OF THE
TOTAL EQUITY POSITION.
* WITH MOST OF THE WORLD'S STOCK MARKETS AT OR NEAR EITHER THEIR ALL- TIME
OR RECENT HIGHS, NO COUNTRY, INDUSTRY OR ECONOMIC SECTOR STANDS OUT AS
CLEARLY UNDERVALUED.
* THE TWO BEST PERFORMING FIXED-INCOME MARKETS WERE ITALY, WHICH GAINED
17.52%, AND SPAIN, UP 16.16%, WHILE THE LAGGARDS WERE THE UNITED STATES,
WHICH GAINED 2.02%, AND JAPAN AND THE UNITED KINGDOM, BOTH UP 5.32%.
<PAGE>
LETTER FROM THE CHAIRMAN
Dear Shareholders:
[Photo of A. Keith Brodkin]
As we enter the final months of 1996, the U.S. economy appears to have settled
into a pattern of moderate growth and inflation -- two factors that we think can
be important contributors to a favorable long-term investment climate. During
the first quarter of 1996, real (inflation-adjusted) economic growth was 2.3% on
an annualized basis, followed by a rate of 4.7% in the second quarter. However,
this unexpectedly high level was followed by a more moderate 2.2% pace in the
third quarter. Overall, real growth in gross domestic product has surpassed our
expectations this year, and we now expect that growth for all of 1996 could
exceed 2.5%. Although individual consumers appear to be carrying an excessive
debt load, the consumer sector itself, which represents two-thirds of the
economy, continues to support the automobile and housing markets. Consumer
spending has also been positively impacted by widespread job growth and, more
recently, increasing wages. However, recent statistics appear to show a slowdown
in consumer spending. This is particularly true when considering overall retail
sales, which have been flat for several months. Furthermore, the economies of
Europe and Japan continue to be in the doldrums, weakening U.S. export markets
while subduing the capital spending plans of American corporations. Thus, while
economic growth should continue, we expect it could slacken toward the end of
the year.
While we do not expect the U.S. stock market to match the extraordinary
performance of 1995, we continue to be positive about the equity market this
year. Although we believe the equity market represents fair value at current
levels, the expected slowdown in corporate earnings growth and interest rate
increases earlier in the year have raised some near-term concerns, as was seen
in July's stock market correction. Further interest rate increases and an
acceleration of inflation coupled with an additional slowdown in corporate
earnings growth could have a negative effect on the stock market in the near
term. However, to the extent that some earnings disappointments are taken as a
sign that the economy is not overheating, this may prove beneficial for the
equity market's longer-term health. We continue to believe that many of the
technology-driven productivity gains that U.S. companies have made in recent
years will continue to enhance corporate America's competitiveness and
profitability. Therefore, while we have some near-term concerns, we remain quite
constructive on the long-term viability of the equity market.
In the bond markets, persistent signs of economic weakness led to decreases in
short-term interest rates by the Federal Reserve Board in late 1995 and early
1996. Should signs of more rapid economic growth and, particularly, of higher
inflation resurface, we would expect the Fed to maintain its anti- inflationary
stance. In the beginning of the year, bond markets traded in a narrow range as
investors shifted between concern for the lack of a budget resolution in
Washington and hope that sluggish economic reports and low inflation might lead
to lower interest rates. Later, fixed-income markets began reacting to
conflicting signals regarding the economy's strength with more volatile trading
patterns marked by an upward bias in interest rates. Interest rates may move
even higher over the coming months, but we believe the current rise in bond
yields is reaching a point where fixed-income markets are equitably valued.
Outside the United States, we see similar economic backdrops, with slow to
moderate growth and low inflation in the developed countries of Europe and
Japan. We believe the long-term underperformance of many of these markets
relative to the United States has created some attractive valuations. European
markets such as the United Kingdom and Germany have recently eased monetary
policy, a trend which may continue as German and other central banks seek
economic stimulus. Meanwhile, corporate earnings growth is expected to improve
in these markets, which may lead to their outperforming the U.S. market.
Finally, as you may notice, this report to shareholders incorporates a number
of changes which we hope you will find informative and useful. Following the
Portfolio Manager's Overview, we have added new information on the Fund's
holdings, including a chart illustrating the portfolio's concentration in the
types of investments that meet its criteria. Near the back of the report,
telephone numbers and addresses are listed if you would like to contact MFS.
We appreciate your support and welcome any questions or comments you may have.
Respectfully,
/s/ A. Keith Brodkin
--------------------------------
A. Keith Brodkin
Chairman and President
November 12, 1996
<PAGE>
PORTFOLIO MANAGER'S OVERVIEW
Dear Shareholders:
[Photo of Frederick J. Simmons]
For the 12 months ended October 31, 1996, Class A shares of the Fund provided a
total return of 16.06%, Class B shares 15.29%, and Class C shares 15.41%. These
returns assume the reinvestment of distributions but exclude the effects of any
sales charges, and compare to that of a benchmark made up of 60% of the Morgan
Stanley Capital International World Index (the MSCI) and 40% of the J.P. Morgan
Global Government Bond Index (the Morgan Index), which returned 10.14% over the
same period. The MSCI is a broad, unmanaged index of global equities, while the
Morgan Index is an aggregate of actively traded government bonds issued from 13
countries, including the United States, with remaining maturities of at least
one year. At the same time, the Fund outperformed the 14.75% return for the
Lipper Global Flexible Fund Index(R) as determined by Lipper Analytical
Services, Inc., an independent firm that reports mutual fund performance.
The strength of the U.S. equity market, relative to other markets, has been
somewhat surprising after its powerful surge in 1995. Thus, the Fund's
approximately 15% reduction in U.S. equities was not as beneficial as expected.
On the other hand, our unwillingness to build up our Japanese and other Far East
holdings benefited the Fund, since most of these markets were significant
underperformers. The Fund's holdings in Japanese stocks are just one-half that
of the MSCI index. Large overweightings in smaller markets such as Sweden and
the Netherlands have been very successful. By industry category, financial
services companies were the best performers, while growth stocks generally
outperformed value-oriented stocks. Almost without regard to these categories,
Japanese stocks were underperformers.
As we enter 1997, the equity position of the portfolio is fully invested, with
63% of its assets invested in U.S. and foreign stocks and convertible
securities. Foreign holdings in 18 countries account for approximately 66% of
the total equity position, higher than earlier in the year.
With most of the world's stock markets at or near either their all-time or
recent highs, stock selection is more important than ever. No country, industry
or economic sector stands out as clearly undervalued. Thus, the portfolio's
equity position has been built up stock by stock, with growth at a reasonable
price, as well as yield, being the objective. As always, every effort is made to
avoid speculative securities.
Despite the fact that the U.S. economy weakened significantly during the third
quarter, most international fixed-income markets continued to outperform the
U.S. bond market. The two best performing markets within the Morgan Index
measured in local currency terms from January 1, 1996 through October 31, 1996,
were Italy and Spain, which gained 19.25% and 16.33%, respectively. Over the
same period, the worst markets were the United States, which gained 2.21%, and
the United Kingdom, up 5.23%. The Fund generally benefited by maintaining
overweighted positions in the better performing European markets while
underweighting the U.S. bond market.
In preparation for monetary union due to commence in January 1999, almost all
European countries have announced tight fiscal budgets, while at the same time
cutting interest rates due to slow growth and low inflation. Within Europe, a
dramatic narrowing of yield spread differentials, or outperformance, began in
earnest during the third quarter with such high-yield countries as Spain, Italy,
and Sweden being the main beneficiaries. Although a good part of this
convergence has now taken place, we anticipate these markets will continue to
overperform as European Monetary Union approaches.
Meanwhile, within the dollar bloc, both Canada and Australia continue to
benefit from low inflation, slow growth, and tight fiscal budgets. For most of
the year, the Fund has benefited by being overweighted in both these markets.
While an underweighted position in U.S. bonds has been beneficial for the year,
the Fund's performance was hindered during the third quarter as the U.S.
position's duration (a measure of interest rate sensitivity) was low in
anticipation of a pickup in U.S. economic growth that never materialized.
For the year, the overall rise in U.S. interest rates, coinciding with
reductions in short-term rates in Europe, has enabled the dollar to appreciate
against the German mark. In addition, the dollar has also benefited from yield
convergence within Europe. The dollar has continued to strengthen versus the
Japanese yen, based primarily on Japan's low interest rates and the government's
policy of engineering a weaker currency in order to stimulate its beleaguered
economy.
Looking forward, we anticipate modest but further central bank lowering of
interest rates in many European countries as well as in Canada, Australia, and
New Zealand, an environment that we believe could be positive for bonds.
However, some caution is warranted as ultimately the effect of lower rates in
these countries could result in a pickup in economic growth and, possibly,
inflation. Moreover, with the U.S. currency benefiting from positive interest
rate differentials, renewed hope for a balanced budget, and movement toward an
inclusive, single European currency, the prospects for a stable dollar remain
favorable.
Respectfully,
/s/ Frederick J. Simmons
- --------------------------------
Frederick J. Simmons
Portfolio Manager
PORTFOLIO MANAGER'S PROFILE
FREDERICK J. SIMMONS IS A SENIOR VICE PRESIDENT OF MASSACHUSETTS
FINANCIAL SERVICES (MFS) AND PORTFOLIO MANAGER OF MFS WORLD TOTAL RETURN
FUND AND MERIDIAN WORLD TOTAL RETURN FUND. MR. SIMMONS JOINED MFS IN
1971 AS AN INVESTMENT OFFICER IN THE RESEARCH DEPARTMENT AND WAS NAMED
ASSISTANT VICE PRESIDENT - INVESTMENTS IN 1974, VICE PRESIDENT -
INVESTMENTS IN 1975 AND SENIOR VICE PRESIDENT IN 1983. HE WAS NAMED
PORTFOLIO MANAGER OF MFS WORLD TOTAL RETURN FUND IN 1991. PREVIOUSLY HE
WAS PORTFOLIO MANAGER OF MFS RESEARCH FUND AND OF MASSACHUSETTS
INVESTORS GROWTH STOCK FUND. MR. SIMMONS GRADUATED WITH HONORS FROM THE
AMOS TUCK SCHOOL OF BUSINESS ADMINISTRATION OF DARTMOUTH COLLEGE. HE IS
A CHARTERED FINANCIAL ANALYST, A MEMBER OF THE BOSTON SECURITY ANALYSTS
SOCIETY, INC. AND PAST PRESIDENT OF THE ELECTRONIC ANALYSTS OF BOSTON.
<PAGE>
FUND FACTS
STRATEGY: 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.
COMMENCEMENT OF
INVESTMENT OPERATIONS: SEPTEMBER 4, 1990
SIZE: $215.9 MILLION NET ASSETS AS OF OCTOBER 31, 1996
PERFORMANCE SUMMARY
The information below and on the following page illustrates the historical
performance of MFS World Total Return Fund Class A shares in comparison to
various market indicators. Class A share results reflect the deduction of the
4.75% maximum sales charge; benchmark comparisons are unmanaged and do not
reflect any fees or expenses. You cannot invest in an index.
All results are historical and assume the reinvestment of all dividends and
capital gains.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the Period from September 4, 1990 to October 31, 1996)
MFS World
Total Return Consumer Price S&P 500 MSCI
(Class A) Index -- U.S. Composite World Index
------------ -------------- --------- -----------
09/90 9529.00 10000.0 10000.0 9405.00
10/90 9585.00 10144.0 9487.00 10082.0
10/92 12466.0 10775.0 13916.0 11779.0
10/93 14669.0 11071.0 15992.0 14232.0
10/95 16894.0 11679.0 20967.0 16937.0
10/96 19607.0 12031.0 25991.0 19056.0
<PAGE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
1 Year 3 Years 5 Years Life***
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MFS World Total Return (Class A) at net asset value +16.06% +10.16% +12.22% +12.42%
- -------------------------------------------------------------------------------------------------------------------------------
MFS World Total Return (Class A) including 4.75% sales charge +10.52% + 8.38% +11.13% +11.54%
- -------------------------------------------------------------------------------------------------------------------------------
MFS World Total Return (Class B) without CDSC +15.29% + 9.36% +11.73% +12.03%
- -------------------------------------------------------------------------------------------------------------------------------
MFS World Total Return (Class B) with CDSC +11.29% + 8.52% +11.47% +12.03%
- -------------------------------------------------------------------------------------------------------------------------------
MFS World Total Return (Class C) without CDSC +15.41% + 9.47% +11.80% +12.08%
- -------------------------------------------------------------------------------------------------------------------------------
MFS World Total Return (Class C) with CDSC +14.41% + 9.47% +11.80% +12.08%
- -------------------------------------------------------------------------------------------------------------------------------
60% Morgan Stanley Capital International/
40% J.P. Morgan Global Government Bond +10.14% + 9.44% +10.07% +10.70%
- -------------------------------------------------------------------------------------------------------------------------------
Average global flexible portfolio fund** +13.60% + 7.77% +10.09% + 7.28%
- -------------------------------------------------------------------------------------------------------------------------------
Consumer Price Index* + 3.01% + 2.81% + 2.88% + 3.68%
- -------------------------------------------------------------------------------------------------------------------------------
Standard & Poor's 500 Composite
Index++ +23.89% +17.57% +15.47% +14.60%
- -------------------------------------------------------------------------------------------------------------------------------
*The Consumer Price Index is a popular measure of change in prices.
**Source: Lipper Analytical Services.
***Commencement of investment operations September 4, 1990.
++The Standard & Poor's 500 Composite Index is an unmanaged composite of commonly used stock total return performance.
</TABLE>
Class A SEC results include the maximum 4.75% sales charge. Class B SEC results
reflect the applicable contingent deferred sales charge (CDSC), which declines
over six years as follows: 4%, 4%, 3%, 3%, 2%, 1%, 0%. Class C shares have no
initial sales charge but, along with Class B shares, have higher annual fees and
expenses than Class A shares. As of April 1, 1996, Class C shares redeemed
within 12 months of purchase will be subject to a 1% CDSC. See the prospectus
for details.
Class B and Class C share performance includes the performance of the Fund's
Class A shares for periods prior to the commencement of offering of Class B
shares on September 7, 1993 and of Class C shares on January 3, 1994. Sales
charges and operating expenses for Class A, Class B, and Class C shares differ.
The Class A share performance, which is included within the Class B and Class C
share SEC performance, has been adjusted to reflect the CDSC generally
applicable to Class B and Class C shares rather than the initial sales charge
generally applicable to Class A shares. Class B and Class C share performance
has not been adjusted, however, to reflect differences in operating expenses
(e.g., Rule 12b-1 fees), which generally are lower for Class A shares.
Investment return and principal value will fluctuate, and shares, when redeemed,
may be worth more or less than their original cost. Past performance is no
guarantee of future results.
<PAGE>
TAX FORM SUMMARY
THE FUND IS ESTIMATED TO HAVE DERIVED APPROXIMATELY 65.11% OF ITS ORDINARY
INCOME FROM DIVIDENDS PAID BY FOREIGN COMPANIES, AND TO HAVE PAID FOREIGN
TAXES EQUIVALENT TO APPROXIMATELY 2.35% OF ITS ORDINARY INCOME.
FOR THE YEAR ENDED OCTOBER 31, 1996, THE AMOUNT OF DISTRIBUTIONS FROM
INCOME ELIGIBLE FOR THE 70% DIVIDENDS-RECEIVED DEDUCTION FOR
CORPORATIONS CAME TO 12.79%.
FEDERAL INCOME TAX INFORMATION ON DISTRIBUTIONS
FOR THE YEAR ENDED OCTOBER 31, 1996 DISTRIBUTIONS FROM LONG-TERM CAPITAL
GAINS ARE $88,525.
PORTFOLIO CONCENTRATION AS OF OCTOBER 31, 1996
LARGEST SECTORS
Other Sectors 42.1%
Utilities & Communications 14.6%
Financial Services 15.3%
Industrial Goods & Services 9.8%
Health Care 9.5%
Consumer Staples 8.7%
TOP TEN HOLDINGS
<TABLE>
<CAPTION>
<S> <C>
PHILIP MORRIS COMPANIES, INC. ABB AB
Tobacco, food, and beverage conglomerate Swiss engineering conglomerate
LION NATHAN EASTMAN KODAK COMPANY
New Zealand brewer Photographic equipment and supplies
ASTRA AB BARNETT BANKS
Swedish pharmaceutical manufacturer Southern U.S. bank holding company
GENERAL ELECTRIC CO. BRITISH PETROLEUM
Diversified manufacturing and Oil exploration and production company
services conglomerate
SCHERING PLOUGH
TYCO INTERNATIONAL LTD. U.S. pharmaceutical company
Manufacturer of fire protection, packaging,
and electronic equipment
</TABLE>
<PAGE>
PORTFOLIO OF INVESTMENTS - October 31, 1996
Common Stocks - 62.2%
- ---------------------------------------------------------------------------
Issuer Shares Value
- ---------------------------------------------------------------------------
U.S. Stocks - 22.3%
Aerospace - 1.0%
General Dynamics Corp. 19,000 $ 1,303,875
Lockheed-Martin Corp. 10,008 896,967
--------------
$ 2,200,842
- ---------------------------------------------------------------------------
Banks and Credit Companies - 1.8%
Barnett Banks, Inc. 59,600 $ 2,272,250
Norwest Corp. 34,500 1,513,688
--------------
$ 3,785,938
- ---------------------------------------------------------------------------
Building - 0.1%
Martin Marietta Materials, Inc. 10,346 $ 245,718
- ---------------------------------------------------------------------------
Business Services
Sabre Group Holding, Inc. 1,300 $ 39,650
- ---------------------------------------------------------------------------
Chemicals - 0.6%
Air Products & Chemicals, Inc. 10,000 $ 600,000
Praxair, Inc. 15,000 663,750
--------------
$ 1,263,750
- ---------------------------------------------------------------------------
Computer Software - Systems - 0.2%
Digital Equipment Corp.* 16,000 $ 472,000
- ---------------------------------------------------------------------------
Consumer Goods and Services - 1.1%
Tyco International Ltd. 47,500 $ 2,357,188
- ---------------------------------------------------------------------------
Electrical Equipment - 1.2%
General Electric Co. 25,600 $ 2,476,800
- ---------------------------------------------------------------------------
Financial Institutions - 2.6%
American Express Co. 25,000 $ 1,175,000
Associates First Capital Corp., "A" 6,700 290,612
Federal Home Loan Mortgage Corp. 9,200 929,200
Philip Morris Cos., Inc. 34,200 3,167,775
--------------
$ 5,562,587
- ---------------------------------------------------------------------------
Food and Beverage Products - 0.4%
McCormick & Co., Inc. 33,000 $ 796,125
- ---------------------------------------------------------------------------
Insurance - 1.4%
Cigna Corp. 14,700 $ 1,918,350
Transamerica Corp. 15,000 1,138,125
--------------
$ 3,056,475
- ---------------------------------------------------------------------------
Machinery - 0.4%
Deere & Co., Inc. 23,000 $ 960,250
- ---------------------------------------------------------------------------
Medical and Health Products - 2.6%
Lilly (Eli) & Co. 18,588 $ 1,310,454
Rhone-Poulenc Rorer, Inc. 19,900 1,335,787
Schering Plough Corp. 32,000 2,048,000
Warner-Lambert Co. 16,000 1,018,000
--------------
$ 5,712,241
- ---------------------------------------------------------------------------
Oils - 2.1%
Exxon Corp. 17,000 $ 1,506,625
Mobil Corp. 13,700 1,599,475
USX-Marathon Group 66,000 1,443,750
--------------
$ 4,549,850
- ---------------------------------------------------------------------------
Pharmaceuticals - 0.5%
Pharmacia & Upjohn, Inc. 28,900 $ 1,040,400
- ---------------------------------------------------------------------------
Photographic Products - 1.1%
Eastman Kodak Co. 28,800 $ 2,296,800
- ---------------------------------------------------------------------------
Printing and Publishing - 0.8%
Gannett Co., Inc. 23,000 $ 1,745,125
- ---------------------------------------------------------------------------
Restaurants and Lodging - 0.3%
Mandarin Oriental 433,000 $ 584,550
- ---------------------------------------------------------------------------
Technology - 0.4%
International Business Machines
Corp. 6,600 $ 851,400
- ---------------------------------------------------------------------------
Utilities - Electric - 2.3%
FPL Group, Inc. 28,000 $ 1,288,000
Illinova Corp. 43,000 1,171,750
Portland General Corp. 26,000 1,137,500
Sierra Pacific Resources 52,000 1,449,500
--------------
$ 5,046,750
- ---------------------------------------------------------------------------
Utilities - Gas - 0.7%
Coastal Corp. 37,000 $ 1,591,000
- ---------------------------------------------------------------------------
Utilities - Telephone - 0.7%
Allstate Corp. 25,000 $ 1,403,125
- ---------------------------------------------------------------------------
Total U.S. Stocks $ 48,038,564
- ---------------------------------------------------------------------------
Foreign Stocks - 39.9%
Argentina - 0.2%
Central Costanera, ADR (Utilities
- Electric)## 13,167 $ 410,646
Mirgor Sacifia, ADR (Auto Parts)## 47,930 76,688
--------------
$ 487,334
- ---------------------------------------------------------------------------
Australia - 1.8%
Australia & New Zealand Banking
Group (Banks and Credit
Companies) 185,000 $ 1,079,853
QBE Insurance Group Ltd.
(Insurance) 377,606 1,997,747
Seven Network Ltd. (Entertainment) 252,000 778,378
--------------
$ 3,855,978
- ---------------------------------------------------------------------------
Canada - 1.4%
Canadian National Railway Co.
(Railroads) 66,600 $ 1,831,500
Westcoast Energy, Inc. (Utilities - Gas) 74,800 1,234,200
--------------
$ 3,065,700
- ---------------------------------------------------------------------------
Chile - 0.4%
Chilectra S.A., ADR (Utilities - Electric) 8,100 $ 439,425
Enersis S.A., ADR (Utilities - Electric) 13,600 399,500
--------------
$ 838,925
- ---------------------------------------------------------------------------
Finland - 1.0%
Huhtamaki Oy (Conglomerates) 38,000 $ 1,648,245
Oy Tamro Ab (Medical and Health Products)## 68,000 494,077
--------------
$ 2,142,322
- ---------------------------------------------------------------------------
France - 2.8%
Pinault-Printemps S.A. (Retail) 5,200 $ 1,956,215
TV Francaise (Entertainment) 17,500 1,857,561
Total S.A., ADR (Oils) 35,000 1,365,000
Union des Assurances Federales
S.A. (Broadcasting) 6,900 774,146
--------------
$ 5,952,922
- ---------------------------------------------------------------------------
Germany - 1.2%
Adidas AG (Apparel and Textiles) 22,300 $ 1,906,811
Henkel Kgaa (Chemicals) 15,000 671,443
--------------
$ 2,578,254
- ---------------------------------------------------------------------------
Greece - 0.4%
Ote Greek Telecom
(Telecommunications) 50,300 $ 886,581
- ---------------------------------------------------------------------------
Hong Kong - 2.5%
Asia Satellite Telecommunications,
ADR (Telecommunications) 10,300 $ 275,525
Cafe de Coral Holding (Electrical Equipment) 1,200,000 353,092
Hong Kong Electric Holdings Ltd.
(Utilities - Electric) 202,000 646,624
Hong Kong Land Hld (Restaurants) 525,000 1,170,750
Li & Fung (Consumer Goods and Services) 600,000 547,098
Wharf Holdings Ltd. (Real Estate) 489,000 2,017,551
Wing Hang Bank Limited (Banks and
Credit Companies) 119,000 478,666
--------------
$ 5,489,306
- ---------------------------------------------------------------------------
Italy - 1.7%
Gucci Group NV (Apparel and
Textiles) 11,100 $ 765,900
Instituto Nazionale Della
Assicurazioni (Insurance) 522,000 720,415
Luxottica Group S.p.A., ADR
(Consumer Goods and Services) 13,100 831,850
Telecom Italia DRNC (Utilities -
Telephone) 475,000 541,337
Telecom Italia RNC (Utilities -
Telephone) 475,000 904,315
--------------
$ 3,763,817
- ---------------------------------------------------------------------------
Japan - 6.9%
Canon, Inc. (Office Equipment) 47,000 $ 898,063
DDI Corp. (Telecommunications) 139 1,041,678
Dai Nippon Printing (Printing and
Publishing) 64,000 1,077,044
Daiwa House Industrial Co.
(Housing) 37,000 512,402
East Japan Railway Co. (Railroads) 135 618,854
Hirose Electric (Electrical
Equipment) 11,000 651,766
Ito Yokado Co., Ltd. (Retail) 15,000 746,779
Kirin Beverage (Beverages) 96,000 1,278,990
Matsushita Electric (Airlines) 119,000 1,898,326
Murata Manufacturing Co., Ltd.
(Electrical Equipment) 36,000 1,154,878
Osaka Sanso Kogyo (Chemicals) 146,000 482,444
Sony Corporation (Electronics) 32,000 1,932,000
Takeda Chemical Industries
(Chemicals) 68,000 1,162,240
Toyota Motor Corporation
(Automotive) 35,000 825,226
Ushio Incorporated (Electronics) 51,000 531,948
--------------
$ 14,812,638
- ---------------------------------------------------------------------------
Netherlands - 1.7%
Ihc Caland NV (Transportation) 25,000 $ 1,391,583
Koninklijke Ahold NV, ADR (Real
Estate
Investment Trusts) 27,447 1,602,218
Wolters Kluwer (Publishing) 5,701 730,846
--------------
$ 3,724,647
- ---------------------------------------------------------------------------
New Zealand - 2.2%
Lion Nathan Ltd. (Food and
Beverage Products) 1,002,000 $ 2,585,711
Sky City Ltd. (Entertainment) 144,900 829,799
Telecom Corporation of New
Zealand, ADR
(Telecommunications) 15,300 1,273,725
--------------
$ 4,689,235
- ---------------------------------------------------------------------------
Peru - 0.5%
Telefonica del Peru S.A., ADR
(Utilities - Telephone) 47,800 $ 985,875
- ---------------------------------------------------------------------------
Singapore - 0.6%
Hong Leong Finance Ltd. (Financial
Services)+ 199,000 $ 607,742
Singapore Press Holdings
(Publishing) 39,000 648,153
--------------
$ 1,255,895
- ---------------------------------------------------------------------------
South Korea - 0.6%
Korea Electric Power Corp.
(Utilities - Electric) 17,000 $ 501,335
Korea Electric Power Corp., ADR
(Utilities - Electric) 15,000 270,000
Korea Mobile Telecommunications, ADR
(Utilities - Telephone)* 40,000 500,000
--------------
$ 1,271,335
- ---------------------------------------------------------------------------
Spain - 1.6%
Acerinox S.A (Steel) 5,700 $ 681,861
Iberdrola S.A. (Utilities -
Electric) 162,000 1,716,263
Repsol S.A. (Oils) 35,000 1,139,757
--------------
$ 3,537,881
- ---------------------------------------------------------------------------
Sweden - 3.8%
Abb AB (Electrical Equipment) 21,000 $ 2,340,607
Astra AB, Free, "B"
(Pharmaceuticals) 55,500 2,531,742
Enator AB (Computer Software -
Services) 60,000 1,332,015
Ericsson L M Telephone Company,
ADR (Telecommunications) 40,000 1,105,000
Hennes & Mauritz, "B", Free Shares
(Retail) 6,900 913,845
--------------
$ 8,223,209
- ---------------------------------------------------------------------------
Switzerland - 0.6%
Sandoz AG (Pharmaceuticals) 1,100 $ 1,265,932
- ---------------------------------------------------------------------------
United Kingdom - 8.0%
Asda Group, PLC (Stores) 920,000 $ 1,750,765
British Aerospace (Aerospace) 41,300 783,926
British Petroleum PLC, ADR (Oils) 16,546 2,128,229
Jarvis Hotels, PLC,(SD) (Lodging)* 390,200 1,009,110
Kwik-Fit Holdings, PLC (Automotive) 286,700 1,037,043
Lloyds TSB Group, PLC (Banks and
Credit Companies) 240,000 1,520,452
London Electricity, PLC (Utilities
- Electric) 51,428 506,068
PowerGen, PLC, ADR (Utilities -
Telephone) 60,000 2,010,000
PowerGen, PLC (Utilities - Electric) 185,000 1,534,603
Reuters Holdings, PLC, ADR
(Business Services) 16,000 1,190,000
Royal Dutch Petroleum Co. (Oils) 6,300 1,041,863
Storehouse, PLC (Retail) 343,000 1,553,723
Tomkins, PLC (Conglomerates) 300,000 1,258,911
--------------
$ 17,324,693
- ---------------------------------------------------------------------------
Total Foreign Stocks $ 86,152,479
- ---------------------------------------------------------------------------
Total Common Stocks (Identified Cost, $106,020,524) $134,191,043
- ---------------------------------------------------------------------------
Bonds - 27.4%
- ---------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- ---------------------------------------------------------------------------
Foreign Bonds - 23.0%
Australia - 2.5%
Commonwealth of Australia,
8.75s, 2001 AUD 4,100 $ 3,458,269
Commonwealth of Australia, 9.75s,
2002 2,100 1,856,963
--------------
$ 5,315,232
- ---------------------------------------------------------------------------
Belgium - 1.2%
Kingdom of Belgium, 7.25s, 2004 BEF 20,000 $ 696,297
Kingdom of Belgium, 8.5s, 2007 15,000 563,327
Kingdom of Belgium, 8.75s, 2002 15,000 559,347
Kingdom of Belgium, 9s, 1998 25,000 871,651
--------------
$ 2,690,622
- ---------------------------------------------------------------------------
Canada - 1.2%
Government of Canada, 7.5s, 2003 CAD 3,200 $ 2,584,560
- ---------------------------------------------------------------------------
Denmark - 1.7%
Kingdom of Denmark, 6s, 1999 DKK 4,144 $ 732,244
Kingdom of Denmark, 7s, 2007 2,013 344,369
Kingdom of Denmark, 8s, 2001 13,625 2,557,127
--------------
$ 3,633,740
- ---------------------------------------------------------------------------
Germany - 4.8%
Germany Federal Republic, 6.875s,
1999 DEM 2,655 $ 1,860,074
Germany Federal Republic, 7.125s,
2002 3,047 2,178,866
Germany Federal Unity, 8.75s, 2000 237 177,984
Treuhandanstalt Obligation,
6.375s, 1999 8,857 6,161,391
--------------
$ 10,378,315
- ---------------------------------------------------------------------------
Ireland - 3.3%
Republic of Ireland, 6.25s, 1999 IEP 1,000 $ 1,632,069
Republic of Ireland, 8s, 2000 3,250 5,611,102
--------------
$ 7,243,171
- ---------------------------------------------------------------------------
Italy - 2.3%
Republic of Italy, 8.313s, 1999 ITL 940,000 $ 649,888
Republic of Italy, 8.313s, 2006 5,965,000 4,270,201
--------------
$ 4,920,089
- ---------------------------------------------------------------------------
Spain - 3.0%
Government of Spain, 8.3s, 1998 ESP 275,000 $ 2,213,546
Government of Spain, 8.4s, 2001 95,120 782,155
Government of Spain, 10.1s, 2001 107,600 935,506
Government of Spain, 8s, 2004 320,600 2,564,299
--------------
$ 6,495,506
- ---------------------------------------------------------------------------
Sweden - 1.2%
Kingdom of Sweden, 11s, 1999 SEK 4,900 $ 828,526
Kingdom of Sweden, 10.25s, 2000 9,700 1,665,659
--------------
$ 2,494,185
- ---------------------------------------------------------------------------
Foreign Bonds - continued
United Kingdom - 1.8%
United Kingdom Treasury, 9s, 2000 GBP 1,100 $ 1,893,708
United Kingdom Treasury, 9.75s,
2002 1,100 1,986,512
--------------
$ 3,880,220
- ---------------------------------------------------------------------------
Total Foreign Bonds $ 49,635,640
- ---------------------------------------------------------------------------
U.S. Government Guaranteed - 4.4%
U.S. Treasury Notes, 7s, 2006 $ 1,600 $ 1,670,496
U.S. Treasury Notes, 0's, 2006 9,600 5,034,240
U.S. Treasury Notes, 0's, 2016 11,200 2,903,488
- ---------------------------------------------------------------------------
Total U.S. Government Guaranteed $ 9,608,224
- ---------------------------------------------------------------------------
Total Bonds (Identified Cost, $58,304,472) $ 59,243,864
- ---------------------------------------------------------------------------
Convertible Bonds - 1.3%
- ---------------------------------------------------------------------------
Mbl International Finance Bermuda,
3s, 2002 $ 728,000 $ 801,710
Italy Republic, 5s, 2001 650,000 650,000
Roche Holdings Incorporated, 2010## 2,200,000 984,500
Sandoz Capital BVI Limited, 2s,
2002## 334,000 367,400
- ---------------------------------------------------------------------------
Total Convertible Bonds (Identified Cost, $2,578,554) $ 2,803,610
- ---------------------------------------------------------------------------
Call Options Purchased - 0.2%
- ---------------------------------------------------------------------------
Principal Amount
of Contracts
Issuer/Expiration Date/Strike Price (000 Omitted)
- ---------------------------------------------------------------------------
Deutsche Marks/British Pounds/
November/2.2145 DEM 8,265 $ 0
Japanese Government Bond/December/
108.155 JPY 276,000 90,528
Japanese Government Bond/January/
111.279 276,000 91,080
Japanese Government Bond/December/
111.1737 179,000 83,593
Japanese Government Bond/November/
114.355 433,000 153,282
- ---------------------------------------------------------------------------
Total Call Options Purchased(Premiums Paid, $98,349) $ 418,483
- ---------------------------------------------------------------------------
Put Options Purchased - 0.3%
- ---------------------------------------------------------------------------
Deutsche Marks/British Pounds/
January/2.45 DEM 11,646 $ 108,658
Deutsche Marks/British Pounds/
November/2.315 8,640 378,638
Deutsche Marks/January/1.55 13,677 45,845
Swiss Francs/Deutsche Marks/January/
0.829 CHF 4,555 41,364
- ---------------------------------------------------------------------------
Total Put Options Purchased (Premiums Paid, $173,708) $ 574,505
- ---------------------------------------------------------------------------
Short-Term Obligations - 9.3%
- ---------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- ---------------------------------------------------------------------------
Eurolira Time Deposit, due 4/21/97 ITL 6,320,000 $ 4,170,034
Federal Home Loan Bank, due 11/08/96 4,200 4,195,786
Federal Home Loan Mortgage Corp.,
due 11/13/96 6,000 5,989,660
Federal Home Loan Mortgage Corp.,
due 11/07/96 290 289,742
Federal National Mortgage Assn., due
11/15/96 3,400 3,393,164
General Electric Capital Corp., due
11/01/96 2,095 2,095,000
- ---------------------------------------------------------------------------
Total Short-Term Obligations (Identified Cost, $20,057,465) $ 20,133,386
- ---------------------------------------------------------------------------
Total Investments (Identified Cost, $187,233,072) $217,364,891
- ---------------------------------------------------------------------------
Call Options Written
- ---------------------------------------------------------------------------
Principal Amount
of Contracts
Issuer/Expiration Date/Strike Price (000 Omitted)
- ---------------------------------------------------------------------------
Deutsche Marks/British Pounds/
November/2.2145 DEM/GBP 8,265 $ 0
Deutsche Marks/British Pounds/ )
January/2.3682 11,257 (20,804
Deutsche Marks/January/1.5065 DEM 13,293 (113,926)
- ---------------------------------------------------------------------------
Total Call Options Written (Premiums Received, $141,474) $ (134,722)
- ---------------------------------------------------------------------------
Put Options Written
- ---------------------------------------------------------------------------
Japanese Bond/December/111.17368 JPY 179,000 $ 0
Japanese Bond/December/108.155 276,000 (1,104)
Japanese Bond/January/111.279 276,000 (2,208)
Japanese Bond/November/114.355 433,000 (433)
- ---------------------------------------------------------------------------
Total Put Options Written (Premiums Received, $97,182) $ (3,745)
- ---------------------------------------------------------------------------
Other Assets, Less Liabilities - (0.7%) (1,347,376)
- ---------------------------------------------------------------------------
Net Assets - 100.0% $215,879,044
- ---------------------------------------------------------------------------
*Non-income producing security.
+Restricted security.
##144A restriction.
Abbreviations have been used throughout this report to indicate amounts shown
in currencies other than the U.S. dollar. A list of abbreviations is shown
below.
AUD = Australian Dollars FRF = French Francs
BEF = Belgian Francs GBP = British Pounds
CAD = Canadian Dollars IEP = Irish Punts
CHF = Swiss Francs ITL = Italian Lire
DEM = Deutsche Marks JPY = Japanese Yen
DKK = Danish Kroner NLG = Netherland Guilder
ESP = Spanish Pesetas NZD = New Zealand Dollars
FIM = Finnish Markka SEK = Swedish Kroner
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- ------------------------------------------------------------------------------
October 31, 1996
- ------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $187,233,072) $217,364,891
Cash 51,200
Net receivable for interest rate swaps 99,630
Net receivable for forward foreign currency exchange
contracts sold 519,092
Net receivable for forward foreign currency exchange
contracts 37,567
Receivable for Fund shares sold 478,336
Receivable for investments sold 1,234,008
Interest and dividends receivable 1,910,365
Other assets 2,030
------------
Total assets $221,697,119
------------
Liabilities:
Payable for Fund shares reacquired $ 235,250
Payable for investments purchased 3,585,006
Net payable for forward foreign currency exchange contracts
purchased 1,626,120
Written options outstanding, at value (premiums received,
$238,656) 138,471
Payable to affiliates -
Management fee 6,293
Shareholder servicing agent fee 1,024
Distribution fee 62,982
Accrued expenses and other liabilities 162,929
------------
Total liabilities $ 5,818,075
------------
Net assets $215,879,044
============
Net assets consist of:
Paid-in capital $175,324,281
Unrealized appreciation on investments and translation
of assets and liabilities in foreign currencies 29,254,975
Accumulated undistributed net realized gain on investments
and foreign currency transactions 10,271,896
Accumulated undistributed net invesment income 1,027,892
------------
Total $215,879,044
============
Shares of beneficial interest outstanding 16,964,447
==========
Class A shares:
Net asset value and redemption price per share
(net assets of $129,843,139 / 10,197,969 shares of beneficial
interest outstanding) $12.73
======
Offering price per share (100 / 95.25 of net asset value per
share) $13.36
======
Class B shares:
Net asset value and offering price per share
(net assets of $71,788,088 / 5,646,347 shares of beneficial
interest outstanding) $12.71
======
Class C shares:
Net asset value, offering price and redemption price per
share (net assets of $14,247,817 / 1,120,131 shares of
beneficial interest outstanding) $12.72
======
On sales of $100,000 or more, the offering price of Class A shares is reduced.
A contingent deferred sales charge may be imposed on redemptions of Class A,
Class B, and Class C shares.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- ------------------------------------------------------------------------------
Year Ended October 31, 1996
- ------------------------------------------------------------------------------
Net investment income:
Income -
Interest $ 5,226,669
Dividends 3,798,557
Foreign taxes withheld (284,638)
-----------
Total investment income $ 8,740,588
-----------
Expenses -
Management fee $ 1,716,121
Trustees' compensation 37,469
Shareholder servicing agent fee (Class A) 179,978
Shareholder servicing agent fee (Class B) 141,911
Shareholder servicing agent fee (Class C) 18,456
Distribution and service fee (Class A) 419,948
Distribution and service fee (Class B) 645,054
Distribution and service fee (Class C) 123,045
Custodian fee 193,571
Postage 50,393
Printing 37,629
Auditing fees 35,741
Legal fees 2,136
Miscellaneous 167,089
-----------
Total expenses $ 3,768,541
Fees paid indirectly (7,764)
-----------
Net expenses $ 3,760,777
-----------
Net investment income $ 4,979,811
-----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $10,667,574
Written option transactions 758,742
Foreign currency transactions (1,016,505)
-----------
Net realized gain on investments and foreign currency
transactions $10,409,811
-----------
Change in unrealized appreciation (depreciation) -
Investments $14,545,035
Written options 26,999
Translation of assets and liabilities in foreign currencies (1,164,617)
-----------
Net unrealized gain on investments $13,407,417
-----------
Net realized and unrealized gain on investments and
foreign currency $23,817,228
-----------
Increase in net assets from operations $28,797,039
===========
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Year Ended October 31, 1996 1995
- --------------------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
<S> <C> <C>
Net investment income $ 4,979,811 $ 4,636,931
Net realized gain on investments and foreign currency
transactions 10,409,811 3,749,269
Net unrealized gain on investments and
foreign currency translation 13,407,417 8,187,457
------------ ------------
Increase in net assets from operations $ 28,797,039 $ 16,573,657
------------ ------------
Distributions declared to shareholders -
From net investment income (Class A) $ (6,143,145) $ (734,229)
From net investment income (Class B) (2,682,617) (140,223)
From net investment income (Class C) (505,747) (27,610)
From net realized gain on investments and foreign currency
transactions (Class A) (54,351) (453,126)
From net realized gain on investments and foreign currency
transactions (Class B) (28,792) (72,338)
From net realized gain on investments and foreign currency
transactions (Class C) (5,382) (13,755)
------------ ------------
Total distributions declared to shareholders $ (9,420,034) $ (1,441,281)
------------ ------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 47,074,888 $ 44,197,817
Net asset value of shares issued to shareholders in
reinvestment of distributions 8,276,937 1,279,372
Cost of shares reacquired (37,251,081) (40,657,870)
------------ ------------
Increase in net assets from Fund share transactions $ 18,100,744 $ 4,819,319
------------ ------------
Total increase in net assets $ 37,477,749 $ 19,951,695
Net assets:
At beginning of year 178,401,295 158,449,600
------------ ------------
At end of year (including accumulated undistributed net
investment income of $1,027,892 and $5,220,666,
respectively) $215,879,044 $178,401,295
============ ============
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
- ----------------------------------------------------------------------------------------------------------------------------
Year Ended October 31, 1996 1995 1994 1993 1992 1991 1990*
- ----------------------------------------------------------------------------------------------------------------------------
Class A
- ----------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value - beginning of period $ 11.57 $ 10.58 $ 11.19 $ 10.21 $ 9.42 $ 8.55 $ 8.50
-------- -------- ------- ------- ------- ------- -------
Income from investment operations# -
Net investment income $ 0.34 $ 0.33 $ 0.30 $ 0.28 $ 0.36 $ 0.37 $ 0.08
Net realized and unrealized
gain (loss) on investments
and foreign currency transactions 1.46 0.79 0.15 1.42 0.86 0.88 (0.03)
-------- -------- ------- ------- ------- ------- -------
Total from investment operations $ 1.80 $ 1.12 $ (0.45) $ 1.70 $ 1.22 $ 1.25 $ 0.05
-------- -------- ------- ------- ------- ------- -------
Less distributions declared to shareholders -
From net investment income $ (0.63) $ (0.08) $ (0.25) $ (0.45) $ (0.26) $ (0.38) --
From net realized gain on investments
and foreign currency transactions (0.01) (0.05) (0.33) (0.27) (0.17) -- --
In excess of net realized gain on
investments and foreign currency
transactions -- -- (0.38) -- -- -- --
From paid-in capital -- -- (0.10) -- -- -- --
-------- -------- ------- ------- ------- ------- -------
Total distributions declared
to shareholder $ (0.62) $ (0.13) $ (1.06) $ (0.72) $ (0.43) $ (0.38) --
-------- -------- ------- ------- ------- ------- -------
Net asset value - end of period $ 12.73 $ 11.57 $ 10.58 $ 11.19 $ 10.21 $ 9.42 $ 8.55
======== ======== ======== ======= ======= ======= =======
Total return** 16.06% 10.63% 4.10% 17.78% 13.14% 14.94% 3.76%+
Ratios (to average net assets)/ Supplemental data:
Expenses## 1.63% 1.77% 1.76% 1.92% 1.84% 2.18% 1.57%+
Net investment income 2.79% 3.06% 2.81% 2.96% 3.65% 4.05% 3.14%+
Portfolio turnover 167% 160% 118% 112% 72% 134% 2%
Average commission rate### $0.0187 -- -- -- -- -- --
Net assets at end of period
(000 omitted) $129,843 $110,294 $99,870 $71,262 $44,707 $30,847 $12,510
*For the period from September 4, 1990 (commencement of investment operations) to October
31, 1990.
+Annualized.
#Per share data for the periods subsequent to October 31, 1993 is based on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid indirectly.
**Total returns do not include the applicable sales charge. If the sales charge had been included, the results would have
been lower.
###Average commission rate is calculated for funds with fiscal years beginning on or after September 1, 1995.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
- -------------------------------------------------------------------------------
Year Ended October 31, 1996 1995 1994 1993**
- -------------------------------------------------------------------------------
Class B
- -------------------------------------------------------------------------------
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $11.52 $10.54 $11.19 $10.84
------ ------ ------ ------
Income from investment operation# -
Net investment income $ 0.25 $ 0.25 $ 0.25 $ 0.06
Net realized and unrealized gain
(loss) on investments and
foreign currency transactions 1.46 0.77 0.13 0.35
------ ------ ------ ------
Total from investment
operations $ 1.71 $ 1.02 $ 0.38 $ 0.41
------ ------ ------ ------
Less distributions declared to
shareholders -
From net investment income $(0.47) $(0.03) $(0.24) $(0.06)
In excess of net investment income (0.04) 0.00 0.00 0.00
From net realized gain on
investments and foreign
currency transactions (0.01) (0.01) (0.32) 0.00
In excess of net realized gain
on investments and
foreign currency transactions 0.00 0.00 (0.38) 0.00
From paid-in capital 0.00 0.00 (0.09) 0.00
------ ------ ------ -----
Total distribution declared to
shareholder $(0.52) $(0.04) $(1.03) $(0.06)
------ ------ ------ ------
Net asset value - end of period $12.71 $11.52 $10.54 $11.19
====== ====== ====== ======
Total return+++ 15.29% 9.75% 3.38% 3.79%++
Ratios (to average net assets)
/Supplemental data:
Expenses## 2.34% 2.49% 2.49% 2.77%+
Net investment income 2.07% 2.34% 2.33% 2.15%+
Portfolio turnover 167% 160% 118% 112%
Average commission rate### $0.0187 -- -- --
Net assets at end of period
(000 omitted) $71,788 $57,214 $47,677 $ 4,381
**For the period from the commencement of offering of Class B shares, September
7, 1993 to October 31, 1993.
+Annualized.
++Not annualized.
#Per share data for the periods subsequent to October 31, 1993 is based on
average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
+++Total returns do not include the applicable sales charge. If the sales charge
had been included the results would have been lower.
###Average commission rate is calculated for funds with fiscal years beginning
on or after September 1, 1995.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
- -----------------------------------------------------------------------------
Year Ended October 31, 1996 1995 1994 ***
- -----------------------------------------------------------------------------
Class C
- -----------------------------------------------------------------------------
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $11.52 $10.53 $11.06
------ ------ ------
Income from investment operation# -
Net investment income $ 0.26 $ 0.27 $ 0.27
Net realized and unrealized gain
(loss) on investments and foreign
currency transactions 1.46 0.76 (0.29)
------ ------ ------
Total from investment operations $ 1.72 $ 1.03 $(0.02)
------ ------ ------
Less distributions declared to
shareholders -
From net investment income $(0.51) $(0.03) $(0.12)
From net realized gain on investments
and foreign currency transactions (0.01) (0.01) (0.16)
In excess of net realized gain on
investments and foreign currency
transactions 0.00 0.00 (0.18)
From paid-in capital 0.00 0.00 (0.05)
------ ------ ------
Total distribution declared to
shareholder $(0.52) $(0.04) $(0.51)
------ ------ ------
Net asset value - end of period $12.72 $11.52 $10.53
====== ====== ======
Total return+++ 15.41% 9.84% (0.15)%++
Ratios (to average net assets)
/Supplemental data:
Expenses## 2.27% 2.42% 2.39%+
Net investment income 2.14% 2.41% 2.51%+
Portfolio turnover 167% 160% 118%
Average commission rate### $0.0187 -- --
Net assets at end of period (000
omitted) $14,248 $10,894 $10,903
***For the period from the commencement of offering of Class C shares, January
3, 1994 to October 31, 1994.
+Annualized.
++Not annualized.
#Per share data for the periods subsequent to October 31, 1993 is based on
average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
+++Total returns do not include the applicable sales charge. If the sales charge
had been included the results would have been lower.
###Average commission rate is calculated for funds with fiscal years beginning
on or after September 1, 1995.
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 is registered under the Investment Company Act of 1940, as amended, as an
open-end management investment company.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Investments
in foreign securities are vulnerable to the effects of changes in the relative
values of the local currency and the U.S. dollar and to the effects of changes
in each country's legal, political and economic environment.
Investment Valuations - Equity securities listed on securities exchanges or
reported through the NASDAQ system are valued at last sale prices. Unlisted
equity securities or listed equity securities for which last sale prices are not
available are valued at last quoted bid prices. Debt securities (other than
short-term obligations which mature in 60 days or less), including listed issues
and forward contracts, are valued on the basis of valuations furnished by
dealers or by a pricing service with consideration to factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data, without exclusive reliance upon exchange or over-the-counter prices.
Short-term obligations, which mature in 60 days or less, are valued at amortized
cost, which approximates market value. Non-U.S. dollar-denominated short-term
obligations are valued at amortized cost as calculated in the base currency and
translated into U.S. dollars at the closing daily exchange rate. 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.
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases and
sales of foreign investments, income and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates of
such transactions. Gains and losses attributable to foreign currency exchange
rates on sales of securities are recorded for financial statement purposes as
net realized gains and losses on investments. Gains and losses attributable to
foreign exchange rate movements on income and expenses are recorded for
financial statement purposes as foreign currency transaction gains and losses.
That portion of both realized and unrealized gains and losses on investments
that results from fluctuations in foreign currency exchange rates is not
separately disclosed.
Written Options - The Fund may write covered call or put options for which
premiums are received and are recorded as liabilities, and are subsequently
adjusted to the current value of the options written. Premiums received from
writing options which expire are treated as realized gains. Premiums received
from writing options which are exercised or are closed are offset against the
proceeds or amount paid on the transaction to determine the realized gain or
loss. If a put option is exercised, the premium reduces the cost basis of the
security purchased by the Fund. The Fund, as writer of an option, may have no
control over whether the underlying securities may be sold (call) or purchased
(put) and, as a result, bears the market risk of an unfavorable change in the
price of the securities underlying the written option. In general, written call
options may serve as a partial hedge against decreases in value in the
underlying securities to the extent of the premium received. Written options may
also be used as part of an income producing strategy reflecting the view of the
Fund's management on the direction of interest rates.
Forward Foreign Currency Exchange Contracts - The Fund may enter into forward
foreign currency exchange contracts for the purchase or sale of a specific
foreign currency at a fixed price on a future date. Risks may arise upon
entering into these contracts from the potential inability of counterparties to
meet the terms of their contracts and from unanticipated movements in the value
of a foreign currency relative to the U.S. dollar. The Fund will enter into
contracts for hedging purposes as well as for non-hedging purposes. For hedging
purposes, the Fund may enter into contracts to deliver or receive foreign
currency it will receive from or require for its normal investment activities.
It may also use contracts in a manner intended to protect foreign
currency-denominated securities from declines in value due to unfavorable
exchange rate movements. For non-hedging purposes, the Fund may enter into
contracts with the intent of changing the relative exposure of the Fund's
portfolio of securities to different currencies to take advantage of anticipated
changes. The forward foreign currency exchange contracts are adjusted by the
daily exchange rate of the underlying currency and any gains or losses are
recorded for financial statement purposes as unrealized until the contract
settlement date.
Swap Agreements - The Fund may enter into swap agreements. A swap is an exchange
of cash payments between the Fund and another party which is based on a specific
financial index. Cash payments are exchanged at specified intervals and the
expected income or expense is recorded on the accrual basis. The value of the
swap is adjusted daily and the change in value is recorded as unrealized
appreciation or depreciation. Risks may arise upon entering into these
agreements from the potential inability of counterparties to meet the terms of
their contract and from unanticipated changes in the value of the financial
index on which the swap agreement is based. The Fund uses swaps for both hedging
and non-hedging purposes. For hedging purposes, the Fund may use swaps to reduce
its exposure to interest and foreign exchange rate fluctuations. For non-hedging
purposes, the Fund may use swaps to take a position on anticipated changes in
the underlying financial index.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
original issue discount are amortized or accreted for financial statement and
tax reporting purposes as required by federal income tax regulations. Dividend
income is recorded on the ex-dividend date for dividends received in cash.
Dividend and interest payments received in additional securities are recorded on
the ex-dividend or ex-interest date in an amount equal to the value of the
security on such date.
The Fund uses the effective interest method for reporting interest income on
payment-in-kind (PIK) bonds, whereby interest income on PIK bonds is recorded
ratably by the Fund at a constant yield to maturity. Legal fees and other
related expenses incurred to preserve and protect the value of a security owned
are added to the cost of the security; other legal fees are expensed. Capital
infusions, which are generally non-recurring, incurred to protect or enhance the
value of high-yield debt securities, are reported as an addition to the cost
basis of the security. Costs that are incurred to negotiate the terms or
conditions of capital infusions or that are expected to result in a plan of
reorganization are reported as realized losses. Ongoing costs incurred to
protect or enhance an investment, or costs incurred to pursue other claims or
legal actions, are reported as operating expenses.
Fees Paid Indirectly - The Fund's custodian bank calculates its fee based on the
Fund's average daily net assets. The fee is reduced according to a fee
arrangement, which provides for custody fees to be reduced based on a formula
developed to measure the value of cash deposited with the custodian by the Fund.
This amount is shown as a reduction of expenses on the Statement of Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided.
The Fund files a tax return annually using tax accounting methods required under
provisions of the Code which may differ from generally accepted accounting
principles, the basis on which these financial statements are prepared.
Accordingly, the amount of net investment income and net realized gain reported
on these financial statements may differ from that reported on the Fund's tax
return and, consequently, the character of distributions to shareholders
reported in the financial highlights may differ from that reported to
shareholders on Form 1099-DIV. Foreign taxes have been provided for on interest
and dividend income earned on foreign investments in accordance with the
applicable country's tax rates and to the extent unrecoverable are recorded as a
reduction of investment income. Distributions to shareholders are recorded on
the ex-dividend date.
The Fund distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a tax return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or accumulated net realized
gains. During the year ended October 31, 1996, $493,440 was reclassified from
paid-in capital to accumulated undistributed net realized gain on investments
and foreign currency transactions and $18,154 was reclassified from paid-in
capital to accumulated undistributed net investment income due to differences
between book and tax accounting for foreign currency and foreign tax credits.
This change had no effect on the net assets or net asset value per share.
Multiple Classes of Shares of Beneficial Interest - The Fund offers Class A,
Class B and Class C shares. The three classes of shares differ in their
respective shareholder servicing agent, distribution and service fees. All
shareholders bear the common expenses of the Fund pro rata based on average
daily net assets of each class, without distinction between share classes.
Dividends are declared separately for each class. No class has preferential
dividend rights; differences in per share dividend rates are generally due to
differences in separate class expenses.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an annual rate of 0.65% of
average daily net assets and 5.00% of investment income.
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 Fund Distributors, Inc. (MFD) and
MFS Service Center, Inc. (MFSC). The Fund has an unfunded defined benefit plan
for all its independent Trustees and Mr. Bailey. Included in Trustees'
compensation is a net periodic pension expense of $6,994 for the year ended
October 31, 1996.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$53,235 for the year ended October 31, 1996, as its portion of the sales charge
on sales of Class A shares of the Fund. The Trustees have adopted separate
distribution plans for Class A, Class B and Class C shares pursuant to Rule
12b-1 of the Investment Company Act of 1940 as follows:
The Class A distribution plan provides that the Fund will pay MFD up to 0.35%
per annum of its average daily net assets attributable to Class A shares in
order that MFD may pay expenses on behalf of the Fund related to the
distribution and servicing of its shares. These expenses include a service fee
to each securities dealer that enters into a sales agreement with MFD of up to
0.25% per annum of the Fund's average daily net assets attributable to Class A
shares which are attributable to that securities dealer, a distribution fee to
MFD of up to 0.10% per annum of the Fund's average daily net assets attributable
to Class A shares, commissions to dealers and payments to MFD wholesalers for
sales at or above a certain dollar level, and other such distribution-related
expenses that are approved by the Fund. MFD retains the service fee for accounts
not attributable to a securities dealer which amounted to $46,796 for the year
ended October 31, 1996. Fees incurred under the distribution plan during the
year ended October 31, 1996 were 0.35% of average daily net assets attributable
to Class A shares on an annualized basis.
The Class B and Class C distribution plans provide that the Fund will pay MFD a
distribution fee of 0.75% per annum, and a service fee of up to 0.25% per annum,
of the Fund's average daily net assets attributable to Class B and Class C
shares. MFD will pay to securities dealers that enter into a sales agreement
with MFD all or a portion of the service fee attributable to Class B and Class C
shares, and will pay to such securities dealers all of the distribution fee
attributable to Class C shares. The service fee is intended to be additional
consideration for services rendered by the dealer with respect to Class B and
Class C shares. MFD retains the service fee for accounts not attributable to a
securities dealer, which amounted to $18,388 and $7,831 for Class B and Class C
shares, respectively, for the year ended October 31, 1996. Fees incurred under
the distribution plans during the year ended October 31, 1996 were 1.00% of
average daily net assets attributable to Class B and Class C shares on an
annualized basis.
Purchases over $1 million of Class A shares and certain purchases into
retirement plans are subject to a contingent deferred sales charge in the event
of a shareholder redemption within 12 months following such purchase. A
contingent deferred sales charge is imposed on shareholder redemptions of Class
B shares in the event of a shareholder redemption within six years of purchase.
A contingent deferred sales charge is imposed on shareholder redemptions of
Class C shares in the event of a shareholder redemption within 12 months of
purchases made on or after April 1, 1996. MFD receives all contingent deferred
sales charges. Contingent deferred sales charges imposed during the year ended
October 31, 1996 were $2,201, $88,243 and $566 for Class A, Class B and Class C
shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as a
percentage of the average daily net assets of each class of shares at an
effective annual rate of up to 0.15%, up to 0.22% and up to 0.15% attributable
to Class A, Class B and Class C shares, respectively.
(4) Portfolio Securities
Purchases and sales of investments, other than purchased option transactions and
short-term obligations, were as follows:
Purchases Sales
- ------------------------------------------------------------------------------
U.S. government securities $ 58,241,533 $ 70,418,267
============ ============
Investments (non-U.S. government securities) $231,089,918 $212,649,862
============ ============
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 $187,233,072
============
Gross unrealized appreciation $ 32,693,003
Gross unrealized depreciation (2,561,184)
------------
Net unrealized appreciation $ 30,131,819
============
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
Class A Shares
Year Ended October 31, 1996 October 31, 1995
-------------------------- --------------------------
Shares Amount Shares Amount
- -----------------------------------------------------------------------------
Shares sold 2,084,100 $25,150,733 2,123,469 $22,961,533
Shares issued to
shareholders in
reinvestment of
distributions 468,643 5,535,276 98,593 1,061,212
Shares reacquired (1,890,835) (22,849,389) (2,125,319) (22,992,718)
---------- ----------- ---------- -----------
Net increase 661,908 $ 7,836,620 96,743 $ 1,030,027
========== =========== ========== ===========
Class B Shares
Year Ended October 31, 1996 October 31, 1995
-------------------------- --------------------------
Shares Amount Shares Amount
- -----------------------------------------------------------------------------
Shares sold 1,371,364 $16,563,323 1,673,616 $18,044,111
Shares issued to
shareholders in
reinvestment of
distributions 199,482 2,357,194 17,272 186,186
Shares reacquired (889,762) (10,770,246) (1,250,017) (13,498,802)
---------- ----------- ---------- -----------
Net increase 681,084 $ 8,150,271 440,871 $ 4,731,495
========== =========== ========== ===========
Class C Shares
Year Ended October 31, 1996 October 31, 1995
-------------------------- --------------------------
Shares Amount Shares Amount
- -----------------------------------------------------------------------------
Shares sold 442,641 $ 5,360,832 296,274 $ 3,192,173
Shares issued to
shareholders in
reinvestment of
distributions 32,507 384,467 2,966 31,974
Shares reacquired (300,333) (3,631,446) (389,108) (4,166,350)
---------- ----------- ---------- -----------
Net increase 174,815 $ 2,113,855 (89,868) $ (942,203)
========== =========== ========== ===========
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $350 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Fund shares. Interest is charged to each
fund, based on its borrowings, at a rate equal to the bank's base rate. In
addition, a commitment fee, based on the average daily unused portion of the
line of credit, is allocated among the participating funds at the end of each
quarter. The commitment fee allocated to the Fund for the year ended October 31,
1996 was $2,138.
(7) Financial Instruments
The Fund trades financial instruments with off-balance sheet risk in the normal
course of its investing activities in order to manage exposure to market risks
such as interest rates and foreign currency exchange rates. These financial
instruments include written options, forward foreign currency exchange contracts
and futures contracts. The notional or contractual amounts of these instruments
represent the investment the Fund has in particular classes of financial
instruments and does not necessarily represent the amounts potentially subject
to risk. The measurement of the risks associated with these instruments is
meaningful only when all related and offsetting transactions are considered. A
summary of obligations under these financial instruments at October 31, 1996, is
as follows:
Written Option Transactions
<TABLE>
<CAPTION>
1996 Calls 1996 Puts
----------------------------- -----------------------------
Principal Amounts Principal Amounts
of Contracts of Contracts
(000 Omitted) Premiums (000 Omitted) Premiums
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OUTSTANDING, BEGINNING OF PERIOD -
Australian Dollars 1,953 $ 23,731 1,904 $ 24,410
British Pounds
Deutsche Marks 5,388 14,445 11,631 38,016
Deutsche Marks/British Pounds 5,310 34,078
Italian Lire/Deutsche Marks 9,941,320 164,753 9,941,320 366,050
Japanese Yen 328,362 57,135 434,201 27,538
Options written -
Australian Dollars 3,579 20,797 1,405 8,584
British Pounds
Canadian Dollars 6,496 6,668 10,641 32,215
Deutsche Marks 46,276 251,914 7,707 21,156
Deutsche Marks/British Pounds 47,350 179,096
Finnish Markkaa/Deutsche Marks
Italian Lire/Deutsche Marks 9,782,643 76,823
Japanese Yen 491,451 6,173 4,162,613 360,687
Japanese Yen/Deutsche Marks 1,206,800 43,022
New Zealand Dollar 10,506 15,622
Spanish Pesetas/Deutsche Marks 926,725 22,990
Swiss Francs/Deutsche Marks
U.S. Dollars
Options terminated in closing transactions -
Australian Dollars (5,532) $ (44,528) (1,405) $ (8,584)
British Pounds
Canadian Dollars
Deutsche Marks (32,983) (185,735) (12,268) (33,340)
Deutsche Marks/British Pounds (21,326) (87,554)
Italian Lire/Deutsche Marks (19,723,963) (241,576) (9,941,320) (366,050)
Japanese Yen (819,813) (63,308) (2,676,000) (249,885)
Japanese Yen/Deutsche Marks (1,206,800) (43,022)
New Zealand Dollar (10,506) (15,622)
Spanish Pesetas/Deutsche Marks
Options exercised -
Deutsche Marks
Italian Lire/Deutsche Marks
Swiss Francs/Deutsche Marks
U.S. Dollars
Options expired -
Australian Dollars (1,904) (24,410)
British Pounds
Canadian Dollars (6,496) (6,668) (10,641) (32,215)
Deutsche Marks (5,388) (14,445) (7,070) (25,832)
Deutsche Marks/British Pounds (11,812) (50,325)
Finnish Markkaa/Deutsche Marks
Italian Lire/Deutsche Marks
Japanese Yen (756,814) (41,158)
SpanishPesetas/Deutsche Marks (926,725) (22,990)
Swedish Kronor/Deutsche Marks
----------- --------- ---------- ---------
OUTSTANDING, END OF PERIOD 32,815 $ 141,474 1,164,000 $ 97,182
=========== ========= ========== =========
OPTIONS OUTSTANDING AT END OF PERIOD
CONSIST OF -
Canadian Dollars
Deutsche Marks 13,293 66,179
Deutsche Marks/British Pounds 19,522 75,295
Spanish Pesetas/Deutsche Marks
Italian Lire/Deutsche Marks
Japanese Yen 1,164,000 97,182
----------- --------- ---------- ---------
OUTSTANDING, END OF PERIOD 32,815 $ 141,474 1,164,000 $ 97,182
=========== ========= ========== =========
</TABLE>
At October 31, 1996, the Fund had sufficient cash and/or securities at least
equal to the value of the written options.
(8) Restricted Securities
The Fund may invest not more than 15% of its net assets in securities which are
subject to legal or contractual restrictions on resale. At October 31, 1996, the
Fund owned the following restricted securities (constituting 0.75% of net
assets) which may not be publicly sold without registration under the Securities
Act of 1933 (the 1933 Act). 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.
Date of Shares/
Description Acquisition Par Amount Cost Value
- --------------------------------------------------------------------------------
Jarvis Hotel PLC 6/21/96 - 9/18/96 390,200 $1,034,237 $1,009,110
Hong Leong Finance Ltd. 5/19/95 - 9/27/95 199,000 700,342 607,742
----------
$1,616,852
==========
Forward Foreign Currency Exchange Contracts
<TABLE>
<CAPTION>
NET UNREALIZED
CONTRACTS TO CONTRACTS APPRECIATION
SETTLEMENT DATE DELIVER/RECEIVE IN EXCHANGE FOR AT VALUE DEPRECIATION)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales 2/20/97 AUD 6,181,354 $ 4,832,582 $ 4,879,969 $ (47,387)
2/24/97 BEF 85,611,138 2,818,010 2,757,792 60,218
11/01/96 - 2/20/97 CAD 17,402,157 12,830,882 13,017,126 (186,244)
2/07/96 CHF 18,448,836 15,442,760 14,665,902 776,859
11/04/96 - 4/28/97 DEM 135,934,096 90,018,881 89,748,990 269,892
2/03/97 DKK 21,215,367 3,719,254 3,656,553 62,700
11/15/96 ESP 330,186,379 2,585,945 2,580,407 5,538
11/06/96 - 2/24/97 GBP 8,972,063 14,245,441 14,576,221 (330,780)
2/24/97 IEP 4,498,344 7,215,335 7,317,133 (101,798)
11/06/96 - 4/28/97 ITL 32,070,649,032 20,988,115 21,083,404 (95,289)
1/29/97 - 2/28/97 JPY 970,567,293 8,845,903 8,625,565 220,338
2/03/97 NLG 2,879,271 1,758,441 1,702,789 55,651
12/13/96 NZD 9,516,940 6,541,465 6,699,697 (158,232)
2/03/97 SEK 18,798,263 2,851,692 2,864,066 (12,374)
------------ ------------ ------------
$194,694,706 $194,175,614 $ 519,092
============ ============ ============
Purchases 2/20/97 AUD 3,148,616 $ 2,481,110 $ 2,485,726 $ 4,616
11/01/96 - 2/20/97 CAD 18,216,452 13,506,586 13,629,152 122,566
1/31/97 - 2/07/97 CHF 16,225,920 13,513,129 12,897,590 (615,539)
11/04/96 - 4/28/97 DEM 147,993,286 98,640,016 97,721,285 (918,731)
2/03/97 DKK 8,489,755 1,462,117 1,463,243 1,126
11/15/96 ESP 312,741,290 2,453,508 2,444,073 (9,435)
2/07/97 FIM 18,996,841 4,209,434 4,208,921 (513)
2/07/97 FRF 17,790,450 3,522,861 3,490,095 (32,766)
11/06/96 GBP 5,039,980 8,037,236 8,197,170 159,934
11/06/97 - 4/28/97 ITL 26,050,772,949 16,984,363 17,110,022 125,659
1/21/97 - 2/28/97 JPY 1,816,325,953 16,740,631 16,132,612 (608,019)
2/03/97 NLG 3,041,777 1,786,836 1,798,894 12,058
12/13/96 NZD 9,541,365 6,596,312 6,716,893 120,581
2/03/97 SEK 12,690,150 1,921,104 1,933,447 12,343
------------ ------------ ------------
$191,855,243 $190,229,123 $ (1,626,120)
============ ============ ============
</TABLE>
Forward foreign currency exchange contract purchases and sales under master
netting arrangements and closed forward foreign currency exchange contracts
excluded from above, amounted to a net receivable of $37,567 at October 31,
1996.
At October 31 1996, the Fund had sufficient cash and/or securities to cover any
commitments under these contracts.
Interest Rate Swaps
<TABLE>
<CAPTION>
Unrealized
Notional Principal Cash Flows Cash Flows Appreciation
Expiration Amount of Contract Paid by the Fund Received by the Fund (Depreciation)
- -------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
10/22/01 ITL 6,320,000,000 Fixed - 8.055% Floating - 6M Libor $99,630
</TABLE>
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
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 of investments, as
of October 31, 1996 and the related statement of operations for the year then
ended, the statement of net assets for each of the two years in the period then
ended, and financial highlights for each of the three years in the period then
ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits. The financial highlights for each of the three years in the period ended
October 31, 1993, and for the period September 4, 1990 (commencement of
investment operations) to October 31, 1990 for Class A shares, and for the
period September 7, 1993 (commencement of investment operations) to October 31,
1993 for Class B shares, were audited by other auditors whose report dated
December 16, 1993 expressed an unqualified opinion on those statements and
financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1996, by correspondence with the custodian and brokers or by other
appropriate auditing procedures where replies from brokers were not received. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of MFS
World Total Return Fund at October 31, 1996, the results of its operations for
the year then ended, the changes in its net assets for each of the two years in
the period then ended and its financial highlights for each of the three years
in the period then ended, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
December 12, 1996
--------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
MFS(R) WORLD TOTAL RETURN FUND
<TABLE>
<CAPTION>
<S> <C>
TRUSTEES CUSTODIAN
A. Keith Brodkin* - Chairman and President State Street Bank and Trust Company
Richard B. Bailey* - Private Investor;
Former Chairman and Director (until 1991), AUDITOR
Massachusetts Financial Services Company; Ernst & Young LLP
Director, Cambridge Bancorp;
Director, Cambridge Trust Company INVESTOR INFORMATION
Marshall N. Cohan - Private Investor For MFS stock and bond market outlooks,
Lawrence H. Cohn, M.D. - Chief of Cardiac call toll free: 1-800-637-4458 anytime from
Surgery, Brigham and Women's Hospital; a touch-tone telephone.
Professor of Surgery, Harvard Medical School
The Hon. Sir J. David Gibbons, KBE - Chief For information on MFS mutual funds,
Executive Officer, Edmund Gibbons Ltd.; call your financial adviser or, for an
Chairman, Bank of N.T. Butterfield & Son Ltd. information kit, call toll free:
Abby M. O'Neill - Private Investor; 1-800-637-2929 any business day from
Director, Rockefeller Financial Services, Inc. 9 a.m. to 5 p.m. Eastern time (or leave
(investment advisers) a message anytime).
Walter E. Robb, III - President and Treasurer,
Benchmark Advisors, Inc. (corporate financial INVESTOR SERVICE
consultants); President, Benchmark Consulting MFS Service Center, Inc.
Group, Inc. (office services); Trustee, P.O. Box 2281
Landmark Funds (mutual funds) Boston, MA 02107-9906
Arnold D. Scott* - Senior Executive Vice
President, Director and Secretary, For general information, call toll free:
Massachusetts Financial Services Company 1-800-225-2606 any business day from
Jeffrey L. Shames* - President and Director, 8 a.m. to 8 p.m. Eastern time.
Massachusetts Financial Services Company
J. Dale Sherratt - President, Insight For service to speech- or hearing-impaired,
Resources, Inc. call toll free: 1-800-637-6576 any business
(acquisition planning specialists) day from 9 a.m. to 5 p.m. Eastern time.
Ward Smith - Former Chairman (until 1994), (To use this service, your phone must be equipped
NACCO Industries; Director, Sundstrand with a Telecommunications Device for the Deaf.)
Corporation
For share prices, account balances and
INVESTMENT ADVISER exchanges, call toll free: 1-800-MFS-TALK
Massachusetts Financial Services Company (1-800-637-8255) anytime from a touch-tone
500 Boylston Street telephone.
Boston, MA 02116-3741
WORLD WIDE WEB
DISTRIBUTOR www.mfs.com
MFS Fund Distributors, Inc.
500 Boylston Street TOP RATED SERVICE
Boston, MA 02116-3741 For the third year in a row,
[DALBAR MFS earned a #1 ranking in
PORTFOLIO MANAGER LOGO] DALBAR, Inc.'s Broker/Dealer
Frederick J. Simmons* Survey, Main Office Operations
Service Quality category. The
TREASURER firm achieved a 3.48 overall score - on a
W. Thomas London* scale of 1 to 4 - in the 1996 survey. A total
of 110 firms responded, offering input on the
ASSISTANT TREASURER quality of service they received from 29
James O. Yost* mutual fund companies nationwide. The survey
contained questions about service quality in
SECRETARY 15 categories, including "knowledge of phone
Stephen E. Cavan* service contracts," "accuracy of transaction
processing," and "overall ease of doing
ASSISTANT SECRETARY business with the firm."
James R. Bordewick, Jr.*
*Affiliated with the Investment Adviser
</TABLE>
<PAGE>
MFS(R) WORLD TOTAL -------------
RETURN FUND [DALBAR BULK RATE
LOGO] U.S. POSTAGE
TOP-RATED SERVICE P A I D
PERMIT #55638
500 Boylston Street BOSTON, MA
Boston, MA 02116 -------------
[LOGO]
INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUNDSM
(C)1996 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116
MWT-2 12/96 35M 24/224/324
<PAGE>
MFS UTILITIES FUND
SUPPLEMENT TO THE MARCH 1, 1997
PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION
THE FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE FUND'S
PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION ("SAI"), DATED MARCH 1, 1997,
AND CONTAINS A DESCRIPTION OF CLASS I SHARES.
CLASS I SHARES ARE AVAILABLE FOR PURCHASE ONLY BY CERTAIN INVESTORS AS
DESCRIBED UNDER THE CAPTION "ELIGIBLE PURCHASERS" BELOW.
<TABLE>
EXPENSE SUMMARY
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES: CLASS I
Maximum Initial Sales Charge Imposed on Purchases of Fund -------
Shares (as a percentage of offering price)........................................... None
Maximum Contingent Deferred Sales Charge (as a percentage
of original purchase price or redemption proceeds, as applicable).................... None
ANNUAL OPERATING EXPENSES OF THE FUND (AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees (after expense limitation)(1).......................................... 0.50%
Rule 12b-1 Fees........................................................................ None
Other Expenses(2)(3)................................................................... 0.43%
----
Total Operating Expenses (after expense limitation)(4)................................. 0.93%
- ----------
(1) Effective April 1, 1997, the Adviser voluntarily reduced the management fee
to 0.50% of the Fund's average daily net assets for an indefinite period of
time. Absent this reduction, the management fee would have been 0.71% of
the Fund's average daily net assets for the fiscal year ended October 31,
1996.
(2) "Other Expenses" is based on Class A expenses incurred during the fiscal
year ended October 31, 1996.
(3) The Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its
custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the
effect of reducing the Fund's expenses). Any such fee reductions are not
reflected under "Other Expenses."
(4) Absent the fee reductions described above, "Total Operating Expenses" would
have been 1.14%.
</TABLE>
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a $1,000
investment in Class I shares of the Fund, assuming (a) a 5% annual return and
(b) redemption at the end of each of the time periods indicated:
PERIOD CLASS I
------ -------
1 year........................................ $ 9
3 years....................................... 30
The purpose of the expense table above is to assist investors in
understanding the various costs and expenses that a shareholder of the Fund will
bear directly or indirectly. A more complete description of the Fund's
management fee is set forth under the caption "Management of the Fund" in the
Prospectus.
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
ELIGIBLE PURCHASERS
Class I shares are available for purchase only by the following purchasers
("Eligible Purchasers"):
(i) certain retirement plans established for the benefit of employees of
Massachusetts Financial Services Company ("MFS"), the Fund's investment
adviser, and employees of MFS' affiliates;
(ii) any fund distributed by MFS Fund Distributors, Inc. ("MFD"), the Fund's
distributor, if the fund seeks to achieve its investment objective by
investing primarily in shares of the Fund and other funds distributed by
MFD;
(iii) any retirement plan which (a) purchases shares directly through MFD
(rather than through a third party broker or dealer or other financial
intermediary); (b) has, at the time of purchase of Class I shares,
aggregate assets of at least $100 million; and (c) invests at least $10
million in Class I shares of the Fund either alone or in combination with
investments in Class I shares of other MFS funds distributed by MFD
(additional investments may be made in any amount); provided that MFD may
accept purchases from smaller plans or in smaller amounts if it believes,
in its sole discretion, that the plan's aggregate assets will equal or
exceed $100 million, or that the plan will make additional investments
which will cause its total investment to equal or exceed $10 million,
within a reasonable period of time; and
(iv) bank trust departments which initially invest, on behalf of their trust
clients, at least $100,000 in Class I shares of the Fund (additional
investments may be made in any amount); provided that MFD may accept
smaller initial purchases if it believes, in its sole discretion, that the
bank trust department will make additional investments, on behalf of its
trust clients, which will cause its total investment to equal or exceed
$100,000 within a reasonable period of time.
In no event will the Fund, MFS, MFD or any of their affiliates pay any sales
commissions or compensation to any third party in connection with the sale of
Class I shares; the payment of any such sales commission or compensation would,
under the Fund's policies, disqualify the purchaser as an eligible investor of
Class I shares.
SHARE CLASSES OFFERED BY THE FUND
Four classes of shares of the Fund currently are offered for sale, Class A
shares, Class B shares, Class C shares and Class I shares. Class I shares are
available for purchase only by Eligible Purchasers, as defined above, and are
described in this Supplement. Class A shares, Class B shares and Class C shares
are described in the Fund's Prospectus and are available for purchase by the
general public.
Class A shares are offered at net asset value plus an initial sales charge
up to a maximum of 4.75% of the offering price (or a contingent deferred sales
charge (a "CDSC") upon redemption of 1.00% during the first year in the case of
purchases of $1 million or more and certain purchases by retirement plans), and
are subject to an annual distribution fee and service fee up to a maximum of
0.35% per annum. Class B shares are offered at net asset value without an
initial sales charge but are subject to a CDSC upon redemption (declining from
4.00% during the first year to 0% after six years) and an annual distribution
fee and service fee up to a maximum of 1.00% per annum; Class B shares convert
to Class A shares approximately eight years after purchase. Class C shares are
offered at net asset value without an initial sales charge but are subject to a
CDSC upon redemption of 1.00% during the first year and an annual distribution
fee and service fee up to a maximum of 1.00% per annum. Class I shares are
offered at net asset value without an initial sales charge or CDSC and are not
subject to a distribution or service fee. Class C and Class I shares do not
convert to any other class of shares of the Fund.
OTHER INFORMATION
Eligible Purchasers may purchase Class I shares only directly through MFD.
Eligible Purchasers may exchange Class I shares of the Fund for Class I shares
of any other MFS Fund available for purchase by such Eligible Purchasers at
their net asset value (if available for sale), and may exchange Class I shares
of the Fund for shares of the MFS Money Market Fund (if available for sale), and
may redeem Class I shares of the Fund at net asset value. Distributions paid by
the Fund with respect to Class I shares generally will be greater than those
paid with respect to Class A shares, Class B shares and Class C shares because
expenses attributable to Class A shares, Class B shares and Class C shares
generally will be higher.
Effective April 1, 1997, the Adviser voluntarily reduced the management fee
to 0.50% of the Fund's average daily net assets for an indefinite period of
time. Prior to that date, the Adviser voluntarily reduced the management fee to
0.375% of the Fund's average daily net assets.
THE DATE OF THIS SUPPLEMENT IS MARCH 1, 1997
<PAGE>
PROSPECTUS -- March 1, 1997
MFS(R) UTILITIES FUND Class A Shares of Beneficial Interest
Class B Shares of Beneficial Interest
(A member of the MFS Family of Funds(R)) Class C Shares of Beneficial Interest
- -------------------------------------------------------------------------------
Page
1. Expense Summary ........................................ 2
2. The Fund ............................................... 3
3. Condensed Financial Information ........................ 4
4. Investment Objective and Policies ...................... 6
5. Investment Techniques .................................. 7
6. Additional Risk Factors ................................ 11
7. Management of the Fund ................................. 14
8. Information Concerning Shares of the Fund .............. 16
Purchases ........................................... 16
Exchanges ........................................... 21
Redemptions and Repurchases ......................... 22
Distribution Plan ................................... 24
Distributions ....................................... 25
Tax Status .......................................... 25
Net Asset Value ..................................... 26
Description of Shares, Voting Rights and Liabilities 26
Performance Information ............................. 27
9. Shareholder Services ................................... 27
Appendix A ............................................. A-1
Appendix B ............................................. B-1
Appendix C ............................................. C-1
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
MFS UTILITIES FUND -- 500 Boylston Street, Boston, MA 02116 (617) 954-5000
This Prospectus pertains to MFS Utilities Fund (the "Fund"), a non-diversified
series of MFS Series Trust VI (the "Trust"), an open-end management investment
company consisting of three series. 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). 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 minimum initial investment generally
is $1,000 per account (see "Information Concerning Shares of the Fund --
Purchases").
The Fund's investment adviser and distributor are Massachusetts Financial
Services Company ("MFS" or the "Adviser") and MFS Fund Distributors, Inc.
("MFD"), respectively, both of which are located at 500 Boylston Street, Boston,
Massachusetts 02116.
INVESTMENT PRODUCTS ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY,
AND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY FINANCIAL
INSTITUTION. SHARES OF MUTUAL FUNDS ARE SUBJECT TO INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED, AND WILL FLUCTUATE IN VALUE. YOU
MAY RECEIVE MORE OR LESS THAN YOU PAID WHEN YOU REDEEM YOUR SHARES.
This Prospectus sets forth concisely the information concerning the 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, 1997, as
amended or supplemented from time to time (the "SAI"), which contains more
detailed information about the Trust and the Fund and is incorporated into this
Prospectus by reference. See page 29 for a further description of the
information set forth in the SAI. A copy of the SAI may be obtained without
charge by contacting the Shareholder Servicing Agent (see back cover for address
and phone number). The SEC maintains an Internet World Wide Web site that
contains the SAI, materials that are incorporated by reference into this
Prospectus and the SAI, and other information regarding the Fund. This
Prospectus is available on the Adviser's Internet World Wide Web site at
http://www.mfs.com.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE>
<TABLE>
1. EXPENSE SUMMARY
<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(1) 4.00% 1.00%
ANNUAL OPERATING EXPENSES OF THE FUND (AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees (after applicable fee reduction)(2) ...................... 0.50% 0.50% 0.50%
Rule 12b-1 Fees (after applicable expense reduction) ..................... 0.25%(3) 1.00%(4) 1.00%(4)
Other Expenses ........................................................... 0.43% 0.43% 0.43%
----- ----- -----
Total Operating Expenses (after applicable expense reduction)(5)........ 1.18% 1.93% 1.93%
- ------------
(1) Purchases of $1 million or more and certain purchases by retirement plans
are not subject to an initial sales charge; however, a contingent deferred
sales charge ("CDSC") of 1% will be imposed on such purchases in the event
of certain redemption transactions within 12 months following such purchases
(see "Information Concerning the Fund -- Purchases" below).
(2) As of April 1, 1997, the Adviser voluntarily reduced the management fee to
0.50% of the Fund's average daily net assets for an indefinite period of
time. Prior to that date, the Adviser voluntarily reduced the management fee
to 0.375% of the Fund's average daily net assets. Absent this reduction, the
management fee would have been 0.71% of the Fund's average daily net assets
for the fiscal year ended October 31, 1996. See "Management of the Fund"
below.
(3) The Fund has adopted a distribution plan for its shares in accordance with
Rule 12b-1 under the Investment Company Act of 1940, as amended (the "1940
Act") (the "Distribution Plan"), which provides that it will pay
distribution/service fees aggregating up to (but not necessarily all of)
0.35% per annum of the average daily net assets attributable to the Class A
shares. Payment of the 0.10% per annum Class A distribution fee will
commence on such date as the Trustees of the Trust may determine.
Distribution expenses under the Plan, together with the initial sales
charge, may cause long-term shareholders to pay more than the maximum sales
charge that would have been permissible if imposed entirely as an initial
sales charge. See "Information Concerning Shares of the Fund -- Distribution
Plan" below.
(4) The Fund's Distribution Plan provides that it will pay distribution/ service
fees aggregating up to (but not necessarily all of) 1.00% per annum of the
average daily net assets attributable to Class B shares and Class C shares,
respectively. Distribution expenses paid under the Distribution Plan with
respect to Class B and Class C shares, together with any CDSC payable upon
redemption of Class B and Class C shares, may cause long-term shareholders
to pay more than the maximum sales charge that would have been permissible
if imposed entirely as an initial sales charge. See "Information Concerning
Shares of the Fund -- Distribution Plan" below.
(5) Absent the fee reductions described above, "Total Operating Expenses" for
Class A, Class B and Class C shares would have been 1.39%, 2.14% and 2.14%,
respectively, of the Fund's average daily net assets attributable to such
shares on an annualized basis.
(6) The Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its
custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the
effect of reducing the Fund's expenses). Any such fee reductions are not
reflected under "Other Expenses."
</TABLE>
<PAGE>
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(3)
- ----- ------- ---------------- ------------------
(1) (1)
1 year ............. $ 59 $ 60 $ 20 $ 30 $ 20
3 years ............ 83 91 61 61 61
5 years ............ 109 124 104 104 104
10 years ............ 184 206(2) 206(2) 225 225
- ------------
(1) Assumes no redemption.
(2) Class B shares convert to Class A shares approximately eight years after
purchase; therefore, years nine and ten reflect Class A expenses.
(3) Purchases subsequent to April 1, 1996 which are redeemed within 12 months of
purchase are subject to a 1% CDSC fee.
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 Plan."
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS
THAN THOSE SHOWN.
2. THE FUND
The Fund is a non-diversified series of the Trust, an open-end management
investment company which was organized as a business trust under the laws of The
Commonwealth of Massachusetts on April 30, 1990. The Trust presently consists of
three series, each of which represents a portfolio with separate investment
objectives and policies. Shares of the Fund are continuously sold to the public
and the Fund then uses the proceeds to buy securities for its portfolio. Three
classes of shares of the Fund currently are offered for sale to the general
public. Class A shares are offered at net asset value plus an initial sales
charge up to a maximum of 4.75% of the offering price (or a CDSC of 1.00% upon
redemption during the first year in the case of purchases of $1 million or more
and certain purchases by retirement plans) and are subject to an annual
distribution fee and service fee up to a maximum of 0.35% per annum. Class B
shares are offered at net asset value without an initial sales charge but are
subject to a CDSC upon redemption (declining from 4.00% during the first year to
0% after six years) and an annual distribution fee and service fee up to a
maximum of 1.00% per annum; Class B shares will convert to Class A shares
approximately eight years after purchase. Class C shares are offered at net
asset value without an initial sales charge but are subject to a CDSC of 1.00%
upon redemption during the first year and an annual distribution fee and service
fee of 1.00% per annum. Class C shares do not convert to any other class of
shares of the Fund. In addition, the Fund offers an additional class of shares,
Class I shares, exclusively to certain institutional investors. Class I shares
are made available by means of a separate Prospectus supplement provided to
institutional investors eligible to purchase Class I shares and are offered at
net asset value without an initial sales charge or CDSC upon redemption and
without an annual distribution and service fee.
The Trust's Board of Trustees provides broad supervision over the affairs of the
Fund. 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 has been audited since inception of the Fund and
should be read in conjunction with financial statements included in the Fund's
Annual Report to shareholders which are incorporated by reference into the SAI
in reliance upon the report of the Fund's independent auditors, given upon their
authority as experts in accounting and auditing. The Fund's independent auditors
are Ernst & Young LLP.
<TABLE>
FINANCIAL HIGHLIGHTS
CLASS A, CLASS B AND CLASS C SHARES
<CAPTION>
YEAR ENDED OCTOBER 31,
---------------------------------------------------------------------
1996 1995 1994 1993 1992*
---- ---- ---- ---- -----
CLASS A
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value - beginning of period .............. $ 8.20 $ 7.00 $ 7.86 $ 6.68 $ 6.33
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) ......................... $ 0.38 $ 0.31 $ 0.33 $ 0.40 $ 0.17
Net realized and unrealized gain (loss) on
investments and foreign currency transactions .. 1.07 1.22 (0.63) 1.19 0.30
------ ------ ------ ------ ------
Total from investment operations ............. $ 1.45 $ 1.53 $(0.30) $ 1.59 $ 0.47
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income ....................... $(0.32) $(0.33) $(0.35) $(0.38) $(0.12)
From net realized gain on investments and foreign
currency transactions .......................... (0.21) -- (0.21) (0.03) --
------ ------ ------ ------ ------
Total distributions declared to shareholders . $(0.53) $(0.33) $(0.56) $(0.41) $(0.12)
------ ------ ------ ------ ------
Net asset value - end of period .................... $ 9.12 $ 8.20 $ 7.00 $ 7.86 $ 6.68
====== ====== ====== ====== ======
TOTAL RETURN(+) .................................... 18.41% 22.48% (3.89)% 24.39% 11.02%+
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA(S):
Expenses## ....................................... 1.08% 0.83% 0.65% 0.65% 0.65%+
Net investment income ............................ 4.37% 4.30% 4.58% 4.57% 5.44%+
PORTFOLIO TURNOVER ................................. 137% 152% 115% 119% 63%
AVERAGE COMMISSION RATE### ........................ $0.0422 -- -- -- --
NET ASSETS AT END OF PERIOD (000 OMITTED) .......... $60,345 $52,474 $42,027 $43,423 $12,859
*For the period from the commencement of investment operations, February 14, 1992 to October 31, 1992.
+Annualized.
#Per share data for the periods subsequent to October 31, 1993 is based on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid indirectly.
###Average commission rate is calculated for funds with fiscal years beginning on or after September 1, 1995.
(+)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.
(S)The investment adviser voluntarily waived a portion of its management fee. If this fee had been incurred by the Fund, the net
investment income per share and the ratios would have been:
Net investment income ................. $ 0.34 $ 0.28 $ 0.28 $ 0.31 $ 0.13
RATIOS (TO AVERAGE NET ASSETS):
Expenses## .......................... 1.42% 1.23% 1.41% 1.68% 2.63%+
Net investment income ............... 4.03% 3.90% 3.82% 4.20% 3.46%+
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS -- CONTINUED
<CAPTION>
YEAR ENDED OCTOBER 31,
--------------------------------------------------------------------------------------
1996 1995 1994 1993** 1996 1995 1994***
---------- ---------- ---------- ------------ ---------- ---------- ------------
CLASS B CLASS C
------------------------------------------------ ------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value - beginning of period ..... $ 8.18 $ 6.98 $ 7.84 $ 7.83 $ 8.18 $ 6.99 $ 7.48
------ ------ ------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) ................ $ 0.31 $ 0.24 $ 0.25 $ 0.05 $ 0.31 $ 0.24 $ 0.25
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions .......................... 1.07 1.22 (0.63) 0.01 1.07 1.21 (0.54)
------ ------ ------ ------ ------ ------ ------
Total from investment operations .... $ 1.38 $ 1.46 (0.38) $ 0.06 $ 1.38 $ 1.45 $(0.29)
------ ------ ------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income .............. $(0.25) $(0.26) $(0.27) $(0.05) $(0.25) $(0.26) $(0.20)
From net realized gain on investments and
foreign currency transactions ......... (0.21) -- (0.21) -- (0.21) -- --
------ ------ ------ ------ ------ ------ ------
Total distributions declared to
shareholders ...................... $(0.46) $(0.26) $(0.48) $(0.05) $(0.46) $(0.26) $(0.20)
------ ------ ------ ------ ------ ------ ------
Net asset value - end of period ........... $ 9.10 $ 8.18 $ 6.98 $ 7.84 $ 9.10 $ 8.18 $ 6.99
====== ====== ====== ====== ====== ====== ======
TOTAL RETURN .............................. 17.50% 21.43% (4.92)% 0.69%++ 17.57% 21.19% (3.87)%++
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA(S):
Expenses## .............................. 1.89% 1.74% 1.72% 1.50%+ 1.82% 1.81% 1.65%+
Net investment income ................... 3.53% 3.33% 3.51% 1.80%+ 3.60% 3.32% 3.56%+
PORTFOLIO TURNOVER ........................ 137% 152% 115% 119% 137% 152% 115%
AVERAGE COMMISSION RATE### ................ $0.0422 -- -- -- $0.0422 -- --
NET ASSETS AT END OF PERIOD (000 OMITTED) . $49,877 $33,239 $19,774 $5,412 $8,231 $4,943 $2,399
**For the period from the commencement of offering of Class B shares, September 7, 1993 to October 31, 1993.
***For the period from the commencement of offering of Class C shares, January 3, 1994 to October 31, 1994.
+Annualized.
++Not annualized.
#Per share data for the periods subsequent to October 31, 1993 is based on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid indirectly.
###Average commission rate is calculated for funds with fiscal years beginning on or after September 30, 1995.
(S)The investment adviser voluntarily waived a portion of its management fee. If this fee had been incurred by the Fund, the net
investment income per share and ratios would have been:
Net investment income (loss) ........ $ 0.28 $ 0.21 $ 0.20 $(0.07) $ 0.28 $ 0.21 $ 0.20
RATIOS (TO AVERAGE NET ASSETS):
Expenses## ..... 2.23% 2.14% 2.48% 3.27%+ 2.16% 2.21% 2.41%+
Net investment income ............... 3.19% 2.93% 2.74% 1.53%+ 3.26% 2.83% 2.80%+
</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 seeks 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. See "Investment
Techniques -- Equity Securities" below. 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 Services
("S&P") or by Fitch Investors Service, Inc. ("Fitch") or will be of comparable
quality as determined by the Adviser (see "Additional 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. 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 "Additional Risk
Factors -- Foreign Securities." For further information on the principal sectors
of the utilities industry in which the Fund may invest, see Appendix B.
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"). See "Investment Techniques -- Government Securities"
below.
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.
5. INVESTMENT TECHNIQUES
Consistent with the Fund's investment objective and policies, the Fund may
engage in the following investment techniques, many of which are described more
fully in the SAI. See "Investment Objective, Policies and Restrictions" in the
SAI.
The Fund may invest in all types of equity securities, including the following:
common stocks, preferred stocks and preference stocks; securities such as bonds,
warrants or rights that are convertible into stocks; and depository receipts for
those securities. These securities may be listed on securities exchanges, traded
in various over-the-counter markets or have no organized markets.
GOVERNMENT SECURITIES: The Fund may invest in securities that are issued or
guaranteed as to principal and interest by the U.S. Government, its agencies,
authorities or instrumentalities, including: (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.
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements in order to
earn income on available cash or as a temporary defensive measure. Under a
repurchase agreement, the Fund acquires securities subject to the seller's
agreement to repurchase at a specified time and price. If the seller becomes
subject to a proceeding under the bankruptcy laws or its assets are otherwise
subject to a stay order, the Fund's right to liquidate the securities may be
restricted (during which time the value of the securities could decline). As
discussed in the SAI, the Fund has adopted certain procedures intended to
minimize 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, Government Securities or an irrevocable
letter of credit maintained on a current basis at an amount at least equal to
the market value of the securities loaned. The Fund 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 or a letter of credit). 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").
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.
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 GNMA); or guaranteed by U.S. Government-sponsored corporations (such as the
Federal National Mortgage Association or the Federal Home Loan Mortgage
Corporation, which are supported only by the discretionary authority of the U.S.
Government to purchase the agency's obligations). Mortgage pass-through
securities may also be issued by non-governmental issuers (such as commercial
banks, savings and loan institutions, private mortgage insurance companies,
mortgage bankers and other secondary market issuers).
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.
INDEXED SECURITIES: The Fund may invest in indexed securities whose value is
linked to foreign currencies, interest rates, commodities, indices, or other
financial indicators. Most indexed securities are short to intermediate term
fixed-income securities whose values at maturity, (i.e., principal value) or
interest rates rise or fall according to the change in one or more specified
underlying instruments. Indexed securities may be positively or negatively
indexed (i.e., their principal value or interest rates may increase or decrease
if the underlying instrument appreciates), and may have return characteristics
similar to direct investments in the underlying instrument or to one or more
options on the underlying instrument. Indexed securities may be more volatile
than the underlying instrument itself.
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.
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 P. Brady (the "Brady Plan"). Brady Plan debt
restructurings have been implemented to date in Argentina, Brazil, Bulgaria,
Costa Rica, Dominican Republic, Ecuador, Jordan, Mexico, Nigeria, Panama, the
Philippines, Poland, Uruguay and Venezuela. Brady Bonds have been issued only
recently, and for that reason do not have a long payment history. Brady Bonds
may be collateralized or uncollateralized, are issued in various currencies (but
primarily the U.S. dollar) and are actively traded in over-the-counter secondary
markets. U.S. dollar-denominated, collateralized Brady Bonds, which may be
fixed-rate bonds or floating-rate bonds, are generally collateralized in full as
to principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds. Brady Bonds are often viewed as having three or four valuation
components: the collateralized repayment of principal at final maturity; the
collateralized interest payments; the uncollateralized interest payments; and
any uncollateralized repayment of principal at maturity (these uncollateralized
amounts consitituting 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.
EMERGING MARKET SECURITIES: Consistent with the Fund's objective and policies,
the Fund may invest in securities of issuers whose principal activities are
located in emerging market countries. Emerging market countries include any
country determined by the Adviser to have an emerging market economy, taking
into account a number of factors, including whether the country has a low- to
middle-income economy according to the International Bank for Reconstruction and
Development, the country's foreign currency debt rating, its political and
economic stability and the development of its financial and capital markets. The
Adviser determines whether an issuer's principal activities are located in an
emerging market country by considering such factors as its country of
organization, the principal trading market for its securities and the source of
its revenues and assets. The issuer's principal activities generally are deemed
to be located in a particular country if: (a) the security is issued or
guaranteed by the government of that country or any of its agencies, authorities
or instrumentalities; (b) the issuer is organized under the laws of, and
maintains a principal office in, that country; (c) the issuer has its principal
securities trading market in that country; (d) the issuer derives 50% or more of
its total revenues from goods sold or services performed in that country; or (e)
the issuer has 50% or more of its assets in that country.
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 "Additional Risk Factors -- Foreign Securities" 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"). A determination is made based upon a continuing review of the
trading markets for a specific Rule 144A security, whether such security is
liquid and thus not subject to a Fund's limitation on investing not more than
10% of its net assets in illiquid investments. The Board of Trustees has adopted
guidelines and delegated to MFS the daily function of determining and monitoring
the liquidity of Rule 144A securities. The Board, however, retains oversight,
focusing on factors such as valuation, liquidity and availability of
information. Investing in Rule 144A securities could have the effect of
decreasing the level of liquidity in 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 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 SAI 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 securities and other obligations
underlying 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 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.
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.
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.
6. ADDITIONAL 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 fund 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 0% 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.
EMERGING MARKET SECURITIES: The risks of investing in foreign securities may be
intensified in the case of investments in emerging markets. Securities of many
issuers in emerging markets may be less liquid and more volatile than securities
of comparable domestic issuers. Emerging markets also have different clearance
and settlement procedures, and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when a portion of the assets of the
Fund is uninvested and no return is earned thereon. The inability of the Fund to
make intended security purchases due to settlement problems could cause the Fund
to miss attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result in losses to the Fund due to
subsequent declines in value of the portfolio security, a decrease in the level
of liquidity in the Fund's portfolio, or if the Fund has entered into a contract
to sell the security, in possible liability to the purchaser. Certain markets
may require payment for securities before delivery and in such markets the Fund
bears the risk that the securities will not be delivered and that the Fund's
payments will not be returned. Securities prices in emerging markets can be
significantly more volatile than in the more developed nations of the world,
reflecting the greater uncertainties of investing in less established markets
and economies. In particular, countries with emerging markets may have
relatively unstable governments, present the risk of nationalization of
businesses, restrictions on foreign ownership, or prohibitions against
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.
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 C 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 SAI 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 (the "Code"). 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 SAI 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.
------------------------
PORTFOLIO TRADING -- The primary consideration in placing portfolio security
transactions with broker-dealers 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 "Portfolio Transactions and Brokerage Commissions" in the SAI.
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. For the fiscal year ended October 31,
1996, the Fund had a portfolio turnover rate in excess of 100%. Transaction
costs incurred by the Fund and the realized capital gains and losses of the Fund
may be greater than a fund with a lesser portfolio turnover rate.
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 SAI includes a discussion of investment policies and a listing of specific
investment restrictions which govern the Fund's investment policies. The
specific investment restrictions listed in the SAI may be changed without
shareholder approval unless indicated otherwise (see "Investment Objective,
Policies and Restrictions -- Investment Restrictions" in the SAI).
The Fund's investment limitations, policies and rating standards are adhered to
at the time of purchase or utilization of assets; a subsequent change in
circumstances will not be considered to result in a violation of policy.
7. MANAGEMENT OF THE FUND
INVESTMENT ADVISER -- The Adviser manages the Fund pursuant to an Investment
Advisory Agreement, dated September 1, 1993 (the "Advisory Agreement"). Under
the Advisory Agreement, the Adviser provides the Fund with overall investment
advisory services. Maura A. Shaughnessy, a Vice President of the Adviser, has
been the Fund's portfolio manager since 1992. Ms. Shaughnessy has been employed
as a portfolio manager by the Adviser since 1991. Subject to such policies as
the Trustees may determine, the Adviser makes investment decisions for the Fund.
For its services and facilities, the Adviser 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
April 1, 1997, the Adviser voluntarily agreed to reduce the management fee to
0.50% 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. From March 1, 1995 to March 31, 1997 the
Adviser voluntarily agreed to reduce its management fee to 0.375% of the Fund's
daily net assets.
For the Fund's fiscal year ended October 31, 1996, MFS received management fees
totalling $385,142. If MFS had not reduced its management fee, MFS would have
received management fees of $732,288 (of which $387,237 would have been based on
average daily net assets and $345,051 on gross income), equivalent to 0.71% of
the Fund's average daily net assets.
MFS also serves as investment adviser to each of the other funds in the MFS
Family of Funds (the "MFS Funds") and to MFS(R) Municipal Income Trust, MFS
Multimarket Income Trust, MFS Government Markets Income Trust, MFS Intermediate
Income Trust, MFS Charter Income Trust, MFS Special Value Trust, MFS
Institutional Trust, MFS Union Standard Trust, MFS Variable Insurance Trust,
MFS/Sun Life Series Trust and seven variable accounts, each of which is a
registered investment company established by Sun Life Assurance Company of
Canada (U.S.) ("Sun Life of Canada (U.S.)") in connection with the sale of
various fixed/variable annuity contracts. MFS and its wholly owned subsidiary,
MFS Institutional Advisors, Inc., provide investment advice to substantial
private clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the U.S., Massachusetts Investors Trust.
Net assets under the management of the MFS organization were approximately $54
billion on behalf of approximately 2.3 million investor accounts as of January
31, 1997. As of such date, the MFS organization managed approximately $30.3
billion of assets invested in equity securities and approximately $20.1 billion
of assets invested in fixed income securities. Approximately $3.9 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 wholly owned
subsidiary of Sun Life Assurance Company of Canada ("Sun Life"). The Directors
of MFS are A. Keith Brodkin, Jeffrey L. Shames, Arnold D. Scott, John D. McNeil
and Donald A. Stewart. Mr. Brodkin is the Chairman 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 Stewart 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.
MFS has established a strategic alliance with Foreign & Colonial Management Ltd.
("Foreign & Colonial"). Foreign & Colonial is a subsidiary of two of the world's
oldest financial services institutions, the London-based Foreign & Colonial
Investment Trust PLC, which pioneered the idea of investment management in 1868,
and HYPO-BANK (Bayerische Hypotheken-und Wechsel-Bank AG), the oldest publicly
listed bank in Germany, founded in 1835. As part of this alliance, the portfolio
managers and investment analysts of MFS and Foreign & Colonial share their views
on a variety of investment related issues, such as the economy, securities
markets, portfolio securities and their issuers, investment recommendations,
strategies and techniques, risk analysis, trading strategies and other portfolio
management matters. MFS has access to the extensive international equity
investment expertise of Foreign & Colonial, and Foreign & Colonial has access to
the extensive U.S. equity investment expertise of MFS. MFS and Foreign &
Colonial each have investment personnel working in each other's offices in
Boston and London, respectively.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for portfolios of other clients of MFS or clients of
Foreign & Colonial. Some simultaneous transactions are inevitable when several
clients receive investment advice from MFS and Foreign & Colonial, particularly
when the same security is suitable for more than one client. While in some cases
this arrangement could have a detrimental effect on the price or availability of
the security as far as the Fund is concerned, in other cases, however, it may
produce increased investment opportunities for the Fund.
ADMINISTRATOR -- MFS provides the Fund with certain administrative services
pursuant to a Master Administrative Services Agreement dated March 1, 1997.
Under this Agreement, MFS provides the Fund with certain financial, legal,
compliance, shareholder communications and other administrative services. As a
partial reimbursement for the cost of providing these services, the Fund pays
MFS an administrative fee up to 0.015% per annum of the Fund's average daily net
assets, provided that the administrative fee is not assessed on Fund assets that
exceed $3 billion.
DISTRIBUTOR -- MFD, a wholly owned subsidiary of MFS, is the distributor of
shares of the Fund and also serves as distributor for each of the other MFS
Funds.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. (the "Shareholder
Servicing Agent"), a wholly owned subsidiary of MFS, performs transfer agency,
certain dividend disbursing agency and other services for the Fund.
8. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Class A, Class B and Class C shares of the Fund may be purchased at the public
offering price through any dealer and other financial institutions ("dealers")
having a selling agreement with MFD. Dealers may also charge their customers
fees relating to investments in the Fund.
This Prospectus offers three classes of shares to the general public (Class A,
Class B and Class C shares), which bear sales charges and distribution fees in
different forms and amounts, as described below:
CLASS A SHARES: Class A shares are generally offered at net asset value plus an
initial sales charge, but in certain cases are offered at net asset value
without an initial sales charge but subject to a CDSC.
PURCHASES SUBJECT TO INITIAL SALES CHARGE. Class A shares are offered at net
asset value plus an initial sales charge as follows:
<TABLE>
<CAPTION>
SALES CHARGE* AS
PERCENTAGE OF:
-------------------------------- DEALER ALLOWANCE
NET AMOUNT AS A PERCENTAGE
AMOUNT OF PURCHASE OFFERING PRICE INVESTED OF OFFERING PRICE
-------------- ---------- -----------------
<S> <C> <C> <C>
Less than $100,000 ......................... 4.75% 4.99% 4.00%
$100,000 but less than $250,000 ............ 4.00 4.17 3.20
$250,000 but less than $500,000 ............ 2.95 3.04 2.25
$500,000 but less than $1,000,000 .......... 2.20 2.25 1.70
$1,000,000 or more ......................... None** None** See Below**
- ----------
*Because of rounding in the calculation of offering price, actual sales charges
may be more or less than those calculated using the percentages above.
**A CDSC will apply to such purchases, as discussed below.
</TABLE>
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price, as shown in the above table. In the case of
the maximum sales charge, the dealer retains 4% and MFD retains approximately
3/4 of 1% of the public offering price. The sales charge may vary depending on
the number of shares of the Fund as well as certain other MFS Funds owned or
being purchased, the existence of an agreement to purchase additional shares
during a 13-month period (or 36-month period for purchases of $1 million or
more) or other special purchase programs. A description of the Right of
Accumulation, Letter of Intent and Group Purchase privileges by which the sales
charge may be reduced is set forth in the SAI.
PURCHASES SUBJECT TO A CDSC (but not subject to an initial sales charge). In the
following four circumstances, Class A shares are offered at net asset value
without an initial sales charge but subject to a CDSC, equal to 1% of the lesser
of the value of the shares redeemed (exclusive of reinvested dividend and
capital gain distributions) or the total cost of such shares, in the event of a
share redemption within 12 months following the purchase:
(i) on investments of $1 million or more in Class A shares;
(ii) on investments in Class A shares by certain retirement plans subject
to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), if, prior to July 1, 1996: (a) the plan had established
an account with the Shareholder Servicing Agent and (b) the
sponsoring organization had demonstrated to the satisfaction of MFD
that either (i) the employer had at least 25 employees or (ii) the
aggregate purchase by the retirement plan of Class A shares of Funds
in the MFS Funds would be in an aggregate amount of at least
$250,000 within a reasonable period of time, as determined by MFD in
its sole discretion;
(iii) on investments in Class A shares by certain retirement plans subject
to ERISA, if: (a) the retirement plan and/or sponsoring organization
subscribes to the MFS FUNDamental 401(k) Program or any similar
recordkeeping system made available by the Shareholder Servicing Agent
(the "MFS Participant Recordkeeping System"); (b) the plan establishes
an account with the Shareholder Servicing Agent on or after July 1,
1996; and (c) the aggregate purchases by the retirement plan of Class
A shares of the MFS Funds will be in an aggregate amount of at least
$500,000 within a reasonable period of time, as determined by MFD in
its sole discretion; and
(iv) on investments in Class A shares by certain retirement plans subject
to ERISA, if: (a) the plan establishes an account with the Shareholder
Servicing Agent on or after July 1, 1996 and (b) the plan has, at the
time of purchase, a market value of $500,000 or more invested in
shares of any class or classes of the MFS Funds. THE RETIREMENT PLAN
WILL QUALIFY UNDER THIS CATEGORY ONLY IF THE PLAN OR ITS SPONSORING
ORGANIZATION INFORMS THE SHAREHOLDER SERVICING AGENT PRIOR TO THE
PURCHASE THAT THE PLAN HAS A MARKET VALUE OF $500,000 OR MORE INVESTED
IN SHARES OF ANY CLASS OR CLASSES OF THE MFS FUNDS. THE SHAREHOLDER
SERVICING AGENT HAS NO OBLIGATION INDEPENDENTLY TO DETERMINE WHETHER
SUCH A PLAN QUALIFIES UNDER THIS CATEGORY.
In the case of all such purchases, MFD will pay commissions to dealers on new
investments in Class A shares made through such dealers as follows:
COMMISSION PAID BY MFD TO DEALERS CUMULATIVE PURCHASE AMOUNT
--------------------------------- --------------------------
1.00% On the first $2,000,000, plus
0.80% Over $2,000,000 to $3,000,000, plus
0.50% Over $3,000,000 to $50,000,000, plus
0.25% Over $50,000,000
For purposes of determining the level of commissions to be paid to dealers with
respect to a shareholder's new investment in Class A shares made on or after
April 1, 1996, purchases for each shareholder account (and certain other
accounts for which the shareholder is a record or beneficial holder) will be
aggregated over a 12-month period (commencing from the date of the first such
purchase).
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" in the
Prospectus for further discussion of the CDSC.
WAIVERS OF INITIAL SALES CHARGE AND CDSC. In certain circumstances, the
initial sales charge imposed upon purchases of Class A shares and the CDSC
imposed upon redemption of Class A shares is waived. These circumstances are
described in Appendix A to this Prospectus. In addition to these circumstances,
the CDSC imposed upon the redemption of Class A shares is waived with respect to
shares held by certain retirement plans qualified under Section 401(a) or 403(b)
of the Code and subject to ERISA, where:
(i) the retirement plan and/or sponsoring organization does not subscribe
to the MFS Participant Recordkeeping System; and
(ii) the retirement plan and/or sponsoring organization demonstrates to the
satisfaction of, and certifies to, the Shareholder Servicing Agent that
the retirement plan has, at the time of certification or will have
pursuant to a purchase order placed with the certification, a market
value of $500,000 or more invested in shares of any class or classes of
the MFS Funds and aggregate assets of at least $10 million;
provided, however, that the CDSC will not be waived (i.e., it will be imposed)
in the event that there is a change in law or regulations which results in a
material adverse change to the tax advantaged nature of the plan, or in the
event that the plan and/or sponsoring organization: (i) becomes insolvent or
bankrupt; (ii) is terminated or partially terminated under ERISA or is
liquidated or dissolved; or (iii) is acquired by, merged into, or consolidated
with, any other entity.
CLASS B SHARES: Class B shares are offered at net asset value without an initial
sales charge but subject to a CDSC upon redemption as follows:
YEAR OF CONTINGENT
REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
-------------- --------------
First ..................................... 4%
Second .................................... 4%
Third ..................................... 3%
Fourth .................................... 3%
Fifth ..................................... 2%
Sixth ..................................... 1%
Seventh and following ..................... 0%
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividends or capital gain distributions.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
Except as described below MFD will pay commissions to dealers of 3.75% of the
purchase price of Class B shares purchased through dealers. MFD will also
advance to dealers the first year service fee payable under the Fund's
Distribution Plan (see "Distribution Plan" below) at a rate equal to 0.25% of
the purchase price of such shares. Therefore, the total amount paid to a dealer
upon the sale of Class B shares is 4% of the purchase price of the shares
(commission rate of 3.75% plus a service fee equal to 0.25% of the purchase
price).
Class B shares purchased by a retirement plan whose sponsoring organization
subscribes to the MFS Participant Recordkeeping System and which has established
its account with the Shareholder Servicing Agent on or after July 1, 1996, will
be subject to the CDSC described above, only under limited circumstances, as
explained below under "Waivers of CDSC." With respect to such purchases, MFD
pays an amount to dealers equal to 3.00% of the amount purchased through such
dealers (rather than the 4.00% payment described above), which is comprised of a
commission of 2.75% plus the advancement of the first year service fee equal to
0.25% of the purchase price payable under the Fund's Distribution Plan. As
discussed above, such retirement plans are eligible to purchase Class A shares
of the Fund at net asset value without an initial sales charge but subject to a
1% CDSC if the plan has, at the time of purchase, a market value of $500,000 or
more invested in shares of any class or classes of the MFS Funds. IN THIS EVENT,
THE PLAN OR ITS SPONSORING ORGANIZATION SHOULD INFORM THE SHAREHOLDER SERVICING
AGENT THAT THE PLAN IS ELIGIBLE TO PURCHASE CLASS A SHARES UNDER THIS CATEGORY;
THE SHAREHOLDER SERVICING AGENT HAS NO OBLIGATION INDEPENDENTLY TO DETERMINE
WHETHER SUCH A PLAN QUALIFIES UNDER THIS CATEGORY FOR THE PURCHASE OF CLASS A
SHARES.
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon redemption of
Class B shares is waived. These circumstances are described in Appendix A to
this Prospectus. In addition to these circumstances, the CDSC imposed upon the
redemption of Class B shares is waived with respect to shares held by a
retirement plan whose sponsoring organization subscribes to the MFS Participant
Recordkeeping System and which has established an account with the Shareholder
Servicing Agent on or after July 1, 1996; provided, however, that the CDSC will
not be waived (i.e., it will be imposed) in the event that there is a change in
law or regulations which results in a material adverse change to the tax
advantaged nature of the plan, or in the event that the plan and/or sponsoring
organization: (i) becomes insolvent or bankrupt; (ii) is terminated or partially
terminated under ERISA or is liquidated or dissolved; or (iii) is acquired by,
merged into, or consolidated with, any other entity.
CONVERSION OF CLASS B SHARES. Class B shares of the Fund that remain outstanding
for approximately eight years will convert to Class A shares of the same Fund.
Shares purchased through the reinvestment of distributions paid in respect of
Class B shares will be treated as Class B shares for purposes of the payment of
the distribution and service fees under the Fund's Distribution Plan. See
"Distribution Plan" below. However, for purposes of conversion to Class A
shares, all shares in a shareholder's account that were purchased through the
reinvestment of dividends and distributions paid in respect of Class B shares
(and which have not converted to Class A shares as provided in the following
sentence) will be held in a separate sub-account. Each time any Class B shares
in the shareholder's account (other than those in the sub-account) convert to
Class A shares, a portion of the Class B shares then in the sub-account will
also convert to Class A shares. The portion will be determined by the ratio that
the shareholder's Class B shares not acquired through reinvestment of dividends
and distributions that are converting to Class A shares bear to the
shareholder's total Class B shares not acquired through reinvestment. The
conversion of Class B shares to Class A shares is subject to the continuing
availability of a ruling from the Internal Revenue Service or an opinion of
counsel that such conversion will not constitute a taxable event for federal tax
purposes. There can be no assurance that such ruling or opinion will be
available, and the conversion of Class B shares to Class A shares will not occur
if such ruling or opinion is not available. In such event, Class B shares would
continue to be subject to higher expenses than Class A shares for an indefinite
period.
CLASS C SHARES: Class C shares are offered at net asset value without an initial
sales charge but are subject to a CDSC of 1.00% upon redemption during the first
year. Class C shares do not convert to any other class of shares of the Fund.
The maximum investment in Class C shares that may be made is up to $1,000,000
per transaction.
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividend and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividend or capital gain distributions.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" below
for further discussion of the CDSC.
MFD will pay dealers 1.00% of the purchase price of Class C shares purchased
through dealers and, as compensation therefor, MFD will retain 1.00% per annum
distribution and service fee paid under the Fund's Distribution Plan to MFD for
the first year after purchase (See "Distribution Plan" below).
Class C shares are not currently available for purchase by any retirement plan
qualified under Sections 401(a) or 403(b) of the Code, if the retirement plan
and/or the sponsoring organization subscribe to the MFS FUNDamental 401(k) Plan
or another similar recordkeeping program made available by the Shareholder
Servicing Agent.
WAIVERS OF CDSC: In certain circumstances, the CDSC imposed upon redemption of
Class C shares is waived. These circumstances are described in Appendix A to
the Prospectus.
GENERAL: The following information applies to purchases of all classes of the
Fund's shares.
MINIMUM INVESTMENT. Except as described below, the minimum initial investment is
$1,000 per account and the minimum additional investment is $50 per account.
Accounts being established for monthly automatic investments and under payroll
savings programs and tax-deferred retirement programs (other than IRAs)
involving the submission of investments by means of group remittal statements
are subject to a $50 minimum on initial and additional investments per account.
The minimum initial investment for IRAs is $250 per account and the minimum
additional investment is $50 per account. Accounts being established for
participation in the Automatic Exchange Plan are subject to a $50 minimum on
initial and additional investments per account. There are also other limited
exceptions to these minimums for certain tax-deferred retirement programs. Any
minimums may be changed at any time at the discretion of MFD. The Fund reserves
the right to cease offering its shares at any time.
SUBSEQUENT INVESTMENT BY TELEPHONE: Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-free
at (800) 225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this telephone
purchase privilege must so elect on their Account Application and designate
thereon a bank and account number from which purchases will be made. If a
telephone purchase request is received by the Shareholder Servicing Agent on any
business day prior to the close of regular trading on the Exchange (generally,
4:00 p.m., Eastern time), the purchase will occur at the closing net asset value
of the shares purchased on that day. The Shareholder Servicing Agent may be
liable for any losses resulting from unauthorized telephone transactions if it
does not follow reasonable procedures designed to verify the identity of the
caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
RIGHT TO REJECT PURCHASE ORDERS/MARKET TIMING. Purchases and exchanges should be
made for investment purposes only. The Fund and MFD each reserves the right to
reject or restrict any specific purchase or exchange request. In the event that
the Fund or MFD rejects an exchange request, neither the redemption nor the
purchase side of the exchange will be processed.
The Fund is not designed for professional market timing organizations or other
entities using programmed or frequent exchanges. The Fund defines a "market
timer" as an individual, or organization acting on behalf of one or more
individuals, if (i) the individual or organization makes three or more exchange
requests out of the Fund per calender year and (ii) any one of such exchange
requests represents shares equal in value to 1/2 of 1% or more of the Fund's net
assets at the time of the request. Accounts under common ownership or control,
including accounts administered by market timers, will be aggregated for
purposes of this definition.
As noted above, the Fund and MFD each reserve the right to reject or restrict
any specific purchase and exchange request and, in addition, may impose specific
limitations with respect to market timers, including delaying for up to seven
days on the purchase side of an exchange request by market timers or
specifically rejecting or otherwise restricting purchase or exchange requests by
market timers. Other MFS Funds may have different and/or more or less
restrictive policies with respect to market timers than the Fund. These policies
are disclosed in the prospectuses of these other MFS Funds.
DEALER CONCESSIONS. Dealers may receive different compensation with respect to
sales of Class A, Class B and Class C shares. In addition, from time to time,
MFD may pay dealers 100% of the applicable sales charge on sales of Class A
shares of certain specified MFS Funds sold by such dealer during a specified
sales period. In addition, MFD or its affiliates may, from time to time, pay
dealers an additional commission equal to 0.50% of the net asset value of all of
the Class B and/or Class C shares of certain specified MFS Funds sold by such
dealer during a specified sales period. In addition, from time to time, MFD, at
its expense, may provide additional commissions, compensation or promotional
incentives ("concessions") to dealers which sell shares of the Fund. Such
concessions provided by MFD may include financial assistance to dealers in
connection with preapproved conferences or seminars, sales or training programs
for invited registered representatives, payment for travel expenses, including
lodging, incurred by registered representatives for such seminars or training
programs, seminars for the public, advertising and sales campaigns regarding one
or more MFS Funds, and/or other dealer-sponsored events. From time to time, MFD
may make expense reimbursements for special training of a dealer's registered
representatives in group meetings or to help pay the expenses of sales contests.
Other concessions may be offered to the extent not prohibited by state laws or
any self-regulatory agency, such as the NASD.
SPECIAL INVESTMENT PROGRAMS. For shareholders who elect to participate in
certain investment programs (e.g., the Automatic Investment Plan) or other
shareholder services, MFD or its affiliates may either (i) give a gift of
nominal value, such as a hand-held calculator, or (ii) make a nominal charitable
contribution on their behalf.
RESTRICTIONS ON ACTIVITIES OF NATIONAL BANKS. The Glass-Steagall Act prohibits
national banks from engaging in the business of underwriting, selling or
distributing securities. Although the scope of the prohibition has not been
clearly defined, MFD believes that such Act should not preclude banks from
entering into agency agreements with MFD. If, however, a bank were prohibited
from so acting, the Trustees would consider what actions, if any, would be
necessary to continue to provide efficient and effective shareholder services in
respect of Shareholders who invested in the Fund through a national bank. It is
not expected that shareholders would suffer any adverse financial consequence as
a result of these occurrences. In addition, state securities laws on this issue
may differ from the interpretation of federal law expressed herein and banks and
financial institutions may be required to register as broker-dealers pursuant to
state law.
------------------------
A shareholder whose shares are held in the name of, or controlled by, a dealer
might not receive many of the privileges and services from the Fund (such as
Right of Accumulation, Letter of Intent and certain recordkeeping services) that
the Fund ordinarily provides.
EXCHANGES
Subject to the requirements set forth below, some or all of the shares in an
account with the Fund for which payment has been received by the Fund (i.e., an
established account) may be exchanged for shares of the same class of any of the
other MFS Funds at net asset value (if available for sale). Shares of one class
may not be exchanged for shares of any other class.
EXCHANGES AMONG MFS FUNDS (EXCLUDING MFS MONEY MARKET FUNDS): No initial sales
charges or CDSC will be imposed in connection with an exchange from shares of an
MFS Fund to shares of any other MFS Fund, except with respect to exchanges from
an MFS money market fund to another MFS Fund which is not an MFS money market
fund (discussed below). With respect to an exchange involving shares subject to
a CDSC, the CDSC will be unaffected by the exchange and the holding period for
purposes of calculating the CDSC will carry over to the acquired shares.
EXCHANGES FROM AN MFS MONEY MARKET FUND: Special rules apply with respect to the
imposition of an initial sales charge or a CDSC for exchanges from an MFS money
market fund to another MFS Fund which is not an MFS money market fund. These
rules are described under the caption "Exchanges" in the Prospectuses of those
MFS money market funds.
EXCHANGES INVOLVING THE MFS FIXED FUND: Class A shares of any MFS Fund held by
certain qualified retirement plans may be exchanged for units of participation
of the MFS Fixed Fund (a bank collective investment fund) (the "Units"), and
Units may be exchanged for Class A shares of any MFS Fund. With respect to
exchanges between Class A shares subject to a CDSC and Units, the CDSC will
carry over to the acquired shares or Units and will be deducted from the
redemption proceeds when such shares or Units are subsequently redeemed,
assuming the CDSC is then payable (the period during which the Class A shares
and the Units were held will be aggregated for purposes of calculating the
applicable CDSC). In the event that a shareholder initially purchases Units and
then exchanges into Class A shares subject to an initial sales charge of an MFS
Fund, the initial sales charge shall be due upon such exchange, but will not be
imposed with respect to any subsequent exchanges between such Class A shares and
Units with respect to shares on which the initial sales charge has already been
paid. In the event that a shareholder initially purchases Units and then
exchanges into Class A shares subject to a CDSC of an MFS Fund, the CDSC period
will commence upon such exchange, and the applicability of the CDSC with respect
to subsequent exchanges shall be governed by the rules set forth above in this
paragraph.
GENERAL: A shareholder should read the prospectus of the other MFS Fund into
which an exchange is made and consider the differences in objectives, policies
and restrictions before making any exchange. Exchanges will be made only after
instructions in writing or by telephone (an "Exchange Request") are received for
an established account by the Shareholder Servicing Agent in proper form (i.e.,
if in writing -- signed by the record owner(s) exactly as the shares are
registered; if by telephone -- proper account identification is given by the
dealer or shareholder of record) and each exchange must involve either shares
having an aggregate value of at least $1,000 ($50 in the case of retirement plan
participants whose sponsoring organizations subscribe to the MFS FUNDamental
401(k) Plan or another similar 401(k) recordkeeping system made available by the
Shareholder Servicing Agent) or all the shares in the account. If an Exchange
Request is received by the Shareholder Servicing Agent on any business day prior
to the close of regular trading on the Exchange (generally, 4:00 p.m., Eastern
time), the exchange will occur on that day if all the requirements set forth
above have been complied with at that time and subject to the Fund's right to
reject purchase orders. No more than five exchanges may be made in any one
Exchange Request by telephone. Additional information concerning this exchange
privilege and prospectuses for any of the other MFS Funds may be obtained from
dealers or the Shareholder Servicing Agent. For federal and (generally) state
income tax purposes, an exchange is treated as a sale of the shares exchanged
and, therefore, an exchange could result in a gain or loss to the shareholder
making the exchange. Exchanges by telephone are automatically available to most
non-retirement plan accounts and certain retirement plan accounts. For further
information regarding exchanges by telephone, see "Redemptions by Telephone."
The exchange privilege (or any aspect of it) may be changed or discontinued and
is subject to certain limitations, including certain restrictions on purchases
by market timers. 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 -- General -- Right to Reject
Purchase Orders/ Market Timing."
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the value of his account on any
date on which the Fund is open for business by redeeming shares at their net
asset value (a redemption) or by selling such shares to the Fund through a
dealer (a repurchase). Certain redemptions and repurchases are, however, subject
to a CDSC. See "Contingent Deferred Sales Charge" below. Because the net asset
value of shares of the account fluctuates, redemptions or repurchases, which are
taxable transactions, are likely to result in gains or losses to the
shareholder. When a shareholder withdraws an amount from his account, the
shareholder is deemed to have tendered for redemption a sufficient number of
full and fractional shares in his account to cover the amount withdrawn. The
proceeds of a redemption or repurchase will normally be available within seven
days, except for shares purchased or received in exchange for shares purchased
by check (including certified checks or cashier's checks). Payment of redemption
proceeds may be delayed for up to 15 days from the purchase date in an effort to
assure that such check has cleared.
REDEMPTION BY MAIL: Each shareholder may redeem all or any portion of the shares
in his account by mailing or delivering to the Shareholder Servicing Agent (see
back cover for address) a stock power with a written request for redemption or
letter of instruction, together with his share certificates (if any were
issued), all in "good order" for transfer. "Good order" generally means that the
stock power, written request for redemption, letter of instruction or
certificate must be endorsed by the record owner(s) exactly as the shares are
registered and the signature(s) must be guaranteed in the manner set forth below
under the caption "Signature Guarantee." In addition, in some cases "good order"
will require the furnishing of additional documents. The Shareholder Servicing
Agent may make certain de minimis exceptions to the above requirements for
redemption. Within seven days after receipt of a redemption request in "good
order" by the Shareholder Servicing Agent, the Fund will make payment in cash of
the net asset value of the shares next determined after such redemption request
was received, reduced by the amount of any applicable CDSC described above and
the amount of any income tax required to be withheld, except during any period
in which the right of redemption is suspended or date of payment is postponed
because the Exchange is closed or trading on such Exchange is restricted or to
the extent otherwise permitted by the 1940 Act if an emergency exists. See "Tax
Status" below.
REDEMPTION BY TELEPHONE: Each shareholder may redeem an amount from his account
by telephoning the Shareholder Servicing Agent toll-free at (800) 225-2606.
Shareholders wishing to avail themselves of this telephone redemption privilege
must so elect on their Account Application, designate thereon a bank and account
number to receive the proceeds of such redemption, and sign the Account
Application Form with the signature(s) guaranteed in the manner set forth below
under the caption "Signature Guarantee." The proceeds of such a redemption,
reduced by the amount of any applicable CDSC and the amount of any income tax
required to be withheld, are mailed by check to the designated account, without
charge, if the redemption proceeds do not exceed $1,000, and are wired in
federal funds to the designated account if the redemption proceeds exceed
$1,000. If a telephone redemption request is received by the Shareholder
Servicing Agent by the close of regular trading on the Exchange on any business
day, shares will be redeemed at the closing net asset value of the Fund on that
day. Subject to the conditions described in this section, proceeds of a
redemption are normally mailed or wired on the next business day following the
date of receipt of the order for redemption. The Shareholder Servicing Agent
will not be liable for any losses resulting from unauthorized telephone
transactions if it follows reasonable procedures designed to verify the identity
of the caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
REPURCHASE THROUGH A DEALER: If a shareholder desires to sell his shares through
his dealer (a repurchase), the shareholder can place a repurchase order with his
dealer, who may charge the shareholder a fee. IF THE DEALER RECEIVES THE
SHAREHOLDER'S ORDER PRIOR TO THE CLOSE OF REGULAR TRADING ON THE EXCHANGE AND
COMMUNICATES IT TO MFD BEFORE THE CLOSE OF BUSINESS ON THE SAME DAY, THE
SHAREHOLDER WILL RECEIVE THE NET ASSET VALUE CALCULATED ON THAT DAY, REDUCED BY
THE AMOUNT OF ANY APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME TAX REQUIRED TO
BE WITHHELD.
CONTINGENT DEFERRED SALES CHARGE: Investments in Class A, Class B and Class C
shares ("Direct Purchases") will be subject to a CDSC for a period of: (i) with
respect to Class A and Class C shares, 12 months, (however, the CDSC on Class A
shares is only imposed with respect to purchases of $1 million or more of Class
A shares; or purchases by certain retirement plans of Class A shares); or (ii)
with respect to Class B shares, six years. Purchases of Class A shares made
during a calendar month, regardless of when during the month the investment
occurred, will age one month on the last day of the month and each subsequent
month. Class B and Class C shares purchased on or after January 1, 1993 will be
aggregated on a calendar month basis -- all transactions made during a calendar
month, regardless of when during the month they have occurred, will age one year
at the close of business on the last day of such month in the following calendar
year and each subsequent year. For Class B shares of the Fund purchased prior to
January 1, 1993, transactions will be aggregated on a calendar year basis -- all
transactions made during a calendar year, regardless of when during the year
they have occurred, will age one year at the close of business on December 31 of
that year and each subsequent year. Prior to April 1, 1996, Class C shares of
the MFS Funds were not subject to a CDSC upon redemption. In no event will Class
C shares of the MFS Funds purchased prior to this date be subject to a CDSC. For
the purpose of calculating the CDSC upon redemption of shares acquired in an
exchange on or after April 1, 1996, the purchase of shares acquired in one or
more exchanges is deemed to have occurred at the time of the original purchase
of the exchanged shares (if such original purchase occurred prior to April 1,
1996, then no CDSC would be imposed upon such a redemption).
At the time of a redemption, the amount by which the value of a shareholder's
account for a particular class of shares represented by Direct Purchases exceeds
the sum of the six calendar year aggregations (12 months in the case of
purchases of Class C shares and purchases of $1 million or more of Class A
shares or purchases by certain retirement plans of Class A shares) of Direct
Purchases may be redeemed without charge ("Free Amount"). Moreover, no CDSC is
ever assessed on additional shares acquired through the automatic reinvestment
of dividends or capital gain distributions ("Reinvested Shares"). Therefore, at
the time of redemption of a particular class, (i) any Free Amount is not subject
to the CDSC and (ii) the amount of the redemption equal to the then-current
value of Reinvested Shares is not subject to the CDSC, but (iii) any amount of
the redemption in excess of the aggregate of the then-current value of
Reinvested Shares and the Free Amount is subject to a CDSC. The CDSC will first
be applied against the amount of Direct Purchases which will result in any such
charge being imposed at the lowest possible rate. The CDSC to be imposed upon
redemptions of shares will be calculated as set forth in "Purchases" above.
The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except as described in Appendix A hereto.
GENERAL: The following information applies to redemptions and repurchases of
all classes of the Fund's shares.
SIGNATURE GUARANTEE. In order to protect shareholders against fraud, the Fund
requires, in certain instances as indicated above, that the shareholder's
signature be guaranteed. In these cases the shareholder's signature must be
guaranteed by an eligible bank, broker, dealer, credit union, national
securities exchange, registered securities association, clearing agency or
savings association. Signature guarantees shall be accepted in accordance with
policies established by the Shareholder Servicing Agent.
REINSTATEMENT PRIVILEGE. Shareholders of the Fund who have redeemed their shares
have a one-time right to reinvest the redemption proceeds in the same class of
shares of any of the MFS Funds (if shares of such Fund are available for sale)
at net asset value (with a credit for any CDSC paid) within 90 days of the
redemption pursuant to the Reinstatement Privilege. If the shares credited for
any CDSC paid are then redeemed within six years of the initial purchase in the
case of Class B shares or within 12 months of the initial purchase for Class C
and certain Class A share purchases, a CDSC will be imposed upon redemption.
Such purchases under the Reinstatement Privilege are subject to all limitations
in the SAI regarding this privilege.
IN-KIND DISTRIBUTIONS. The Trust agrees to redeem shares of the Fund solely in
cash up to the lesser of $250,000 or 1% of the net asset value of the Fund
during any 90-day period for any one shareholder. The Fund has reserved the
right to pay other redemptions, either totally or partially, by a distribution
in-kind of securities (instead of cash) from the Fund's portfolio. The
securities distributed in such a distribution would be valued at the same amount
as that assigned to them in calculating the net asset value for the shares being
sold. If a shareholder received a distribution in-kind, the shareholder could
incur brokerage or transaction charges when converting the securities to cash.
INVOLUNTARY REDEMPTIONS/SMALL ACCOUNTS. Due to the relatively high cost of
maintaining small accounts, the Fund reserves the right to redeem shares in any
account for their then-current value if at any time the total investment in such
account drops below $500 because of redemptions, except in the case of accounts
being established for monthly automatic investments and certain payroll savings
programs, Automatic Exchange Plan accounts and tax-deferred retirement plans,
for which there is a lower minimum investment requirement. See "Purchases --
General -- Minimum Investment." Shareholders will be notified that the value of
their account is less than the minimum investment requirement and allowed 60
days to make an additional investment before the redemption is processed.
DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class A, Class B and Class C
shares pursuant to Section 12(b) of the 1940 Act and Rule 12b-1 thereunder (the
"Distribution Plan"), after having concluded that there is a reasonable
likelihood that the Plan would benefit the Fund and its shareholders.
In certain circumstances, the fees described below have not yet been imposed or
are being waived. These circumstances are described below under the heading
"Current Level of Distribution and Service Fees."
FEATURES COMMON TO EACH CLASS OF SHARES: There are features of the Distribution
Plan that are common to each class of shares, as described below.
SERVICE FEES. The Distribution Plan provides that the Fund may pay MFD a service
fee of up to 0.25% of the average daily net assets attributable to the class of
shares to which the Distribution Plan relates (i.e., Class A, Class B or Class C
shares, as appropriate) (the "Designated Class") annually in order that MFD may
pay expenses on behalf of the Fund relating to the servicing of shares of the
Designated Class. The service fee is used by MFD to compensate dealers which
enter into a sales agreement with MFD in consideration for all personal services
and/or account maintenance services rendered by the dealer with respect to
shares of the Designated Class owned by investors for whom such dealer is the
dealer or holder of record. MFD may from time to time reduce the amount of the
service fees paid for shares sold prior to a certain date. Service fees may be
reduced for a dealer that is the holder or dealer of record for an investor who
owns shares of the Fund having an aggregate net asset value at or above a
certain dollar level. Dealers may from time to time be required to meet certain
criteria in order to receive service fees. MFD or its affiliates are entitled to
retain all service fees payable under the Distribution Plan for which there is
no dealer of record or for which qualification standards have not been met as
partial consideration for personal services and/or account maintenance services
performed by MFD or its affiliates to shareholder accounts.
DISTRIBUTION FEES. The Distribution Plan provides that the Fund may pay MFD a
distribution fee based on the average daily net assets attributable to the
Designated Class as partial consideration for distribution services performed
and expenses incurred in the performance of MFD's obligations under its
distribution agreement with the Fund. See "Management of the Fund --
Distributor" in the SAI. The amount of the distribution fee paid by the Fund
with respect to each class differs under the Distribution Plan, as does the use
by MFD of such distribution fees. Such amounts and uses are described below in
the discussion of the provisions of the Distribution Plan relating to each class
of shares. While the amount of compensation received by MFD in the form of
distribution fees during any year may be more or less than the expense incurred
by MFD under its distribution agreement with the Fund, the Fund is not liable to
MFD for any losses MFD may incur in performing services under its distribution
agreement with the Fund.
OTHER COMMON FEATURES. Fees payable under the Distribution Plan are charged to,
and therefore reduce, income allocated to shares of the Designated Class. The
provisions of the Distribution Plan relating to operationg policies as well as
initial approval, renewal, amendment and termination are substantially identical
as they relate to each class of shares covered by the Distribution Plan.
FEATURES UNIQUE TO EACH CLASS OF SHARES: There are certain features of the
Distribution Plan that are unique to each class of shares, as described below.
CLASS A SHARES. Class A shares are generally offered with an initial sales
charge, a substantial portion of which is paid to or retained by the dealer
making the sale (and the remainder of which is paid to MFD). See "Purchases --
Class A Shares" above. In addition to the initial sales charge, the dealer also
generally receives the ongoing 0.25% per annum service fee, as discussed above.
The distribution fee paid to MFD under the Distribution Plan is equal, on an
annual basis, to 0.10% of the Fund's average daily net assets attributable to
Class A shares. As noted above, MFD may use the distribution fee to cover
distribution-related expenses incurred by it under its distribution agreement
with the Fund, including commissions to dealers and payments to wholesalers
employed by MFD (e.g., MFD pays commission to dealers with respect to purchases
of $1 million or more and purchases by certain retirement plans of Class A
shares which are sold at net asset value but which are subject to a 1% CDSC for
one year after purchase). See "Purchases -- Class A Shares" above. In addition,
to the extent that the aggregate service and distribution fees paid under the
Distribution Plan do not exceed 0.35% per annum of the average daily net assets
of the Fund attributable to Class A shares, the Fund is permitted to pay such
distribution-related expenses or other distribution- related expenses.
CLASS B SHARES. Class B shares are offered at net asset value without an initial
sales charge but subject to a CDSC. See "Purchases -- Class B Shares" above. MFD
will advance to dealers the first year service fee described above at a rate
equal to 0.25% of the purchase price of such shares and, as compensation
therefor, MFD may retain the service fee paid by the Fund with respect to such
shares for the first year after purchase. Dealers will become eligible to
receive the ongoing 0.25% per annum service fee with respect to such shares
commencing in the thirteenth month following purchase.
Under the Distribution Plan, the Fund pays MFD a distribution fee equal, on an
annual basis, to 0.75% of the Fund's average daily net assets attributable to
Class B shares. As noted above, this distribution fee may be used by MFD to
cover its distribution-related expenses under its distribution agreement with
the Fund (including the 3.75% commission it pays to dealers upon purchase of
Class B shares, as described under "Purchases -- Class B Shares" above).
CLASS C SHARES. Class C shares are offered at net asset value without an initial
sales charge but subject to a CDSC. See "Purchases -- Class C shares" above. MFD
will pay a commission to dealers of 1.00% of the purchase price of Class C
shares purchased through dealers at the time of purchase. In compensation for
this 1.00% commission paid by MFD to dealers, MFD will retain the 1.00% per
annum Class C distribution and service fees paid by the Fund with respect to
such shares for the first year after purchase, and dealers will become eligible
to receive from MFD the ongoing 1.00% per annum distribution and service fees
paid by the Fund to MFD with respect to such shares commencing in the thirteenth
month following purchase.
This ongoing 1.00% fee is comprised of the 0.25% per annum service fee paid to
MFD under the Distribution Plan (which MFD in turn pays to dealers), as
discussed above, and a distribution fee paid to MFD (which MFD also in turn pays
to dealers) under the Distribution Plan equal, on an annual basis, to 0.75% of
the Fund's average daily net assets attributable to Class C shares.
CURRENT LEVEL OF DISTRIBUTION AND SERVICE FEES: The Fund's Class A, Class B and
Class C distribution and service fees for its current fiscal year are 0.25%,
1.00% and 1.00% per annum, respectively. Payment of the 0.10% per annum Class A
distribution fee will commence on such date as the Trustees of the Trust may
determine.
DISTRIBUTIONS
The Fund intends to 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 -- Distributions Options" below).
Distributions paid by the Fund with respect to Class A shares will generally be
greater than those paid with respect to Class B and Class C shares because
expenses attributable to Class B and Class C shares will generally be higher.
TAX STATUS
The Fund is treated as an entity separate from the other series of the Trust for
federal income tax purposes. In order to minimize the taxes the Fund would
otherwise be required to pay, the Fund intends to qualify each year as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"). Because the Fund intends to distribute all of
its net investment income and net realized capital gains to its shareholders in
accordance with the timing requirements imposed by the Code, it is not expected
that the Fund will be required to pay any federal income or excise taxes,
although the Fund's foreign-source income may be subject to foreign withholding
taxes.
Shareholders of the Fund normally will have to pay federal income taxes (and any
state or local taxes) on the dividends and capital gain distributions they
receive from the Fund, whether the distribution is paid in cash or in additional
shares. A portion of the dividends received from the Fund (but none of the
Fund's capital gain distributions) may qualify for the dividend- received
deduction for corporations. Shortly after the end of each calendar year, each
shareholder will be sent a statement setting forth the federal income tax status
of all dividends and distributions for that year, including the portion taxable
as ordinary income, the portion taxable as long-term capital gain, the portion,
if any, representing a return of capital (which is free of current taxes but
results in a basis reduction) and the amount, if any, of federal income tax
withheld.
Fund distributions will reduce the Fund's net asset value per share.
Shareholders who buy shares shortly before the Fund makes a distribution 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 the 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 treaty.
The Fund is also required in certain circumstances to apply backup withholding
at the rate of 31% on taxable dividends and redemption proceeds paid to any
shareholder (including a shareholder who is neither a citizen nor a resident of
the U.S.) who does not furnish to the Fund certain information and
certifications or who is otherwise subject to backup withholding. Backup
withholding will not, however, be applied to payments that have been subject to
30% withholding. Prospective investors should read the Fund's Account
Application for additional information regarding backup withholding of federal
income tax and should consult their own tax advisers as to the tax consequences
to them of an investment in the Fund.
NET ASSET VALUE
The net asset value per share of each class of the Fund is determined each day
during which the Exchange is open for trading. This determination is made once
each day as of the close of regular trading on the Exchange by deducting the
amount of liabilities attributable to the class from the value of the Fund's
assets attributable to the class and dividing the difference by the number of
shares of the class outstanding. Assets in the Fund's portfolio are valued on
the basis of their current values or otherwise at their fair values, as
described in the SAI. All investments and assets are expressed in U.S. dollars
based upon current currency exchange rates. The net asset value of each class of
shares is effective for orders received by the dealer prior to its calculation
and received by MFD prior to the close of that business day.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund, one of three series of the Trust, has three classes of shares which it
offers to the general public, entitled Class A, Class B and Class C Shares of
Beneficial Interest (without par value). The Fund also has a class of shares
which it offers exclusively to certain retirement plans established for the
benefit of employees of the Adviser and its affiliates, entitled Class I shares.
The Trust has reserved the right to create and issue additional classes and
series of shares, in which case each class of shares of a series would
participate equally in the earnings, dividends and assets attributable to that
class of that particular series. Shareholders are entitled to one vote for each
share held and shares of each series would be entitled to vote separately to
approve investment advisory agreements or changes in investment restrictions,
but shares of all series would vote together in the election of Trustees and
selection of accountants. Additionally, each class of shares of a series will
vote separately on any material increases in the fees under the Distribution
Plan or on any other matter that affects solely that class of shares, but will
otherwise vote together with all other classes of shares of the series on all
other matters. The Trust does not intend to hold annual shareholder meetings.
The Declaration of Trust provides that a Trustee may be removed from office in
certain instances (see "Description of Shares, Voting Rights and Liabilities" in
the SAI).
Each share of a class of the Fund represents an equal proportionate interest in
the Fund with each other class share, subject to the liabilities of 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 is limited to circumstances in which both inadequate
insurance (e.g., fidelity bonding and omissions insurance) existed and the Trust
itself is 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 and Class C 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 and Class C shares assume no CDSC is paid. The current
distribution rate differs from the yield calculation because it may include
distributions to shareholders from sources other than dividends and interest,
such as premium income from option writing, short-term capital gains, and return
of invested capital, and is calculated over a different period of time. Total
rate of return quotations will reflect the average annual percentage change over
stated periods in the value of an investment in each class of shares of the Fund
made at the maximum public offering price of the shares of that class and with
all distributions reinvested and which will give effect to the imposition of any
applicable CDSC assessed upon redemptions of the Fund's Class B and Class C
shares. Such total rate of return quotations may be accompanied by quotations
which do not reflect the reduction in value of the initial investment due to the
sales charge or the deduction of the CDSC, and which will thus be higher. The
Fund offers multiple classes of shares which were initially offered for sale to
the public on different dates. The calculation of total rate of return for a
class of shares which initially was offered for sale to the public subsequent to
another class of shares of the Fund is based both on (i) the performance of the
Fund's newer class from the date it initially was offered for sale to the public
and (ii) the performance of the Fund's oldest class from the date it initially
was offered for sale to the public up to the date that the newer class initially
was offered for sale to the public. See the SAI for further information on the
calculation of total rate of return for share classes initially offered for sale
to the public on different dates.
All performance quotations are based on historical performance and are not
intended to indicate future performance. Yield reflects only net portfolio
income as of a stated 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 SAI. For further information
about the Fund's performance for the fiscal year ended October 31, 1996, please
see the Fund's Annual Report. A copy of the Annual Report may be obtained
without charge by contacting the Shareholder Servicing Agent (see back cover for
address and phone number). In addition to information provided in shareholder
reports, the Fund may, in its discretion, from time to time, make a list of all
or a portion of its holdings available to investors upon request.
9. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described below
or concerning other aspects of the Fund, should contact the Shareholder
Servicing Agent (see back cover for address and phone number).
ACCOUNT AND CONFIRMATION STATEMENTS -- Each shareholder will receive
confirmation statements showing the transaction activity in his account. At the
end of each calendar year, each shareholder will receive income tax information
regarding reportable dividends and capital gain distributions for that year (see
"Tax Status").
DISTRIBUTION OPTIONS -- The following options are available to all accounts
(except Systematic Withdrawal Plan accounts) and may be changed as often as
desired by notifying the Shareholder Servicing Agent:
-- Dividends and capital gain distributions reinvested in additional
shares. This option will be assigned if no other option is specified;
-- Dividends in cash; capital gain distributions reinvested in additional
shares;
-- Dividends and capital gain distributions in cash.
Reinvestments (net of any tax withholding) will be made in additional full and
fractional shares of the same class of shares at the net asset value in effect
at the close of business on the record date. Dividends and capital gain
distributions in amounts less than $10 will automatically be reinvested in
additional shares of the Fund. If a shareholder has elected to receive dividends
and/or capital gain distributions in cash, and the postal or other delivery
service is unable to deliver checks to the shareholder's address of record, or
the shareholder does not respond to mailings from the Shareholder Servicing
Agent with regard to uncashed distribution checks, such shareholder's
distribution option will automatically be converted to having all dividends and
other distributions reinvested in additional shares. Any request to change a
distribution option must be received by the Shareholder Servicing Agent by the
record date for a dividend or distribution in order to be effective for that
dividend or distribution. No interest will accrue on amounts represented by
uncashed distribution or redemption checks.
INVESTMENT AND WITHDRAWAL PROGRAMS -- For the convenience of shareholders, the
Fund makes available the following programs designed to enable shareholders to
add to their investment in an account with the Fund or withdraw from it with a
minimum of paper work. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or the Fund.
LETTER OF INTENT: If a shareholder (other than a group purchaser as described in
the SAI) anticipates purchasing $100,000 or more of Class A shares of the Fund
alone or in combination with shares of any class of other MFS Funds or MFS Fixed
Fund (a bank collective investment fund) within a 13-month period (or 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, B and C shares of that
shareholder in the MFS Funds or MFS Fixed Fund (a bank collective investment
fund) reaches a discount level.
DISTRIBUTION INVESTMENT PROGRAM: Shares of a particular class of the Fund may be
sold at net asset value (and without any applicable CDSC) through the automatic
reinvestment of dividend and capital gain distributions from the same class of
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 based upon
the value of his account. Each payment under a Systematic Withdrawal Plan (a
"SWP") must be at least $100, except in certain limited circumstances. The
aggregate withdrawals of Class B and Class C shares in any year pursuant to a
SWP will not be subject to a CDSC and are generally limited to 10% of the value
of the account at the time of the establishment of the SWP. The CDSC will not be
waived in the case of SWP redemptions of Class A shares which are subject to a
CDSC.
DOLLAR COST AVERAGING PROGRAMS --
AUTOMATIC INVESTMENT PLAN: Cash investments of $50 or more may be made through a
shareholder's checking account on any day of the month. If the shareholder does
not specify a date, the investment will automatically occur on the first
business day of the month. Required forms are available from the Shareholder
Servicing Agent or investment dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least $5,000
in any MFS Fund may 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 if such fund is available for sale. Under the Automatic Exchange
Plan, exchanges of at least $50 each may be made to up to six different funds. A
shareholder should consider the objectives and policies of a fund and review its
prospectus before electing to exchange money into such fund through the
Automatic Exchange Plan. No transaction fee is imposed in connection with
exchange transactions under the Automatic Exchange Plan. However, exchanges of
shares of MFS Money Market Fund, MFS Government Money Market Fund or Class A
shares of MFS Cash Reserve Fund will be subject to any applicable sales charge.
For federal and (generally) state income tax purposes an exchange is treated as
a sale of the shares exchanged and, therefore, could result in a capital gain or
loss to the shareholder making the exchange. See the SAI for further information
concerning the Automatic Exchange Plan. Investors should consult their tax
advisers for information regarding the potential capital gain and loss
consequences of transactions under the Automatic Exchange Plan.
Because a dollar cost averaging program involves periodic purchases of shares
regardless of fluctuating share offering prices, a shareholder should consider
his financial ability to continue his purchases through periods of low price
levels. Maintaining a dollar cost averaging program concurrently with a
withdrawal program could be disadvantageous because of the sales charges
included in share purchases in the case of Class A shares, and because of the
assessment of the CDSC for certain share redemptions in the case of Class A
shares.
TAX-DEFERRED RETIREMENT PLANS -- Except as noted under "Purchases -- Class C
Shares," shares of the Fund may be purchased by all types of tax-deferred
retirement plans, including IRAs, SEP-IRA plans, 401(k) plans, 403(b) plans and
other corporate pension and profit-sharing plans. Investors should consult with
their tax adviser before establishing any of the tax-deferred retirement plans
described above.
------------------------
The Fund's SAI, dated March 1, 1997, contains more detailed information about
the Trust and the Fund, including, but not limited to, information related to:
(i) investment objective, policies and restrictions, including the purchase and
sale of 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 Plan; and (vii) various services and
privileges provided by the Fund for the benefit of its shareholders, including
additional information with respect to the exchange privilege.
<PAGE>
APPENDIX A
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable sales
charges are waived (Section I), the initial sales charge and the CDSC for Class
A shares is waived (Section II), and the CDSC for Class B and Class C shares is
waived (Section III).
I. WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on
purchases of Class A shares and the CDSC imposed on certain redemptions of
Class A shares and on redemptions of Class B and Class C shares, as
applicable, is waived:
1. DIVIDEND REINVESTMENT
o Shares acquired through dividend or capital gain reinvestment; and
o Shares acquired by automatic reinvestment of distributions of
dividends and capital gains of any MFS Fund pursuant to the
Distribution Investment Program.
2. CERTAIN ACQUISITIONS/LIQUIDATIONS
o Shares acquired on account of the acquisition or liquidation of assets
of other investment companies or personal holding companies.
3. AFFILIATES OF AN MFS FUND/CERTAIN DEALERS. Shares acquired by:
o Officers, eligible directors, employees (including retired employees)
and agents of MFS, Sun Life or any of their subsidiary companies;
o Trustees and retired trustees of any investment company for which MFD
serves as distributor;
o Employees, directors, partners, officers and trustees of any sub-
adviser to any MFS Fund;
o Employees or registered representatives of dealers and other financial
institution ("dealers") which have a sales agreement with MFD;
o Certain family members of any such individual and their spouses
identified above and certain trusts, pension, profit-sharing or other
retirement plans for the sole benefit of such persons, provided the
shares are not resold except to the MFS Fund which issued the shares;
and
o Institutional Clients of MFS or MFS Institutional Advisors, Inc.
4. INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
o Shares redeemed at an MFS Fund's direction due to the small size of a
shareholder's account. See "Redemptions and Repurchases -- General --
Involuntary Redemptions/ Small Accounts" in the Prospectus.
5. RETIREMENT PLANS (CDSC WAIVER ONLY). Shares redeemed on account of
distributions made under the following circumstances:
INDIVIDUAL RETIREMENT ACCOUNTS ("IRA'S")
o Death or disability of the IRA owner.
SECTION 401(A) PLANS ("401(A) PLANS") AND SECTION 403(B) EMPLOYER
SPONSORED PLANS ("ESP PLANS")
o Death, disability or retirement of Plan participant;
o Loan from 401(a) Plan or ESP Plans (repayment of loans, however, will
constitute new sales for purposes of assessing sales charges);
o Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1 (d)(2), as amended from time to time);
o Termination of employment of 401(a) or ESP Plan participant
(excluding, however, a partial or other termination of the Plan);
o Tax-free return of excess 401(a) or ESP Plan contributions;
o To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the 401(a) or ESP Plan (e.g.,
participant account fees), provided that the 401(a) or ESP Plan
sponsor subscribes to the MFS FUNDamental 401(k) Plan or another
similar recordkeeping system made available by the Shareholder
Servicing Agent; and
o Distributions from a 401(a) or ESP Plan that has invested its assets
in one or more of the MFS Funds for more than 10 years from the later
to occur of: (i) January 1, 1993 or (ii) the date such 401(a) or ESP
Plan first invests its assets in one or more of the MFS Funds. The
sales charges will be waived in the case of a redemption of all of the
401(a) or ESP Plan's shares in all MFS Funds (i.e., all the assets of
the 401(a) or ESP Plan invested in the MFS Funds are withdrawn),
unless immediately prior to the redemption, the aggregate amount
invested by the 401(a) or ESP Plan in shares of the MFS Funds
(excluding the reinvestment of distributions) during the prior four
years equals 50% or more of the total value of the 401(a) or ESP
Plan's assets in the MFS Funds, in which case the sales charges will
not be waived.
SECTION 403(B) SALARY REDUCTION ONLY PLANS ("SRO PLANS")
o Death or disability of Plan participant.
6. CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY). Shares
transferred:
o To an IRA rollover account where any sales charges with respect to the
shares being reregistered would have been waived had they been
redeemed; and
o From a single account maintained for a 401(a) Plan to multiple
accounts maintained by the Shareholder Servicing Agent on behalf of
individual participants of such Plan, provided that the Plan sponsor
subscribes to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping system made available by the Shareholder Servicing
Agent.
II. WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A
shares and the CDSC imposed on certain redemptions of Class A shares is
waived:
1. INVESTMENT OF REDEMPTION PROCEEDS FROM UNAFFILIATED MUTUAL FUNDS
o Shares acquired through the investment of redemption proceeds from
another open-end management investment company not distributed or
managed by MFD or its affiliates if: (i) the investment is made
through a dealer and appropriate documentation is submitted to MFD;
(ii) the redeemed shares were subject to an initial sales charge or
deferred sales charge (whether or not actually imposed); (iii) the
redemption occurred no more than 90 days prior to the purchase of
Class A shares; and (iv) the MFS Fund, MFD or its affiliates have not
agreed with such company or its affiliates, formally or informally, to
waive sales charges on Class A shares or provide any other incentive
with respect to such redemption and sale.
2. WRAP ACCOUNT INVESTMENTS
o Shares acquired by investments through certain dealers which have
entered into an agreement with MFD which includes a requirement that
such shares be sold for the sole benefit of clients participating in a
"wrap" account or a similar program under which such clients pay a fee
to such dealer.
3. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
o Shares acquired by insurance company separate accounts.
4. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
o Shares acquired by retirement plans whose third party administrators,
or dealers have entered into an administrative services agreement with
MFD or one of its affiliates to perform certain administrative
services, subject to certain operational and minimum size requirements
specified from time to time by MFD or one or more of its affiliates.
REINVESTMENT OF DISTRIBUTIONS FROM QUALIFIED RETIREMENT PLANS
o Shares acquired through the automatic reinvestment in Class A shares
of Class A or Class B distributions which constitute required
withdrawals from qualified retirement plans.
Shares redeemed on account of distributions made under the following
circumstances:
IRA'S
o Distributions made on or after the IRA owner has attained the age of
59 1/2 years old; and
o Tax-free returns of excess IRA contributions.
401(A) PLANS
o Distributions made on or after the Plan participant has attained the
age of 59 1/2 years old; and
o Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a Plan.
ESP PLANS AND SRO PLANS
o Distributions made on or after the Plan participant has attained the
age of 59 1/2 years old.
III. WAIVERS OF CLASS B AND CLASS C SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B and Class C shares
is waived:
1. SYSTEMATIC WITHDRAWAL PLAN
o Systematic Withdrawal Plan redemptions with respect to up to 10% per
year of the account value at the time of establishment.
2. DEATH OF OWNER
o Shares redeemed on account of the death of the account owner if the
shares are held solely in the deceased individual's name or in a
living trust for the benefit of the deceased individual.
3. DISABILITY OF OWNER
o Shares redeemed on account of the disability of the account owner if
shares are held either solely or jointly in the disabled individual's
name or in a living trust for the benefit of the disabled individual
(in which case a disability certification form is required to be
submitted to the Shareholder Servicing Agent).
4. RETIREMENT PLANS. Shares redeemed on account of distributions made
under the following circumstances:
IRA'S, 401(A) PLANS, ESP PLANS AND SRO PLANS
o Distributions made on or after the IRA owner or the 401(a), ESP or SRO
Plan participant, as applicable, has attained the age of 70 1/2 years
old, but only with respect to the minimum distribution under
applicable Code rules.
SALARY REDUCTION SIMPLIFIED EMPLOYEE PENSION PLANS ("SAR-SEP PLANS")
o Distributions made on or after the SAR-SEP Plan participant has
attained the age of 70 1/2 years old, but only with respect to the
minimum distribution under applicable Code rules;
o Death or disability of a SAR-SEP Plan participant.
<PAGE>
APPENDIX B
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 decommissioning 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 C
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 SERVICES
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 Auditors
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116
MFS(R) UTILITIES FUND
Prospectus
March 1, 1997
[LOGO]
MFS(R) UTILTITES FUND
500 Boylston Street
Boston, MA 02116
MUF-1-3/97/85M 35/235/335
<PAGE>
[logo] M F S(SM)
INVESTMENT MANAGEMENT
STATEMENT OF
MFS(R) UTILITIES FUND ADDITIONAL INFORMATION
(A Member of the MFS Family of Funds(R))
March 1, 1997
- -----------------------------------------------------------------------------
Page
----
1. Definitions ............................................... 2
2. Investment Objectives, Policies and Restrictions .......... 2
3. Management of the Fund .................................... 10
Trustees ................................................ 10
Officers ................................................ 11
Trustee Compensation Table .............................. 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 ...................................... 17
Tax-Deferred Retirement Plans ........................... 17
6. Tax Status ................................................ 18
7. Determination of Net Asset Value and Performance .......... 19
8. Description of Shares, Voting Rights and Liabilities ...... 21
9. Distribution Plan ......................................... 22
10. Independent Auditors and Financial Statements ............. 22
Appendix A ................................................ A-1
MFS UTILITIES FUND
A Series of MFS Series Trust VI
500 Boylston Street, Boston, Massachusetts 02116
(617) 954-5000
This Statement of Additional Information, as amended or supplemented from time
to time (the "SAI"), sets forth information which may be of interest to
investors but which is not necessarily included in the Fund's Prospectus, dated
March 1, 1997. This SAI should be read in conjunction with the Prospectus, a
copy of which may be obtained without charge by contacting the Shareholder
Servicing Agent (see last page for address and phone number).
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE
INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
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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 was 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 of the Fund, dated March 1, 1997, as
amended or supplemented from time to time.
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.
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 0% 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. Under the terms of most sponsored
arrangements, depositories agree to distribute notices of shareholder meetings
and voting instructions, and to provide shareholder communications and other
information to the ADR holders at the request of the issuer of the deposited
securities. The depository of an unsponsored ADR, on the other hand, is under no
obligation to distribute shareholder communications received from the issuer of
the deposited securities or to pass through voting rights to ADR holders in
respect of the deposited securities. The Fund may invest in either type of ADR.
Although the U.S. investor holds a substitute receipt of ownership rather than
direct stock certificates, the use of the depository receipts in the United
States can reduce costs and delays as well as potential currency exchange and
other difficulties. The Fund may purchase securities in local markets and direct
delivery of these ordinary shares to the local depository of an ADR agent bank
in the foreign country. Simultaneously, the ADR agents create a certificate
which settles at the Fund's custodian in five days. The Fund may also execute
trades on the U.S. markets using existing ADRs. A foreign issuer of the security
underlying an ADR is generally not subject to the same reporting requirements in
the United States as a domestic issuer. Accordingly, the information available
to a U.S. investor will be limited to the information the foreign issuer is
required to disclose in its own country and the market value of an ADR may not
reflect undisclosed material information concerning the issuer of the underlying
security. ADRs may also be subject to exchange rate risks if the underlying
foreign securities are denominated in foreign currency.
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, U.S. Government securities or an irrevocable letter of credit
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 cash collateral or a fee. The Fund would not, however, have the
right to vote any securities having voting rights during the existence of the
loan, but would call the loan in anticipation of an important vote to be taken
among holders of the securities or of the giving or withholding of their consent
on a material matter affecting the investment. As with other extensions of
credit there are risks of delay in recovery or even loss of rights in the
collateral should the borrower of the securities fail financially. However, the
loans would be made only to 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 (i.e., principal value) or coupon rate is determined by reference to a
specific instrument or statistic. Gold-indexed securities, for example,
typically provide for a maturity value that depends on the price of gold,
resulting in a security whose price tends to rise and fall together with gold
prices. Currency-indexed securities typically are short-term to
intermediate-term debt securities whose maturity values or interest rates are
determined by reference to the values of one or more specified foreign
currencies, and may offer higher yields than U.S. dollar-denominated securities
of equivalent issuers. Currency-indexed securities may be 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. The Fund records these transactions as sale and purchase transactions,
rather than as borrowing transactions. During the roll period, the Fund foregoes
principal and interest paid on the mortgage-backed securities. The Fund is
compensated for the lost interest by the difference between the current sales
price and the lower price for the 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 Services ("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. 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 "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 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 leveraging effect
of such Futures Contract is minimized.
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 SAI, 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 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); (i) the Fund will only borrow amounts from banks and
then only has permitted by Investment Restriction (1); and (j) 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 (born 8/4/35)
Massachusetts Financial Services Company, Chairman
RICHARD B. BAILEY* (born 9/14/26)
Private Investor; Massachusetts Financial Services Company, former Chairman
(prior to September 30, 1991); Cambridge Bancorp, Director; Cambridge Trust
Company, Director
MARSHALL N. COHAN (born 11/14/26)
Private Investor
Address: 2524 Bedford Mews Drive, Wellington, Florida
LAWRENCE H. COHN, M.D. (born 3/11/37)
Brigham and Women's Hospital, Chief of Cardiac Surgery; Harvard Medical
School, Professor of Surgery
Address: 75 Francis Street, Boston, Massachusetts
THE HON. SIR J. DAVID GIBBONS, KBE (born 6/15/27)
Edmund Gibbons Limited, Chief Executive Officer; The Bank of N.T. Butterfield
& Son Ltd., Chairman
Address: 21 Reid Street, Hamilton, Bermuda
ABBY M. O'NEILL (born 4/27/28)
Private Investor; Rockefeller Financial Services, Inc. (investment advisers),
Director
Address: 30 Rockefeller Plaza, Room 5600, New York, New York
WALTER E. ROBB, III (born 7/9/27)
Benchmark Advisors, Inc. (corporate financial consultants), President and
Treasurer; Benchmark Consulting Group, Inc. (office services), President;
Landmark Funds (mutual funds), Trustee
Address: 110 Broad Street, Boston, Massachusetts
ARNOLD D. SCOTT* (born 12/16/42)
Massachusetts Financial Services Company, Senior Executive Vice President and
Secretary
JEFFREY L. SHAMES* (born 6/2/55)
Massachusetts Financial Services Company, President
J. DALE SHERRATT (born 9/23/38)
Insight Resources, Inc. (acquisition planning specialists), President
Address: One Liberty Square, 10th Floor, Boston, Massachusetts
WARD SMITH (born 9/13/30)
NACCO Industries (holding company), Chairman (prior to June, 1994); Sundstrand
Corporation (diversified mechanical manufacturer), Director; Society
Corporation (bank holding company), Director (prior to April, 1992); Society
National Bank (commercial bank), Director (prior to April, 1992)
Address: 5875 Landerbrook Drive, Mayfield Heights, Ohio
OFFICERS
W. THOMAS LONDON,* Treasurer (born 3/1/44)
Massachusetts Financial Services Company, Senior Vice President
STEPHEN E. CAVAN,* Secretary and Clerk (born 11/6/53)
Massachusetts Financial Services Company, Senior Vice President, General
Counsel and Assistant Secretary
JAMES O. YOST,* Assistant Treasurer (born 6/12/62)
Massachusetts Financial Services Company, Vice President
JAMES R. BORDEWICK, JR.,* Assistant Secretary (born 3/6/59)
Massachusetts Financial Services Company, Senior Vice President and Associate
General Counsel
- ------------
*"Interested persons" (as defined in the 1940 Act) of the Adviser, whose address
is 500 Boylston Street, Boston, Massachusetts 02116.
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 Fund pays the compensation of non-interested Trustees and Mr. Bailey (who
currently receive a fee of $1,250 per year plus $225 per meeting and $225 per
committee meeting attended, together with such Trustee's out-of-pocket expenses)
and 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 Messrs. Brodkin, Scott and Shames. The
Fund will accrue its allocable share of compensation expenses each year to cover
current year's service and amortize past service cost.
Set forth below is certain information concerning the cash compensation paid to
the Trustees and benefits accrued, and estimated benefits payable, under the
retirement plan.
<TABLE>
TRUSTEE COMPENSATION TABLE
<CAPTION>
RETIREMENT BENEFIT ESTIMATED TOTAL TRUSTEE FEES
TRUSTEE FEES ACCRUED AS PART OF CREDITED YEARS FROM FUND AND
TRUSTEE FROM FUND(1) FUND EXPENSE(1) OF SERVICE(2) FUND COMPLEX(3)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Bailey ..... $3,050 $ 542 8 $247,168
A. Keith Brodkin ...... --0-- --0-- N/A --0--
Marshall N. Cohan...... 4,175 643 8 149,258
Dr. Lawrence Cohn ..... 3,725 900 20 136,508
Sir J. David Gibbons .. 3,725 559 8 136,508
Abby M. O'Neill ....... 3,725 508 9 123,758
Walter E. Robb, III ... 4,175 643 8 149,258
Arnold D. Scott ....... --0-- --0-- N/A --0--
Jeffrey L. Shames ..... --0-- --0-- N/A --0--
J. Dale Sherratt ...... 4,175 1,012 22 149,258
Ward Smith ............ 4,175 643 12 149,258
(1) For fiscal year ended October 31, 1996.
(2) Based on normal retirement age of 75.
(3) For calendar year 1996. All Trustees receiving compensation served as Trustees of 41 funds within the
MFS fund complex (having aggregate net assets at December 31, 1996, of approximately $14,968,833,746 billion)
except Mr. Bailey, who served as Trustee of 81 funds within the MFS fund complex (having aggregate net assets
at December 31, 1996, of approximately $38,479,230,224 billion).
<CAPTION>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
YEARS OF SERVICE
---------------------------------------------------------------------------------
AVERAGE TRUSTEE FEES 3 5 7 10 OR MORE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$2,745 $412 $ 686 $ 961 $1,373
3,115 467 779 1,090 1,557
3,484 523 871 1,219 1,742
3,854 578 963 1,349 1,927
4,223 633 1,056 1,478 2,112
4,593 689 1,148 1,607 2,296
(4) Other funds in the MFS fund complex provide similar retirement benefits to the Trustees.
</TABLE>
As of January 31, 1997, the Trustees and officers as a group, owned less than 1%
of the outstanding shares of the Fund.
As of January 31, 1997, Merrill Lynch Pierce, Fenner & Smith, Inc. for the
sole benefit of its customers, Attn: Fund Administration, 4800 Deer Lake Drive
E FL3, Jacksonville, FL. 32246-6484, was the record owner of approximately
9.11% and 9.21% of the outstanding Class B and Class C shares of the Fund,
respectively.
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 wholly
owned 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"). Under the Advisory Agreement the
Adviser provides the Fund with overall investment advisory services. Subject to
such policies as the Trustees may determine, the Adviser makes investment
decisions for the Fund. For 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 April 1, 1996, the Adviser voluntarily agreed to reduce
the management fee to 0.50% 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. For the
period March 1, 1995 through March 31, 1996, the Adviser voluntarily agreed to
reduce the management fee to 0.375% of the Fund's average daily net assets.
Prior to March 1, 1995, the Adviser voluntarily agreed to reduce the management
fee to 0% of the Fund's average daily net assets.
For the Fund's fiscal year ended October 31, 1996, MFS voluntarily reduced its
management fee to $385,142, equivalent to 0.373% of the Fund's net assets on an
annualized basis. If MFS had not reduced its management fee, MFS would have
received management fees of $732,288 of which $387,237 would have been based on
average daily net assets and $345,051 on gross income, equivalent to 0.71% of
the Fund's net assets on an annualized basis.
For the Fund's fiscal year ended October 31, 1995, MFS received management fees
of $219,400, equivalent to 0.30% of the Fund's net assets on an annualized
basis. If MFS had not reduced its management fee, MFS would have received
management fees under a prior investment advisory agreement of $505,241 (of
which $270,402 would have been based on average daily net assets and $234,839 on
gross income), equivalent to 0.70% of the Fund's net assets on an annualized
basis.
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 0.70% 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 all of 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, 1996, see the "Statement of Operations" in the Fund's Annual
Report incorporated by reference into this SAI. 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, 1997 and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Fund's shares (as defined in "Investment 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.
ADMINISTRATOR
MFS provides the Fund with certain administrative services pursuant to a Master
Administrative Services Agreement dated March 1, 1997. Under this Agreement, MFS
provides the Fund with certain financial, legal, compliance, shareholder
communications and other administrative services. As a partial reimbursement for
the cost of providing these services, the Fund pays MFS an administrative fee up
to 0.015% per annum of the Fund's average daily net assets, provided that the
administrative fee is not assessed on Fund assets that exceed $3 billion.
CUSTODIAN
State Street Bank and Trust Company (the "Custodian") is the custodian of the
Fund's assets. The Custodian's responsibilities include safekeeping and
controlling the Fund's cash and securities, handling the receipt and delivery of
securities, determining income and collecting interest and dividends on the
Fund's investments, maintaining books of original entry for portfolio and fund
accounting and other required books and accounts, and calculating the daily net
asset value of each class of shares of the Fund. The Custodian does not
determine the investment policies of the Fund or decide which securities the
Fund will buy or sell. The Fund may, however, invest in securities of the
Custodian and may deal with the Custodian as principal in securities
transactions. The Custodian also acts as the dividend disbursing agent of the
Fund. The Custodian has contracted with the Adviser for the Adviser to perform
certain accounting functions related to options transactions for which the
Adviser receives remuneration on a cost basis.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (the "Shareholder Servicing Agent"), a wholly owned
subsidiary of MFS, is the Fund's shareholder servicing agent, pursuant to a
Shareholder Servicing Agreement, dated 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 calculated as a percentage of the
average daily net assets of the Fund at an effective annual rate of up to 0.13%.
In addition, the Shareholder Servicing Agent will be reimbursed by the Fund for
certain expenses incurred by the Shareholder Servicing Agent on behalf of the
Fund. State Street Bank and Trust Company, the dividend and distribution
disbursing agent of the Fund, has contracted with the Shareholder Servicing
Agent to perform certain dividend and distribution disbursing functions for the
Fund.
DISTRIBUTOR
MFD, a wholly owned subsidiary of MFS, serves as distributor for the continuous
offering of shares of the Fund pursuant to a Distribution Agreement, 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, CLASS C AND CLASS I SHARES: MFD acts as agent in selling Class B, Class
C and Class I shares of the Fund to dealers. The public offering price of Class
B, Class C and Class I shares is their net asset value next computed after the
sale (see "Purchases" in the Prospectus and the Prospectus supplement pursuant
to which Class I shares are offered).
GENERAL: Neither MFD nor dealers are permitted to delay placing orders to
benefit themselves by a price change. On occasion, MFD may obtain brokers loans
from various banks, including the custodian banks for the MFS Funds, to
facilitate the settlement of sales of shares of the Fund to dealers. MFD may
benefit from its temporary holding of funds paid to it by investment dealers for
the purchase of Fund shares.
During the Fund's fiscal year ended October 31, 1996, gross sales charges on
sales of Class A shares of the Fund amounted to $345,085, of which $54,931 was
retained by MFD and $290,154 by dealers and certain banks and other financial
institutions; the Fund received $12,921,658, representing the aggregate net
asset value of such shares. During the Fund's fiscal year ended October 31,
1995, gross sales charges on sales of Class A shares of the Fund amounted to
$161,721, of which $26,665 was retained by MFD and $135,056 by dealers and
certain banks and other financial institutions; the Fund received $6,475,310,
representing the aggregate net asset value of such 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 years ended October 31, 1996, 1995 and 1994, the CDSC
imposed on certain redemptions of Class A shares was $700, $41 and $16,
respectively.
During the Fund's fiscal years ended October 31, 1996, 1995 and 1994, the CDSC
imposed on redemption of Class B shares was $96,691, $76,193 and $45,345,
respectively.
During the period from April 1, 1996 through October 1, 1996, the CDSC imposed
on the redemption of Class C shares was $716.
The Distribution Agreement will remain in effect until August 1, 1997, and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Fund's shares (as defined in "Investment 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
from time to time through such broker-dealers on behalf of the Fund. The
Trustees (together with the Trustees of the other MFS Funds) have directed the
Adviser to allocate a total of $39,100 of commission business from the MFS Funds
to the Pershing Division of Donaldson Lufkin & Jenrette as consideration for the
annual renewal of certain publications provided by Lipper Analytical Securities
Corporation (which provides information useful to the Trustees in reviewing the
relationship between the Fund and the Adviser).
The Adviser's 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 years ended October 31, 1996, 1995 and 1994 the Fund
paid brokerage commissions of $886,781, $293,905 and $165,973 on total
transactions of $302,767,949, $137,197,646 and $144,237,566.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for that of one or more of the other clients of the Adviser
or any subsidiary of the Adviser. Investment decisions for the Fund and for such
other clients are made with a view to achieving their respective investment
objectives. It may develop that a particular security is bought or sold for only
one client even though it might be held by, or bought or sold for, other
clients. Likewise, a particular security may be bought for one or more clients
when one or more other clients are selling that same security. Some simultaneous
transactions are inevitable when several clients receive investment advice from
the same investment adviser, particularly when the same security is suitable for
the investment objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed by the Adviser to be
equitable to each. It is recognized that in some cases this system could have a
detrimental effect on the price or volume of the security as far as the Fund is
concerned. In other cases, however, the Fund believes that its ability to
participate in volume transactions will produce better executions for the Fund.
5. SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS --The Fund makes available the following
programs designed to enable shareholders to add to their investment or withdraw
from it with a minimum of paper work. These are described below and, 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 Class A, B and C shares
of that shareholder in the MFS Funds or MFS Fixed Fund (a bank collective
investment fund) reaches a discount level. See "Purchases" in the Prospectus for
the sales charges on quantity discounts. For example, if a shareholder owns
shares 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.
SUBSEQUENT INVESTMENT BY TELEPHONE: Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-free
at (800) 225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this telephone
puurchase privilege must so elect on their Account Application and designate
thereon a bank and account number from which purchases will be made. If a
telephone purchase request is received by the Shareholder Servicing Agent on any
business day prior to the close of regular trading on the Exchange (generally,
4:00 p.m., Eastern time), the purchase will occur at the closing net asset value
of the shares purchased on that day. The Shareholder Servicing Agent may be
liable for any losses resulting from unauthorized telephone transactions if it
does not follow reasonable procedures designed to verify the identity of the
caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
DISTRIBUTION INVESTMENT PROGRAM: Distributions of dividends and capital gains
made by the Fund with respect to a particular class of shares may be
automatically invested in shares of the same class of one of the other MFS
Funds, if shares of the fund are available for sale. Such investments will be
subject to additional purchase minimums. Distributions will be invested at net
asset value (exclusive of any sales charge) and 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 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 and Class C shares will be made in the following order:
(i) any "Reinvested Shares"; (ii) to the extent necessary, any "Free Amount";
and (iii) to the extent necessary, the "Direct Purchase" subject to the lowest
CDSC (as such terms are defined in "Contingent Deferred Sales Charge" in the
Prospectus). The CDSC will be waived in the case of redemptions of Class B and
Class C shares pursuant to a SWP but will not be waived in the case of SWP
redemptions of Class A shares which are subject to a CDSC. To the extent that
redemptions for such periodic withdrawals exceed dividend income reinvested in
the account, such redemptions will reduce and may eventually exhaust the number
of shares in the shareholder's account. All dividend and capital gain
distributions for an account with a SWP will be 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 $5,000 either must be held on
deposit by, or certificates for such shares must be deposited with, the
Shareholder Servicing Agent. With respect to Class A shares, maintaining a
withdrawal plan concurrently with an investment program would be disadvantageous
because of the sales charges included in share purchases 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 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 (if available for sale) under the Automatic Exchange Plan.
The Automatic Exchange Plan provides for automatic exchanges of funds from the
shareholder's account in an MFS Fund for investment in the same class of shares
of other MFS Funds selected by the shareholder. Under the Automatic Exchange
Plan, exchanges of at least $50 each may be made to up to six different funds
effective on the seventh day of each month or of every third month, depending
whether monthly or quarterly exchanges are elected by the shareholder. If the
seventh day of the month is not a business day, the transaction will be
processed on the next business day. Generally, the initial exchange will occur
after receipt and processing by the Shareholder Servicing Agent of an
application in good order. Exchanges will continue to be made from a
shareholder's account in any MFS Fund, as long as the balance of the account is
sufficient to complete the 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 within 12 months of the
initial purchase in the case of Class C shares and certain Class A shares, a
CDSC will be imposed upon redemption. Although redemptions and repurchases of
shares are taxable events, a reinvestment within a certain period of time in the
same fund may be considered a "wash sale" and may result in the inability to
recognize currently all or a portion of a loss realized on the original
redemption for federal income tax purposes. Please see your tax adviser for
further information.
EXCHANGE PRIVILEGE -- Subject to the requirements set forth below, some or all
of the shares in an account with the Fund for which payment has been received by
the Fund (i.e., an established account) may be exchanged for shares of the same
class of any of the other MFS Funds (if available for sale and if the purchaser
is eligible to purchase the class of shares) at their 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 Internal Revenue Code
of 1986 (the "Code");
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 ordinary income and any distributions from
net short-term capital gains are taxable to shareholders as ordinary income for
federal income tax purposes, whether the distributions are paid in cash or in
additional shares. A portion of the Fund's ordinary income dividends is normally
eligible for the dividends received deduction for corporations if the recipient
otherwise qualifies for that deduction with respect to its holding of Fund
shares. Availability of the deduction for particular corporate shareholders is
subject to certain limitations, and deducted amounts may be subject to the
alternative minimum tax or result in certain basis adjustments. Distributions of
net capital gains (i.e., the excess of net long-term capital gains over net
short-term capital losses), whether paid in cash or reinvested in additional
shares, are taxable to shareholders as long-term capital gains without regard to
the length of time the shareholders have held their shares. Any Fund dividend
that is declared in October, November or December of any calendar year, that is
payable to shareholders of record in such a month, and that is paid the
following January will be treated as if received by the shareholders on December
31 of the year in which the dividend is declared. The Fund will notify
shareholders regarding the federal tax status of its distributions after the end
of each calendar year.
Any Fund distribution 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 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 a 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 disposition of shares may also be disallowed under rules
relating to wash sales. Gain may be increased (or loss reduced) upon a
redemption of Class A shares of the Fund within ninety days after their purchase
followed by any purchase (including purchases by exchange or by reinvestment)
without payment of an additional sales charge of Class A shares of the Fund or
of another MFS Fund (or any other shares of an MFS Fund generally sold subject
to a sales charge).
The Fund's current dividend and accounting policies will affect the amount,
timing, and character of distributions to shareholders, and may, under certain
circumstances, make an economic return of capital taxable to shareholders. Any
investment in zero coupon bonds and certain securities purchased at a market
discount will cause the Fund 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.
The Fund's transactions in options, Futures Contracts and Forward Contracts will
be subject to special tax rules that may affect the amount, timing and character
of Fund income and distributions to shareholders. For example, certain positions
held by the Fund on the last business day of each taxable year will be marked to
market (i.e., treated as if closed out) on that day, and any gain or loss
associated with the positions will be treated as 60% long-term and 40%
short-term capital gain or loss. Certain positions held by the Fund that
substantially diminish its risk of loss with respect to other positions in its
portfolio may constitute "straddles," and may be subject to special tax rules
that would cause deferral of Fund losses, adjustments in the holding periods of
Fund securities, and conversion of short-term into long-term capital losses.
Certain tax elections exist for straddles that may alter the effects of these
rules. The Fund will limit its activities in options, Futures Contracts and
Forward Contracts to the extent necessary to meet the requirements of Subchapter
M of the Code.
Special tax considerations apply with respect to foreign investments of the
Fund. Foreign exchange gains and losses realized by the Fund will generally be
treated as ordinary income or losses. Use of foreign currencies for non-hedging
purposes and investment by the Fund in certain "passive foreign investment
companies" may be limited in order to avoid a tax on the Fund. Investment income
received by the Fund from foreign securities may be subject to foreign income
taxes withheld at the source; the Fund does not expect to be able to pass
through to shareholders foreign tax credits with respect to such foreign taxes.
The United States has entered into tax treaties with many foreign countries that
may entitle the Fund to a reduced rate of tax or an exemption from tax on such
income; the Fund intends to qualify for treaty reduced rates where available. It
is not possible to determine the Fund's effective rate of foreign tax in advance
since the amount of the Fund's assets to be invested within various countries is
not known.
Dividends and certain other payments to persons who are not citizens or
residents of the United States or U.S. entities ("Non-U.S. Persons") are
generally subject to U.S. tax withholding at a rate of 30%. The Fund intends to
withhold U.S. federal income tax at the rate of 30% on taxable dividends and
other payments to Non-U.S. Persons that are subject to such withholding,
regardless of whether a lower rate may be permitted under an applicable treaty.
Any amounts overwithheld may be recovered by such persons by filing a claim for
refund with the U.S. Internal Revenue Service within the time period appropriate
to such claims. Distributions received from the Fund by Non-U.S. Persons may
also be subject to tax under the laws of their own jurisdictions. The Fund is
also required in certain circumstances to apply backup withholding at the rate
of 31% on taxable dividends and redemption proceeds paid to any shareholder
(including a Non-U.S. Person) who does not furnish to the Fund certain
information and certifications or who is otherwise subject to backup
withholding. Backup withholding will not, however, be applied to payments that
have been subject to 30% withholding.
As long as it qualifies as a regulated investment company under the Code, the
Fund will not be required to pay Massachusetts income or excise taxes.
Distributions of the Fund that are derived from interest on obligations of the
U.S. Government and certain of its agencies and instrumentalities (but generally
not from capital gains realized upon the disposition of such obligations) may be
exempt from state and local taxes. The Fund intends to advise shareholders of
the extent, if any, to which its distributions consist of such interest.
Shareholders are urged to consult their tax advisers regarding the possible
exclusion of such portion of their dividends for state and local income tax
purposes as well as regarding the tax consequences of an investment in the Fund.
7. DETERMINATION OF NET ASSET VALUE AND PERFORMANCE
NET ASSET VALUE: The net asset value per share of each class of the Fund is
determined each day during which the Exchange is open for trading. (As of the
date of this SAI, the Exchange is open for trading every weekday except for the
following holidays or the days on which they are observed: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.) This determination is made once each day as
of the close of regular trading on the Exchange by deducting the amount of the
liabilities attributable to 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 in its
capacity as the Fund's distributor, or its agent, the Shareholder Servicing
Agent, 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 1% maximum for Class C
shares purchased after April 1, 1996) and therefore may result in a higher rate
of return, (ii) a total rate of return assuming an initial account value of
$1,000, which will result in a higher rate of return 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 Fund offers multiple classes of shares which were initially offered for sale
to the public on different dates. The calculation of total rate of return for a
class of shares which initially was offered for sale to the public subsequent to
another class of shares of the Fund is based both on (i) the performance of the
Fund's newer class from the date it initially was offered for sale to the public
and (ii) the performance of the Fund's oldest class from the date it initially
was offered for sale to the public up to the date that the newer class initially
was offered for sale to the public.
As discussed in the Prospectus, the sales charges, expenses and expense ratios,
and therefore the performance, of the Fund's classes of shares differ. In
calculating total rate of return for a newer class of shares in accordance with
certain formulas required by the SEC, the performance will be adjusted to take
into account the fact that the newer class is subject to a different sales
charge than the oldest class (e.g., if the newer class is Class A shares, the
total rate of return quoted will reflect the deduction of the initial sales
charge applicable to Class A shares; if the newer class is Class B shares, the
total rate of return quoted will reflect the deduction of the CDSC applicable to
Class B shares). However, the performance will not be adjusted to take into
account the fact that the newer class of shares bears different class specific
expenses than the oldest shares (e.g., Rule 12b-1 fees). Therefore, the total
rate of return quoted for a newer class of shares will differ from the return
that would be quoted had the newer class of shares been outstanding for the
entire period over which the calculation is based (i.e., the total rate of
return quoted for the newer class will be higher than the return that would have
been quoted had the newer class of shares been outstanding for the entire period
over which the calculation is based if the class specific expenses for the newer
class are higher than the class specific expenses of the oldest class, and the
total rate of return quoted for the newer class will be lower than the return
that would be quoted had the newer class of shares been outstanding for this
entire period if the class specific expenses for the newer class are lower than
the class specific expenses of the oldest class).
Total rate of return quotations for each class are presented in Appendix A
attached hereto under the heading "Performance Quotations."
PERFORMANCE RESULTS: The performance results presented in Appendix A attached
hereto under the heading "Performance Results" assume an initial investment of
$10,000 in Class A shares and cover the period from February 14, 1992
(commencement of investment operations) through December 31, 1996. It has been
assumed that dividends and capital gain distributions were reinvested in
additional shares. These performance results, as well as any 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).
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 yield
calculations assumes no CDSC is paid. Yield quotations for each class of shares
is presented in Appendix A attached hereto under the heading "Performance
Quotations."
CURRENT DISTRIBUTION RATE: Yield, which is calculated according to a formula
prescribed by the SEC, is not indicative of the amounts which were or will be
paid to the Fund's shareholders. Amounts paid to shareholders of each class are
reflected in the quoted "current distribution rate" for that class. The current
distribution rate for a class 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 assumes no CDSC is
paid. Current distribution rate quotations for each class of shares are
presented in Appendix A attached hereto under the heading "Performance
Quotations."
GENERAL: 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.
From time to time, the Fund may discuss or quote its current portfolio manager
as well as other investment personnel, including such persons' views on: the
economy; securities markets; portfolio securities and their issuers; investment
philosophies, strategies, techniques and criteria used in the selection of
securities to be purchased or sold for the Fund; the Fund's portfolio holdings;
the investment research and analysis process; the formulation and evaluation of
investment recommendations; and the assessment and evaluation of credit,
interest rate, market and economic risks, and similar or related matters.
The Fund may also quote evaluations mentioned in independent radio or television
broadcasts.
From time to time the Fund may use charts and graphs to illustrate the past
performance of various indices such as those mentioned above and illustrations
using hypothetical rates of return to illustrate the effects of compounding and
tax-deferral.
From time to time the Fund may also discuss or quote the views of its
distributor, its investment adviser and other financial planning, legal, tax,
accounting, insurance, estate planning and other professionals, or from surveys,
regarding individual and family financial planning. Such views may include
information regarding: retirement planning; tax management strategies; estate
planning; general investment techniques (e.g., asset allocation and disciplined
saving and investing); business succession; ideas and information provided
through the MFS Heritage Planningsm program, an inter-generational financial
planning assistance program; issues with respect to insurance (e.g., disability
and life insurance and Medicare supplemental insurance); issues regarding
financial and health care management for elderly family members; and similar or
related matters.
The Fund may advertise examples of the effects of periodic investment plans,
including the principle of dollar cost averaging. In such a program, an investor
invests a fixed dollar amount in a fund at periodic intervals, thereby
purchasing fewer shares when prices are high and more shares when prices are
low. While such a strategy does not assure a profit or guard against a loss in a
declining market, the investor's average cost per share can be lower than if
fixed numbers of shares are purchased at the same intervals.
MFS FIRSTS: MFS has a long history of innovations.
-- 1924 -- Massachusetts Investors Trust is established as the first
open-end mutual fund in America.
-- 1924 -- Massachusetts Investors Trust is the first mutual fund to make
full public disclosure of its operations in shareholder reports.
-- 1932 -- One of the first internal research departments is established to
provide in-house analytical capability for an investment management
firm.
-- 1933 -- Massachusetts Investors Trust is the first mutual fund to
register under the Securities Act of 1933 ("Truth in Securities Act" or
"Full Disclosure Act").
-- 1936 -- Massachusetts Investors Trust is the first mutual fund to allow
shareholders to take capital gain distributions either in additional
shares or in cash.
-- 1976 -- MFS(R) Municipal Bond Fund is among the first municipal bond
funds established.
-- 1979 -- Spectrum becomes the first combination fixed/ variable annuity
with no initial sales charge.
-- 1981 -- MFS(R) World Governments Fund is established as America's first
globally diversified fixed-income mutual fund.
-- 1984 -- MFS(R) Municipal High Income Fund is the first open-end mutual
fund to seek high tax-free income from lower-rated municipal securities.
-- 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual fund to
target and shift investments among industry sectors for shareholders.
-- 1986 -- MFS(R) Municipal Income Trust is the first closed-end,
high-yield municipal bond fund traded on the New York Stock Exchange.
-- 1987 -- MFS(R) Multimarket Income Trust is the first closed-end,
multimarket high income fund listed on the New York Stock Exchange.
-- 1989 -- MFS(R) Regatta becomes America's first non-qualified
market-value-adjusted fixed/variable annuity.
-- 1990 -- MFS(R) World Total Return Fund is the first global balanced
fund.
-- 1993 -- MFS 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
four classes of shares of each of the Trust's three series, Class A shares,
Class B, Class C and Class I shares. Each share of a class of the Fund
represents an equal proportionate interest in the assets of the Fund allocable
to that class. Upon liquidation of the Fund, shareholders of each class 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 PLAN
The Trustees have adopted a Distribution Plan for Class A, Class B and Class C
shares (the "Distribution Plan") pursuant to Section 12(b) of the 1940 Act and
Rule 12b-1 thereunder (the "Rule") after having concluded that there is a
reasonable likelihood that the Distribution Plan would benefit the Fund and each
respective class of shareholders. The provisions of the Distribution Plan are
severable with respect to each class of shares offered by the Fund. The
Distribution Plan is designed to promote sales, thereby increasing the net
assets of the Fund. Such an increase may reduce the expense ratio to the extent
the Fund's fixed costs are spread over a larger net asset base. Also, an
increase in net assets may lessen the adverse effects that could result were the
Fund required to liquidate portfolio securities to meet redemptions. There is,
however, no assurance that the net assets of the Fund will increase or that the
other benefits referred to above will be realized.
The Distribution Plan is described in the Prospectus under the caption
"Distribution Plan," which is incorporated herein by reference. The following
information supplements this Prospectus discussion.
SERVICE FEES: With respect to Class A shares, no service fees will be paid: (i)
to any dealer who is the holder or dealer of record for investors who own Class
A shares having an aggregate net asset value less than $750,000, or such other
amount as may be determined from time to time by MFD (MFD, however, may waive
this minimum amount requirement from time to time); or (ii) to any insurance
company which has entered into an agreement with the Fund and MFD that permits
such insurance company to purchase Class A shares from the Fund at their net
asset value in connection with annuity agreements issued in connection with the
insurance company's separate accounts. Dealers may from time to time be required
to meet certain other criteria in order to receive service fees.
With respect to Class B shares, except in the case of the first year service
fee, no service fees will be paid to any securities dealer who is the holder or
dealer of record for investors who own Class B shares having an aggregate net
asset value of less than $750,000 or such other amount as may be determined by
MFD from time to time. MFD, however, may waive this minimum amount requirement
from time to time. Dealers may from time to time be required to meet certain
other criteria in order to receive service fees.
MFD or its affiliates shall be entitled to receive any service fee payable under
the Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by MFD or its affiliates
for shareholder accounts.
DISTRIBUTION FEES: The purpose of distribution payments to MFD under the
Distribution Plan is to compensate MFD for its distribution services to the
Fund. MFD pays commissions to dealers as well as expenses of printing
prospectuses and reports used for sales purposes, expenses with respect to the
preparation and printing of sales literature and other distribution related
expenses, including, without limitation, the cost necessary to provide
distribution-related services, or personnel, travel, office expenses and
equipment.
DISTRIBUTION AND SERVICE FEES PAID DURING THE FUND'S LAST FISCAL YEAR: During
the fiscal year ended October 31, 1996, the Fund paid the following Distribution
Plan expenses:
AMOUNT OF AMOUNT OF AMOUNT OF
DISTRIBUTION DISTRIBUTION DISTRIBUTION
AND SERVICE AND SERVICE AND SERVICE
FEES PAID FEES RETAINED FEES RECEIVED
CLASSES OF SHARES BY FUND BY MFD BY DEALERS
- ----------------- ------------ ------------- -------------
Class A Shares $135,801 $ 22,024 $113,777
Class B Shares $418,771 $324,559 $ 94,212
Class C Shares $ 65,072 $ 1,061 $ 64,011
GENERAL: The Distribution Plan will remain in effect until August 1, 1997, and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by vote of both the Trustees and a majority of the
Trustees who are not "interested persons" or financially interested parties to
such Plan ("Distribution Plan Qualified Trustees"). The Distribution Plan 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. The Distribution Plan may be
terminated at any time by vote of a majority of the Distribution Plan Qualified
Trustees or by vote of the holders of a majority of the respective class of the
Fund's shares (as defined in "Investment Restrictions"). All agreements relating
to the Distribution Plan entered into between the Fund or MFD and other
organizations must be approved by the Board of Trustees, including a majority of
the Distribution Plan Qualified Trustees. Agreements under the Distribution Plan
must be in writing, will be terminated automatically if assigned, and may be
terminated at any time without payment of any penalty, by vote of a majority of
the Distribution Plan Qualified Trustees or by vote of the holders of a majority
of the respective class of the Fund's shares. The Distribution Plan may not be
amended to increase materially the amount of permitted distribution expenses
without the approval of a majority of the respective class of the Fund's shares
(as defined in "Investment Restrictions") or may not be materially amended in
any case without a vote of the Trustees and a majority of the Distribution Plan
Qualified Trustees. The selection and nomination of Distribution Plan Qualified
Trustees shall be committed to the discretion of the non-interested Trustees
then in office. No Trustee who is not an "interested person" has any financial
interest in the Distribution Plan or in any related agreement.
10. INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS
Ernst & Young LLP are the Fund's independent auditors, providing audit services,
tax services, and assistance and consultation with respect to the preparation of
filings with the SEC.
The Portfolio of Investments and the Statement of Assets and Liabilities at
October 31, 1996, the Statement of Operations for the year ended October 31,
1996, the Statement of Changes in Net Assets for each of the two years in the
period ended October 31, 1996, the Notes to Financial Statements and the Report
of Independent Auditors, each of which is included in the Annual Report to
shareholders of the Fund, are incorporated by reference into this SAI in
reliance upon the report of Ernst & Young LLP, independent auditors, given upon
their authority as experts in accounting and auditing. A copy of the Annual
Report accompanies this SAI.
<PAGE>
APPENDIX A
PERFORMANCE INFORMATION
The performance results and quotations below should not be considered as
representative of the performance of the Fund in the future since the net asset
value and public offering price of shares of the Fund will vary. See
"Determination of Net Asset Value and Performance" in the SAI.
<TABLE>
PERFORMANCE RESULTS -- CLASS A SHARES
<CAPTION>
VALUE OF
VALUE OF INITIAL CAPITAL GAIN VALUE OF
YEAR ENDED $10,000 INVESTMENT DISTRIBUTIONS REINVESTED DIVIDENDS TOTAL VALUE
---------- ------------------ ------------- -------------------- -----------
<S> <C> <C> <C> <C>
December 31, 1992* $10,287 $ 42 $ 326 $10,655
December 31, 1993 11,389 112 1,236 12,737
December 31, 1994 10,332 102 1,672 12,106
December 31, 1995 12,809 196 3,041 16,046
December 31, 1996 13,564 810 4,905 19,279
- ----------
*Class A shares of the Fund commenced investment operations on February 14, 1992.
</TABLE>
Explanatory Notes: The results in the table assume that income dividends and
capital gain distributions were invested in additional shares. The results also
assume that the initial investment in Class A shares was reduced by the current
maximum applicable sales charge. No adjustment has been made for income taxes,
if any, payable by shareholders.
<TABLE>
PERFORMANCE QUOTATIONS
All performance quotations are for the period ended October 31, 1996.
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
------------------------------ ACTUAL 30-DAY YIELD 30-DAY YIELD CURRENT
1 YEAR LIFE OF FUND (INCLUDING ANY WAIVERS) (WITHOUT ANY WAIVERS) DISTRIBUTION RATE
------ ------------ ----------------------- --------------------- -----------------
<S> <C> <C> <C> <C> <C>
Class A with sales charge 12.77% 13.03%(1) 2.57% 2.26% 3.40%
Class A without sales charge 18.41% 14.18%(1) % % %
Class B with CDSC 13.5 % 13.18%(2) % % %
Class B without CDSC 17.5 % 13.45%(2) 1.89% 1.57% 2.80%
Class C with CDSC 16.57% 13.48%(3) % % %
Class C without CDSC 17.57% 13.48%(3) 1.96% 1.63% 2.86%
- ----------
(1) From the commencement of investment operations of Class A shares on February 14, 1992 to the period ended October 31, 1996.
(2) Class B share performance includes the performance of the Fund's Class A shares for periods prior to the commencement of
offering of Class B shares on September 7, 1993. Sales charges, expenses and expense ratios, and therefore performance,
for Class A and Class B shares differ. Class B share performance has been adjusted to reflect that Class B shares generally
are subject to CDSC (unless the performance quotation does not give effect to the CDSC) whereas Class A shares generally are
subject to an initial sales charge. Class B share performance has not, however, been adjusted to reflect differences in
operating expenses (e.g., Rule 12b-1 fees), which generally are lower for Class A shares.
(3) Class C share performance includes the performance of the Fund's Class A
shares for periods prior to the commencement of offering of Class C shares on January 3, 1994. Sales charges, expenses and
expense ratios, and therefore performance, for Class A and Class C shares differ. Class C share performance has been adjusted
to reflect that Class C shares generally are subject to CDSC (unless the performance quotation does not give effect to the CDSC)
whereas Class A shares generally are subject to an initial sales charge. Class C share performance has not, however, been
adjusted to reflect differences in operating expenses (e.g., Rule 12b-1 fees), which generally are lower for Class A shares.
</TABLE>
<PAGE>
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617) 954-5000
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
CUSTODIAN AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800) 225-2606
Mailing Address:
P.O. Box 2281, Boston, MA 02107-9906
INDEPENDENT AUDITORS
Ernst & Young LLP
200 Clarendon Street, Boston, MA 02116
MFS(R)
UTILITIES
FUND
500 BOYLSTON STREET
BOSTON, MA 02116
[logo] M F S(SM)
INVESTMENT MANAGEMENT
We invented the mutual fund(SM) MUF-13-3/97/500 35/235/335
<PAGE>
<PAGE>
[logo] MFS Annual Report
INVESTMENT MANAGEMENT for Year Ended
October 31, 1996
MFS{R) UTILITIES FUND
[graphic omitted]
AMERICA LEARNS HOW "WE INVENTED THE MUTUAL FUND", (see page 28)
<PAGE>
TABLE OF CONTENTS
Letter from the Chairman ................................................... 1
A Discussion with the Portfolio Manager .................................... 3
Portfolio Manager's Profile ................................................ 5
Fund Facts ................................................................. 5
Portfolio Concentration .................................................... 6
Tax Form Summary ........................................................... 6
Performance Summary ........................................................ 7
Portfolio of Investments ................................................... 9
Financial Statements .......................................................14
Notes to Financial Statements ..............................................20
Report of Independent Auditors .............................................26
MFS Family of Funds ........................................................27
Trustees and Officers ......................................................29
HIGHLIGHTS
* FOR THE YEAR ENDED OCTOBER 31, 1996, CLASS A SHARES OF THE FUND PROVIDED A
TOTAL RETURN AT NET ASSET VALUE OF 18.41%, CLASS B SHARES 17.50%, AND CLASS C
SHARES 17.57%.
* ELECTRIC UTILITY STOCKS COMPRISE APPROXIMATELY 42% OF THE FUND'S EQUITY
POSITION. ALTHOUGH ELECTRIC UTILITIES ARE FACING A PERIOD OF DEREGULATION,
THE PACE OF CHANGE HAS BEEN SLOWER THAN ANTICIPATED, WHICH IS FAVORABLE FOR
THESE STOCKS.
* WHILE THE WEAK BOND MARKET IN THE FIRST HALF OF THE FUND'S FISCAL YEAR HURT
INTEREST RATE SENSITIVE UTILITY STOCKS, THE BOND MARKET'S RECENT STRENGTH HAS
BENEFITED THESE STOCKS.
* ABOUT 20% OF THE FUND'S ASSETS ARE INVESTED IN INTERNATIONAL MARKETS, WHICH
CAN OFFER MUCH HIGHER GROWTH AND, AT TIMES, MORE CONSTRUCTIVE REGULATORY
ENVIRONMENTS THAN THE UNITED STATES. SEE THE FUND'S PROSPECTUS FOR RISKS
INVOLVED IN INTERNATIONAL INVESTING.
<PAGE>
LETTER FROM THE CHAIRMAN
[photo of A. Keith Brodkin]
Dear Shareholders:
As we enter the final months of 1996, the U.S. economy appears to have settled
into a pattern of moderate growth and inflation -- two factors that we think
can be important contributors to a favorable long-term investment climate.
During the first quarter of 1996, real (inflation-adjusted) economic growth
was 2.3% on an annualized basis, followed by a rate of 4.7% in the second
quarter. However, this unexpectedly high level was followed by a more moderate
2.2% pace during the third quarter. Overall, real growth in gross domestic
product has surpassed our expectations this year, and we now expect that
growth for all of 1996 could exceed 2.5%. Although individual consumers appear
to be carrying an excessive debt load, the consumer sector itself, which
represents two-thirds of the economy, continues to support the automobile and
housing markets. Consumer spending has also been positively impacted by
widespread job growth and, more recently, rising wages. However, recent
statistics appear to show a slowdown in consumer spending. This is
particularly true when considering overall retail sales, which have been flat
for several months. Furthermore, the economies of Europe and Japan continue to
be in the doldrums, weakening U.S. export markets while subduing the capital
spending plans of American corporations. Thus, while economic growth should
continue, we expect some slackening toward the end of the year.
While we do not expect the U.S. stock market to match the extraordinary
performance of 1995, we continue to be positive about the equity market this
year. Although we believe the equity market represents fair value at current
levels, the expected slowdown in corporate earnings growth and interest rate
increases earlier in the year have raised some near-term concerns, as was seen
in July's stock market correction. Further interest rate increases, and an
acceleration of inflation coupled with an additional slowdown in corporate
earnings growth, could have a negative effect on the stock market in the near
term. However, to the extent that some earnings disappointments are taken as a
sign that the economy is not overheating, this may prove beneficial for the
equity market's longer-term health. We believe many of the technology-driven
productivity gains that U.S. companies have made in recent years will continue
to enhance corporate America's competitiveness and profitability. Therefore,
while we have some near-term concerns, we remain quite constructive on the
long-term viability of the equity market.
In the bond markets, persistent signs of economic weakness led to decreases
in short-term interest rates by the Federal Reserve Board in late 1995 and
early 1996. Should signs of more rapid economic growth and, particularly, of
higher inflation resurface, we would expect the Fed to maintain its anti-
inflationary stance. In the beginning of the year, the bond markets traded in
a narrow range as investors shifted between concern for the lack of a budget
resolution in Washington and hope that sluggish economic reports and low
inflation might lead to lower interest rates. Later, fixed-income markets
began reacting to conflicting signals regarding the economy's strength with
more volatile trading patterns marked by an upward bias in interest rates.
Interest rates may move even higher over the coming months, but we believe the
current rise in bond yields is reaching a point where fixed-income markets are
equitably valued.
Finally, as you may notice, this report to shareholders incorporates a number
of changes which we hope you will find informative and useful. Following a
discussion with the Portfolio Manager, we have added new information on the
Fund's holdings, including charts illustrating the portfolio's concentration in
the types of investments that meet its criteria. Near the back of the report,
telephone numbers and addresses are listed if you would like to contact MFS.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
/s/ A. Keith Brodkin
A. Keith Brodkin
Chairman and President
November 12, 1996
<PAGE>
A DISCUSSION WITH THE PORTFOLIO MANAGER
[Photo of Maura Shaughnessy]
For the 12 months ended October 31, 1996, Class A shares of the Fund provided
a total return of 18.41%, Class B shares 17.50%, and Class C shares 17.57%.
These returns, which include the reinvestment of distributions but exclude the
effects of any sales charges, compare to a 9.80% return for the Standard &
Poor's Utility Index (the Utility Index), an unmanaged, market-value weighted,
total-return index of all utility stocks in the Standard & Poor's 500
Composite Index (the S&P 500), and an 11.42% return for the average utility
fund as measured by Lipper Analytical Services, Inc., an independent firm that
reports mutual fund performance. For the same period, the S&P 500, an
unmanaged index of common stock performance, returned 24.08%.
Q. WHAT DO YOU SEE AS SOME REASONS FOR THE FUND'S FAVORABLE PERFORMANCE THIS
YEAR, MAURA?
A. The Fund has been overweighted in natural gas stocks, which have been
terrific performers this year. Also, two of the Fund's top holdings, Portland
General and MCI Communications, were bought out by Enron and British
Telephone, respectively.
Q. COULD YOU DISCUSS THE GENERAL BUSINESS AND ECONOMIC ENVIRONMENT YOU FACED
OVER THE PAST YEAR, PARTICULARLY AS IT RELATES TO THE FUND?
A. The Fund's assets are more interest rate sensitive than the overall market,
and the weak bond market in the first half of the Fund's fiscal year hurt
utility stocks. Recently, however, the bond market has strengthened, and this
has certainly helped these stocks.
Q. YOU'RE CURRENTLY OVERWEIGHTED IN ELECTRIC UTILITY STOCKS, AT LEAST WHEN
COMPARED TO THE WEIGHTINGS IN THE S&P UTILITY INDEX. WHAT IS YOUR ELECTRIC
UTILITY WEIGHTING, AND WHY ARE YOU AT THAT LEVEL?
A. Electric utility stocks comprise approximately 42% of the Fund's equity
position, with 14% of this position made up of international electric stocks.
Although electric utilities are facing a period of deregulation, the pace of
change has been slower than anticipated, which is favorable for these stocks.
The Fund's electric holdings include utilities that we believe should thrive
in this new environment.
Q. WHAT OTHER SECTORS DO YOU LIKE, AND WHY?
A. Natural gas companies are benefiting from stronger-than-expected earnings
growth due to robust earnings from nonregulated businesses, and these stocks
make up approximately 20% of the Fund's portfolio.
Q. ARE THERE SOME PARTS OF THE COUNTRY WHERE YOU'RE FINDING A MORE FAVORABLE
CLIMATE FOR UTILITY STOCKS THAN OTHERS?
A. There are certain parts of the country that are combining robust customer
growth with rational regulatory environments. States in these areas include
Florida, Texas, Arizona, and Oregon.
Q. CAN YOU TELL US ABOUT SOME SECTORS YOU MIGHT BE AVOIDING, OR
UNDERWEIGHTING, AND WHY?
A. The Fund has been underweighted in telecommunications stocks for the entire
year. The passage of the federal Telecommunications Act has created
uncertainty about these stocks, as we expect it will be several years before
we understand who are the winners and losers from this legislation. For the
large-capitalization stocks in this sector, we expect earnings per share
growth to decline.
Q. WE NOTICED THAT ABOUT 20% OF THE FUND'S ASSETS ARE INVESTED
INTERNATIONALLY. CAN YOU TELL US WHY YOU LIKE THESE INVESTMENTS AND GIVE US
SOME EXAMPLES?
A. Typically, international markets can offer much higher growth and, at
times, a more constructive regulatory environment than the United States.
Powergen, a U.K. electric generating company, is one of the cheapest utilities
in the world based on growth relative to its earnings and cash flow
generation. Telefonica del Peru, meanwhile, enjoys an excellent combination of
robust growth and rational regulation.
Q. YOU ALSO HAVE ABOUT 10% OF THE FUND'S ASSETS IN REITS (REAL ESTATE
INVESTMENT TRUSTS). WHAT IS IT YOU LIKE ABOUT REITS, AND WHAT TYPES OF REITS
DO YOU PARTICULARLY LIKE?
A. REITs often offer yields and dividend growth stronger than the typical
utility. Our strategy is to hold a diversified group of REITs, including
health care, self-storage, hotel, apartment, office, and industrial REITs.
Respectfully,
/s/ Maura Shaughnessy
Maura Shaughnessy
Portfolio Manager
<PAGE>
PORTFOLIO MANAGER'S PROFILE
MAURA SHAUGHNESSY JOINED MFS IN 1991 AS AN EQUITY ANALYST. A GRADUATE OF COLBY
COLLEGE AND THE AMOS TUCK SCHOOL OF BUSINESS AT DARTMOUTH COLLEGE, SHE WAS
PROMOTED TO ASSISTANT VICE PRESIDENT IN 1992 AND VICE PRESIDENT IN 1993. SHE HAS
MANAGED MFS UTILITIES FUND SINCE 1992. MS. SHAUGHNESSY IS A CHARTERED FINANCIAL
ANALYST (C.F.A.).
LARGEST SECTORS (% OF INVESTMENTS)
Utilities -- Electric 33.6%
Utilities -- Gas 20.7%
Communications 20.6%
Real Estate Investment Trust 11.8%
U.S. Treasuries 10.6%
Other 2.7%
FUND FACTS
STRATEGY: THE FUND SEEKS CAPITAL GROWTH AND CURRENT INCOME BY
INVESTING AT LEAST 65% OF ITS ASSETS UNDER NORMAL
MARKET CONDITIONS IN EQUITY AND DEBT SECURITIES OF
BOTH DOMESTIC AND FOREIGN COMPANIES IN THE
UTILITIES INDUSTRY.
COMMENCEMENT OF
INVESTMENT OPERATIONS: FEBRUARY 14, 1992
SIZE: $118.5 MILLION NET ASSETS AS OF OCTOBER 31, 1996
PORTFOLIO CONCENTRATION AS OF OCTOBER 31, 1996
TOP TEN HOLDINGS
U.S. TREASURY NOTES, 9.125S, 1999 CINERGY CORP.
Midwestern electric utility
POWERGEN PLC PANENERGY CORP.
U.K. electric utility Natural gas transmission company
U.S. TREASURY NOTES, 7.875S, 2004 MCI COMMUNICATIONS CO., INC.
Telecommunications company
GTE CORP.
Telecommunications company CMS ENERGY CORP.
Michigan electric and gas utility
SIERRA PACIFIC RESOURCES
Western U.S. electric utility MFS COMMUNICATIONS CO., INC.
Telecommunications company
TAX FORM SUMMARY
IN JANUARY 1997, SHAREHOLDERS WILL BE MAILED A TAX FORM SUMMARY REPORTING THE
FEDERAL TAX STATUS OF ALL DISTRIBUTIONS PAID DURING THE CALENDAR YEAR 1996.
FEDERAL INCOME TAX INFORMATION ON DISTRIBUTIONS
THE FUND HAS DESIGNATED $4,060,476 AS A LONG-TERM CAPITAL GAIN.
FOR THE YEAR ENDED OCTOBER 31, 1996, THE AMOUNT OF DISTRIBUTIONS FROM INCOME
ELIGIBLE FOR THE 70% DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS CAME TO
20.4%.
<PAGE>
PERFORMANCE SUMMARY
The information below and on the following page illustrates the historical
performance of MFS Utilities Fund Class A shares in comparison to various
market indicators. Class A share results reflect the deduction of the 4.75%
maximum sales charge; benchmark comparisons are unmanaged and do not reflect
any fees or expenses. You cannot invest in an index. All results reflect the
reinvestment of all dividends and capital gains.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the Period from February 14, 1992 to October 31, 1996)
Lehman Brothers
MFS Utilities Consumer Price Corporate Bond
Fund Class A Index U.S. Index S&P Utility
------------- -------------- --------------- -----------
02/92 9532.00 10000.0 10000.0 10000.0
10/92 10280.0 10268.0 10790.0 11752.0
10/93 12729.0 10550.0 12425.0 13449.0
10/94 12284.0 10825.0 11781.0 12381.0
10/95 15046.0 11130.0 13994.0 17472.0
10/96 17913.0 11465.0 14865.0 17731.0
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
1 Year 3 Years Life of Fund(S)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MFS Utilities Fund (Class A) including 4.75% sales charge +12.77% + 9.92% +13.03%
- -------------------------------------------------------------------------------------------------------
MFS Utilities Fund (Class A) at net asset value +18.41% +11.70% +14.18%
- -------------------------------------------------------------------------------------------------------
MFS Utilities Fund (Class B) with CDSC +13.50% + 9.88% +13.18%
- -------------------------------------------------------------------------------------------------------
MFS Utilities Fund (Class B) without CDSC +17.50% +10.70% +13.45%
- -------------------------------------------------------------------------------------------------------
MFS Utilities Fund (Class C) with CDSC +16.57% +10.63% +13.48%
- -------------------------------------------------------------------------------------------------------
MFS Utilities Fund (Class C) without CDSC +17.57% +10.63% +13.48%
- -------------------------------------------------------------------------------------------------------
Average utility fund* +11.42% + 5.79% + 9.06%
- -------------------------------------------------------------------------------------------------------
Lehman Brothers Corporate Bond Utility Total Return Index+ + 6.10% + 5.90% + 9.52%
- -------------------------------------------------------------------------------------------------------
Standard & Poor's Utility Index + 9.80% + 7.59% +12.38%
- -------------------------------------------------------------------------------------------------------
Consumer Price Index** + 3.01% + 2.81% +3.687%
- -------------------------------------------------------------------------------------------------------
<FN>
(S) For the period from the commencement of investment operations, February 14, 1992 to October 31, 1996.
* Source: Lipper Analytical Services.
** The Consumer Price Index is a popular measure of change in prices.
+ The Lehman Brothers Corporate Bond Utility Total Return Index is an unmanaged index that includes all
publicly issued, fixed-rate, nonconvertible investment-grade domestic utility debt.
</FN>
</TABLE>
Class A SEC results include the maximum 4.75% sales charge. Class B SEC
results reflect the applicable contingent deferred sales charge (CDSC), which
declines over six years as follows: 4%, 4%, 3%, 3%, 2%, 1%, 0%. Class C shares
have no initial sales charge but, along with Class B shares, have higher
annual fees and expenses than Class A shares. As of April 1, 1996, Class C
shares redeemed within 12 months of purchase will be subject to a 1% CDSC. See
the prospectus for details.
Class B and Class C share performance includes the performance of the Fund's
Class A shares for periods prior to the commencement of offering of Class B
shares on September 7, 1993 and of Class C shares on January 3, 1994. Sales
charges and operating expenses for Class A, Class B, and Class C shares
differ. The Class A share performance, which is included within the Class B
and Class C share SEC performance, has been adjusted to reflect the CDSC
generally applicable to Class B and Class C shares rather than the initial
sales charge generally applicable to Class A shares. Class B and Class C share
performance has not been adjusted, however, to reflect differences in
operating expenses (e.g., Rule 12b-1 fees), which generally are lower for
Class A shares.
Investment return and principal value will fluctuate, and shares, when
redeemed, may be worth more or less than their original cost. Past performance
is no guarantee of future results.
All Class C share results reflect the applicable expense subsidy which is
explained in the Notes to Financial Statements. Had the subsidy not been in
effect, the results would have been less favorable. The subsidy may be
rescinded by MFS at any time.
<PAGE>
<TABLE>
PORTFOLIO OF INVESTMENTS - October 31, 1996
<CAPTION>
Non-Convertible Bonds - 21.2%
- -------------------------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Bonds - 20.2%
Financial Institutions - 0.4%
Boise Cascade Co., 7.43s, 2005 $ 450 $ 452,812
- -------------------------------------------------------------------------------------------------
Real Estate Investment Trusts - 0.4%
Loewen Group International, Inc., 7.75s, 2001## $ 500 $ 508,125
- -------------------------------------------------------------------------------------------------
Telecommunications - 0.2%
Rogers Cablesystems, Inc., 10.125s, 2012 $ 200 $ 198,000
- -------------------------------------------------------------------------------------------------
U.S. Government Guaranteed - 10.8%
U.S. Treasury Obligations
U.S. Treasury Notes, 9.125s, 1999 $ 5,000 $ 5,379,700
U.S. Treasury Notes, 7.875s, 2004 4,000 4,390,000
U.S. Treasury Bonds, 12s, 2005 810 1,108,307
U.S. Treasury Bonds, 6s, 2026 970 884,824
U.S. Treasury Bonds, 6.75s, 2026 1,000 1,011,870
------------
$ 12,774,701
- -------------------------------------------------------------------------------------------------
Utilities - Electric - 3.2%
Arkansas Power & Light Co., 8.75s, 2026 $ 500 $ 516,695
First PV Funding Corp., 10.3s, 2014 400 424,500
First PV Funding Corp., 10.15s, 2016 737 784,905
Louisiana Power & Light Co., 8.75s, 2026 250 257,188
Midland Cogeneration Venture Corp., 10.33s, 2002 468 495,251
System Energy Resources, 7.38s, 2000 500 499,910
Texas & New Mexico Power Co., 12.5s, 1999 300 328,440
Utilicorp United, Inc., 8.45s, 1999 500 525,675
------------
$ 3,832,564
- -------------------------------------------------------------------------------------------------
Utilities - Gas - 4.3%
Coastal Corp., 7.75s, 2035 $ 1,000 $ 1,011,670
Louis Dreyfus Natural Gas Corp., 9.25s, 2004 500 527,670
NGC Corp., 6.75s, 2005 1,000 987,600
Oryx Energy Co., 10s, 1999 500 533,235
PanEnergy Corp., 7s, 2006 1,000 1,003,180
Tosco Corp., 7.625s, 2006 1,000 1,029,300
------------
$ 5,092,655
- -------------------------------------------------------------------------------------------------
Other - 0.9%
Delta Air Lines, Inc., 8.5s, 2002 $ 500 $ 533,640
McDonnell Douglas Corp., 6.875s, 2006 500 495,910
------------
$ 1,029,550
- -------------------------------------------------------------------------------------------------
Total U.S. Bonds $ 23,888,407
- -------------------------------------------------------------------------------------------------
Foreign Bonds - 1.0%
Argentina - 0.1%
Hidroelectrica Alicura, 8.375s, 1999
(Utilities - Electric)## $ 150 $ 145,875
- -------------------------------------------------------------------------------------------------
Foreign Bonds - continued
Chile - 0.9%
Empresa Electric Del Norts, 7.75s, 2006
(Utilities - Electric)## $ 600 $ 609,000
Empresa Electric Guacolda S.A., 7.6s, 2001
(Utilities - Electric)## 500 508,900
------------
$ 1,117,900
- -------------------------------------------------------------------------------------------------
Total Foreign Bonds $ 1,263,775
- -------------------------------------------------------------------------------------------------
Total Non-Convertible Bonds (Identified Cost, $25,324,969) $ 25,152,182
- -------------------------------------------------------------------------------------------------
Stocks - 80.3%
- -------------------------------------------------------------------------------------------------
Shares
- -------------------------------------------------------------------------------------------------
U.S. Stocks - 61.1%
Consumer Goods and Services - 1.5%
Philip Morris Cos., Inc. 19,100 $ 1,769,138
- -------------------------------------------------------------------------------------------------
Real Estate Investment Trusts - 11.6%
American General Hospitality Corp. 94,100 $ 1,870,237
Arden Realty, Inc.* 17,900 404,988
Boykin Lodging Co.* 13,400 268,000
FelCor Suite Hotels, Inc. 27,200 890,800
First Industrial Realty Trust, Inc. 31,500 815,063
Hospitality Properties Trust 43,000 1,118,000
Innkeepers USA Trust 93,000 1,092,750
National Health Investors, Inc. 38,500 1,342,687
Oasis Residential, Inc. 30,000 637,500
Patriot American Hospitality, Inc. 13,700 481,213
Prentiss Properties Trust* 48,100 992,062
Public Storage, Inc. 9,800 225,400
Sovran Self Storage, Inc. 25,000 671,875
Storage Trust Realty 90,000 2,081,250
Winston Hotels, Inc. 69,600 870,000
------------
$ 13,761,825
- -------------------------------------------------------------------------------------------------
Utilities - Electric - 18.2%
Allegheny Power Systems, Inc. 65,600 $ 1,959,800
Boston Edison Co. 29,000 696,000
Cinergy Corp. 91,249 3,022,623
CMS Energy Corp. 73,000 2,308,625
Edison International 40,000 790,000
FPL Group, Inc. 35,000 1,610,000
GPU, Inc. 37,000 1,216,375
Illinova Corp. 79,900 2,177,275
NIPSCO Industries, Inc. 50,200 1,901,325
Pinnacle West Capital Corp. 43,900 1,355,413
Portland General Corp. 46,800 2,047,500
Public Service Company of Colorado 34,600 1,280,200
Texas Utilities Co. 15,000 607,500
Unicom Corp. 22,000 572,000
------------
$ 21,544,636
- -------------------------------------------------------------------------------------------------
Utilities - Gas - 15.6%
Coastal Corp. 41,000 $ 1,763,000
Columbia Gas Systems, Inc. 32,400 1,968,300
El Paso Natural Gas Co. 33,300 1,615,050
KN Energy, Inc. 41,300 1,543,588
Noble Affiliates, Inc. 15,000 652,500
PanEnergy Corp. 77,900 2,999,150
Questar Corp. 10,000 360,000
Sierra Pacific Resources 110,700 3,085,762
Sonat, Inc. 39,000 1,920,750
Tejas Gas Corp.* 10,000 406,250
Williams Cos., Inc. 40,500 2,116,125
------------
$ 18,430,475
- -------------------------------------------------------------------------------------------------
Utilities - Telephone - 14.2%
BellSouth Corp. 33,000 $ 1,344,750
Frontier Corp. 16,800 487,200
GTE Corp. 82,650 3,481,631
ICG Communications, Inc.* 40,000 750,000
MCI Communications Corp. 118,400 2,974,800
MFS Communications Co., Inc. 44,200 2,215,525
Pacific Telesis Group 40,000 1,360,000
SBC Communications, Inc. 26,000 1,264,250
Telco Communications Group* 58,200 945,750
Telephone & Data Systems, Inc. 32,000 1,120,000
Teleport Communications Group, Inc.* 36,900 904,050
------------
$ 16,847,956
- -------------------------------------------------------------------------------------------------
Total U.S. Stocks $ 72,354,030
- -------------------------------------------------------------------------------------------------
Foreign Stocks - 19.2%
Argentina - 1.1%
Central Costanera, ADR (Utilities - Electric)## 41,200 $ 1,284,925
- -------------------------------------------------------------------------------------------------
Brazil - 0.9%
Multicanal Participacoes S.A., ADR (Telecommunications)* 36,700 $ 513,800
Telecomunicacoes Brasileiras S.A., ADR (Utilities - Telephone) 8,000 594,000
------------
$ 1,107,800
- -------------------------------------------------------------------------------------------------
Canada - 1.3%
TransCanada Pipelines Ltd. (Utilities - Gas) 40,000 $ 675,000
Westcoast Energy, Inc. (Utilities - Gas) 49,800 821,700
------------
$ 1,496,700
- -------------------------------------------------------------------------------------------------
Chile - 2.8%
Chilectra S.A., ADR (Utilities - Electric) 26,000 $ 1,410,500
Chilgener S.A., ADR (Utilities - Electric) 40,000 905,000
Empresa Nacional de Electricidad, ADR (Utilities - Electric) 53,000 973,875
------------
$ 3,289,375
- -------------------------------------------------------------------------------------------------
Italy - 1.2%
Telecom Italia S.p.A. (Utilities - Telephone) 89,200 $ 184,217
Telecom Italia S.p.A. Di Risp (Utilities - Telephone) 1,110,000 1,265,020
------------
$ 1,449,237
- -------------------------------------------------------------------------------------------------
Peru - 1.9%
Telefonica del Peru S.A., "B" (Utilities - Telephone) 264,700 $ 561,267
Telefonica del Peru S.A., ADR (Utilities - Telephone) 84,800 1,749,000
------------
$ 2,310,267
- -------------------------------------------------------------------------------------------------
Philippines - 0.4%
Pilipino Telephone (Utilities - Telephone) 475,000 $ 420,875
- -------------------------------------------------------------------------------------------------
Portugal - 0.7%
Portugal Telecom S.A. (Utilities - Telephone) 24,600 $ 638,045
Portugal Telecom S.A., ADR (Utilities - Telephone) 9,500 245,812
------------
$ 883,857
- -------------------------------------------------------------------------------------------------
South Korea - 1.2%
Korea Mobile Telecommunications (Utilities - Telephone) 500 $ 501,517
Korea Mobile Telecommunications, ADR (Utilities - Telephone)* 72,500 906,250
------------
$ 1,407,767
- -------------------------------------------------------------------------------------------------
Spain - 2.0%
Empresa Nacional de Electricidad, ADR (Utilities - Electric) 14,000 $ 861,000
Iberdrola S.A. (Utilities - Electric) 96,000 1,017,045
Telefonica de Espana S.A., ADR (Utilities - Telephone) 8,000 482,000
------------
$ 2,360,045
- -------------------------------------------------------------------------------------------------
United Kingdom - 5.7%
East Midlands Electricity (Utilities - Electric) 20,000 $ 177,288
National Power (Utilities - Electric) 188,600 1,242,370
PowerGen PLC (Utilities - Electric) 638,050 5,292,721
------------
$ 6,712,379
- -------------------------------------------------------------------------------------------------
Total Foreign Stocks $ 22,723,227
- -------------------------------------------------------------------------------------------------
Total Stocks (Identified Cost, $84,692,734) $ 95,077,257
- -------------------------------------------------------------------------------------------------
Convertible Preferred Stock - 0.4%
- -------------------------------------------------------------------------------------------------
Issuer Shares Value
- -------------------------------------------------------------------------------------------------
Argentina
Compania Inversiones Telephone, 7%
(Utilities - Telephone)## (Identified Cost, $561,475) 10,900 $ 506,850
- -------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $110,579,178) $120,736,289
Other Assets, Less Liabilities - (1.9)% (2,283,736)
- -------------------------------------------------------------------------------------------------
Net Assets - 100.0% $118,452,553
- -------------------------------------------------------------------------------------------------
<FN>
*Non-income producing security.
##SEC Rule 144A restriction.
</FN>
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- ------------------------------------------------------------------------------
October 31, 1996
- ------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $110,579,178) $120,736,289
Receivable for Fund shares sold 812,701
Receivable for investments sold 2,822,625
Interest and dividends receivable 915,152
Deferred organization expenses 10,394
Other assets 1,049
------------
Total assets $125,298,210
------------
Liabilities:
Cash overdraft $ 261,828
Distributions payable 67,641
Payable for Fund shares reacquired 1,067,504
Payable for investments purchased 5,314,880
Payable to affiliates -
Management fee 1,208
Shareholder servicing agent fee 503
Distribution fee 27,276
Accrued expenses and other liabilities 104,817
------------
Total liabilities $ 6,845,657
------------
Net assets $118,452,553
============
Net assets consist of:
Paid-in capital $ 97,583,426
Unrealized appreciation on investments and translation of
assets and liabilities in foreign currencies 10,157,769
Accumulated undistributed net realized gain on investments
and foreign currency transactions 10,275,332
Accumulated undistributed net investment income 436,026
------------
Total $118,452,553
============
Shares of beneficial interest outstanding 13,006,847
==========
Class A shares:
Net asset value per share
(net assets of $60,345,357 / 6,619,062 shares of beneficial
interest outstanding) $ 9.12
======
Offering price per share (100/95.25 of net asset value per
share) $ 9.57
======
Class B shares:
Net asset value and offering price per share
(net assets of $49,876,586 / 5,483,735 shares of beneficial
interest outstanding) $ 9.10
======
Class C shares:
Net asset value and offering price per share
(net assets of $8,230,610 / 904,050 shares of beneficial
interest outstanding) $ 9.10
======
On sales of $100,000 or more, the offering price of Class A shares is reduced.
A contingent deferred sales charge may be imposed on redemptions of Class A,
Class B and Class C shares.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- ------------------------------------------------------------------------------
Year Ended October 31, 1996
- ------------------------------------------------------------------------------
Net investment income:
Income -
Dividends $ 4,048,085
Interest 1,809,261
Foreign taxes withheld (241,032)
-----------
Total investment income $ 5,616,314
-----------
Expenses -
Management fee $ 732,288
Trustees' compensation 37,488
Shareholder servicing agent fee (Class A) 81,480
Shareholder servicing agent fee (Class B) 92,130
Shareholder servicing agent fee (Class C) 9,761
Distribution and service fee (Class A) 135,801
Distribution and service fee (Class B) 418,771
Distribution and service fee (Class C) 65,072
Custodian fee 70,764
Auditing fees 27,850
Printing 26,535
Postage 24,530
Legal fees 4,749
Amortization of organization expenses 3,804
Miscellaneous 124,545
-----------
Total expenses $ 1,855,568
Fees paid indirectly (3,689)
Reduction of expenses by investment adviser (347,146)
-----------
Net expenses $ 1,504,733
-----------
Net investment income $ 4,111,581
-----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $10,558,170
Foreign currency transactions (19,445)
-----------
Net realized gain on investments and foreign currency
transactions $10,538,725
-----------
Change in unrealized appreciation -
Investments $ 2,215,230
Translation of assets and liabilities in foreign
currencies 879
-----------
Net unrealized gain on investments and foreign
currency translation $ 2,216,109
-----------
Net realized and unrealized gain on investments and
foreign currency $12,754,834
-----------
Increase in net assets from operations $16,866,415
===========
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------------------
Year Ended October 31, 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets:
From operations -
Net investment income $ 4,111,581 $ 2,830,796
Net realized gain on investments and foreign currency
transactions 10,538,725 3,089,196
Net unrealized gain on investments and
foreign currency translation 2,216,109 9,031,929
------------ ------------
Increase in net assets from operations $ 16,866,415 $ 14,951,921
------------ ------------
Distributions declared to shareholders -
From net investment income (Class A) $ (2,063,623) $ (1,950,814)
From net investment income (Class B) (1,256,601) (894,547)
From net investment income (Class C) (199,785) (123,779)
From net realized gain on investments and foreign currency
transactions (Class A) (1,254,112) --
From net realized gain on investments and foreign currency
transactions (Class B) (921,552) --
From net realized gain on investments and foreign currency
transactions (Class C) (134,537) --
------------ ------------
Total distributions declared to shareholders $ (5,830,210) $ (2,969,140)
------------ ------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 63,557,253 $ 54,589,877
Net asset value of shares issued to shareholders in
reinvestment of distributions 4,859,274 2,417,592
Cost of shares reacquired (51,656,344) (42,534,317)
------------ ------------
Increase in net assets from Fund share transactions $ 16,760,183 $ 14,473,152
------------ ------------
Total increase in net assets $ 27,796,388 $ 26,455,933
Net assets:
At beginning of period 90,656,165 64,200,232
------------ ------------
At end of period (including accumulated undistributed net
investment income (accumulated distributions in excess
of net investment income) of $436,026 and $(137,970),
respectively) $118,452,553 $ 90,656,165
============ ============
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
- ----------------------------------------------------------------------------------------------------------------
Year Ended October 31, 1996 1995 1994 1993 1992*
- ----------------------------------------------------------------------------------------------------------------
Class A
- ----------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period $ 8.20 $ 7.00 $ 7.86 $ 6.68 $ 6.33
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.38 $ 0.31 $ 0.33 $ 0.40 $ 0.17
Net realized and unrealized
gain (loss) on investments and
foreign currency transactions 1.07 1.22 (0.63) 1.19 0.30
------ ------ ------ ------ ------
Total from investment operations $ 1.45 $ 1.53 $(0.30) $ 1.59 $ 0.47
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.32) $(0.33) $(0.35) $(0.38) $(0.12)
From net realized gain on
investments and foreign
currency transactions (0.21) -- (0.21) (0.03) --
------ ------ ------ ------ ------
Total distributions declared
to shareholders $(0.53) $(0.33) $(0.56) $(0.41) $(0.12)
------ ------ ------ ------ ------
Net asset value - end of period $ 9.12 $ 8.20 $ 7.00 $ 7.86 $ 6.68
====== ====== ====== ====== ======
Total return(+) 18.41% 22.48% (3.89)% 24.39% 11.02%+
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.08% 0.83% 0.65% 0.65% 0.65%+
Net investment income 4.37% 4.30% 4.58% 4.57% 5.44%+
Portfolio turnover 137% 152% 115% 119% 63%
Average commission rate### $0.0422 -- -- -- --
Net assets at end of period (000 omitted) $60,345 $52,474 $42,027 $43,423 $12,859
<FN>
*For the period from the commencement of investment operations, February 14, 1992 to October 31, 1992.
+Annualized.
#Per share data for the periods subsequent to October 31, 1993 is based on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid indirectly.
###Average commission rate is calculated for funds with fiscal years beginning on or after September 1, 1995.
(+)Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results would
have been lower.
(S)The investment adviser voluntarily waived a portion of its management fee. If this fee had been incurred by the Fund, the net
investment income per share and ratios would have been:
Net investment income $ 0.34 $ 0.28 $ 0.28 $ 0.31 $ 0.13
Ratios (to average net assets):
Expenses## 1.42% 1.23% 1.41% 1.68% 2.63%+
Net investment income 4.03% 3.90% 3.82% 4.20% 3.46%+
</FN>
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- --------------------------------------------------------------------------------------
Year Ended October 31, 1996 1995 1994 1993**
- --------------------------------------------------------------------------------------
Class B
- --------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C>
Net asset value - beginning of period $ 8.18 $ 6.98 $ 7.84 $ 7.83
------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.31 $ 0.24 $ 0.25 $ 0.05
Net realized and unrealized gain
(loss) on investments and
foreign currency transactions 1.07 1.22 (0.63) 0.01
------ ------ ------ ------
Total from investment operations $ 1.38 $ 1.46 $(0.38) $ 0.06
------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.25) $(0.26) $(0.27) $(0.05)
From net realized gain on
investments and foreign
currency transactions (0.21) -- (0.21) --
------ ------ ------ ------
Total distributions declared
to shareholders $(0.46) $(0.26) $(0.48) $(0.05)
------ ------ ------ ------
Net asset value - end of period $ 9.10 $ 8.18 $ 6.98 $ 7.84
====== ====== ====== ======
Total return 17.50% 21.43% (4.92)% 0.69%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.89% 1.74% 1.72% 1.50%+
Net investment income 3.53% 3.33% 3.51% 1.80%+
Portfolio turnover 137% 152% 115% 119%
Average commission rate### $0.0422 -- -- --
Net assets at end of period (000 omitted) $49,877 $33,239 $19,774 $5,412
<FN>
**For the period from the commencement of offering of Class B shares, September 7, 1993
to October 31, 1993.
+Annualized.
++Not annualized.
#Per share data for the periods subsequent to October 31, 1993 is based on average
shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated
without reduction for fees paid indirectly.
###Average commission rate is calculated for funds with fiscal years beginning on or
after September 30, 1995.
(S)The investment adviser voluntarily waived a portion of its management fee. If this
fee had been incurred by the Fund, the net investment income per share and ratios
would have been:
Net investment income (loss) $ 0.28 $ 0.21 $ 0.20 $(0.07)
Ratios (to average net assets):
Expenses## 2.23% 2.14% 2.48% 3.27%+
Net investment income 3.19% 2.93% 2.74% 1.53%+
</FN>
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
- ------------------------------------------------------------------------------
Year Ended October 31, 1996 1995 1994***
- ------------------------------------------------------------------------------
Class C
- ------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 8.18 $ 6.99 $ 7.48
------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.31 $ 0.24 $ 0.25
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions 1.07 1.21 (0.54)
------ ------ ------
Total from investment operations $ 1.38 $ 1.45 $(0.29)
------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.25) $(0.26) $(0.20)
From net realized gain on investments and
foreign currency transactions (0.21) -- --
------ ------ ------
Total distributions declared to
shareholders $(0.46) $(0.26) $(0.20)
------ ------ ------
Net asset value - end of period $ 9.10 $ 8.18 $ 6.99
====== ====== ======
Total return 17.57% 21.19% (3.87)%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.82% 1.81% 1.65%+
Net investment income 3.60% 3.32% 3.56%+
Portfolio turnover 137% 152% 115%
Average commission rate### $0.0422 -- --
Net assets at end of period (000 omitted) $8,231 $4,943 $2,399
***For the period from the commencement of offering of Class C shares, January
3, 1994 to October 31, 1994.
+Annualized.
++Not annualized.
#Per share data for the periods subsequent to October 31, 1993 is based on
average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
###Average commission rate is calculated for funds with fiscal years beginning
on or after September 1, 1995.
(S)The investment adviser voluntarily waived a portion of its management fee. If
this fee had been incurred by the Fund, the net investment income per share
and ratios would have been:
Net investment income $ 0.28 $ 0.21 $ 0.20
Ratios (to average net assets):
Expenses## 2.16% 2.21% 2.41% +
Net investment income 3.26% 2.83% 2.80% +
See notes to financial statements
<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
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Investments
in foreign securities are vulnerable to the effects of changes in the relative
values of the local currency and the U.S. dollar and to the effects of changes
in each country's legal, political and economic environment.
Investment Valuations - Equity securities listed on securities exchanges or
reported through the NASDAQ system are valued at last sale prices. Unlisted
equity securities or listed equity securities for which last sale prices are not
available are valued at last quoted bid prices. Debt securities (other than
short-term obligations which mature in 60 days or less), including listed issues
and forward contracts, are valued on the basis of valuations furnished by
dealers or by a pricing service with consideration to factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data, without exclusive reliance upon exchange or over-the-counter prices.
Short-term obligations, which mature in 60 days or less, are valued at amortized
cost, which approximates market value. Non-U.S. dollar-denominated short-term
obligations are valued at amortized cost as calculated in the base currency and
translated into U.S. dollars at the closing daily exchange rate. 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.
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases
and sales of foreign investments, income and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates
of such transactions. Gains and losses attributable to foreign currency
exchange rates on sales of securities are recorded for financial statement
purposes as net realized gains and losses on investments. Gains and losses
attributable to foreign exchange rate movements on income and expenses are
recorded for financial statement purposes as foreign currency transaction
gains and losses. That portion of both realized and unrealized gains and
losses on investments that results from fluctuations in foreign currency
exchange rates is not separately disclosed.
Deferred Organization Expenses - Costs incurred by the Fund in connection with
its organization have been deferred and are being amortized on a straight-line
basis over a five-year period beginning on the date of commencement of Fund
operations.
Forward Foreign Currency Exchange Contracts - The Fund may enter into forward
foreign currency exchange contracts for the purchase or sale of a specific
foreign currency at a fixed price on a future date. Risks may arise upon
entering into these contracts from the potential inability of counterparties
to meet the terms of their contracts and from unanticipated movements in the
value of a foreign currency relative to the U.S. dollar. The Fund will enter
into contracts for hedging purposes as well as for non-hedging purposes. For
hedging purposes, the Fund may enter into contracts to deliver or receive
foreign currency it will receive from or require for its normal investment
activities. The Fund may also use contracts in a manner intended to protect
foreign currency-denominated securities from declines in value due to
unfavorable exchange rate movements. For non-hedging purposes, the Fund may
enter into contracts with the intent of changing the relative exposure of the
Fund's portfolio of securities to different currencies to take advantage of
anticipated changes. The forward foreign currency exchange contracts are
adjusted by the daily exchange rate of the underlying currency and any gains
or losses are recorded for financial statement purposes as unrealized until
the contract settlement date.
Investment Transactions and Income - Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All premium
and original issue discount are amortized or accreted for financial statement
and tax reporting purposes as required by federal income tax regulations.
Dividend income is recorded on the ex-dividend date for dividends received in
cash. Dividend and interest payments received in additional securities are
recorded on the ex-dividend or ex-interest date in an amount equal to the
value of the security on such date.
Fees Paid Indirectly - The Fund's custodian bank calculates its fee based on
the Fund's average daily net assets. The fee is reduced according to a fee
arrangement, which provides for custody fees to be reduced based on a formula
developed to measure the value of cash deposited with the custodian by the
Fund. This amount is shown as a reduction of expenses on the Statement of
Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided. The Fund files a tax
return annually using tax accounting methods required under provisions of the
Code which may differ from generally accepted accounting principles, the basis
on which these financial statements are prepared. Accordingly, the amount of net
investment income and net realized gain reported on these financial statements
may differ from that reported on the Fund's tax return and, consequently, the
character of distributions to shareholders reported in the financial highlights
may differ from that reported to shareholders on Form 1099-DIV. Foreign taxes
have been provided for on interest and dividend income earned on foreign
investments in accordance with the applicable country's tax rates and to the
extent unrecoverable are recorded as a reduction of investment income.
Distributions to shareholders are recorded on the ex-dividend date.
The Fund distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a tax return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or accumulated net realized
gains. During the year ended October 31, 1996, accumulated undistributed net
investment income was decreased by $17,576, accumulated undistributed net
realized gain on investments and foreign currency transactions was increased by
$2,493, and paid-in capital was increased by $15,083, due primarily to
differences between book and tax accounting for foreign currency transactions.
This change had no effect on the net assets or net asset value per share.
Multiple Classes of Shares of Beneficial Interest - The Fund offers Class A,
Class B and Class C shares. The three classes of shares differ in their
respective shareholder servicing agent, distribution and service fees. All
shareholders bear the common expenses of the Fund pro rata based on average
daily net assets of each class, without distinction between share classes.
Dividends are declared separately for each class. No class has preferential
dividend rights; differences in per share dividend rates are generally due to
differences in separate class expenses.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an annual rate of 0.375%
of average daily net assets and 6.25% of investment income. The investment
adviser did not impose a portion of its fee, which is reflected as a reduction
of expenses in the Statement of Operations.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive remuneration
for their services to the Fund from MFS. Certain of the officers and Trustees of
the Fund are officers or directors of MFS, MFS Fund Distributors, Inc. (MFD) and
MFS Service Center, Inc. (MFSC). The Fund has an unfunded defined benefit plan
for all its independent Trustees and Mr. Bailey. Included in Trustees'
compensation is a net periodic pension expense of $7,013 for the year ended
October 31, 1996.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$54,931 for the year ended October 31, 1996, as its portion of the sales charge
on sales of Class A shares of the Fund.
The Trustees have adopted separate distribution plans for Class A, Class B and
Class C shares pursuant to Rule 12b-1 of the Investment Company Act of 1940 as
follows:
The Class A distribution plan provides that the Fund will pay MFD up to 0.35%
per annum of its average daily net assets attributable to Class A shares in
order that MFD may pay expenses on behalf of the Fund related to the
distribution and servicing of its shares. These expenses include a service fee
to each securities dealer that enters into a sales agreement with MFD of up to
0.25% per annum of the Fund's average daily net assets attributable to Class A
shares which are attributable to that securities dealer, a distribution fee to
MFD of up to 0.10% per annum of the Fund's average daily net assets attributable
to Class A shares, commissions to dealers and payments to MFD wholesalers for
sales at or above a certain dollar level, and other such distribution-related
expenses that are approved by the Fund. MFD retains the service fee for accounts
not attributable to a securities dealer which amounted to $22,024 for the year
ended October 31, 1996. Payment of the 0.10% per annum Class A distribution fee
will commence on such date as the Trustees of the Trust may determine. Fees
incurred under the distribution plan during the year ended October 31, 1996 were
0.25% of average daily net assets attributable to Class A shares on an
annualized basis.
The Class B and Class C distribution plans provide that the Fund will pay MFD a
distribution fee of 0.75% per annum, and a service fee of up to 0.25% per annum,
of the Fund's average daily net assets attributable to Class B and Class C
shares. MFD will pay to securities dealers that enter into a sales agreement
with MFD all or a portion of the service fee attributable to Class B and Class C
shares, and will pay to such securities dealers all of the distribution fee
attributable to Class C shares. The service fee is intended to be additional
consideration for services rendered by the dealer with respect to Class B and
Class C shares. MFD retains the service fee for accounts not attributable to a
securities dealer, which amounted to $10,481 and $1,061 for Class B and Class C
shares, respectively, for the year ended October 31, 1996. Fees incurred under
the distribution plans during the year ended October 31, 1996 were 1.00% of
average daily net assets attributable to Class B and Class C shares on an
annualized basis.
Purchases over $1 million of Class A shares and certain purchases into
retirement plans are subject to a contingent deferred sales charge in the event
of a shareholder redemption within 12 months following such purchase. A
contingent deferred sales charge is imposed on shareholder redemptions of Class
B shares in the event of a shareholder redemption within six years of purchase.
A contingent deferred sales charge is imposed on shareholder redemptions of
Class C shares in the event of a shareholder redemption within 12 months of
purchases made on or after April 1, 1996. MFD receives all contingent deferred
sales charges. Contingent deferred sales charges imposed during the year ended
October 31, 1996 were $700, $96,691 and $716 for Class A, Class B and Class C
shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as a
percentage of the average daily net assets of each class of shares at an
effective annual rate of up to 0.15%, up to 0.22% and up to 0.15% attributable
to Class A, Class B and Class C shares, respectively.
(4) Portfolio Securities
Purchases and sales of investments, other than purchased option transactions
and short-term obligations, were as follows:
Purchases Sales
- -----------------------------------------------------------------------------
U.S. government securities $ 23,698,549 $ 19,896,841
============ ============
Investments (non-U.S. government securities) $134,166,312 $118,811,330
============ ============
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 $110,884,906
============
Gross unrealized appreciation $ 11,858,862
Gross unrealized depreciation (2,007,479)
------------
Net unrealized appreciation $ 9,851,383
============
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
Class A Shares
Year Ended October 31, 1996 Year Ended October 31, 1995
--------------------------- ---------------------------
Shares Amount Shares Amount
- -----------------------------------------------------------------------------
Shares sold 2,539,349 $ 22,019,033 2,699,306 $ 20,628,776
Shares issued to
shareholders in
reinvestment of
distributions 323,805 2,748,691 214,458 1,568,560
Shares reacquired (2,646,692) (22,729,788) (2,514,510) (18,778,516)
---------- ------------ ---------- ------------
Net increase 216,462 $ 2,037,936 399,254 $ 3,418,820
========== ============ ========== ============
Class B Shares
Year Ended October 31, 1996 Year Ended October 31, 1995
--------------------------- ---------------------------
Shares Amount Shares Amount
- -----------------------------------------------------------------------------
Shares sold 4,096,390 $ 35,220,452 4,097,196 $ 30,083,089
Shares issued to
shareholders in
reinvestment of
distributions 216,988 1,834,501 101,411 742,636
Shares reacquired (2,894,405) (24,930,962) (2,964,865) (21,644,727)
--------- ------------ --------- ------------
Net increase 1,418,973 $ 12,123,991 1,233,742 $ 9,180,998
========= ============ ========= ============
Class C Shares
Year Ended October 31, 1996 Year Ended October 31, 1995
--------------------------- ---------------------------
Shares Amount Shares Amount
- -----------------------------------------------------------------------------
Shares sold 734,010 $6,317,768 533,340 $3,878,012
Shares issued to
shareholders in
reinvestment of
distributions 32,617 276,082 14,452 106,396
Shares reacquired (466,623) (3,995,594) (286,745) (2,111,074)
------- ---------- ------- ----------
Net increase 300,004 $2,598,256 261,047 $1,873,334
======= ========== ======= ==========
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $350 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Fund shares. Interest is charged to each
fund, based on its borrowings, at a rate equal to the bank's base rate. In
addition, a commitment fee, based on the average daily unused portion of the
line of credit, is allocated among the participating funds at the end of each
quarter. The commitment fee allocated to the Fund for the year ended October
31, 1996 was $1,195.
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Trustees of MFS Series Trust VI 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, 1996, and the related statement of operations for the year then ended, the
statement of changes in net assets for each of the two years in the period then
ended, and financial highlights for each of the three years in the period then
ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits. The financial highlights for the year ended October 31, 1993, and for
the period February 14, 1992 (commencement of investment operations) to October
31, 1992 for Class A shares, and for the period September 7, 1993 (commencement
of investment operations) to October 31, 1993 for Class B shares, were audited
by other auditors whose report dated December 14, 1993 expressed an unqualified
opinion on those statements and financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1996, by correspondence with the custodian and brokers or by other
appropriate auditing procedures where replies from brokers were not received. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of MFS
Utilities Fund at October 31, 1996, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended, and its financial highlights for each of the three years in
the period then ended, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
December 12, 1996
--------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
MFS(R) UTILITIES FUND
<TABLE>
<C> <C>
TRUSTEES ASSISTANT SECRETARY
A. Keith Brodkin* - Chairman and President James R. Bordewick, Jr.*
Richard B. Bailey* - Private Investor; CUSTODIAN
Former Chairman and Director (until 1991), State Street Bank and Trust Company
Massachusetts Financial Services Company;
Director, Cambridge Bancorp; AUDITORS
Director, Cambridge Trust Company Ernst & Young LLP
Marshall N. Cohan - Private Investor INVESTOR INFORMATION
For MFS stock and bond market outlooks,
Lawrence H. Cohn, M.D. - Chief of Cardiac call toll free: 1-800-637-4458
Surgery, Brigham and Women's Hospital; anytime from a touch-tone telephone.
Professor of Surgery, Harvard Medical School
For information on MFS mutual funds,
The Hon. Sir J. David Gibbons, KBE - Chief call your financial adviser or, for an
Executive Officer, Edmund Gibbons Ltd.; information kit, call toll free:
Chairman, Bank of N.T. Butterfield & Son Ltd. 1-800-637-2929 any business day from
9 a.m. to 5 p.m. Eastern time (or leave
Abby M. O'Neill - Private Investor; a message anytime).
Director, Rockefeller Financial Services, Inc.
(investment advisers) INVESTOR SERVICE
MFS Service Center, Inc.
Walter E. Robb, III - President and Treasurer, P.O. Box 2281
Benchmark Advisors, Inc. (corporate financial Boston, MA 02107-9906
consultants); President, Benchmark Consulting
Group, Inc. (office services); Trustee, For general information, call toll free:
Landmark Funds (mutual funds) 1-800-225-2606 any business day from
8 a.m. to 8 p.m. Eastern time.
Arnold D. Scott* - Senior Executive
Vice President, Director and Secretary, For service to speech- or hearing-impaired,
Massachusetts Financial Services Company call toll free: 1-800-637-6576 any business
day from 9 a.m. to 5 p.m. Eastern time.
Jeffrey L. Shames* - President and Director, (To use this service, your phone must
Massachusetts Financial Services Company be equipped with a Telecommunications
Device for the Deaf.)
J. Dale Sherratt - President, Insight Resources,
Inc. (acquisition planning specialists) For share prices, account balances, and
exchanges, call toll free: 1-800-MFS-TALK
Ward Smith - Former Chairman (until 1994), (1-800-637-8255) anytime from a touch-tone
NACCO Industries; Director, Sundstrand Corporation telephone.
INVESTMENT ADVISER WORLD WIDE WEB
Massachusetts Financial Services Company www.mfs.com
500 Boylston Street
Boston, MA 02116-3741
DISTRIBUTOR [DALBAR For the third year in a row,
MFS Fund Distributors, Inc. LOGO] MFS earned a #1 ranking in
500 Boylston Street TOP RATED DALBAR, Inc. Broker/Dealer
Boston, MA 02116-3741 SERVICE Survey, Main Office Operations
Service Quality Category. The
PORTFOLIO MANAGER firm achieved a 3.48 overall score on a
Maura Shaughnessy* scale of 1 to 4 in the 1996 survey. A total
of 110 firms responded, offering input on the
TREASURER quality of service they received from 29
W. Thomas London* mutual fund companies nationwide. The survey
contained questions about service quality in
ASSISTANT TREASURER 15 categories, including "knowledge of phone
James O. Yost* service contacts," "accuracy of transaction
processing," and "overall ease of doing
SECRETARY business with the firm."
Stephen E. Cavan*
*Affiliated with the Investment Adviser
</TABLE>
<PAGE>
-------------
MFS(R) UTILITIES FUND [DALBAR LOGO: #1 BULK RATE
TOP RATED SERVICE] U.S. POSTAGE
500 Boylston Street PAID
Boston, MA 02116 PERMIT #55638
BOSTON, MA
-------------
[LOGO: M F S(SM)
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)]
(C)1996 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116
MUF-2 12/96 16.5M 35/235/335
<PAGE>
MFS WORLD EQUITY FUND
SUPPLEMENT TO THE MARCH 1, 1997
PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION
THE FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE FUND'S
PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION ("SAI"), DATED MARCH 1, 1997,
AND CONTAINS A DESCRIPTION OF CLASS I SHARES.
CLASS I SHARES ARE AVAILABLE FOR PURCHASE ONLY BY CERTAIN INVESTORS AS
DESCRIBED UNDER THE CAPTION "ELIGIBLE PURCHASERS" BELOW.
<TABLE>
EXPENSE SUMMARY
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES: CLASS I
Maximum Initial Sales Charge Imposed on Purchases of Fund -------
Shares (as a percentage of offering price)........................................... None
Maximum Contingent Deferred Sales Charge (as a percentage
of original purchase price or redemption proceeds, as applicable).................... None
ANNUAL OPERATING EXPENSES OF THE FUND (AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees........................................................................ 1.00%
Rule 12b-1 Fees........................................................................ None
Other Expenses(1)(2)................................................................... 0.38%
-----
Total Operating Expenses............................................................... 1.38%
.........
- ----------
(1) "Other Expenses" is based on Class A expenses incurred during the fiscal year ended October 31,
1996.
(2) The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the
amount of cash maintained by the Fund with its custodian and dividend disbursing agent, and may
enter into other such arrangements and directed brokerage arrangements (which would also have the
effect of reducing the Fund's expenses). Any such fee reductions are not reflected under "Other
Expenses."
</TABLE>
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a $1,000
investment in Class I shares of the Fund, assuming (a) a 5% annual return and
(b) redemption at the end of each of the time periods indicated:
PERIOD CLASS I
------ -------
1 year........................................ $14
3 years....................................... 44
The purpose of the expense table above is to assist investors in
understanding the various costs and expenses that a shareholder of the Fund will
bear directly or indirectly. A more complete description of the Fund's
management fee is set forth under the caption "Management of the Fund" in the
Prospectus.
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
ELIGIBLE PURCHASERS
Class I shares are available for purchase only by the following purchasers
("Eligible Purchasers"):
(i) certain retirement plans established for the benefit of employees of
Massachusetts Financial Services Company ("MFS"), the Fund's investment
adviser, and employees of MFS' affiliates;
(ii) any fund distributed by MFS Fund Distributors, Inc. ("MFD"), the Fund's
distributor, if the fund seeks to achieve its investment objective by
investing primarily in shares of the Fund and other funds distributed by
MFD;
(iii) any retirement plan which (a) purchases shares directly through MFD
(rather than through a third party broker or dealer or other financial
intermediary); (b) has, at the time of purchase of Class I shares,
aggregate assets of at least $100 million; and (c) invests at least $10
million in Class I shares of the Fund either alone or in combination with
investments in Class I shares of other MFS funds distributed by MFD
(additional investments may be made in any amount); provided that MFD may
accept purchases from smaller plans or in smaller amounts if it believes,
in its sole discretion, that the plan's aggregate assets will equal or
exceed $100 million, or that the plan will make additional investments
which will cause its total investment to equal or exceed $10 million,
within a reasonable period of time; and
(iv) bank trust departments which initially invest, on behalf of their trust
clients, at least $100,000 in Class I shares of the Fund (additional
investments may be made in any amount); provided that MFD may accept
smaller initial purchases if it believes, in its sole discretion, that the
bank trust department will make additional investments, on behalf of its
trust clients, which will cause its total investment to equal or exceed
$100,000 within a reasonable period of time.
In no event will the Fund, MFS, MFD or any of their affiliates pay any sales
commissions or compensation to any third party in connection with the sale of
Class I shares; the payment of any such sales commission or compensation would,
under the Fund's policies, disqualify the purchaser as an eligible investor of
Class I shares.
SHARE CLASSES OFFERED BY THE FUND
Four classes of shares of the Fund currently are offered for sale, Class A
shares, Class B shares, Class C shares and Class I shares. Class I shares are
available for purchase only by Eligible Purchasers, as defined above, and are
described in this Supplement. Class A shares, Class B shares and Class C shares
are described in the Fund's Prospectus and are available for purchase by the
general public.
Class A shares are offered at net asset value plus an initial sales charge
up to a maximum of 5.75% of the offering price (or a contingent deferred sales
charge (a "CDSC") upon redemption of 1.00% during the first year in the case of
purchases of $1 million or more and certain purchases by retirement plans), and
are subject to an annual distribution fee and service fee up to a maximum of
0.35% per annum. Class B shares are offered at net asset value without an
initial sales charge but are subject to a CDSC upon redemption (declining from
4.00% during the first year to 0% after six years) and an annual distribution
fee and service fee up to a maximum of 1.00% per annum; Class B shares convert
to Class A shares approximately eight years after purchase. Class C shares are
offered at net asset value without an initial sales charge but are subject to a
CDSC upon redemption of 1.00% during the first year and an annual distribution
fee and service fee up to a maximum of 1.00% per annum. Class I shares are
offered at net asset value without an initial sales charge or CDSC and are not
subject to a distribution or service fee. Class C and Class I shares do not
convert to any other class of shares of the Fund.
OTHER INFORMATION
Eligible Purchasers may purchase Class I shares only directly through MFD.
Eligible Purchasers may exchange Class I shares of the Fund for Class I shares
of any other MFS Fund available for purchase by such Eligible Purchasers at
their net asset value (if available for sale), and may exchange Class I shares
of the Fund for shares of the MFS Money Market Fund (if available for sale), and
may redeem Class I shares of the Fund at net asset value. Distributions paid by
the Fund with respect to Class I shares generally will be greater than those
paid with respect to Class A shares, Class B shares and Class C shares because
expenses attributable to Class A shares, Class B shares and Class C shares
generally will be higher.
THE DATE OF THIS SUPPLEMENT IS MARCH 1, 1997
<PAGE>
PROSPECTUS
March 1, 1997
MFS(R) WORLD Class A Shares of Beneficial Interest
EQUITY 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 .................................. 8
5. Investment Techniques .............................................. 8
6. Additional Risk Factors ............................................ 13
7. Management of the Fund ............................................. 15
8. Information Concerning Shares of the Fund .......................... 17
Purchases ....................................................... 17
Exchanges ....................................................... 22
Redemptions and Repurchases ..................................... 23
Distribution Plan ............................................... 25
Distributions ................................................... 26
Tax Status ...................................................... 27
Net Asset Value ................................................. 27
Description of Shares, Voting Rights and Liabilities ............ 27
Performance Information ......................................... 28
9. Shareholder Services ............................................... 28
Appendix A ............................................................ A-1
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
MFS WORLD EQUITY FUND
500 Boylston Street, Boston, Massachusetts 02116 (617) 954-5000
This Prospectus pertains to MFS World Equity Fund (the "Fund") a diversified
series of MFS Series Trust VI (the "Trust"), an open-end management investment
company presently consisting of three series. The investment objective of the
Fund is to provide capital appreciation primarily through investments in equity
securities of U.S. and non-U.S. issuers. 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
"Information Concerning Shares of the Fund -- Purchases"). The Fund's investment
adviser and distributor are Massachusetts Financial Services Company ("MFS" or
the "Adviser") and MFS Fund Distributors, Inc. ("MFD"), respectively, both of
which are located at 500 Boylston Street, Boston, Massachusetts 02116.
INVESTMENT PRODUCTS ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY,
AND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY FINANCIAL
INSTITUTION. SHARES OF MUTUAL FUNDS ARE SUBJECT TO INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED, AND WILL FLUCTUATE IN VALUE. YOU
MAY RECEIVE MORE OR LESS THAN YOU PAID WHEN YOU REDEEM YOUR SHARES.
This Prospectus sets forth concisely the information concerning the 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, 1997, as
amended or supplemented from time to time (the "SAI"), which contains more
detailed information about the Trust and the Fund and is incorporated into this
Prospectus by reference. See page 30 for a further description of the
information set forth in the SAI. A copy of the SAI may be obtained without
charge by contacting the Shareholder Servicing Agent (see back cover for address
and phone number). The SEC maintains an Internet World Wide Web site that
contains the SAI, materials that are incorporated by reference into this
Prospectus and the SAI, and other information regarding the Fund. This
Prospectus is available on the Adviser's Internet World Wide Web site at
http://www.mfs.com.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<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(1) 4.00% 1.00%
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 (after applicable fee reduction) ............................ 0.25%(2) 1.00%(3) 1.00%(3)
Other Expenses (4) .......................................................... 0.38% 0.38% 0.38%
---- ---- ----
Total Operating Expenses (after applicable fee reduction) ................... 1.63% 2.38% 2.38%
</TABLE>
- ------------
(1) Purchases of $1 million or more and certain purchases by retirement plans
are not subject to an initial sales charge; however, a contingent deferred
sales charge ("CDSC") of 1% will be imposed on such purchases in the event
of certain redemption transactions within 12 months following such purchases
(see "Information Concerning Shares of the Fund -- Purchases" below).
(2) The Fund has adopted a distribution plan for its shares in accordance with
Rule 12b-1 under the Investment Company Act of 1940, as amended (the "1940
Act") (the "Distribution Plan"), which provides that it will pay
distribution/service fees aggregating up to (but not necessarily all of)
0.35% per annum of the average daily net assets attributable to the Class A
shares. Payment of the 0.10% per annum Class A distribution fee will
commence on such date as the Trustees of the Trust may determine.
Distribution expenses paid under this Plan, together with the initial sales
charge, may cause long-term shareholders to pay more than the maximum sales
charge that would have been permissible if imposed entirely as an initial
sales charge. See "Information Concerning Shares of the Fund -- Distribution
Plan" below).
(3) The Fund's Distribution Plan provides that it will pay distribution/service
fees aggregating up to (but not necessarily all of) 1.00% per annum of the
average daily net assets attributable to Class B shares and Class C shares,
respectively. Distribution expenses paid under the Distribution Plan with
respect to Class B or Class C shares, together with any CDSC payable upon
redemption of Class B and Class C shares, may cause long-term shareholders
to pay more than the maximum sales charge that would have been permissible
if imposed entirely as an initial sales charge. See "Information Concerning
Shares of the Fund -- Distribution Plan" below.
(4) The Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its
custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the
effect of reducing the Fund's expenses). Any such expense limitations are
not reflected under "Total Operating Expenses."
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(3)
- ------ ------- --------------------- ----------
(1) (1)
<S> <C> <C> <C> <C> <C>
1 year ..................................... $ 73 $ 64 $ 24 $ 34 $ 24
3 years .................................... 106 104 74 74 74
5 years .................................... 141 147 127 127 127
10 years .................................... 240 253(2) 253(2) 272 272
</TABLE>
- ----------
(1) Assumes no redemption.
(2) Class B shares convert to Class A shares approximately eight years after
purchase; therefore, years nine and ten reflect Class A expenses.
(3) Purchases subsequent to April 1, 1996 which are redeemed within 12 months of
purchase are subject to a 1% CDSC.
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 Plan."
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS
THAN THOSE SHOWN.
2. THE FUND
The Fund is a diversified series of the Trust, an open-end management investment
company which was organized as a business trust under the laws of The
Commonwealth of Massachusetts on April 30, 1990. The Trust presently consists of
three series, each of which represents a portfolio with separate investment
objectives and policies. Shares of the Fund are continuously sold to the public
and the Fund then uses the proceeds to buy securities for its portfolio. Three
classes of shares of the Fund currently are offered for sale to the general
public. Class A shares are offered at net asset value plus an initial sales
charge up to a maximum of 5.75% of the offering price (or a CDSC upon redemption
of 1% during the first year in the case of purchases of $1 million or more and
certain purchases by retirement plans) and are subject to an annual distribution
fee and service fee up to a maximum of 0.35% per annum. Class B shares are
offered at net asset value without an initial sales charge but are subject to a
CDSC upon redemption (declining from 4.00% during the first year to 0% after six
years) and an annual distribution fee and service fee up to a maximum of 1.00%
per annum; Class B shares will convert to Class A shares approximately eight
years after purchase. Class C shares are offered at net asset value without an
initial sales charge but are subject to a CDSC of 1.00% upon redemption during
the first year and an annual distribution fee and service fee up to a maximum of
1.00% per annum. Class C shares do not convert to any other class of shares of
the Fund. In addition, the Fund offers an additional class of shares, Class I
shares, exclusively to certain additional investors. Class I shares are made
available by means of a separate Prospectus supplement provided to institutional
investors eligible to purchase Class I shares and are offered at net asset value
without an initial sales charge or CDSC upon redemption and without an annual
distribution and service fee.
The Trust's Board of Trustees provides broad supervision over the affairs of the
Fund. 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.
3. CONDENSED FINANCIAL INFORMATION
The following information has been audited for at least the latest five fiscal
years of the Fund and should be read in conjunction with the Fund's financial
statements included in the Fund's Annual Report to shareholders which are
incorporated by reference into the SAI in reliance upon the report of the Fund's
independent auditors, given upon their authority as experts in accounting and
auditing. The Fund's current independent auditors are Deloitte & Touche LLP.
FINANCIAL HIGHLIGHTS
CLASS A, CLASS B AND CLASS C SHARES
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
---------------------------------------------------------
1996 1995 1994 1993*
---------------------------------------------------------
CLASS A
---------------------------------------------------------
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
<S> <C> <C> <C> <C>
Net asset value -- beginning of period ............. $16.68 $16.95 $16.56 $15.71
------ ------ ------ ------
Income from investment operations# --
Net investment income ............................ $ 0.07 $ 0.09 $ 0.03 $ 0.01
Net realized and unrealized gain on investments
and foreign currency transactions ............. 2.60 1.37 1.13 0.84
------ ------ ------ ------
Total from investment operations ............... $ 2.67 $ 1.46 $ 1.16 $ 0.85
------ ------ ------ ------
Less distributions declared to shareholders --
In excess of net investment income ............... $ -- $ -- $(0.07) $ --
From net realized gain on investments and foreign
currency transactions .......................... (0.90) (1.73) (0.70) --
------ ------ ------ ------
Total distributions declared to shareholders ... $(0.90) $(1.73) $(0.77) $ --
------ ------ ------ ------
Net asset value -- end of period ................... $18.45 $16.68 $16.95 $16.56
====== ====== ====== ======
TOTAL RETURN(+) .................................... 16.72% 10.16% 7.03% 5.41%++
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses## ....................................... 1.65% 1.61% 1.54% 1.68%+
Net investment income ............................ 0.38% 0.58% 0.15% 0.94%+
PORTFOLIO TURNOVER ................................. 83% 73% 99% 70%
AVERAGE COMMISSION RATE### ......................... $0.0200 $ -- $ -- $ --
NET ASSETS AT END OF PERIOD (000 OMITTED) .......... $94,909 $52,164 $16,968 $2,076
- ----------
*For the period from the commencement of offering of Class A shares, September 7, 1993 to October 31, 1993.
+Annualized.
++Not annualized.
(+)Total returns for Class A shares do not include the applicable sales charge. If the charge had been included,
the results would have been lower.
#Per share data for the periods subsequent to October 31, 1993 is based on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees
paid indirectly.
###Average commission rate is calculated for funds with fiscal years beginning on or after September 1, 1995.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS -- CONTINUED
PERIOD
ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, YEAR ENDED NOVEMBER 30,
---------------------------------------- ------------- --------------------------
1996 1995 1994 1993* 1992 1991
- -----------------------------------------------------------------------------------------------------------------------------------
CLASS B
- -----------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
<S> <C> <C> <C> <C> <C> <C>
Net asset value -- beginning of period ....... $16.55 $16.78 $16.53 $13.50 $12.40 $12.94
------ ------ ------ ------ ------ ------
Income from investment operations# --
Net investment income (loss) ............... $(0.08) $(0.05) $(0.17) $(0.10) $(0.04) $ 0.17
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions ............................. 2.60 1.37 1.13 3.28 1.17 (0.37)
------ ------ ------ ------ ------ ------
Total from investment operations ......... $ 2.52 $ 1.32 $ 0.96 $ 3.18 $ 1.13 $(0.20)
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders --
In excess of net investment income ......... $ -- $ -- $(0.01) $ -- $ -- $ --
From net realized gain on investments and
foreign currency transactions ............ (0.71) (1.55) (0.70) (0.15) (0.03) (0.15)
From paid-in capital ....................... -- -- -- -- -- (0.19)
------ ------ ------ ------ ------ ------
Total distributions declared to
shareholders ........................... $(0.71) $(1.55) $(0.71) $(0.15) $(0.03) $(0.34)
------ ------ ------ ------ ------ ------
Net asset value -- end of period ............. $18.36 $16.55 $16.78 $16.53 $13.50 $12.40
====== ====== ====== ====== ====== ======
TOTAL RETURN ................................. 15.75% 9.07% 5.91% 23.80%++ 9.13% (1.57)%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses## ................................. 2.45% 2.55% 2.58% 2.66%+ 2.91% 2.88%
Net investment income (loss) ............... (0.44)% (0.35)% (1.01)% (0.71)%+ (0.31)% 1.35%
PORTFOLIO TURNOVER ........................... 83% 73% 99% 70% 110% 160%
AVERAGE COMMISSION RATE### ................... $ 0.0200 -- -- -- -- --
NET ASSETS AT END OF PERIOD (000 OMITTED) .... $182,139 $156,286 $175,438 $145,575 $101,550 $ 82,890
</TABLE>
- ----------
*For the 11 months ended October 31, 1993,
+Annualized.
++Not annualized.
#Per share data for the periods subsequent to October 31, 1993 is based on
average shares outstanding. ##For fiscal years ending after September 1,
1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
###Average commission rate is calculated for funds with fiscal years beginning
on or after September 1, 1995.
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS -- CONTINUED
YEAR ENDED NOVEMBER 30,
-----------------------------------------------------------
1990 1989 1988 1987*
- -----------------------------------------------------------------------------------------------------------
CLASS B
- -----------------------------------------------------------------------------------------------------------
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
<S> <C> <C> <C> <C>
Net asset value -- beginning of period ....... $12.96 $11.21 $10.12 $ 8.47
------ ------ ------ ------
Income from investment operations --
Net investment income (loss) ............... $ 0.13 $ 0.09 $ 0.14 $(0.02)
Net realized and unrealized gain on
investments and foreign currency
transactions ............................. 0.14 2.03 0.95 1.67
------ ------ ------ ------
Total from investment operations ......... $ 0.27 $ 2.12 $ 1.09 $ 1.65
------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income ................. $ -- $(0.21) $ -- $ --
From net realized gain on investments and
foreign currency transactions............. (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
====== ====== ====== ======
TOTAL RETURN ................................. 2.02% 19.58% 10.77% 19.48%++
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses ................................... 2.93% 3.05% 2.48% 2.50%+
Net investment income (loss) ............... 1.07% 0.77% 1.29% (0.29)%+
PORTFOLIO TURNOVER ........................... 173% 190% 276% 272%
NET ASSETS AT END OF PERIOD (000 OMITTED) .... $81,505 $50,827 $42,806 $37,248
</TABLE>
- ----------
*For the period from the commencement of investment operations, December 29,
1986 to November 30, 1987.
+Annualized.
++Not annualized.
<PAGE>
FINANCIAL HIGHLIGHTS -- CONTINUED
YEAR ENDED OCTOBER 31,
------------------------------
1996 1995 1994*
- ------------------------------------------------------------------------------
CLASS C
- ------------------------------------------------------------------------------
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period ....... $16.53 $16.80 $16.75
------ ------ -----
Income from investment operations --
Net investment loss ........................ $(0.06) $(0.05) $(0.09)
Net realized and unrealized gain on
investments and foreign currency
transactions ............................. 2.57 1.37 0.14
------ ------ ------
Total from investment operations ......... $ 2.51 $ 1.32 $ 0.05
------ ------ ------
Less distributions declared to shareholders
from net investment income and
foreign currency transactions .............. $(0.80) $(1.59) $ --
----- ----- -----
Net asset value -- end of period ............. $18.24 $16.53 $16.80
====== ====== ======
TOTAL RETURN ................................. 15.82% 9.20% 0.30%++
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses## ................................. 2.39% 2.49% 2.55%+
Net investment loss ........................ (0.34)% (0.31)% (0.72)%+
PORTFOLIO TURNOVER ........................... 83% 73% 99%
AVERAGE COMMISSION RATE### ................... $0.0200 $ -- $ --
NET ASSETS AT END OF PERIOD (000 OMITTED) .... $7,503 $2,908 $1,440
- ----------
*For the period from the commencement of offering of Class C shares,
January 3, 1994 to October 31, 1994.
+Annualized.
++Not annualized.
##For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
###Average commission rate is calculated for funds with fiscal years beginning
on or after September 1, 1995.
<PAGE>
4. INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE -- The Fund seeks to provide capital appreciation.
INVESTMENT POLICIES -- The Fund seeks to achieve its objective by investing,
under normal market conditions, in equity securities of U.S. and non-U.S.
issuers. (See "Investment Techniques -- Equity Securities") below. 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. The Fund may also
invest in fixed income securities offering an opportunity for capital
appreciation, including up to 5% of its net assets in fixed income securities
rated BB or lower by Standard & Poor's Ratings Services ("S&P") and Fitch
Investors Services, Inc. ("Fitch") or Ba and lower by Moody's, or if unrated,
determined to be of equivalent quality by the Adviser (commonly referred to as
"junk bonds"). For a description of these ratings, see Appendix B to the SAI
(see "Additional Risk Factors -- Lower Rated Fixed Income Securities" below). 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 temporary defensive purposes, the Fund may invest up to 20% of
its assets in Government Securities. See "Investment Techniques -- Government
Securities" below.
Consistent with its investment objective and policies described above, the Fund
may invest up to 100% (and expects generally to invest between 10% and 100%) of
its net assets in foreign securities which may be traded on foreign exchanges.
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
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.
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.
5. INVESTMENT TECHNIQUES
Consistent with the Fund's investment objective and policies, the Fund may
engage in the following investment techniques, many of which are described more
fully in the SAI. See "Investment Techniques" in the SAI.
EQUITY SECURITIES: The Fund may invest in all types of equity securities,
including the following: common stocks, preferred stocks and preference stocks;
securities such as bonds, warrants or rights that are convertible into stocks;
and depository receipts for those securities. These securities may be listed on
securities exchanges, traded in various over-the-counter markets or have no
organized markets.
GOVERNMENT SECURITIES: The Fund may invest in fixed income obligations issued by
national governments their agencies, authorities and instrumentalities,
including (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.
FOREIGN SECURITIES: The Fund may invest in dollar denominated and non-dollar
denominated foreign securities. Investing in securities of foreign issuers
generally involves risks not ordinarily associated with investing in securities
of domestic issuers. These include changes in currency rates, exchange control
regulations, securities settlement practices, governmental administration or
economic or monetary policy (in the United States or abroad) or circumstances in
dealings between nations. Costs may be incurred in connection with conversions
between various currencies. Special considerations may also include more limited
information about foreign issuers, higher brokerage costs, different accounting
standards and thinner trading markets. Foreign securities markets may also be
less liquid, more volatile and less subject to government supervision than in
the United States. Investments in foreign countries could be affected by other
factors including expropriation, confiscatory taxation and potential
difficulties in enforcing contractual obligations and could be subject to
extended settlement periods. The Fund may hold foreign currency received in
connection with investments in foreign securities when, in the judgment of the
Adviser, it would be beneficial to convert such currency into U.S. dollars at a
later date, based on anticipated changes in the relevant exchange rate. The Fund
may also hold foreign currency in anticipation of purchasing foreign securities.
EMERGING MARKET SECURITIES: Consistent with the Fund's objective and policies,
the Fund may invest in securities of issuers whose principal activities are
located in emerging market countries. Emerging market countries include any
country determined by the Adviser to have an emerging market economy, taking
into account a number of factors, including whether the country has a low-to
middle-income economy according to the International Bank for Reconstruction and
Development, the country's foreign currency debt rating, its political and
economic stability and the development of its financial and capital markets. The
Adviser determines whether an issuer's principal activities are located in an
emerging market country by considering such factors as its country of
organization, the principal trading market for its securities and the source of
its revenues and assets. The issuer's principal activities generally are deemed
to be located in a particular country if: (a) the security is issued or
guaranteed by the government of that country or any of its agencies, authorities
or instrumentalities; (b) the issuer is organized under the laws of, and
maintains a principal office in, that country; (c) the issuer has its principal
securities trading market in that country; (d) the issuer derives 50% or more of
its total revenues from goods sold or services performed in that country; or (e)
the issuer has 50% or more of its assets in that country.
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, such as changes in exchange rates and
more limited information about foreign issuers.
BRADY BONDS: The Fund may invest in Brady Bonds, which are securities created
through the exchange of existing commercial bank loans to public and private
entities in certain emerging markets for new bonds in connection with debt
restructurings under a debt restructuring plan introduced by former U.S.
Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan debt
restructurings have been implemented to date in Argentina, Brazil, Bulgaria,
Costa Rica, Dominican Republic, Ecuador, Jordan, Mexico, Nigeria, Panama, the
Philippines, Poland, Uruguay and Venezuela. Brady Bonds have been issued only
recently, and for that reason do not have a long payment history. Brady Bonds
may be collateralized or uncollateralized, are issued in various currencies (but
primarily the U.S. dollar) and are actively traded in over-the-counter secondary
markets. U.S. dollar-denominated, collateralized Brady Bonds, which may be
fixed-rate bonds or floating-rate bonds, are generally collateralized in full as
to principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds. Brady Bonds are often viewed as having three or four valuation
components: the collateralized repayment of principal at final maturity; the
collateralized interest payments; the uncollateralized interest payments; and
any uncollateralized repayment of principal at maturity (these uncollateralized
amounts constituting the "residual risk"). In light of the residual risk of
Brady Bonds and the history of defaults of countries issuing Brady Bonds with
respect to commercial bank loans by public and private entities, investments in
Brady Bonds may be viewed as speculative.
LENDING OF SECURITIES: The Fund may make loans of its portfolio securities. Such
loans will usually be made only to member banks of the Federal Reserve System
and member firms (and subsidiaries thereof) of the New York Stock Exchange (the
"Exchange") and would be required to be secured continuously by collateral in
cash, U.S. Government Securities or an irrevocable letter of credit maintained
on a current basis at an amount at least equal to the market value of the
securities loaned. The Fund would continue to collect the equivalent of the
interest on the securities loaned and would also receive either interest
(through investment of cash collateral) or a fee (if the collateral is U.S.
Government Securities or a letter of credit). 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 income on available cash or as a temporary defensive measure. Under a
repurchase agreement the Fund acquires securities subject to the seller's
agreement to repurchase at a specified time and price. If the seller becomes
subject to a proceeding under the bankruptcy laws or its assets are otherwise
subject to a stay order, the Fund's right to liquidate the securities may be
restricted (during which time the value of the securities could decline). As
discussed in the SAI, the Fund has adopted certain procedures which are intended
to minimize risk.
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"). A determination is made, based upon a continuing review of the
trading markets for a specific Rule 144A security, whether such security is
liquid and thus not subject to the Fund's limitation on investing not more than
15% of its net assets in illiquid investments. The Board of Trustees has adopted
guidelines and delegated to MFS the daily function of determining and monitoring
the liquidity of Rule 144A securities. The Board, however, retains oversight
focusing on factors, such as valuation, liquidity and availability of
information. Investing in Rule 144A Securities could have the effect of
decreasing the level of liquidity in 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. 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 SAI for further
information on these securities.
LOANS AND OTHER DIRECT INDEBTEDNESS: The Fund may invest a portion of its assets
in loans. By purchasing a loan, the Fund acquires some or all of the interest of
a bank or other lending institution in a loan to a corporate, government or
other borrower. Many such loans are secured, and most impose restrictive
covenants which must be met by the borrower. These loans are made generally to
finance internal growth, mergers, acquisitions, stock repurchases, leveraged
buy-outs and other corporate activities. Such loans may be in default at the
time of purchase. The Fund may also purchase trade or other claims against
companies, which generally represent money owed by the company to a supplier of
goods and services. These claims may also be purchased at a time when the
company is in default Certain of the loans acquired by the Fund may involve
revolving credit facilities or other standby financing commitments which
obligate the Fund to pay additional cash on a certain date or on demand.
The highly leveraged nature of many such loans may make such loans especially
vulnerable to adverse changes in economic or market conditions. Loans 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.
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: 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 against increases in the cost of securities to be
acquired. Purchases of Options on Futures Contracts may present less risk in
hedging the portfolios of the Fund than the purchase or sale of the underlying
Futures Contracts since the potential loss is limited to the amount of the
premium plus related transaction costs. The writing of such options, however,
does not present less risk than the trading of Futures Contracts and will
constitute only a partial hedge, up to the amount of the premium received. In
addition if an option is exercised, the Fund may suffer a loss on the
transaction.
FORWARD CONTRACTS: The Fund may enter into forward foreign currency exchange
contracts for the purchase or sale of a fixed quantity of a foreign currency at
a future date at a price set at the time of the contract ("Forward Contracts").
The Fund may enter into Forward Contracts for hedging purposes and for
non-hedging purposes of increasing the Fund's current income. By entering into
transactions in Forward Contracts for hedging purposes, 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.
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. The
Fund may also choose to, or be required to, receive delivery of the foreign
currencies underlying options on foreign currency it was entered into. 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.
SHORT-TERM INVESTMENTS FOR TEMPORARY DEFENSIVE PURPOSES -- During periods of
unusual market conditions when the Adviser believes that investing for temporary
defensive purposes is appropriate, or in order to meet anticipated redemption
requests, a large portion or all of the assets of the Fund may be invested in
cash or cash equivalents including, but not limited to, obligations of banks
(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.
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 SAI.
The Fund intends to manage its portfolio by buying and selling securities to
help attain its investment objective. This may result in increases or decreases
in the Fund's current income available for distribution to the Fund's
shareholders and in the holding by the Fund of debt securities which sell at
moderate to substantial premiums or discounts from face value. The Fund will
engage in portfolio trading if it believes a transaction, net of costs
(including custodian charges), will help in attaining its investment objective.
See "Portfolio Transactions and Brokerage Commissions" in the SAI.
6. ADDITIONAL RISK FACTORS
The following discussion of additional risk factors supplements the risk factors
described above. Additional information concerning risk factors can be found
under the caption "Investment Techniques" in the SAI.
EMERGING MARKET SECURITIES: The risks of investing in foreign securities may be
intensified in the case of investments in emerging markets. Securities of many
issuers in emerging markets may be less liquid and more volatile than securities
of comparable domestic issuers. Emerging markets also have different clearance
and settlement procedures, and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when a portion of the assets of the
Fund is uninvested and no return is earned thereon. The inability of the Fund to
make intended security purchases due to settlement problems could cause the Fund
to miss attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result in losses to the Fund due to
subsequent declines in value of the portfolio security, a decrease in the level
of liquidity in the Fund portfolio, or if the Fund has entered into a contract
to sell the security, in possible liability to the purchaser. Certain markets
may require payment for securities before delivery and in such markets the Fund
bears the risk that the securities will not be delivered and that the Fund's
payments will not be returned. Securities prices in emerging markets can be
significantly more volatile than in the more developed nations of the world,
reflecting the greater uncertainties of investing in less established markets
and economies. In particular, countries with emerging markets may have
relatively unstable governments, present the risk of nationalization of
businesses, restrictions on foreign ownership, or prohibitions against
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.
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. 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 SAI, which could increase the risks incurred by the Fund in
entering into such transactions.
Transactions in options may be entered into on U.S. exchanges regulated by the
SEC, in the over-the-counter market and on foreign exchanges, while Forward
Contracts may be entered into only in the over-the-counter market. Futures
Contracts and Options on Futures Contracts may be entered into on U.S. exchanges
regulated by the Commodity Futures Trading Commission (the "CFTC") and on
foreign exchanges. The securities underlying options and Futures Contracts
traded by the Fund may include domestic as well as foreign securities. Investors
should recognize that transactions involving foreign securities or foreign
currencies, and transactions entered into in foreign countries, may involve
considerations and risks not typically associated with investing in U.S.
markets.
Transactions in options, Futures Contracts, Options on Futures Contracts and
Forward Contracts entered into for non-hedging purposes involve greater risk and
could result in losses which are not offset by gains on other portfolio assets.
For example, the Fund may sell Futures Contracts on an index of securities in
order to profit from any anticipated decline in the value of the securities
comprising the underlying index. In such instances, any losses on the Futures
transaction will not be offset by gains on any portfolio securities comprising
such index, as might occur in connection with a hedging transaction. The risks
related to transactions in options, Futures Contracts, Options on Futures
Contracts and Forward Contracts entered into by the Fund are set forth in
greater detail in the SAI, which should be reviewed in conjunction with the
foregoing discussion.
FIXED INCOME SECURITIES: The net asset value of the shares of an open-end
investment company which may invest to a limited extent in fixed income
securities changes as the general levels of interest rates fluctuate. When
interest rates decline, the value of a fixed income portfolio can be expected to
rise. Conversely, when interest rates rise, the value of a fixed income
portfolio can be expected to decline.
LOWER RATED FIXED INCOME SECURITIES -- The Fund may invest up to 5% of its net
assets in lower rated fixed income securities or comparable unrated securities.
In particular, securities rated lower than Baa by Moody's, BBB by S&P or by
Fitch or comparable unrated securities (commonly known as "junk bonds") are
considered speculative and, while generally providing greater income than
investments in higher rated securities, will involve greater risk of principal
and income (including the possibility of default or bankruptcy of the issuers of
such securities) and may involve greater volatility of price (especially during
periods of economic uncertainty or change) than securities in the higher rating
categories. However, since yields vary over time, no specific level of income
can ever be assured. These lower rated high yielding fixed income securities
generally tend to reflect economic changes and short-term corporate and industry
developments to a greater extent than higher rated securities which react
primarily to fluctuations in the general level of interest rates (although these
lower rated fixed income securities are also affected by changes in interest
rates, the market's perception of their credit quality, and the outlook for
economic growth). In the past, economic downturns or an increase in interest
rates have, under certain circumstances, caused a higher incidence of default by
the issuers of these securities and may do so in the future, especially in the
case of highly leveraged issuers. During certain periods, the higher yields on a
Fund's lower rated high yielding fixed income securities are paid primarily
because of the increased risk of loss of principal and income, arising from such
factors as the heightened possibility of default or bankruptcy of the issuers of
such securities. Due to the fixed income payments of these securities, the Fund
may continue to earn the same level of interest income while its net asset value
declines due to portfolio losses, which could result in an increase in the
Fund's yield despite the actual loss of principal. The market for these lower
rated fixed income securities may be less liquid than the market for investment
grade fixed income securities, and judgment may at times play a greater role in
valuing these securities than in the case of investment grade fixed income
securities. Changes in the value of securities subsequent to their acquisition
will not affect cash income or yield to maturity to the Fund but will be
reflected in the net asset value of shares of the Fund.
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 man in the case of higher grade fixed income securities.
--------------------
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 SAI includes a discussion of other investment policies and a listing of
specific investment restrictions which govern the Fund's investment policies.
The specific investment restrictions listed in the SAI may be changed without
shareholder approval unless indicated otherwise (see "Investment Restrictions"
in the SAI). The Fund's investment limitations, policies and rating standards
are adhered to at the time of purchase or utilization of assets; a subsequent
change in circumstances will not be considered to result in a violation of
policy.
7. MANAGEMENT OF THE FUND
INVESTMENT ADVISER -- The Adviser manages the Fund pursuant to an Investment
Advisory Agreement dated September 1, 1993 (the "Advisory Agreement"). Under the
Advisory Agreement, the Adviser provides the Fund with overall investment
advisory and administrative services, as well as general office facilities.
David R. Mannheim, a Senior Vice President of the Adviser, has been the Fund's
portfolio manager since 1992. Mr. Mannheim has been employed as a portfolio
manager 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 daily and paid
monthly, in an amount equal to 1.00% of the Fund's average daily net assets for
its then-current fiscal year. This management fee is greater than the fee paid
by most funds, but is comparable to funds having similar investment objectives
and policies.
For the Fund's fiscal year ended October 31, 1996, the investment advisory fees
received under the Advisory Agreement were $2,493,195.
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 and seven variable accounts, each of which is a
registered investment company established by Sun Life Assurance Company of
Canada (U.S.) ("Sun Life of Canada (U.S.)") in connection with the sale of
various fixed/variable annuity contracts. MFS and its wholly owned subsidiary,
MFS Institutional Advisors, Inc., provide investment advice to substantial
private clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the United States, Massachusetts Investors
Trust. Net assets under the management of the MFS organization were
approximately, $54 billion on behalf of approximately 2.3 million investor
accounts as of January 31, 1997. As of such date, the MFS organization managed
approximately $30.3 billion of assets invested in equity securities and
approximately $20.1 billion of assets invested in fixed income securities.
Approximately $3.9 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
wholly owned subsidiary of Sun Life Assurance Company of Canada ("Sun Life").
The Directors of MFS are A. Keith Brodkin, Jeffrey L. Shames, Arnold D. Scott,
John D. McNeil and Donald A. Stewart. Mr. Brodkin is the Chairman, Mr. Shames is
the President and Mr. Scott is the Secretary and a Senior Executive Vice
President of MFS. Messrs. McNeil and Stewart are the Chairman and President,
respectively, of Sun Life. Sun Life, a mutual life insurance company, is one of
the largest international life insurance companies and has been operating in the
United States since 1895, establishing a headquarters office here in 1973. The
executive officers of MFS report to the Chairman of Sun Life.
A. Keith Brodkin, the Chairman and a Director of MFS, is the Chairman and
President of the Trust. W. Thomas London, Stephen E. Cavan, James 0. Yost and
James R. Bordewick, Jr., all of whom are officers of MFS, are officers of the
Trust.
MFS has established a strategic alliance with Foreign & Colonial Management Ltd.
("Foreign & Colonial"). Foreign & Colonial is a subsidiary of two of the world's
oldest financial services institutions, the London-based Foreign & Colonial
Investment Trust PLC, which pioneered the idea of investment management in 1868,
and HYPO-BANK (Bayerische Hypotheken-und Wechsel-Bank AG), the oldest publicly
listed bank in Germany, founded in 1835. As part of this alliance, the portfolio
managers and investment analysts of MFS and Foreign & Colonial share their views
on a variety of investment related issues, such as the economy, securities
markets, portfolio securities and their issuers, investment recommendations,
strategies and techniques, risk analysis, trading strategies and other portfolio
management matters. MFS has access to the extensive international equity
investment expertise of Foreign & Colonial, and Foreign & Colonial has access to
the extensive U.S. equity investment expertise of MFS. MFS and Foreign &
Colonial each have investment personnel working in each other's office in Boston
and London, respectively.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for portfolios of other clients of MFS or clients of
Foreign & Colonial. Some simultaneous transactions are inevitable when several
clients receive investment advice from MFS and Foreign & Colonial, particularly
when the same security is suitable for more than one client. While in some cases
this arrangement could have a detrimental effect on the price or availability of
the security as far as the Fund is concerned, in other cases, however, it may
produce increased investment opportunities for the Fund.
ADMINISTRATOR -- MFS provides the Fund with certain administrative services
pursuant to a Master Administrative Services Agreement dated March 1, 1997.
Under this Agreement, MFS provides the Fund with certain financial, legal,
compliance, shareholder communications and other administative services. As a
partial reimbursement for the cost of providing these services, the Fund pays
MFS an administrative fee up to 0.015% per annum of the Fund's average daily net
assets, provided that the administrative fee is not assessed on Fund assets that
exceed $3 billion.
DISTRIBUTOR -- MFD, a wholly owned subsidiary of MFS, is the distributor of
shares of the Fund and also serves as distributor for each of the other MFS
Funds.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. (the "Shareholder
Servicing Agent"), a wholly owned subsidiary of MFS, performs transfer agency,
certain dividend disbursing agency and other services for the Fund.
8. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Class A, B and C shares of the Fund may be purchased at the public offering
price through any dealer and other financial institutions ("dealers") having a
selling agreement with MFD. Dealers may also charge their customers fees
relating to investments in the Fund.
This Prospectus offers three classes of shares to the general public (Class A, B
and C shares), which bear sales charges and distribution fees in different forms
and amounts, as described below:
CLASS A SHARES: Class A shares are generally offered at net asset value plus an
initial sales charge, but in certain cases are offered at net asset value
without an initial sales charge but subject to a CDSC.
PURCHASES SUBJECT TO INITIAL SALES CHARGE. Class A shares are offered at
net asset value plus an initial sales charge as follows:
<TABLE>
<CAPTION>
SALES CHARGE* AS
PERCENTAGE OF:
-------------------------------- DEALER ALLOWANCE
NET AMOUNT AS A PERCENTAGE
AMOUNT OF PURCHASE OFFERING PRICE INVESTED OF OFFERING PRICE
- ------------------ -------------- -------- -----------------
<S> <C> <C> <C>
Less than $50,000 ..................... 5.75% 6.10% 5.00%
$50,000 but less than $100,000 ........ 4.75 4.99 4.00
$100,000 but less than $250,000 ....... 4.00 4.17 3.20
$250,000 but less than $500,000 ....... 2.95 3.04 2.25
$500,000 but less than $1,000,000 ..... 2.20 2.25 1.70
$1,000,000 or more .................... None** None** See Below**
</TABLE>
- ------------
*Because of rounding in the calculation of offering price, actual sales charges
may be more or less than those calculated using the percentages above.
**A CDSC will apply to such purchases, as discussed below.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price, as shown in the above table. In the case of
the maximum sales charge, the dealer retains 5% and MFD retains approximately
3/4 of 1% of the public offering price. The sales charge may vary depending on
the number of shares of the Fund as well as certain other MFS Funds owned or
being purchased, the existence of an agreement to purchase additional shares
during a 13-month period (or 36-month period for purchases of $1 million or
more) or other special purchase programs. A description of the Right of
Accumulation, Letter of Intent and Group Purchase privileges by which the sales
charge may be reduced is set forth in the SAI.
PURCHASES SUBJECT TO A CDSC (but not subject to an initial sales charge). In the
following four circumstances, Class A shares are offered at net asset value
without an initial sales charge but subject to a CDSC, equal to 1% of the lesser
of the value of the shares redeemed (exclusive of reinvested dividend and
capital gain distributions) or the total cost of such shares, in the event of a
share redemption within 12 months following the purchase:
(i) on investments of $1 million or more in Class A shares;
(ii) on investments in Class A shares by certain retirement plans subject
to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), if, prior to July 1, 1996: (a) the plan had established
an account with the Shareholder Servicing Agent and (b) the
sponsoring organization had demonstrated to the satisfaction of MFD
that either (i) the employer had at least 25 employees or (ii) the
aggregate purchases by the retirement plan of Class A shares of
Funds in the MFS Funds would be in an aggregate amount of at least
$250,000 within a reasonable period of time, as determined by MFD in
its sole discretion;
(iii) on investments in Class A shares by certain retirement plans subject
to ERISA, if: (a) the retirement plan and/or sponsoring organization
subscribes to the MFS FUNDamental 401(k) Program or any similar
recordkeeping system made available by the Shareholder Servicing Agent
(the "MFS Participant Recordkeeping System"); (b) the plan establishes
an account with the Shareholder Servicing Agent on or after July 1,
1996; and (c) the aggregate purchases by the retirement plan of Class
A shares of the MFS Funds will be in an aggregate amount of at least
$500,000 within a reasonable period of time, as determined by MFD in
its sole discretion; and
(iv) on investments in Class A shares by certain retirement plans subject to
ERISA, if: (a) the plan establishes an account with the Shareholder
Servicing Agent on or after July 1, 1996 and (b) the plan has, at the
time of purchase, a market value of $500,000 or more invested in shares
of any class or classes of the MFS Funds. THE RETIREMENT PLAN WILL
QUALIFY UNDER THIS CATEGORY ONLY IF THE PLAN OR ITS SPONSORING
ORGANIZATION INFORMS THE SHAREHOLDER SERVICING AGENT PRIOR TO THE
PURCHASES THAT THE PLAN HAS A MARKET VALUE OF $500,000 OR MORE INVESTED
IN SHARES OF ANY CLASS OR CLASSES OF THE MFS FUNDS. THE SHAREHOLDER
SERVICING AGENT HAS NO OBLIGATION INDEPENDENTLY TO DETERMINE WHETHER
SUCH A PLAN QUALIFIES UNDER THIS CATEGORY.
In the case of all such purchases, MFD will pay commissions to dealers on new
investments in Class A shares made through such dealers as follows:
COMMISSION PAID BY MFD TO DEALERS CUMULATIVE PURCHASE AMOUNT
--------------------------------- --------------------------
1.00% On the first $2,000,000, plus
0.80% Over $2,000,000 to $3,000,000, plus
0.50% Over $3,000,000 to $50,000,000, plus
0.25% Over $50,000,000
For purposes of determining the level of commissions to be paid to dealers with
respect to a shareholder's new investment in Class A shares made on or after
April 1, 1996, purchases for each shareholder account (and certain other
accounts for which the shareholder is a record or beneficial holder) will be
aggregated over a 12-month period (commencing from the date of the first such
purchase).
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" in the
Prospectus for further discussion of the CDSC.
WAIVERS OF INITIAL SALES CHARGE AND CDSC. In certain circumstances, the
initial sales charge imposed upon purchases of Class A shares and the CDSC
imposed upon redemption of Class A shares is waived. These circumstances are
described in Appendix A to this Prospectus. In addition to these circumstances,
the CDSC imposed upon the redemption of Class A shares is waived with respect to
shares held by certain retirement plans qualified under Section 401(a) or 403(b)
of the Code and subject to ERISA, where:
(i) the retirement plan and/or sponsoring organization does not subscribe
to the MFS Participant Recordkeeping System; and
(ii) the retirement plan and/or sponsoring organization demonstrates to the
satisfaction of, and certifies to, the Shareholder Servicing Agent that
the retirement plan has, at the time of certification or will have
pursuant to a purchase order placed with the certification, a market
value of $500,000 or more invested in shares of any class or classes of
the MFS Funds and aggregate assets of at least $10 million;
provided, however, that the CDSC will not be waived (i.e., it will be imposed)
in the event that there is a change in law or regulations which results in a
material adverse change to the tax advantaged nature of the plan, or in the
event that the plan and/or sponsoring organization: (i) becomes insolvent or
bankrupt; (ii) is terminated or partially terminated under ERISA or is
liquidated or dissolved; or (iii) is acquired by, merged into, or consolidated
with, any other entity.
CLASS B SHARES: Class B shares are offered at net asset value without an initial
sales charge but subject to a CDSC upon redemption as follows:
YEAR OF CONTINGENT
REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
-------------- ---------------
First ..................................................... 4%
Second .................................................... 4%
Third ..................................................... 3%
Fourth .................................................... 3%
Fifth ..................................................... 2%
Sixth ..................................................... 1%
Seventh and following ..................................... 0%
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividends or capital gain distributions.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
Except as described below, MFD will pay commissions to dealers of 3.75% of the
purchase price of Class B shares purchased through dealers. MFD will also
advance to dealers the first year service fee payable under the Fund's Class B
Distribution Plan (see "Distribution Plan" below) at a rate equal to 0.25% of
the purchase price of such shares. Therefore, the total amount paid to a dealer
upon the sale of Class B shares is 4% of the purchase price of the shares
(commission rate of 3.75% plus a service fee equal to 0.25% of the purchase
price).
Class B shares purchased by a retirement plan whose sponsoring organization
subscribes to the MFS Participant Recordkeeping System and which has established
its account with the Shareholder Servicing Agent on or after July 1, 1996, will
be subject to the CDSC described above, only under limited circumstances, as
explained below under "Waivers of CDSC." With respect to such purchases, MFD
pays an amount to dealers equal to 3.00% of the amount purchased through such
dealers (rather than the 4.00% payment described above), which is comprised of a
commission of 2.75% plus the advancement of the first year service fee equal to
0.25% of the purchase price payable under the Fund's Distribution Plan. As
discussed above, such retirement plans are eligible to purchase Class A shares
of the Fund at net asset value without an initial sales charge but subject to a
1% CDSC if the plan has, at the time of purchase, a market value of $500,000 or
more invested in shares of any class or classes of the MFS Funds. IN THIS EVENT,
THE PLAN OR ITS SPONSORING ORGANIZATION SHOULD INFORM THE SHAREHOLDER SERVICING
AGENT THAT THE PLAN IS ELIGIBLE TO PURCHASE CLASS A SHARES UNDER THIS CATEGORY;
THE SHAREHOLDER SERVICING AGENT HAS NO OBLIGATION INDEPENDENTLY TO DETERMINE
WHETHER SUCH A PLAN QUALIFIES UNDER THIS CATEGORY FOR THE PURCHASE OF CLASS A
SHARES.
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon redemption
of Class B shares is waived. These circumstances are described in Appendix A to
this Prospectus. In addition to these circumstances, the CDSC imposed upon the
redemption of Class B shares is waived with respect to shares held by a
retirement plan whose sponsoring organization subscribes to the MFS Participant
Recordkeeping System and which has established an account with the Shareholder
Servicing Agent on or after July 1, 1996; provided, however, that the CDSC will
not be waived (i.e., it will be imposed) in the event that there is a change in
law or regulations which results in a material adverse change to the tax
advantaged nature of the plan, or in the event that the plan and/or sponsoring
organization: (i) becomes insolvent or bankrupt; (ii) is terminated or partially
terminated under ERISA or is liquidated or dissolved; or (iii) is acquired by,
merged into, or consolidated with, any other entity.
CONVERSION OF CLASS B SHARES. Class B shares of the Fund that remain outstanding
for approximately eight years will convert to Class A shares of the same Fund.
Shares purchased through the reinvestment of distributions paid in respect of
Class B shares will be treated as Class B shares for purposes of the payment of
the distribution and service fees under the Fund's Distribution Plan. See
"Distribution Plan" below. However, for purposes of conversion to Class A
shares, all shares in a shareholder's account that were purchased through the
reinvestment of dividends and distributions paid in respect of Class B shares
(and which have not converted to Class A shares as provided in the following
sentence) will be held in a separate sub-account. Each time any Class B shares
in the shareholder's account (other than those in the sub-account) convert to
Class A shares, a portion of the Class B shares then in the sub-account will
also convert to Class A shares. The portion will be determined by the ratio that
the shareholder's Class B shares not acquired through reinvestment of dividends
and distributions that are converting to Class A shares bear to the
shareholder's total Class B shares not acquired through reinvestment. The
conversion of Class B shares to Class A shares is subject to the continuing
availability of a ruling from the Internal Revenue Service or an opinion of
counsel that such conversion will not constitute a taxable event for federal tax
purposes. There can be no assurance that such ruling or opinion will be
available, and the conversion of Class B shares to Class A shares will not occur
if such ruling or opinion is not available. In such event, Class B shares would
continue to be subject to higher expenses than Class A shares for an indefinite
period.
CLASS C SHARES: Class C shares are offered at net asset value without an initial
sales charge but are subject to a CDSC upon redemption of 1.00% during the first
year. Class C shares do not convert to any other class of shares of the Fund.
The maximum investment in Class C shares that may be made is up to $1,000,000
per transaction.
The CDSC imposed is assessed against the lesser of the value of shares redeemed
(exclusive of reinvested dividend and capital gain distributions) or the total
cost of such shares. No CDSC is assessed against shares acquired through the
automatic reinvestment of dividend or capital gain distributions. See
"Redemptions and Repurchases - Contingent Deferred Sales Charge" below for
further discussion of the CDSC.
MFD will pay dealers 1.00% of the purchase price of Class C shares purchased
through dealers and, as compensation therefor, MFD will retain 1.00% per annum
distribution and service fee paid under the Fund's Distribution Plan by the Fund
to MFD for the first year after purchase (See "Distribution Plan").
Class C shares are not currently available for purchase by any retirement plan
qualified under Sections 401(a) or 403(b) of the Internal Revenue Code of 1986,
as amended (the "Code"), if the retirement plan and/or the sponsoring
organization subscribe to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping program made available by the Shareholder Servicing Agent.
WAIVERS OF CDSC: In certain circumstances, the CDSC imposed upon redemption of
Class C shares is waived. These circumstances are described in Appendix A to
the Prospectus.
GENERAL: The following information applies to purchases of all classes of the
Fund's shares.
MINIMUM INVESTMENT. Except as described below, the minimum initial
investment is $1,000 per account and the minimum additional investment is $50
per account. Accounts being established for monthly automatic investments and
under payroll savings programs and tax-deferred retirement programs (other than
IRAs) involving the submission of investments by means of group remittal
statements are subject to a $50 minimum on initial and additional investments
per account. The minimum initial investment for IRAs is $250 per account and the
minimum additional investment is $50 per account. Accounts being established for
participation in the Automatic Exchange Plan are subject to a $50 minimum on
initial and additional investments per account. There are also other limited
exceptions to these minimums for certain tax-deferred retirement programs. Any
minimums may be changed at any time at the discretion of MFD. The Fund reserves
the right to cease offering its shares at any time.
SUBSEQUENT INVESTMENT BY TELEPHONE: Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-free
at (800) 225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this telephone
purchase privilege must so elect on their Account Application and designate
thereon a bank and account number from which purchases will be made. If a
telephone purchase request is received by the Shareholder Servicing Agent on any
business day prior to the close of regular trading on the Exchange (generally,
4:00 p.m., Eastern time), the purchase will occur at the closing net asset value
of the shares purchased on that day. The Shareholder Servicing Agent may be
liable for any losses resulting from unauthorized telephone transactions if it
does not follow reasonable procedures designed to verify the identity of the
caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
RIGHT TO REJECT PURCHASE ORDERS/MARKET TIMING. Purchases and exchanges
should be made for investment purposes only. The Fund and MFD each reserves the
right to reject or restrict any specific purchase order or exchange request. In
the event that the Fund or MFD rejects an exchange request, neither the
redemption nor the purchase side of the exchange will be processed.
The Fund is not designed for professional market timing organizations or other
entities using programmed or frequent exchanges. The Fund defines a "market
timer" as an individual, or organization acting on behalf of one or more
individudals, if (i) the individual or organization makes three or more exchange
requests out of the Fund per calender year and (ii) any one of such exchange
requests represents shares equal in value to 1/2 of 1% or more of the Fund's net
assets at the time of the request. Accounts under common ownership or control,
including accounts administered by market timers, will be aggregated for
purposes of this definition.
As noted above, the Fund and MFD each reserve the right to reject or restrict
any specific purchase and exchange request and, in addition, may impose specific
limitations with respect to market timers, including delaying for up to seven
days the purchase side of an exchange request by market timers or specifically
rejecting or otherwise restricting purchase or exchange requests by market
timers. In the event that any individual or entity is determined either by the
Fund or MFD, in its sole discretion, to be a market timer with respect to any
calendar year, the Fund and/or MFD will reject all exchange requests into the
Fund during the remainder of that calendar year. Other funds in the MFS Family
of Funds may have different and/or more restrictive policies with respect to
market timers than the Fund. These policies are disclosed in the prospectuses of
these other MFS funds.
DEALER CONCESSIONS. Dealers may receive different compensation with respect
to sales of Class A, Class B and Class C shares. In addition, from time to time,
MFD may pay dealers 100% of the applicable sales charge on sales of Class A
shares of certain specified MFS Funds sold by such dealer during a specified
sales period. In addition, MFD or its affiliates may, from time to time, pay
dealers an additional commission equal to 0.50% of the net asset value of all of
the Class B and/or Class C shares of certain specified MFS Funds sold by such
dealer during a specified sales period. In addition, from time to time, MFD, at
its expense, may provide additional commissions, compensation or promotional
incentives ("concessions") to dealers which sell shares of the Fund. Such
concessions provided by MFD may include financial assistance to dealers in
connection with preapproved conferences or seminars, sales or training programs
for invited registered representatives, payment for travel expenses, including
lodging, incurred by registered representatives for such seminars or training
programs, seminars for the public, advertising and sales campaigns regarding one
or more MFS Funds, and/or other dealer-sponsored events. From time to time, MFD
may make expense reimbursements for special training of a dealer's registered
representatives in group meetings or to help pay the expenses of sales contests.
Other concessions may be offered to the extent not prohibited by state laws or
any self-regulatory agency, such as the NASD.
SPECIAL INVESTMENT PROGRAMS. For shareholders who elect to participate in
certain investment programs (e.g., the Automatic Investment Plan) or other
shareholder services, MFD or its affiliates may either (i) give a gift of
nominal value, such as a hand-held calculator, or (ii) make a nominal charitable
contribution on their behalf.
RESTRICTIONS ON ACTIVITIES OF NATIONAL BANKS. The Glass-Steagall Act
prohibits national banks from engaging in the business of underwriting,
selling or distributing securities. Although the scope of the prohibition has
not been clearly defined, MFD believes that such Act should not preclude banks
from entering into agency agreements with MFD. If, however, a bank were
prohibited from so acting, the Trustees would consider what actions, if any,
would be necessary to continue to provide efficient and effective shareholder
services in respect of Shareholders who invested in the Fund through a
national bank. It is not expected that shareholders would suffer any adverse
financial consequence as a result of these occurrences. In addition, state
securities laws on this issue may differ from the interpretation of federal
law expressed herein and banks and financial institutions may be required to
register as broker-dealers pursuant to state law.
------------------------
A shareholder whose shares are held in the name of, or controlled by, a dealer
might not receive many of the privileges and services from the Fund (such as
Right of Accumulation, Letter of Intent and certain recordkeeping services) that
the Fund ordinarily provides.
EXCHANGES
Subject to the requirements set forth below, some or all of the shares in an
account with the Fund for which payment has been received by the Fund (i.e., an
established account) may be exchanged for shares of the same class of any of the
other MFS Funds at net asset value (if available for sale). Shares of one class
may not be exchanged for shares of any other class.
EXCHANGES AMONG MFS FUNDS (EXCLUDING MFS MONEY MARKET FUNDS): No initial sales
charges or CDSC will be imposed in connection with an exchange from shares of an
MFS Fund to shares of any other MFS Fund, except with respect to exchanges from
an MFS money market fund to another MFS Fund which is not an MFS money market
fund (discussed below). With respect to an exchange involving shares subject to
a CDSC, the CDSC will be unaffected by the exchange and the holding period for
purposes of calculating the CDSC will carry over to the acquired shares.
EXCHANGES FROM AN MFS MONEY MARKET FUND: Special rules apply with respect to the
imposition of an initial sales charge or a CDSC for exchanges from an MFS money
market fund to another MFS Fund which is not an MFS money market fund. These
rules are described under the caption "Exchanges" in the Prospectuses of those
MFS money market funds.
EXCHANGES INVOLVING THE MFS FIXED FUND: Class A shares of any MFS Fund held by
certain qualified retirement plans may be exchanged for units of participation
of the MFS Fixed Fund (a bank collective investment fund) (the "Units"), and
Units may be exchanged for Class A shares of any MFS Fund. With respect to
exchanges between Class A shares subject to a CDSC and Units, the CDSC will
carry over to the acquired shares or Units and will be deducted from the
redemption proceeds when such shares or Units are subsequently redeemed,
assuming the CDSC is then payable (the period during which the Class A shares
and the Units were held will be aggregated for purposes of calculating the
applicable CDSC). In the event that a shareholder initially purchases Units and
then exchanges into Class A shares subject to an initial sales charge of an MFS
Fund, the initial sales charge shall be due upon such exchange, but will not be
imposed with respect to any subsequent exchanges between such Class A shares and
Units with respect to shares on which the initial sales charge has already been
paid. In the event that a shareholder initially purchases Units and then
exchanges into Class A shares subject to a CDSC of an MFS Fund, the CDSC period
will commence upon such exchange, and the applicability of the CDSC with respect
to subsequent exchanges shall be governed by the rules set forth above in this
paragraph.
GENERAL: A shareholder should read the prospectus of the other MFS Fund into
which an exchange is made and consider the differences in objectives, policies
and restrictions before making any exchange. Exchanges will be made only after
instructions in writing or by telephone (an "Exchange Request") are received for
an established account by the Shareholder Servicing Agent in proper form (i.e.,
if in writing -- signed by the record owner(s) exactly as the shares are
registered; if by telephone -- proper account identification is given by the
dealer or shareholder of record) and each exchange must involve either shares
having an aggregate value of at least $1,000 ($50 in the case of retirement plan
participants whose sponsoring organizations subscribe to the MFS FUNDamental
401(k) Plan or another similar 401(k) recordkeeping system made available by the
Shareholder Servicing Agent) or all the shares in the account. If an Exchange
Request is received by the Shareholder Servicing Agent on any business day prior
to the close of regular trading on the New York Stock Exchange (generally, 4:00
p.m., Eastern time) (the "Exchange"), the exchange will occur on that day if all
the requirements set forth above have been complied with at that time and
subject to the Fund's right to reject purchase orders. No more than five
exchanges may be made in any one Exchange Request by telephone. Additional
information concerning this exchange privilege and prospectuses for any of the
other MFS Funds may be obtained from dealers or the Shareholder Servicing Agent.
For federal and (generally) state income tax purposes, an exchange is treated as
a sale of the shares exchanged and, therefore, an exchange could result in a
gain or loss to the shareholder making the exchange. Exchanges by telephone are
automatically available to most non-retirement plan accounts and certain
retirement plan accounts. For further information regarding exchanges by
telephone, see "Redemptions by Telephone." The exchange privilege (or any aspect
of it) may be changed or discontinued and is subject to certain limitations,
including certain restrictions on purchases by market timers.
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the value of his account on any
date on which the Fund is open for business by redeeming shares at their net
asset value (a redemption) or by selling such shares to the Fund through a
dealer (a repurchase). Certain redemptions and repurchases are, however, subject
to a CDSC. See "Contingent Deferred Sales Charge" below. Because the net asset
value of shares of the account fluctuates, redemptions or repurchases, which are
taxable transactions, are likely to result in gains or losses to the
shareholder. When a shareholder withdraws an amount from his account, the
shareholder is deemed to have tendered for redemption a sufficient number of
full and fractional shares in his account to cover the amount withdrawn. The
proceeds of a redemption or repurchase will normally be available within seven
days, except for shares purchased or received in exchange for shares purchased
by check (including certified checks or cashier's checks). Payment of redemption
proceeds may be delayed for up to 15 days from the purchase date in an effort to
assure that such check has cleared.
REDEMPTION BY MAIL: Each shareholder may redeem all or any portion of the shares
in his account by mailing or delivering to the Shareholder Servicing Agent (see
back cover for address) a stock power with a written request for redemption or
letter of instruction, together with his share certificates (if any were
issued), all in "good order" for transfer. "Good order" generally means that the
stock power, written request for redemption, letter of instruction or
certificate must be endorsed by the record owner(s) exactly as the shares are
registered and the signature(s) must be guaranteed in the manner set forth below
under the caption "Signature Guarantee." In addition, in some cases "good order"
will require the furnishing of additional documents. The Shareholder Servicing
Agent may make certain de minimis exceptions to the above requirements for
redemption. Within seven days after receipt of a redemption request in "good
order" by the Shareholder Servicing Agent, the Fund will make payment in cash of
the net asset value of the shares next determined after such redemption request
was received, reduced by the amount of any applicable CDSC described above and
the amount of any income tax required to be withheld, except during any period
in which the right of redemption is suspended or date of payment is postponed
because the Exchange is closed or trading on such Exchange is restricted or to
the extent otherwise permitted by the 1940 Act if an emergency exists. See "Tax
Status" below.
REDEMPTION BY TELEPHONE: Each shareholder may redeem an amount from his account
by telephoning the Shareholder Servicing Agent toll-free at (800) 225-2606.
Shareholders wishing to avail themselves of this telephone redemption privilege
must so elect on their Account Application, designate thereon a bank and account
number to receive the proceeds of such redemption, and sign the Account
Application Form with the signature(s) guaranteed in the manner set forth below
under the caption "Signature Guarantee." The proceeds of such a redemption,
reduced by the amount of any applicable CDSC and the amount of any income tax
required to be withheld, are mailed by check to the designated account, without
charge, if the redemption proceeds do not exceed $1,000, and are wired in
federal funds to the designated account if the redemption proceeds exceed
$1,000. If a telephone redemption request is received by the Shareholder
Servicing Agent by the close of regular trading on the Exchange on any business
day, shares will be redeemed at the closing net asset value of the Fund on that
day. Subject to the conditions described in this section, proceeds of a
redemption are normally mailed or wired on the next business day following the
date of receipt of the order for redemption. The Shareholder Servicing Agent
will not be liable for any losses resulting from unauthorized telephone
transactions if it follows reasonable procedures designed to verify the identity
of the caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
REPURCHASE THROUGH A DEALER: If a shareholder desires to sell his shares through
his dealer (a repurchase), the shareholder can place a repurchase order with his
dealer, who may charge the shareholder a fee. IF THE DEALER RECEIVES THE
SHAREHOLDER'S ORDER PRIOR TO THE CLOSE OF REGULAR TRADING ON THE EXCHANGE AND
COMMUNICATES IT TO MFD BEFORE THE CLOSE OF BUSINESS ON THE SAME DAY, THE
SHAREHOLDER WILL RECEIVE THE NET ASSET VALUE CALCULATED ON THAT DAY, REDUCED BY
THE AMOUNT OF ANY APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME TAX REQUIRED TO
BE WITHHELD.
CONTINGENT DEFERRED SALES CHARGE: Investments in Class A, Class B and Class C
shares ("Direct Purchases") will be subject to a CDSC for a period of: (i) with
respect to Class A and Class C shares, 12 months, (however, the CDSC on Class A
shares is only imposed with respect to purchases of $1 million or more of Class
A shares or purchases by certain retirement plans of Class A shares); or (ii)
with respect to Class B shares, six years. Purchases of Class A shares made
during a calendar month, regardless of when during the month the investment
occurred, will age one month on the last day of the month and each subsequent
month. Class B and Class C shares purchased on or after January 1, 1993 will be
aggregated on a calendar month basis -- all transactions made during a calendar
month, regardless of when during the month they have occurred, will age one year
at the close of business on the last day of such month in the following calendar
year and each subsequent year. For Class B shares of the Fund purchased prior to
January 1, 1993, transactions will be aggregated on a calendar year basis -- all
transactions made during a calendar year, regardless of when during the year
they have occurred, will age one year at the close of business on December 31 of
that year and each subsequent year. Prior to April 1, 1996, Class C shares of
the MFS Funds were not subject to a CDSC upon redemption. In no event will Class
C shares of the MFS Funds purchased prior to this date be subject to a CDSC. For
the purpose of calculating the CDSC upon redemption of shares acquired in an
exchange on or after April 1, 1996, the purchase of shares acquired in one or
more exchanges is deemed to have occurred at the time of the original purchase
of the exchanged shares (if such original purchase occurred prior to April 1,
1996, then no CDSC would be imposed upon such a redemption).
At the time of a redemption, the amount by which the value of a shareholder's
account for a particular class of shares represented by Direct Purchases exceeds
the sum of the six calendar year aggregations (12 months in the case of
purchases of Class C shares and of purchases of $1 million or more of Class A
shares or purchases by certain retirement plans of Class A shares) of Direct
Purchases may be redeemed without charge ("Free Amount"). Moreover, no CDSC is
ever assessed on additional shares acquired through the automatic reinvestment
of dividends or capital gain distributions ("Reinvested Shares"). Therefore, at
the time of redemption of a particular class, (i) any Free Amount is not subject
to the CDSC and (ii) the amount of the redemption equal to the then-current
value of Reinvested Shares is not subject to the CDSC, but (iii) any amount of
the redemption in excess of the aggregate of the then-current value of
Reinvested Shares and the Free Amount is subject to a CDSC. The CDSC will first
be applied against the amount of Direct Purchases which will result in any such
charge being imposed at the lowest possible rate. The CDSC to be imposed upon
redemptions of shares will be calculated as set forth in "Purchases" above.
The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except as described in Appendix A hereto.
GENERAL: The following information applies to redemptions and repurchases of
all classes of the Fund's shares.
SIGNATURE GUARANTEE. In order to protect shareholders against fraud, the
Fund requires, in certain instances as indicated above, that the shareholder's
signature be guaranteed. In these cases the shareholder's signature must be
guaranteed by an eligible bank, broker, dealer, credit union, national
securities exchange, registered securities association, clearing agency or
savings association. Signature guarantees shall be accepted in accordance with
policies established by the Shareholder Servicing Agent.
REINSTATEMENT PRIVILEGE. Shareholders of the Fund who have redeemed their
shares have a one-time right to reinvest the redemption proceeds in the same
class of shares of any of the MFS Funds (if shares of such Fund are available
for sale) at net asset value (with a credit for any CDSC paid) within 90 days of
the redemption pursuant to the Reinstatement Privilege. If the shares credited
for any CDSC paid are then redeemed within six years of the initial purchase in
the case of Class B shares or within 12 months of the initial purchase for
certain Class A share and Class C share purchases, a CDSC will be imposed upon
redemption. Such purchases under the Reinstatement Privilege are subject to all
limitations in the SAI regarding this privilege.
IN-KIND DISTRIBUTIONS. The Trust agrees to redeem shares of the Fund solely
in cash up to the lesser of $250,000 or 1% of the net asset value of the Fund
during any 90-day period for any one shareholder. The Fund has reserved the
right to pay other redemptions either totally or partially, by a distribution
in-kind of securities (instead of cash) from the Fund's portfolio. The
securities distributed in such a distribution would be valued at the same amount
as that assigned to them in calculating the net asset value for the shares being
sold. If a shareholder received a distribution in-kind, the shareholder could
incur brokerage or transaction charges when converting the securities to cash.
INVOLUNTARY REDEMPTIONS/SMALL ACCOUNTS. Due to the relatively high cost of
maintaining small accounts, the Fund reserves the right to redeem shares in any
account for their then-current value if at any time the total investment in such
account drops below $500 because of redemptions, except in the case of accounts
being established for monthly automatic investments and certain payroll savings
programs, Automatic Exchange Plan accounts and tax-deferred retirement plans,
for which there is a lower minimum investment requirement. See "Purchases --
General -- Minimum Investment." Shareholders will be notified that the value of
their account is less than the minimum investment requirement and allowed 60
days to make an additional investment before the redemption is processed.
DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class A, Class B and Class C
shares pursuant to Section 12(b) of the 1940 Act and Rule 12b-1 thereunder (the
"Distribution Plan"), after having concluded that there is a reasonable
likelihood that the Plan would benefit the Fund and its shareholders.
In certain circumstances, the fees described below may not be imposed or are
being waived. These circumstances, if any, are described below under the heading
"Current Level of Distribution and Service Fees."
FEATURES COMMON TO EACH CLASS OF SHARES: There are features of the Distribution
Plan that are common to each class of shares as described below.
SERVICE FEES. The Distribution Plan provides that the Fund may pay MFD a
service fee of up to 0.25% of the average daily net assets attributable to the
class of shares to which the Distribution Plan relates (i.e., Class A, Class B
or Class C shares, as appropriate) (the "Designated Class") annually in order
that MFD may pay expenses on behalf of the Fund relating to the servicing of
shares of the Designated Class. The service fee is used by MFD to compensate
dealers which enter into a sales agreement with MFD in consideration for all
personal services and/or account maintenance services rendered by the dealer
with respect to shares of the Designated Class owned by investors for whom such
dealer is the dealer or holder of record. MFD may from time to time reduce the
amount of the service fees paid for shares sold prior to a certain date. Service
fees may be reduced for a dealer that is the holder or dealer of record for an
investor who owns shares of the Fund having an aggregate net asset value at or
above a certain dollar level. Dealers may from time to time be required to meet
certain criteria in order to receive service fees. MFD or its affiliates are
entitled to retain all service fees payable under the Distribution Plan for
which there is no dealer of record or for which qualification standards have not
been met as partial consideration for personal services and/or account
maintenance services performed by MFD or its affiliates to shareholder accounts.
DISTRIBUTION FEES. The Distribution Plan provides that the Fund may pay MFD
a distribution fee based on the average daily net assets attributable to the
Designated Class as partial consideration for distribution services performed
and expenses incurred in the performance of MFD's obligations under its
distribution agreement with the Fund. See "Management of the Fund --
Distributor" in the SAI. The amount of the distribution fee paid by the Fund
with respect to each class differs under the Distribution Plan, as does the use
by MFD of such distribution fees. Such amounts and uses are described below in
the discussion of the provisions of the Distribution Plan relating to each class
of shares. While the amount of compensation received by MFD in the form of
distribution fees during any year may be more or less than the expense incurred
by MFD under its distribution agreement with the Fund, the Fund is not liable to
MFD for any losses MFD may incur in performing services under its distribution
agreement with the Fund.
OTHER COMMON FEATURES. Fees payable under the Distribution Plan are charged
to, and therefore reduce, income allocated to shares of the Designated Class.
The provisions of the Distribution Plan relating to operating policies, as well
as initial approval, renewal, amendment and termination, are substantially
identical as they relate to each class of shares covered by the Distribution
Plan.
FEATURES UNIQUE TO EACH CLASS OF SHARES: There are certain features of the
Distribution Plan that are unique to each class of shares, as described below.
CLASS A SHARES. Class A shares are generally offered with an initial sales
charge, a substantial portion of which is paid to or retained by the dealer
making the sale (and the remainder of which is paid to MFD). See "Purchases --
Class A Shares" above. In addition to the initial sales charge, the dealer also
generally receives the ongoing 0.25% per annum service fee, as discussed above.
The distribution fee paid to MFD under the Distribution Plan is equal, on an
annual basis, to 0.10% of the Fund's average daily net assets attributable to
Class A shares. As noted above, MFD may use the distribution fee to cover
distribution-related expenses incurred by it under its distribution agreement
with the Fund, including commissions to dealers and payments to wholesalers
employed by MFD (e.g., MFD pays commission to dealers with respect to purchases
of $1 million or more and purchases by certain retirement plans of Class A
shares which are sold at net asset value but which are subject to a 1% CDSC for
one year after purchase). See "Purchases -- Class A Shares" above. In addition,
to the extent that the aggregate service and distribution fees paid under the
Distribution Plan do not exceed 0.35% per annum of the average daily net assets
of the Fund attributable to Class A shares, the Fund is permitted to pay such
distribution-related expenses or other distribution- related expenses.
CLASS B SHARES. Class B shares are offered at net asset value without an
initial sales charge but subject to a CDSC. See "Purchases -- Class B Shares"
above. MFD will advance to dealers the first year service fee described above at
a rate equal to 0.25% of the purchase price of such shares and, as compensation
therefor, MFD may retain the service fee paid by the Fund with respect to such
shares for the first year after purchase. Dealers will become eligible to
receive the ongoing 0.25% per annum service fee with respect to such shares
commencing in the thirteenth month following purchase.
Under the Distribution Plan, the Fund pays MFD a distribution fee equal, on an
annual basis, to 0.75% of the Fund's average daily net assets attributable to
Class B shares. As noted above, this distribution fee may be used by MFD to
cover its distribution-related expenses under its distribution agreement with
the Fund (including the 3.75% commission it pays to dealers upon purchase of
Class B shares, as described under "Purchases -- Class B Shares" above).
CLASS C SHARES. Class C shares are offered at net asset value without an
initial sales charge but subject to a CDSC. See "Purchases -- Class C shares"
above. MFD will pay a commission to dealers of 1.00% of the purchase price of
Class C shares purchased through dealers at the time of purchase. In
compensation for this 1.00% commission paid by MFD to dealers, MFD will retain
the 1.00% per annum Class C distribution and service fees paid by the Fund with
respect to such shares for the first year after purchase, and dealers will
become eligible to receive from MFD the ongoing 1.00% per annum distribution and
service fees paid by the Fund to MFD with respect to such shares commencing in
the thirteenth month following purchase.
This ongoing 1.00% fee is comprised of the 0.25% per annum service fee paid to
MFD under the Distribution Plan (which MFD in turn pays to dealers), as
discussed above, and a distribution fee paid to MFD (which MFD also in turn pays
to dealers) under the Distribution Plan equal, on an annual basis, to 0.75% of
the Fund's average daily net assets attributable to Class C shares.
CURRENT LEVEL OF DISTRIBUTION AND SERVICE FEES: The Fund's Class A, Class B and
Class C distribution and service fees for its current fiscal year are 0.25%,
1.00% and 1.00% per annum, respectively. Payment of the 0.10% per annum
distribution fee under the Class A Distribution Plan will commence on such date
as the Trustees may determine.
DISTRIBUTIONS
The Fund intends to pay substantially all of its net investment income to its
shareholders as dividends on an annual basis. In determining the net investment
income available for distributions, the Fund may rely on projections of its
anticipated net investment income over a longer term, rather than its actual net
investment income for the period. The Fund may make one or more distributions
during the calendar year to its shareholders from any long-term capital gains,
and may also make one or more distributions during the calendar year to its
shareholders from short-term capital gains. Shareholders may elect to receive
dividends and capital gain distributions in either cash or additional shares of
the same class with respect to which a distribution is made (see "Tax Status"
and "Shareholder Services -- Distribution Options" below). Distributions paid by
the Fund with respect to Class A shares will generally be greater than those
paid with respect to Class B and Class C shares because expenses attributable to
Class B and Class C shares will generally be higher.
TAX STATUS
The Fund is treated as an entity separate from the other series of the Trust for
federal income tax purposes. In order to minimize the taxes the Fund would
otherwise be required to pay, the Fund intends to qualify each year as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"). Because the Fund intends to distribute all of
its net investment income and net realized capital gains to its shareholders in
accordance with the timing requirements imposed by the Code, it is not expected
that the Fund will be required to pay federal income or excise taxes, although
the Fund's foreign-source income may be subject to foreign withholding taxes.
Shareholders of the Fund normally will have to pay federal income taxes (and any
state or local taxes) on the dividends and capital gain distributions they
receive from the Fund, whether the distribution is paid in cash or in additional
shares. A portion of the dividends received from the Fund (but none of the
Fund's capital gain distributions) may qualify for the dividends received
deduction for corporations. Shortly after the end of each calendar year, each
shareholder will be sent a statement setting forth the federal income tax status
of all dividends and distributions for that year, including the portion taxable
as ordinary income, the portion taxable as long-term capital gain, 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. 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 shortly before the Fund makes a distribution may
thus pay the full price for the shares and then effectively receive a portion of
the purchase price back as a taxable distribution.
The Fund intends to withhold U.S. federal income tax at the rate of 30% on
dividends and other payments that are subject to such withholding and that are
made to persons who are neither citizens nor residents of the U.S., regardless
of whether a lower rate may be permitted under an applicable treaty. The Fund is
also required in certain circumstances to apply backup withholding at the rate
of 31% on taxable dividends and redemption proceeds paid to any shareholder
(including a shareholder who is neither a citizen nor a resident of the U.S.)
who does not furnish to the Fund certain information and certifications or who
is otherwise subject to backup withholding. Backup withholding will not,
however, be applied to payments that have been subject to 30% withholding.
Prospective investors should read the Fund's Account Application for additional
information regarding backup withholding of federal income tax and should
consult their own tax advisers as to the tax consequences to them of an
investment in the Fund.
NET ASSET VALUE
The net asset value per share of each class of the Fund is determined each day
during which the Exchange is open for trading. This determination is made once
each day as of the close of regular trading on the Exchange by deducting the
amount of the liabilities attributable to the class from the value of the Fund's
assets attributable to the class and dividing the difference by the number of
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 SAI. All investments and assets are expressed in U.S. dollars
based upon current currency exchange rates. The net asset value per share of
each class of shares is effective for orders received by the dealer prior to its
calculation and received by MFD prior to the close of that business day.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund, one of three series of the Trust, has three classes of shares which it
offers to the general public, entitled Class A, Class B and Class C Shares of
Beneficial Interest (without par value). The Fund also has a class of shares
which it offers exclusively to certain retirement plans established for the
benefit of employees of the Adviser and its affiliates, entitled Class I shares.
The Trust has reserved the right to create and issue additional classes and
series of shares, in which case each class of shares of a series would
participate equally in the earnings, dividends and assets attributable to that
class of that particular series. Shareholders are entitled to one vote for each
share held and shares of each series would be entitled to vote separately to
approve investment advisory agreements or changes in investment restrictions,
but shares of all series would vote together in the election of Trustees or
selection of accountants. Additionally, each class of shares of a series will
vote separately on any material increases in the fees under the Distribution
Plan or on any other matter that affects solely that class of shares, but will
otherwise vote together with all other classes of shares of the series on all
other matters. The Trust does not intend to hold annual shareholder meetings.
The Declaration of Trust provides that a Trustee may be removed from office in
certain instances (see "Description of Shares, Voting Rights and Liabilities" in
the SAI).
Each share of a class of the Fund represents an equal proportionate interest in
the Fund with each other class share, subject to the liabilities of 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 will give effect to the imposition of any applicable CDSC assessed upon
redemptions of the Fund's Class B and Class C shares. Such total rate of return
quotations may be accompanied by quotations which do not reflect the reduction
in value of the initial investment due to the sales charge or the deduction of a
CDSC, and which will thus be higher. The Fund offers multiple classes of shares
which were initially offered for sale to the public on different dates. The
calculation of total rate of return for a class of shares which initially was
offered for sale to the public subsequent to another class of shares of the Fund
is based both on (i) the performance of the Fund's newer class from the date it
initially was offered for sale to the public and (ii) the performance of the
Fund's oldest class from the date it initially was offered for sale to the
public up to the date that the newer class initially was offered for sale to the
public. See the SAI for further information on the calculation of total rate of
return for share classes initially offered for sale to the public on different
dates.
The Fund's total rate of return quotations are based on historical performance
and are not intended to indicate future performance. Total rate of return
reflects all components of investment return over a stated period of time. The
Fund's quotations may from time to time be used in advertisements, shareholder
reports or other communications to shareholders. For a discussion of the manner
in which the Fund will calculate its total rate of return, see the SAI. For
further information about the Fund's performance for the fiscal year ended
October 31, 1996, 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.
9. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described below
or concerning other aspects of the Fund should contact the Shareholder Servicing
Agent (see back cover for address and phone number).
ACCOUNT AND CONFIRMATION STATEMENTS -- Each shareholder will receive
confirmation statements showing the transaction activity in his account. At the
end of each calendar year, each shareholder will receive income tax information
regarding reportable dividends and capital gain distributions for that year (see
"Tax Status").
DISTRIBUTION OPTIONS -- The following options are available to all accounts
(except Systematic Withdrawal Plan accounts) and may be changed as often as
desired by notifying the Shareholder Servicing Agent:
-- Dividends and capital gain distributions reinvested in additional
shares. This option will be assigned if no other option is specified;
-- Dividends in cash; capital gain distributions reinvested in additional
shares;
-- Dividends and capital gain distributions in cash.
Reinvestments (net of any tax withholding) will be made in additional full and
fractional shares of the same class of shares at the net asset value in effect
at the close of business on the record date. Checks for dividends and capital
gain distributions in amounts less than $10 will automatically be reinvested in
additional shares of the Fund. If a shareholder has elected to receive dividends
and/or capital gain distributions in cash, and the postal or other delivery
service is unable to deliver checks to the shareholder's address of record, or
the shareholder does not respond to mailings from the Shareholder Servicing
Agent with regard to uncashed distribution checks, such shareholder's
distribution option will automatically be converted to having all dividends and
other distributions reinvested in additional shares. Any request to change a
distribution option must be received by the Shareholder Servicing Agent by the
record date for a dividend or distribution in order to be effective for that
dividend or distribution. No interest will accrue on amounts represented by
uncashed distribution or redemption checks.
INVESTMENT AND WITHDRAWAL PROGRAMS -- For the convenience of shareholders, the
Fund makes available the following programs designed to enable shareholders to
add to their investment in an account with the Fund or withdraw from it with a
minimum of paper work. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or the Fund.
LETTER OF INTENT: If a shareholder (other than a group purchaser as
described in the SAI) anticipates purchasing $50,000 or more of Class A shares
of the Fund alone or in combination with shares of any class of other MFS Funds
or MFS Fixed Fund (a bank collective investment fund) within a 13-month period
(or 36-month period for purchases of $1 million or more), the shareholder may
obtain such shares at the same reduced sales charge as though the total quantity
were invested in one lump sum, subject to escrow agreements and the appointment
of an attorney for redemptions from the escrow amount if the intended purchases
are not completed, by completing the Letter of Intent section of the Account
Application.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on purchases of Class A shares when his new investment, together with
the current offering price value of all holdings of Class A, B and C of shares
of that shareholder in the MFS Funds or MFS Fixed Fund (a bank collective
investment fund) reaches a discount level.
DISTRIBUTION INVESTMENT PROGRAM: Shares of a particular class of the Fund
may be sold at net asset value (and without any applicable CDSC) through the
automatic reinvestment of dividend and capital gain distributions from the same
class of 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
based upon the value of his account. Each payment under a Systematic Withdrawal
Plan (a "SWP") must be at least $100 except in certain limited circumstances.
The aggregate withdrawals of Class B and Class C shares in any year pursuant to
a SWP will not be subject to a CDSC and are limited to 10% of the value of the
account at the time of the establishment of the SWP. The CDSC will not be waived
in the case of SWP redemptions of Class A shares which are subject to a CDSC.
DOLLAR COST AVERAGING PROGRAMS --
AUTOMATIC INVESTMENT PLAN: Cash investments of $50 or more may be made
through a shareholder's checking account on any day of the month. If the
shareholder does not specify a date, the investment will automatically occur on
the first business day of the month. Required forms are available from the
Shareholder Servicing Agent or investment dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may exchange their shares for the same class of shares of
the other MFS Funds under the Automatic Exchange Plan. 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 six different funds. A
shareholder should consider the objectives and policies of a fund and review its
prospectus before electing to exchange money into such fund through the
Automatic Exchange Plan. No transaction fee is imposed in connection with
exchange transactions under the Automatic Exchange Plan. However, exchanges of
shares of MFS Money Market Fund, MFS Government Money Market Fund or Class A
shares of MFS Cash Reserve Fund will be subject to any applicable sales charge.
For federal and (generally) state income tax purposes, an exchange is treated as
a sale of the shares exchanged and, therefore, could result in a capital gain or
loss to the shareholder making the exchange. See the SAI for further information
concerning the Automatic Exchange Plan. Investors should consult their tax
advisers for information regarding the potential capital gain and loss
consequences of transactions under the Automatic Exchange Plan.
Because a dollar cost averaging program involves periodic purchases of shares
regardless of fluctuating share offering prices, a shareholder should consider
his financial ability to continue his purchases through periods of low price
levels. Maintaining a dollar cost averaging program concurrently with a
withdrawal program could be disadvantageous because of the sales charges
included in share purchases in the case of Class A shares, and because of the
assessment of the CDSC for certain share redemptions in the case of Class A
shares.
TAX-DEFERRED RETIREMENT PLANS -- Except as noted under "Purchases -- Class C
Shares," shares of the Fund may be purchased by all types of tax-deferred
retirement plans, including IRAs, SEP-IRA plans, 401(k) plans, 403(b) plans and
other corporate pension and profit-sharing plans. Investors should consult with
their tax adviser before establishing any of the tax-deferred retirement plans
described above.
--------------------
The Fund's SAI, dated March 1, 1997, contains more detailed information about
the Trust and the Fund, including, but not limited to, information related to
(i) investment techniques and restrictions, including the purchase and sale of
options, Futures Contracts, Options on Futures Contracts, Forward Contracts and
Options on Foreign Currencies, (ii) the Trustees, officers and investment
adviser, (iii) portfolio trading, (iv) the Fund's shares, including rights and
liabilities of shareholders, (v) tax status of dividends and distributions, (vi)
the Distribution Plan, (vii) the method used to calculate total rate of return
quotations and (viii) various services and privileges provided by the Fund for
the benefit of its shareholders, including additional information with respect
to the exchange privilege.
<PAGE>
APPENDIX A
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable sales
charges are waived (Section I), the initial sales charge and the CDSC for Class
A shares is waived (Section II), and the CDSC for Class B and Class C shares is
waived (Section III).
I. WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on
purchases of Class A shares and the CDSC imposed on certain redemptions of
Class A shares and on redemptions of Class B and Class C shares, as
applicable, is waived:
1. DIVIDEND REINVESTMENT
o Shares acquired through dividend or capital gain reinvestment; and
o Shares acquired by automatic reinvestment of distributions of
dividends and capital gains of any MFS Fund pursuant to the
Distribution Investment Program.
2. CERTAIN ACQUISITIONS/LIQUIDATIONS
o Shares acquired on account of the acquisition or liquidation of assets
of other investment companies or personal holding companies.
3. AFFILIATES OF AN MFS FUND/CERTAIN DEALERS. Shares acquired by:
o Officers, eligible directors, employees (including retired employees)
and agents of MFS, Sun Life or any of their subsidiary companies;
o Trustees and retired trustees of any investment company for which MFD
serves as distributor;
o Employees, directors, partners, officers and trustees of any sub-
adviser to any MFS Fund;
o Employees or registered representatives of dealers and other financial
institution ("dealers") which have a sales agreement with MFD;
o Certain family members of any such individual and their spouses
identified above and certain trusts, pension, profit-sharing or other
retirement plans for the sole benefit of such persons, provided the
shares are not resold except to the MFS Fund which issued the shares;
and
o Institutional Clients of MFS or MFS Institutional Advisors, Inc.
4. INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
o Shares redeemed at an MFS Fund's direction due to the small size of a
shareholder's account. See "Redemptions and Repurchases -- General --
Involuntary Redemptions/ Small Accounts" in the Prospectus.
5. RETIREMENT PLANS (CDSC WAIVER ONLY). Shares redeemed on account of
distributions made under the following circumstances:
INDIVIDUAL RETIREMENT ACCOUNTS ("IRA'S")
o Death or disability of the IRA owner.
SECTION 401(A) PLANS ("401(A) PLANS") AND SECTION 403(B) EMPLOYER
SPONSORED PLANS ("ESP PLANS")
o Death, disability or retirement of Plan participant;
o Loan from 401(a) Plan or ESP Plan (repayment of loans, however, will
constitute new sales for purposes of assessing sales charges);
o Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1 (d)(2), as amended from time to time);
o Termination of employment of Plan participant (excluding, however, a
partial or other termination of the Plan);
o Tax-free return of excess 401(a) or ESP Plan contributions;
o To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the 401(a) or ESP Plan (e.g.,
participant account fees), provided that the 401(a) or ESP Plan
sponsor subscribes to the MFS FUNDamental 401(k) Plan or another
similar recordkeeping system made available by the Shareholder
Servicing Agent; and
o Distributions from a 401(a) or ESP Plan that has invested its assets
in one or more of the MFS Funds for more than 10 years from the later
to occur of: (i) January 1, 1993 or (ii) the date such 401(a) or ESP
Plan first invests its assets in one or more of the MFS Funds. The
sales charges will be waived in the case of a redemption of all of the
401(a) or ESP Plan's shares in all MFS Funds (i.e., all the assets of
the 401(a) or ESP Plan invested in the MFS Funds are withdrawn),
unless immediately prior to the redemption, the aggregate amount
invested by the 401 (a) or ESP Plan in shares of the MFS Funds
(excluding the reinvestment of distributions) during the prior four
years equals 50% or more of the total value of the 401(a) or ESP
Plan's assets in the MFS Funds, in which case the sales charges will
not be waived.
SECTION 403(B) SALARY REDUCTION ONLY PLANS ("SRO PLANS")
o Death or disability of Plan participant.
6. CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY). Shares
transferred:
o To an IRA rollover account where any sales charges with respect to the
shares being reregistered would have been waived had they been
redeemed; and
o From a single account maintained for a 401(a) Plan to multiple
accounts maintained by the Shareholder Servicing Agent on behalf of
individual participants of such Plan, provided that the Plan sponsor
subscribes to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping system made available by the Shareholder Servicing
Agent.
II. WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A
shares and the contingent deferred sales charge imposed on certain
redemptions of Class A shares is waived:
1. INVESTMENT OF REDEMPTION PROCEEDS FROM UNAFFILIATED MUTUAL FUNDS
o Shares acquired through the investment of redemption proceeds from
another open-end management investment company not distributed or
managed by MFD or its affiliates if: (i) the investment is made
through a dealer and appropriate documentation is submitted to MFD;
(ii) the redeemed shares were subject to an initial sales charge or
deferred sales charge (whether or not actually imposed); (iii) the
redemption occurred no more than 90 days prior to the purchase of
Class A shares; and (iv) the MFS Fund, MFD or its affiliates have not
agreed with such company or its affiliates, formally or informally, to
waive sales charges on Class A shares or provide any other incentive
with respect to such redemption and sale.
2. WRAP ACCOUNT INVESTMENTS
o Shares acquired by investments through certain dealers which have
entered into an agreement with MFD which includes a requirement that
such shares be sold for the sole benefit of clients participating in a
"wrap" account or a similar program under which such clients pay a fee
to such dealer.
3. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
o Shares acquired by insurance company separate accounts.
4. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
o Shares acquired by retirement plans whose third party administrators,
or dealers have entered into an administrative services agreement with
MFD or one of its affiliates to perform certain administrative
services, subject to certain operational and minimum size requirements
specified from time to time by MFD or one or more of its affiliates.
REINVESTMENT OF DISTRIBUTIONS FROM QUALIFIED RETIREMENT PLANS
o Shares acquired through the automatic reinvestment in Class A shares
of Class A or Class B distributions which constitute required
withdrawals from qualified retirement plans.
Shares redeemed on account of distributions made under the following
circumstances:
IRA'S
o Distributions made on or after the IRA owner has attained the age of
59 1/2 years old; and
o Tax-free returns of excess IRA contributions.
401(A) PLANS
o Distributions made on or after the Plan participant has attained the
age of 59 1/2 years old; and
o Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a Plan.
ESP PLANS AND SRO PLANS
o Distributions made on or after the Plan participant has attained the
age of 59 1/2 years old.
III. WAIVERS OF CLASS B AND CLASS C SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B and Class C shares
is waived:
1. SYSTEMATIC WITHDRAWAL PLAN
o Systematic Withdrawal Plan redemptions with respect to up to 10% per
year of the account value at the time of establishment.
2. DEATH OF OWNER
o Shares redeemed on account of the death of the account owner if the
shares are held solely in the deceased individual's name or in a
living trust for the benefit of the deceased individual.
3. DISABILITY OF OWNER
o Shares redeemed on account of the disability of the account owner if
shares are held either solely or jointly in the disabled individual's
name or in a living trust for the benefit of the disabled individual
(in which case a disability certification form is required to be
submitted to the Shareholder Servicing Agent.).
4. RETIREMENT PLANS. Shares redeemed on account of distributions made under
the following circumstances:
IRA'S, 401(A) PLANS, ESP PLANS AND SRO PLANS
o Distributions made on or after the IRA owner or the 401(a), ESP or SRO
Plan participant, as applicable, has attained the age of 70 1/2 years
old, but only with respect to the minimum distribution under
applicable Internal Revenue Code ("Code") rules.
SALARY REDUCTION SIMPLIFIED EMPLOYEE PENSION PLANS ("SAR-SEP PLANS")
o Distributions made on or after the SAR-SEP Plan participant has
attained the age of 70 1/2 years old, but only with respect to the
minimum distribution under applicable Code rules;
o Death or disability of a SAR-SEP Plan participant.
<PAGE>
APPENDIX B
DESCRIPTION OF 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>
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
[logo]
MFS(SM)
INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND(SM)
MFS(R) WORLD EQUITY FUND
500 Boylston Street
Boston, Ma 02116
[LOGO]
MFS(SM)
INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND(SM)
MFS(R) WORLD EQUITY FUND
PROSPECTUS
MARCH 1, 1997
MWE-1-3/97/205M 04/204/304
<PAGE>
[logo] M F S(SM)
INVESTMENT MANAGEMENT
MFS(R) WORLD STATEMENT OF
EQUITY FUND ADDITIONAL INFORMATION
(A member of the MFS Family of Funds(R)) March 1, 1997
- ------------------------------------------------------------------------------
Page
----
1. Definitions ............................................... 2
2. Investment Techniques ..................................... 2
3. Investment Restrictions ................................... 12
4. Management of the Fund .................................... 13
Trustees ............................................... 13
Officers ............................................... 13
Trustee Compensation Table ............................. 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 Plan ......................................... 23
10. Description of Shares, Voting Rights and Liabilities ...... 23
11. Independent Auditors and Financial Statements ............. 24
Appendix A ................................................ A-1
Appendix B ................................................ B-1
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, as amended or supplemented from time
to time (the "SAI"), sets forth information which may be of interest to
investors but which is not necessarily included in the Fund's Prospectus, dated
March 1, 1997. This SAI should be read in conjunction with the Prospectus, a
copy of which may be obtained without charge by contacting the Shareholder
Servicing Agent (see back cover for address and phone number).
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE
INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
<PAGE>
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" -- Massachusetts Financial Services Company, a
Delaware corporation.
"MFD" -- MFS Fund Distributors, Inc., a Delaware
corporation.
"Prospectus" -- The Prospectus of the Fund, dated March 1, 1997, as
amended or supplemented from time to time.
2. INVESTMENT TECHNIQUES
The investment objective, policies and techniques are described in the
Prospectus. In addition, certain of the Fund's investment techniques are
described in greater detail below.
LENDING OF SECURITIES
The Fund may seek to increase its income by lending portfolio securities. Such
loans will usually be made only to member banks of the Federal Reserve System
and to member firms (and subsidiaries thereof) of the New York Stock Exchange
(the "Exchange") and would be required to be secured continuously by collateral
in cash, U.S. Government securities or an irrevocable letter of credit
maintained on a current basis at an amount at least equal to the market value of
the securities loaned. The Fund would have the right to call a loan and obtain
the securities loaned at any time on customary industry settlement notice (which
will usually not exceed five days). During the existence of a loan, the Fund
would continue to receive the equivalent of the interest or dividends paid by
the issuer on the securities loaned and would also receive compensation based on
investment of cash collateral or a fee. The Fund would not, however, have the
right to vote any securities having voting rights during the existence of the
loan, but would call the loan in anticipation of an important vote to be taken
among holders of the securities or of the giving or withholding of their consent
on a material matter affecting the investment. As with other extensions of
credit, there are risks of delay in recovery or even loss of rights in the
collateral should the borrower 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. The Fund records these transactions as
sale and purchase transactions, rather than as borrowing transactions. During
the roll period, the Fund foregoes principal and interest paid on the
mortgage-backed securities. The Fund is compensated for the lost principal and
interest by the difference between the current sales price and the lower price
for the future purchase (often referred to as the "drop") as well as by the
interest earned on the cash proceeds of the initial sale. The Fund may also be
compensated by receipt of a commitment fee.
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. Under the terms of most sponsored arrangements,
depositories agree to distribute notices of shareholder meetings and voting
instructions, and to provide shareholder communications and other information to
the ADR holders at the request of the issuer of the deposited securities. The
depository of an unsponsored ADR, on the other hand, is under no obligation to
distribute shareholder communications received from the issuer of the deposited
securities or to pass through voting rights to ADR holders in respect of the
deposited securities. The Fund may invest in either type of ADR. Although the
U.S. investor holds a substitute receipt of ownership rather than direct stock
certificates, the use of the depository receipts in the United States can reduce
costs and delays as well as potential currency exchange and other difficulties.
The Fund may purchase securities in local markets and direct delivery of these
ordinary shares to the local depository of an ADR agent bank in the foreign
country. Simultaneously, the ADR agents create a certificate which settles at
the Fund's custodian in five days. The Fund may also execute trades on the U.S.
markets using existing ADRs. A foreign issuer of the security underlying an ADR
is generally not subject to the same reporting requirements in the United States
as a domestic issuer. Accordingly, the information available to a U.S. investor
will be limited to the information the foreign issuer is required to disclose in
its own country and the market value of an ADR may not reflect undisclosed
material information concerning the issuer of the underlying security. ADRs may
also be subject to exchange rate risks if the underlying foreign securities are
denominated in foreign currency.
LOANS AND OTHER DIRECT INDEBTEDNESS
As described in the Prospectus, the Fund may purchase loans 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,
governmental or other borrower. Many such loans are secured, although some may
be unsecured. Such loans may be in default at the time of purchase. Loans that
are fully secured offer a Fund more protection than an unsecured loan in the
event of non-payment of scheduled interest or principal. However, there is no
assurance that the liquidation of collateral from a secured loan would satisfy
the corporate borrower's obligation, or that the collateral can be liquidated.
These loans and other direct indebtedness are made generally to finance internal
growth, mergers, acquisitions, stock repurchases, leveraged buy-outs and other
corporate activities. Such loans are typically made by a syndicate of lending
institutions, represented by an agent lending institution which has negotiated
and structured the loan and is responsible for collecting interest, principal
and other amounts due on its own behalf and on behalf of the others in the
syndicate, and for enforcing its and their other rights against the borrower.
Alternately, such loans may be structured as a novation, pursuant to which the
Fund would assume all of the rights of the lending institution in a loan or as
an assignment, pursuant to which the Fund would purchase an assignment of a
portion of a lender's interest in a loan either directly from the lender or
through an intermediary. The Fund may also purchase trade or other claims
against companies, which generally represent money owed by the company to a
supplier of goods or services. These claims may also be purchased at a time when
the company is in default.
Certain of the loans acquired by the Fund may involve revolving credit
facilities or other standby financing commitments which obligate the Fund to pay
additional cash on a certain date or on demand. These commitments may have the
effect of requiring the Fund to increase its investment in a company at a time
when the Fund might not otherwise decide to do so (including at a time when the
company's financial condition makes it unlikely that such amounts will be
repaid). To the extent that the Fund is committed to advance additional funds,
it will at all times hold and maintain in a segregated account cash or other
high grade debt obligations in an amount sufficient to meet such commitments.
The Fund's ability to receive payment of principal, interest and other amounts
due in connection with these investments will depend primarily on the financial
condition of the borrower. In selecting the loans which the Fund will purchase,
the Adviser will rely upon its own (and not the original lending institution's)
credit analysis of the borrower. As the Fund may be required to rely upon
another lending institution to collect and pass onto the Fund amounts payable
with respect to the loan and to enforce the Fund's rights under the loan, an
insolvency, bankruptcy or reorganization of the lending institution may delay or
prevent the Fund from receiving such amounts. In such cases, the Fund will
evaluate as well the creditworthiness of the lending institution and will treat
both the borrower and the lending institution as an "issuer" of the loan for
purposes of certain investment restrictions pertaining to the diversification of
the Fund's portfolio investments. The highly leveraged nature of many such loans
may make such loans 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.
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
ability to effectively 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 SAI, and the use of such transactions for
non-hedging purposes could therefore involve significant risk of loss.
With respect to the writing of straddles on securities, the Fund incurs the risk
that the price of the underlying security will not remain stable, that one of
the options written will be exercised and that the resulting loss will not be
offset by the amount of the premiums received. Such transactions, therefore,
create an opportunity for increased return by providing the Fund with two
simultaneous premiums on the same security, but involve additional risk, since
the Fund may have an option exercised against it regardless of whether the price
of the security increases or decreases.
RISK OF A POTENTIAL LACK OF A LIQUID SECONDARY MARKET. Prior to exercise or
expiration, a futures or option position can only be terminated by entering into
a closing purchase or sale transaction. This requires a secondary market for
such instruments on the exchange on which the initial transaction was entered
into. While the Fund will enter into options or futures positions only if there
appears to be a liquid secondary market therefor, there can be no assurance that
such a market will exist for any particular contracts at any specific time. In
that event, it may not be possible to close out a position held by the Fund, and
the Fund could be required to purchase or sell the instrument underlying an
option, make or receive a cash settlement or meet ongoing variation margin
requirements. Under such circumstances, if the Fund has insufficient cash
available to meet margin requirements, it will be necessary to liquidate
portfolio securities or other assets at a time when it is disadvantageous to do
so. The inability to close out options and futures positions, therefore, could
have an adverse impact on the Fund's ability effectively to hedge its portfolio,
and could result in trading losses.
The liquidity of a secondary market in a Futures Contract or option thereon may
be adversely affected by "daily price fluctuation limits," established by
exchanges, which limit the amount of fluctuation in the price of a contract
during a single trading day. Once the daily limit has been reached in the
contract, no trades may be entered into at a price beyond the limit, thus
preventing the liquidation of open futures or option positions and requiring
traders to make additional margin deposits. Prices have in the past moved the
daily limit on a number of consecutive trading days.
The trading of Futures Contracts and options is also subject to the risk of
trading halts, suspensions, exchange or clearinghouse equipment failures,
government intervention, insolvency of a brokerage firm or clearinghouse or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
MARGIN. Because of low initial margin deposits made upon the opening of a
futures or forward position and the writing of an option, such transactions
involve substantial leverage. As a result, relatively small movements in the
price of the contract can result in substantial unrealized gains or losses.
Where the Fund enters into such transactions for hedging purposes, any losses
incurred in connection therewith should, if the hedging strategy is successful,
be offset, in whole or in part, by increases in the value of securities or other
assets held by the Fund or decreases in the prices of securities or other assets
the Fund intends to acquire. Where the Fund enters into such transactions for
other than hedging purposes, the margin requirements associated with such
transactions could expose the Fund to greater risk.
TRADING AND POSITION LIMITS. The exchanges on which futures and options are
traded may impose limitations governing the maximum number of positions on the
same side of the market and involving the same underlying instrument which may
be held by a single investor, whether acting alone or in concert with others
(regardless of whether such contracts are held on the same or different
exchanges or held or written in one or more accounts or through one or more
brokers). Further, the CFTC and the various contract markets have established
limits referred to as "speculative position limits" on the maximum net long or
net short position which any person may hold or control in a particular futures
or option contract. An exchange may order the liquidation of positions found to
be in violation of these limits and it may impose other sanctions or
restrictions. The Adviser does not believe that these trading and position
limits will have any adverse impact on the strategies for hedging the portfolio
of the Fund.
RISKS OF OPTIONS ON FUTURES CONTRACTS. The amount of risk the Fund assumes
when it purchases an Option on a Futures Contract is the premium paid for the
option, plus related transaction costs. In order to profit from an option
purchased, however, it may be necessary to exercise the option and to liquidate
the underlying Futures Contract, subject to the risks of the availability of a
liquid offset market described herein. The writer of an Option on a Futures
Contract is subject to the risks of commodity futures trading, including the
requirement of initial and variation margin payments, as well as the additional
risk that movements in the price of the option may not correlate with movements
in the price of the underlying security, index, currency or Futures Contract.
RISKS OF TRANSACTIONS RELATED TO FOREIGN CURRENCIES AND TRANSACTIONS NOT
CONDUCTED ON U.S. EXCHANGES. Transactions in Forward Contracts on foreign
currencies, as well as futures and options on foreign currencies and
transactions executed on foreign exchanges, are subject to all of the
correlation, liquidity and other risks outlined above. In addition, however,
such transactions are subject to the risk of governmental actions affecting
trading in or the prices of currencies underlying such contracts, which could
restrict or eliminate trading and could have a substantial adverse effect on the
value of positions held by the Fund. Further, the value of such positions could
be adversely affected by a number of other complex political and economic
factors applicable to the countries issuing the underlying currencies.
Further, unlike trading in most other types of instruments, there is no
systematic reporting of last sale information with respect to the foreign
currencies underlying contracts thereon. As a result, the available information
on which trading systems will be based may not be as complete as the comparable
data on which the Fund makes investment and trading decisions in connection with
other transactions. Moreover, because the foreign currency market is a global,
24-hour market, events could occur in that market which will not be reflected in
the forward, futures or options markets until the following day, thereby making
it more difficult for the Fund to respond to such events in a timely manner.
Settlements of exercises of over-the-counter Forward Contracts or foreign
currency options generally must occur within the country issuing the underlying
currency, which in turn requires traders to accept or make delivery of such
currencies in conformity with any U.S. or foreign restrictions and regulations
regarding the maintenance of foreign banking relationships, fees, taxes or other
charges.
Unlike transactions entered into by the Fund in Futures Contracts and
exchange-traded options, options on foreign currencies, Forward Contracts and
over-the-counter options on securities are not traded on contract markets
regulated by the CFTC or (with the exception of certain foreign currency
options) the SEC. To the contrary, such instruments are traded through financial
institutions acting as market-makers, although foreign currency options are also
traded on certain national securities exchanges, such as the Philadelphia Stock
Exchange and the Chicago Board Options Exchange, subject to SEC regulation. In
an over-the-counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there are no daily
price fluctuation limits, and adverse market movements could therefore continue
to an unlimited extent over a period of time. Although the purchaser of an
option cannot lose more than the amount of the premium plus related transaction
costs, this entire amount could be lost. Moreover, the option writer and a
trader of Forward Contracts could lose amounts substantially in excess of their
initial investments, due to the margin and collateral requirements associated
with such positions.
In addition, over-the-counter transactions can only be entered into with a
financial institution willing to take the opposite side, as principal, of the
Fund's position unless the institution acts as broker and is able to find
another counterparty willing to enter into the transaction with the Fund. Where
no such counterparty is available, it will not be possible to enter into a
desired transaction. There also may be no liquid secondary market in the trading
of over-the-counter contracts, and the Fund could be required to retain options
purchased or written, or Forward Contracts entered into, until exercise,
expiration or maturity. This in turn could limit the Fund's ability to profit
from open positions or to reduce losses experienced, and could result in greater
losses.
Further, over-the-counter transactions are not subject to the guarantee of an
exchange clearinghouse, and the Fund will therefore be subject to the risk of
default by, or the bankruptcy of, the financial institution serving as its
counterparty. One or more of such institutions also may decide to discontinue
their role as market-makers in a particular currency or security, thereby
restricting the Fund's ability to enter into desired hedging transactions. The
Fund will enter into an over-the-counter transaction only with parties whose
creditworthiness has been reviewed and found satisfactory by the Adviser.
Options on securities, options on stock indexes, Futures Contracts, Options on
Futures Contracts and options on foreign currencies may be traded on exchanges
located in foreign countries. Such transactions may not be conducted in the same
manner as those entered into on U.S. exchanges, and may be subject to different
margin, exercise, settlement or expiration procedures. As a result, many of the
risks of over-the-counter trading may be present in connection with such
transactions.
Options on foreign currencies traded on national securities exchanges are within
the jurisdiction of the SEC, as are other securities traded on such exchanges.
As a result, many of the protections provided to traders on organized exchanges
will be available with respect to such transactions. In particular, all foreign
currency option positions entered into on a national securities exchange are
cleared and guaranteed by the Options Clearing Corporation (the "OCC"), thereby
reducing the risk of counterparty default. Further, a liquid secondary market in
options traded on a national securities exchange may be more readily available
than in the over-the-counter market, potentially permitting the Fund to
liquidate open positions at a profit prior to exercise or expiration, or to
limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however, is
subject to the risks of the availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effects of other political and
economic events. In addition, exchange-traded options on foreign currencies
involve certain risks not presented by the over-the-counter market. For example,
exercise and settlement of such options must be made exclusively through the
OCC, which has established banking relationships in applicable foreign countries
for this purpose. As a result, the OCC may, if it determines that foreign
governmental restrictions or taxes would prevent the orderly settlement of
foreign currency option exercises, or would result in undue burdens on the OCC
or its clearing member, impose special procedures on exercise and settlement,
such as technical changes in the mechanics of delivery of currency, the fixing
of dollar settlement prices or prohibitions on exercise.
POLICIES ON THE USE OF FUTURES AND OPTIONS ON FUTURES CONTRACTS. In order to
assure that the Fund will not be deemed to be a "commodity pool" for purposes of
the Commodity Exchange Act, regulations of the CFTC require that the Fund enter
into transactions in Futures Contracts and Options on Futures Contracts 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 leveraging effect of such Futures Contract is
minimized.
The staff of the SEC has taken the position that purchased over-the-counter
options and assets used to cover written over-the-counter options are illiquid
and, therefore, together with other illiquid securities held by a Fund, cannot
exceed 15% of the Fund's assets (the "SEC illiquidity ceiling"). Although the
Adviser disagrees with this position, the Adviser intends to limit the Fund's
writing of over-the-counter options in accordance with the following procedure.
Except as provided below, the Fund intends to write over-the-counter options
only with primary U.S. Government securities dealers recognized as such by the
Federal Reserve Bank of New York. Also, the contracts the Fund has in place with
such primary dealers provide that the Fund has the absolute right to repurchase
an option it writes at any time at a price which represents the fair market
value, as determined in good faith through negotiation between the parties, but
which in no event will exceed a price determined pursuant to a formula in the
contract. Although the specific formula may vary between contracts with
different primary dealers, the formula generally is based on a multiple of the
premium received by the Fund for writing the option, plus the amount, if any of
the option's intrinsic value (i.e., the amount that the option is in-the-money).
The formula may also include a factor to account for the difference between the
price of the security and the strike price of the option if the option is
written out-of-the-money. The Fund will treat all or a portion of the formula as
illiquid for purposes of the SEC illiquidity ceiling test imposed by the SEC
staff. The Fund may also write over-the-counter options with non-primary
dealers, including foreign dealers (where applicable), and will treat the assets
used to cover these options as illiquid for purposes of such SEC illiquidity
ceiling test.
3. INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions which cannot be changed without
the approval of the holders of a majority of the Fund's shares (which, as used
in this SAI, means the lesser of (i) more than 50% of the outstanding shares of
the Trust (or a 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.
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 (born 8/4/35)
Massachusetts Financial Services Company, Chairman
RICHARD B. BAILEY* (born 9/14/26)
Private Investor; Massachusetts Financial Services Company, former Chairman
(prior to September 30, 1991); Cambridge Bancorp, Director; Cambridge Trust
Company, Director
MARSHALL N. COHAN (born 11/14/26)
Private Investor
Address: 2524 Bedford Mews Drive, Wellington, Florida
LAWRENCE H. COHN, M.D. (born 3/11/37)
Brigham and Women's Hospital, Chief of Cardiac Surgery; Harvard Medical
School, Professor of Surgery
Address: 75 Francis Street, Boston, Massachusetts
THE HON. SIR J. DAVID GIBBONS, KBE (born 6/15/27)
Edmund Gibbons Limited, Chief Executive Officer; The Bank of N.T. Butterfield
& Son Ltd., Chairman
Address: 21 Reid Street, Hamilton, Bermuda
ABBY M. O'NEILL (born 4/27/28)
Private Investor; Rockefeller Financial Services, Inc. (investment advisers),
Director
Address: 30 Rockefeller Plaza, Room 5600, New York, New York
WALTER E. ROBB, III (born 7/9/27)
Benchmark Advisors, Inc. (corporate financial consultants), President and
Treasurer; Benchmark Consulting Group, Inc. (office services), President;
Landmark Funds (mutual funds), Trustee
Address: 110 Broad Street, Boston, Massachusetts
ARNOLD D. SCOTT* (born 12/16/42)
Massachusetts Financial Services Company, Senior Executive Vice President
JEFFREY L. SHAMES* (born 6/2/55)
Massachusetts Financial Services Company, President
J. DALE SHERRATT (born 9/23/38)
Insight Resources, Inc. (acquisition planning specialists), President
Address: One Liberty Square, 10th Fl., Boston, Massachusetts
WARD SMITH (born 9/13/30)
NACCO Industries (holding company), Chairman (prior to June 1994); Sundstrand
Corporation (diversified mechanical manufacturer), Director; Society
Corporation (bank holding company), Director (prior to April 1992); Society
National Bank (commercial bank), Director (prior to April 1992)
Address: 5875 Landerbrook Drive, Mayfield Heights, Ohio
OFFICERS
W. THOMAS LONDON,* Treasurer (born 3/1/44)
Massachusetts Financial Services Company, Senior Vice President
STEPHEN E. CAVAN,* Secretary and Clerk (born 11/6/53)
Massachusetts Financial Services Company, Senior Vice President, General
Counsel and Assistant Secretary
JAMES O. YOST,* Assistant Treasurer (born 6/12/60)
Massachusetts Financial Services Company, Vice President
JAMES R. BORDEWICK, JR.,* Assistant Secretary (born 3/6/59)
Massachusetts Financial Services Company, Senior Vice President and Associate
General Counsel
- ----------
*"Interested persons" (as defined in the 1940 Act) of the Adviser, whose address
is 500 Boylston Street, Boston, Massachusetts 02116.
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 Fund pays the compensation of non-interested Trustees and Mr. Bailey who
currently receive a fee of $1250 per year plus $225 per meeting and $225 per
committee meeting attended, together with such Trustee's out-of-pocket expenses.
The Trust has adopted a retirement plan for non-interested Trustees and Mr.
Bailey. Under this plan, a Trustee will retire upon reaching age 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 Fund for Messrs. Brodkin, Scott and
Shames. The Fund will accrue its allocable share of compensation expenses each
year to cover current year's service and amortize past service cost.
Set forth below is certain information concerning the cash compensation paid to
the Trustees and benefits accrued, and estimated benefits payable, under the
retirement plan.
<TABLE>
TRUSTEE COMPENSATION TABLE
<CAPTION>
RETIREMENT BENEFIT ESTIMATED TOTAL TRUSTEE FEES
TRUSTEE FEES ACCRUED AS PART OF CREDITED YEARS FROM FUND AND
TRUSTEE FROM FUND(1) FUND EXPENSE(1) OF SERVICE(2) FUND COMPLEX(3)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Bailey ..... $3,050 $ 875 10 $247,168
A. Keith Brodkin ...... 0 0 N/A 0
Marshall N. Cohan ..... 4,175 1,879 14 149,258
Dr. Lawrence Cohn . 3,725 542 18 136,508
Sir David Gibbons ..... 3,725 1,460 13 136,508
Abby M. O'Neill ....... 3,275 670 10 123,758
Walter E. Robb, III ... 4,175 2,087 15 149,258
Arnold D. Scott ....... 0 0 N/A 0
Jeffrey L. Shames ..... 0 0 N/A 0
J. Dale Sherratt ...... 4,175 609 20 149,258
Ward Smith ............ 4,175 820 13 149,258
(1) For fiscal year ended October 31, 1996.
(2) Based on normal retirement age of 75.
(3) For calendar year 1996. All Trustees receiving compensation served as Trustees of 41 funds within the MFS
fund complex (having aggregate net assets at December 31, 1996, of approximately $14,968,833,746 billion)
except Mr. Bailey, who served as Trustee of 81 funds within the MFS fund complex (having aggregate net assets
at December 31, 1996, of approximately $38,479,230,224 billion).
<CAPTION>
ESTIMATED ANNUAL BENEFITS
PAYABLE BY FUND UPON RETIREMENT(4)
YEARS OF SERVICE
------------------------------------------------------------------------------------
AVERAGE TRUSTEE FEES 3 5 7 10 OR MORE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$2,745 $412 $ 686 $ 961 $1,373
3,115 467 779 1,090 1,557
3,484 523 871 1,219 1,742
3,854 578 963 1,349 1,927
4,223 633 1,056 1,478 2,112
4,593 689 1,148 1,607 2,296
(4) Other funds in the MFS fund complex provide similar retirement benefits to the Trustees.
</TABLE>
As of January 31, 1997, the Trustees and officers, as a group, of the Fund owned
less than 1% of the outstanding shares of the Fund.
As of January 31, 1997, Merril Lynch Pierce, Fenner & Smith, Inc. for the sole
benefit of its customers, Attn: Fund Administration, 4800 Deer Lake Drive E FL3,
Jacksonville, FL., 32246-6484, was the record owner of approximately 11.66% 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 wholly owned 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. Under the Advisory
Agreement, the Adviser provides the Fund with overall investment advisory
services. Subject to such policies as the Trustees may determine, the Adviser
makes investment decisions for the Fund. For 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 October 31, 1994, 1995 and 1996, the
investment advisory fees paid by the Fund were $1,778,464, $1,981,096 and
$2,493,195, respectively.
In order to comply with the expense limitations of certain state securities
commissions, the Adviser will reduce its management fee or otherwise reimburse
the Fund for any expenses, exclusive of interest, taxes and brokerage
commissions, incurred by the Fund in any fiscal year to the extent such expenses
exceed the most restrictive of such state expense limitations. The Adviser will
make appropriate adjustments to such reimbursements in response to any amendment
or rescission of the various state requirements.
The Fund pays all of the Fund's expenses (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. 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, 1996, see the "Statement
of Operations" in the Fund's Annual Report incorporated by reference into this
SAI. 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, 1997,
and will continue in effect thereafter only if such continuance is specifically
approved at least annually by the Board of Trustees or by vote of a majority of
the Fund's shares (as defined in "Investment Restrictions") and, in either case,
by a majority of the Trustees who are not parties to the Advisory Agreement or
interested persons of any such party. The Advisory Agreement terminates
automatically if it is assigned and may be terminated without penalty by vote of
a majority of the Fund's shares (as defined in "Investment Restrictions") or by
either party on not more than 60 days' nor less than 30 days' written notice.
The Advisory Agreement provides that if MFS ceases to serve as the Adviser to
the Fund, the Fund will change its name so as to delete the term "MFS" and that
MFS may render services to others and may permit other fund clients to use the
term "MFS" in their names. The Advisory Agreement also provides that neither the
Adviser nor its personnel shall be liable for any error of judgment or mistake
of law or for any loss arising out of any investment or for any act or omission
in the execution and management of the Fund, except for willful misfeasance, bad
faith or gross negligence in the performance of its or their duties or by reason
of reckless disregard of its or their obligations and duties under the Advisory
Agreement.
ADMINISTRATOR
MFS provides the Fund with certain administrative services pursuant to a Master
Administrative Services Agreement dated March 1, 1997. Under this Agreement, MFS
provides the Fund with certain financial, legal, compliance, shareholder
communications and other administrative services. As a partial reimbursement for
the cost of providing these sevices, the Fund pays MFS an administrative fee up
to 0.015% per annum of the Fund's average daily net assets, provided that the
administrative fee is not assessed on Fund assets that exceed $3 billion.
CUSTODIAN
State Street Bank and Trust Company (the "Custodian") is the custodian of the
Fund's assets. The Custodian's responsibilities include safekeeping and
controlling the Fund's cash and securities, handling the receipt and delivery of
securities, determining income and collecting interest and dividends on the
Fund's investments, maintaining books of original entry for portfolio and fund
accounting and other required books and accounts, and calculating the daily net
asset value and public offering price of each class of shares of the Fund. The
Custodian does not determine the investment policies of the Fund or decide which
securities the Fund will buy or sell. The Fund may, however, invest in
securities of the Custodian and may deal with the Custodian as principal in
securities transactions. The Custodian also serves as the dividend and
distribution disbursing agent of the Fund. 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 calculated as a
percentage of the average daily net assets of the Fund at an effective annual
rate of up to 0.13%. In addition, the Shareholder Servicing Agent will be
reimbursed by the Fund for certain expenses incurred by the Shareholder
Servicing Agent on behalf of the Fund. State Street Bank and Trust Company, the
dividend and distribution disbursing agent 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, CLASS C AND CLASS I SHARES: MFD acts as agent in selling Class B, Class
C and Class I shares of the Fund to dealers. The public offering price of Class
B, Class C and Class I shares is their net asset value next computed after the
sale (see "Purchases" in the Prospectus and the Prospectus Supplement pursuant
to which Class I shares are offered).
GENERAL: Neither MFD nor dealers are permitted to delay placing orders to
benefit themselves by a price change. On occasion, MFD may obtain brokers loans
from various banks, including the custodian banks for the MFS Funds, to
facilitate the settlement of sales of shares of the Fund to dealers. MFD may
benefit from its temporary holding of funds paid to it by investment dealers for
the purchase of Funds shares.
During the Fund's fiscal year ended October 31, 1996, MFD received net
commissions of $35,038 and dealers received net commissions of $330,268 (as
their concession on gross commissions of $365,306) for selling Class A shares of
the Fund; the Fund received $23,947,194 representing the aggregate net asset
value of such shares. During the Fund's fiscal year ended October 31, 1995, MFD
received net commissions of $19,998 and dealers and other financial institutions
received net commissions of $225,700 (as their concession on gross commissions
of $245,698) for selling Class A shares of the Fund; the Fund received
$17,616,922 representing the aggregated net asset value of 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 fiscal years ended October 31, 1994, 1995 and 1996, the CDSC imposed
on redemptions of Class B shares was $212,918, $235,884 and $187,701, and on
redemptions of Class A shares was $31, $198 and $11,608, respectively. For the
period from April 1, 1996 to October 31, 1996, the CDSC imposed on redemption of
Class C was $361.
The Distribution Agreement will remain in effect until August 1, 1997 and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Fund's shares (as defined in "Investment Restrictions") and in either case, by a
majority of the Trustees who are not parties to such Distribution Agreement or
interested persons of any such party. The Distribution Agreement terminates
automatically if it is assigned and may be terminated without penalty by either
party on not more than 60 days' nor less than 30 days' notice.
5. PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are made by
employees of the Adviser, who are appointed and supervised by its senior
officers. Changes in the Fund's investments are reviewed by the Board of
Trustees. The Fund's portfolio manager may serve other clients of the Adviser or
any subsidiary of MFS in a similar capacity.
The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain and maintain the availability of
execution at the most favorable prices and in the most effective manner
possible. The Adviser attempts to achieve this result by selecting
broker-dealers to execute portfolio transactions on behalf of the Fund and other
clients of the Adviser on the basis of their professional capability, the value
and quality of their brokerage services, and the level of their brokerage
commissions. In the case of securities, such as government securities, which are
principally traded in the over-the-counter market (where no stated commissions
are paid but the prices include a dealer's markup or markdown), the Adviser
normally seeks to deal directly with the primary market makers, unless in its
opinion, better prices are available elsewhere. In the case of securities
purchased from underwriters, the cost of such securities generally includes a
fixed underwriting commission or concession. Securities firms or futures
commission merchants may receive brokerage commissions on transactions involving
options, Futures Contracts and Options on Futures Contracts and the purchase and
sale of underlying securities upon exercise of options. The brokerage
commissions associated with buying and selling options may be proportionately
higher than those associated with general securities transactions. From time to
time, soliciting dealer fees are available to the Adviser on the tender of the
Fund's portfolio securities in so-called tender or exchange offers. Such
soliciting dealer fees are in effect recaptured for the Fund by the Adviser. At
present no other recapture arrangements are in effect.
Under the Advisory Agreement and as permitted by Section 28(e) of the Securities
Exchange Act of 1934, the Adviser may cause the Fund to pay a broker-dealer
which provides brokerage and research services to the Adviser an amount of
commission for effecting a securities transaction for the Fund in excess of the
amount other broker-dealers would have charged for the transaction if the
Adviser determines in good faith that the greater commission is reasonable in
relation to the value of the brokerage and research services provided by the
executing broker-dealer viewed in terms of either a particular transaction or
the Adviser's overall responsibilities to the Fund or to its other clients. Not
all of such services are useful or of value in advising the Fund.
The term "brokerage and research services" includes advice as to the value of
securities, the advisability of purchasing or selling securities, and the
availability of purchasers or sellers of securities; furnishing analyses and
reports concerning issues, industries, securities, economic factors and trends,
portfolio strategy and the performance of accounts; and effecting securities
transactions and performing functions incidental thereto such as clearance and
settlement.
Although commissions paid on every transaction will, in the judgment of the
Adviser, be reasonable in relation to the value of the brokerage services
provided, commissions exceeding those which another broker might charge may be
paid to broker-dealers who were selected to execute transactions on behalf of
the Fund and the Adviser's other clients in part for providing advice as to the
availability of purchasers or sellers of securities and services in effecting
securities transactions and performing functions incidental thereto such as
clearance and settlement.
Broker-dealers may be willing to furnish statistical, research and other factual
information or services ("Research") to the Adviser for no consideration other
than brokerage or underwriting commissions. Securities may be bought or sold
from time to time through such broker-dealers on behalf of the Fund. The
Trustees (together with the Trustees of the other MFS Funds) have directed the
Adviser to allocate a total of $39,100 of commission business from the MFS Funds
to the Pershing Division of Donaldson Lufkin & Jenrette as consideration for the
annual renewal of certain publications provided by Lipper Analytical Securities
Corporation (which provides information useful to the Trustees in reviewing the
relationship between the Fund and the Adviser).
The Adviser's investment management personnel attempt to evaluate the quality of
Research provided by brokers. Results of this effort are sometimes used by the
Adviser as a consideration in the selection of brokers to execute portfolio
transactions. However, the Adviser is unable to quantify the amount of
commissions which will be paid as a result of such Research because a
substantial number of transactions will be effected through brokers which
provide Research but which were selected principally because of their execution
capabilities.
The management fee that the Fund pays to the Adviser will not be reduced as a
consequence of the Adviser's receipt of brokerage and research services. To the
extent the Fund's portfolio transactions are used to obtain such services, the
brokerage commissions paid by the Fund will exceed those that might otherwise be
paid, by an amount which cannot be presently determined. Such services would be
useful and of value to the Adviser in serving both the Fund and other clients
and, conversely, such services obtained by the placement of brokerage business
of other clients would be useful to the Adviser in carrying out its obligations
to the Fund. While such services are not expected to reduce the expenses of the
Adviser, the Adviser would, through use of the services, avoid the additional
expenses which would be incurred if it should attempt to develop comparable
information through its own staff.
For the Fund's fiscal years ended October 31, 1996, 1995 and 1994, total
brokerage commissions of $354,752, $646,655 and $844,899 were paid on total
transactions of $302,767,949, $206,406,596 and $362,491,084, respectively.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for that of one or more of the other clients of the Adviser
or MFS or any subsidiary of MFS. Investment decisions for the Fund and for such
other clients are made with a view to achieving their respective investment
objectives. It may develop that a particular security is bought or sold for only
one client even though it might be held by, or bought or sold for, other
clients. Likewise, a particular security may be bought for one or more clients
when one or more other clients are selling that same security. Some simultaneous
transactions are inevitable when several clients receive investment advice from
the same investment adviser, particularly when the same security is suitable for
the investment objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed by the Adviser to be
equitable to each. It is recognized that in some cases this system could have a
detrimental effect on the price or volume of the security as far as the Fund is
concerned. In other cases, however, it is believed that the Fund's ability to
participate in volume transactions will produce better executions for the Fund.
6. SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS -- The Fund makes available 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 Class A, B and C 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.
SUBSEQUENT INVESTMENT BY TELEPHONE: Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-free
at (800) 225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this telephone
purchase privilege must so elect on their Account Application and designate
thereon a bank and account number from which purchases will be made. If a
telephone purchase request is received by the Shareholder Servicing Agent on any
business day prior to the close of regular trading on the Exchange (generally,
4:00 p.m., Eastern time), the purchase will occur at the closing net asset value
of the shares purchased on that day. The Shareholder Servicing Agent may be
liable for any losses resulting from unauthorized telephone transactions if it
does not follow reasonable procedures designed to verify the identity of the
caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
DISTRIBUTION INVESTMENT PROGRAM: Distributions of dividends and capital
gains made by the Fund with respect to a particular class of shares may be
automatically invested in shares of the same class of one of the other MFS
Funds, if shares of the fund are available for sale. Such investments will be
subject to additional purchase minimums. Distributions will be invested at net
asset value (exclusive of any sales charge) and will not be subject to any CDSC.
Distributions will be invested at the close of business on the payable date for
the distribution. A shareholder considering the Distribution Investment Program
should obtain and read the prospectus of the other fund and consider the
differences in objectives and policies before making any investment.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder
Servicing Agent to send him (or anyone he designates) regular periodic payments
based upon the value of his account. Each payment under a Systematic Withdrawal
Plan (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 and Class C shares will be made in the following order:
(i) any "Reinvested Shares"; (ii) to the extent necessary, any "Free Amount";
and (iii) to the extent necessary, the "Direct Purchase" subject to the lowest
CDSC (as such terms are defined in "Contingent Deferred Sales Charge" in the
Prospectus). The CDSC will be waived in the case of redemptions of Class B and
Class C shares pursuant to a SWP but will not be waived in the case of SWP
redemptions of Class A shares which are subject to a CDSC. All dividend and
capital gain distributions for an account with a SWP will be received in full
and fractional shares of the Fund at the net asset value in effect at the close
of business on the record date for such distributions. To initiate this service,
shares having an aggregate value of at least $5,000 either must be held on
deposit by, or certificates for such shares must be deposited with, the
Shareholder Servicing Agent. Maintaining a withdrawal plan concurrently with an
investment program would be disadvantageous because of the sales charges
included in share purchases 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 may deposit into the account additional shares of the
Fund, change the payee or change the amount of each payment. The Shareholder
Servicing Agent may charge the account for services rendered and expenses
incurred beyond those normally assumed by the Fund with respect to the
liquidation of shares. No charge is currently assessed against the account, but
one could be instituted by the Shareholder Servicing Agent on 60 days' notice in
writing to the shareholder in the event that the Fund ceases to assume the cost
of these services. The Fund may terminate any SWP for an account if the value of
the account falls below $5,000 as a result of share redemptions (other than as a
result of a SWP) or an exchange of shares of the Fund for shares of another MFS
Fund. Any SWP may be terminated at any time by either the shareholder or the
Fund.
INVEST BY MAIL: Additional investments of $50 or more in the Fund may be
made at any time either by mailing a check payable to the Fund directly to the
Shareholder Servicing Agent. The shareholder's account number and the name of
his investment dealer must be included with each investment.
GROUP PURCHASES: A bona fide group and all its members may be treated as a
single purchaser and, under the Right of Accumulation (but not the Letter of
Intent), obtain quantity sales charge discounts on the purchase of Class A
shares if the group (1) gives its endorsement or authorization to the investment
program so it may be used by the investment dealer to facilitate solicitation of
the membership, thus effecting economies of sales effort; (2) has been in
existence for at least six months and has a legitimate purpose other than to
purchase mutual fund shares at a discount; (3) is not a group of individuals
whose sole organizational nexus is as credit cardholders of a company,
policyholders of an insurance company, customers of a bank or broker-dealer,
clients of an investment adviser or other similar groups; and (4) agrees to
provide certification of membership of those members investing money in the MFS
Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may exchange their shares for the same class of shares of
the other MFS Funds (if available for sale) under the Automatic Exchange Plan.
The Automatic Exchange Plan provides for automatic exchanges of funds from the
shareholder's account in an MFS Fund for investment in the same class of shares
of other MFS Funds selected by the shareholder. Under the Automatic Exchange
Plan, exchanges of at least $50 each may be made to up to six different funds
effective on the seventh day of each month or of every third month, depending 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 Class C shares and certain Class A shares, a CDSC will
be imposed upon redemption. Although redemptions and repurchases of shares are
taxable events, a reinvestment within such 90-day period of time in the same
fund may be considered a "wash sale" and may result in the inability to
recognize currently all or a portion of a loss realized on the original
redemption for federal income tax purposes. Please see your tax 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 and if the purchaser is
eligible to purchase the class of shares) at net asset value. Exchanges will be
made after instructions in writing or by telephone (an "Exchange Request") are
received for an established account by the Shareholder Servicing Agent.
Each Exchange Request must be in proper form (i.e., if in writing -- signed by
the record owner(s) exactly as the shares are registered; if by telephone --
proper account identification is given by the dealer or shareholder of record),
and each exchange must involve either shares having an aggregate value of at
least $1,000 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 ordinary income and any distributions from
net short-term capital gains are taxable to shareholders as ordinary income for
federal income tax purposes, whether the distributions are paid in cash or in
additional shares. A portion of the Fund's ordinary income dividends is normally
eligible for the dividends received deduction for corporations if the recipient
otherwise qualifies for that deduction with respect to its holding of Fund
shares. Availability of the deduction for particular corporate shareholders is
subject to certain limitations, and deducted amounts may be subject to the
alternative minimum tax or result in certain basis adjustments. Distributions of
net capital gains (i.e., the excess of net long-term capital gains over net
short-term capital losses), whether paid in cash or reinvested in additional
shares, are taxable to shareholders as long-term capital gains without regard to
the length of time the shareholders have held their shares. Any Fund dividend
that is declared in October, November, or December, that is payable to
shareholders of record in such a month, and that is paid the following January
will be treated as if received by the shareholders on December 31 of the year in
which the dividend is declared. The Fund will notify shareholders regarding the
federal tax status of its distributions after the end of each calendar year.
Any Fund distribution will have the effect of reducing the per share net asset
value of shares in the Fund by the amount of the distribution. Shareholders
purchasing shares shortly before the record date of any distribution may thus
pay the full price for the shares and then effectively receive a portion of the
purchase price back as a taxable distribution.
In general, any gain or loss realized upon a taxable disposition of shares of
the Fund by a shareholder that holds such shares as a capital asset will be
treated as a long-term capital gain or loss if the shares have been held for
more than twelve months and otherwise as a short-term capital gain or loss.
However, any loss realized upon a disposition of shares in the Fund held for six
months or less will be treated as a long-term capital loss to the extent of any
distributions of net capital gain made with respect to those shares. Any loss
realized upon a disposition of shares may also be disallowed under rules
relating to wash sales. Gain may be increased (or loss reduced) upon a
redemption of Class A shares of the Fund within ninety days after their purchase
followed by any purchase (including purchases by exchange or by reinvestment)
without payment of an additional sales charge of Class A shares of that Fund or
of another MFS Fund (or any other shares of an MFS Fund generally sold subject
to a sales charge).
The Fund's current dividend and accounting policies will affect the amount,
timing, and character of distributions to shareholders, and may, under certain
circumstances, make an economic return of capital taxable to shareholders. Any
investment in certain securities purchased at a market discount will cause the
Fund to 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.
The Fund's transactions in options, Futures Contracts and Forward Contracts will
be subject to special tax rules that may affect the amount, timing and character
of Fund income and distributions to shareholders. For example, certain positions
held by the Fund on the last business day of each taxable year will be marked to
market (i.e., treated as if closed out) on that day, and any gain or loss
associated with the positions will be treated as 60% long-term and 40%
short-term capital gain or loss. Certain positions held by the Fund that
substantially diminish its risk of loss with respect to other positions in its
portfolio may constitute "straddles", and may be subject to special tax rules
that would cause deferral of Fund losses, adjustments in the holding periods of
Fund securities and conversion of short-term into long-term capital losses.
Certain tax elections exist for straddles that may alter the effects of these
rules. The Fund will limit its activities in options, Futures Contracts and
Forward Contracts to the extent necessary to meet the requirements of Subchapter
M of the Code.
Special tax considerations apply with respect to foreign investments of the
Fund. Foreign exchange gains and losses realized by the Fund will generally be
treated as ordinary income and losses. Use of foreign currencies for non-hedging
purposes and investment by the Fund in certain "passive foreign investment
companies" may be limited in order to avoid a tax on the Fund. Investment income
received by the Fund from foreign securities may be subject to foreign income
taxes withheld at the source. The United States has entered into tax treaties
with many foreign countries that may entitle the Fund to a reduced rate of tax
or an exemption from tax on such income; the Fund intends to qualify for treaty
reduced rates where available. It is not possible, however, to determine the
Fund's effective rate of foreign tax in advance since the amount of the Fund's
assets to be invested within various countries is not known. If the Fund holds
more than 50% of its assets in foreign 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 (subject to such limitations)
be able to claim a credit but not a deduction. No deduction will be permitted to
individuals in computing their alternative minimum tax liability. If the Fund
does not qualify or elect to "pass through" to the Fund's shareholders foreign
income taxes paid by it, shareholders will not be able to claim any deduction or
credit for any part of the foreign taxes paid by the Fund.
Dividends and certain other payments to persons who are not citizens or
residents of the United States or U.S. entities ("Non-U.S. Persons") are
generally subject to U.S. tax withholding at a rate of 30%. The Fund intends to
withhold U.S. federal income tax at the rate of 30% on taxable dividends and
other payments to Non-U.S. Persons that are subject to such withholding,
regardless of whether a lower rate may be permitted under an applicable treaty.
Any amounts overwithheld may be recovered by such persons by filing a claim for
refund with the U.S. Internal Revenue Service within the time period appropriate
to such claims. Distributions received from the Fund by Non-U.S. Persons also
may be subject to tax under the laws of their own jurisdictions. The Fund is
also required in certain circumstances to apply backup withholding at the rate
of 31% on taxable dividends and redemption proceeds paid to any shareholder
(including a Non-U.S. Person) who does not furnish to the Fund certain
information and certifications or who is otherwise subject to backup
withholding. Backup withholding will not, however, be applied to payments that
have been subject to 30% withholding.
The Fund will not be required to pay Massachusetts income or excise taxes as
long as it qualifies as a regulated investment company under the Code.
Distributions of the Fund that are derived from interest on obligations of the
U.S. Government and certain of its agencies and instrumentalities (but generally
not from capital gains realized upon the disposition of such obligations) may be
exempt from state and local taxes. The Fund intends to advise shareholders of
the extent, if any, to which its distributions consist of such interest.
Shareholders are urged to consult their tax advisers regarding the possible
exclusion of such portion of their dividends for state and local income tax
purposes as well as regarding the tax consequences of an investment in the Fund.
8. DETERMINATION OF NET ASSET VALUE; PERFORMANCE INFORMATION
NET ASSET VALUE
The net asset value per share of each class of the Fund is determined each day
during which the Exchange is open for trading. (As of the date of this SAI, the
Exchange is open for trading every weekday except for the following holidays or
the days on which they are observed: New Year's Day, 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 1% maximum for Class C
shares purchased after April 1, 1996) and therefore may result in a higher rate
of return, (ii) a total rate of return assuming an initial account value of
$1,000, which will result in a higher rate of return 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 offers multiple classes of shares which were initially offered for sale
to the public on different dates. The calculation of total rate of return for a
class of shares which initially was offered for sale to the public subsequent to
another class of shares of the Fund is based both on (i) the performance of the
Fund's newer class from the date it initially was offered for sale to the public
and (ii) the performance of the Fund's oldest class from the date it initially
was offered for sale to the public up to the date that the newer class initially
was offered for sale to the public.
As discussed in the Prospectus, the sales charges, expenses and expense ratios,
and therefore the performance, of the Fund's classes of shares differ. In
calculating total rate of return for a newer class of shares in accordance with
certain formulas required by the SEC, the performance will be adjusted to take
into account the fact that the newer class is subject to a different sales
charge than the oldest class (e.g., if the newer class is Class A shares, the
total rate of return quoted will reflect the deduction of the initial sales
charge applicable to Class A shares; if the newer class is Class B shares, the
total rate of return quoted will reflect the deduction of the CDSC applicable to
Class B shares). However, the performance will not be adjusted to take into
account the fact that the newer class of shares bears different class specific
expenses than the oldest shares (e.g., Rule 12b-1 fees). Therefore, the total
rate of return quoted for a newer class of shares will differ from the return
that would be quoted had the newer class of shares been outstanding for the
entire period over which the calculation is based (i.e., the total rate of
return quoted for the newer class will be higher than the return that would have
been quoted had the newer class of shares been outstanding for the entire period
over which the calculation is based if the class specific expenses for the newer
class are higher than the class specific expenses of the oldest class, and the
total rate of return quoted for the newer class will be lower than the return
that would be quoted had the newer class of shares been outstanding for this
entire period if the class specific expenses for the newer class are lower than
the class specific expenses of the oldest class).
Total rate of return quotations for each class are presented in Appendix A
attached hereto under the heading "Performance Quotations."
PERFORMANCE RESULTS: The performance results presented in Appendix A attached
hereto under the heading "Performance Results" assume an initial investment of
$10,000 in Class B shares and cover the period from January 1, 1987 through
December 31, 1996. It has been assumed that dividend and capital gain
distributions were reinvested in additional shares. Any performance results or
total rate of return quotation provided by the Fund should not be considered as
representative of the performance of the Fund in the future since the net asset
value of shares of the Fund will vary based not only on the type, quality and
maturities of the securities held in the Fund's portfolio, but also on changes
in the current value of such securities and on changes in the expenses of the
Fund. These factors and possible differences in the methods used to calculate
total rates of return should be considered when comparing the total rate of
return of the Fund to total rates of return published for other investment
companies or other investment vehicles. Total rate of return reflects the
performance of both principal and income. Current net asset value and account
balance information may be obtained by calling 1-800-MFS-TALK (637-8255).
From time to time 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.
From time to time, the Fund may discuss or quote its current portfolio manager
as well as other investment personnel, including such persons' views on: the
economy; securities markets; portfolio securities and their issuers; investment
philosophies, strategies, techniques and criteria used in the selection of
securities to be purchased or sold for the Fund; the Fund's portfolio holdings;
the investment research and analysis process; the formulation and evaluation of
investment recommendations; and the assessment and evaluation of credit,
interest rate, market and economic risks and similar or related matters.
The Fund may also quote evaluations mentioned in independent radio or television
broadcasts.
From time to time the Fund may use charts and graphs to illustrate the past
performance of various indices such as those mentioned above and illustrations
using hypothetical rates of return to illustrate the effects of compounding and
tax-deferral.
From time to time the Fund may also discuss or quote the views of its
distributor, its investment adviser and other financial planning, legal, tax,
accounting, insurance, estate planning and other professionals, or from surveys,
regarding individual and family financial planning. Such views may include
information regarding: retirement planning; tax management strategies; estate
planning; general investment techniques (e.g., asset allocation and disciplined
saving and investing); business succession; ideas and information provided
through the MFS Heritage Planningsm program, an inter-generational financial
planning assistance program; issues with respect to insurance (e.g., disability
and life insurance and Medicare supplemental insurance); issues regarding
financial and health care management for elderly family members; and similar or
related matters.
The Fund may advertise examples of the effects of periodic investment plans,
including the principle of dollar cost averaging. In such a program, an investor
invests a fixed dollar amount in a fund at periodic intervals, thereby
purchasing fewer shares when prices are high and more shares when prices are
low. While such a strategy does not assure a profit or guard against a loss in a
declining market, the investor's average cost per share can be lower than if
fixed numbers of shares are purchased at the same intervals.
MFS FIRSTS: MFS has a long history of innovations.
-- 1924 -- Massachusetts Investors Trust is established as the first
open-end mutual fund in America.
-- 1924 -- Massachusetts Investors Trust is the first mutual fund to make
full public disclosure of its operations in shareholder reports.
-- 1932 -- One of the first internal research departments is established to
provide in-house analytical capability for an investment management
firm.
-- 1933 -- Massachusetts Investors Trust is the first mutual fund to
register under the Securities Act of 1933.
-- 1936 -- Massachusetts Investors Trust is the first mutual fund to allow
shareholders to take capital gain distributions either in additional
shares or in cash.
-- 1976 -- MFS(R) Municipal Bond Fund is among the first municipal bond
funds established.
-- 1979 -- Spectrum becomes the first combination fixed/ variable annuity
with no initial sales charge.
-- 1981 -- MFS(R) World Governments Fund is established as America's first
globally diversified fixed/income mutual fund.
-- 1984 -- MFS(R) Municipal High Income Fund is the first open-end mutual
fund to seek high tax-free income from lower-rated municipal securities.
-- 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual fund to
target and shift investments among industry sectors for shareholders.
-- 1986 -- MFS(R) Municipal Income Trust is the first closed-end,
high-yield municipal bond fund traded on the New York Stock Exchange.
-- 1987 -- MFS(R) Multimarket Income Trust is the first closed-end,
multimarket high income fund listed on the New York Stock Exchange.
-- 1989 -- MFS(R) Regatta becomes America's first non- qualified
market-value-adjusted fixed/variable annuity.
-- 1990 -- MFS(R) World Total Return Fund is the first global balanced
fund.
-- 1993 -- MFS(R) World Growth Fund is the first global emerging markets
fund to offer the expertise of two sub-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 PLAN
The Trustees have adopted a Distribution Plan for Class A, Class B and Class C
shares (the "Distribution Plan") pursuant to Section 12(b) of the 1940 Act and
Rule 12b-1 thereunder (the "Rule") after having concluded that there is a
reasonable likelihood that the Distribution Plan would benefit the Fund and each
respective class of shareholders. The Distribution Plan is designed to promote
sales, thereby increasing the net assets of the Fund. Such an increase may
reduce the expense ratio to the extent the Fund's fixed costs are spread over a
larger net asset base. Also, an increase in net assets may lessen the adverse
effects that could result were the Fund required to liquidate portfolio
securities to meet redemptions. There is, however, no assurance that the net
assets of the Fund will increase or that the other benefits referred to above
will be realized.
The Distribution Plan is described in the Prospectus under the caption
"Distribution Plan," which is incorporated herein by reference. The following
information supplements this Prospectus discussion.
SERVICE FEES: With respect to Class A shares, no service fees will be paid: (i)
to any dealer who is the holder or dealer of record for investors who own Class
A shares having an aggregate net asset value less than $750,000, or such other
amount as may be determined from time to time by MFD (MFD, however, may waive
this minimum amount requirement from time to time); or (ii) to any insurance
company which has entered into an agreement with the Fund and MFD that permits
such insurance company to purchase Class A shares from the Fund at their net
asset value in connection with annuity agreements issued in connection with the
insurance company's separate accounts. Dealers may from time to time be required
to meet certain other criteria in order to receive service fees.
With respect to Class B shares, except in the case of the first year service
fee, no service fees will be paid to any securities dealer who is the holder or
dealer of record for investors who own Class B shares having an aggregate net
asset value of less than $750,000 or such other amount as may be determined by
MFD from time to time. MFD, however, may waive this minimum amount requirement
from time to time. Dealers may from time to time be required to meet certain
other criteria in order to receive service fees.
MFD or its affiliates shall be entitled to receive any service fee payable under
the Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by MFD or its affiliates
for shareholder accounts.
DISTRIBUTION FEES: The purpose of distribution payments to MFD under the
Distribution Plan is to compensate MFD for its distribution services to the
Fund. MFD pays commissions to dealers as well as expenses of printing
prospectuses and reports used for sales purposes, expenses with respect to the
preparation and printing of sales literature and other distribution related
expenses, including, without limitation, the cost necessary to provide
distribution-related services, or personnel, travel, office expenses and
equipment.
DISTRIBUTION AND SERVICE FEES PAID DURING THE FUND'S LAST FISCAL YEAR: During
the fiscal year ended October 31, 1996, the Fund paid the following Distribution
Plan expenses:
AMOUNT OF AMOUNT OF AMOUNT OF
DISTRIBUTION DISTRIBUTION DISTRIBUTION
AND SERVICE AND SERVICE AND SERVICE
FEES PAID FEES RETAINED FEES RECEIVED
CLASSES OF SHARES BY FUND BY MFD BY DEALERS
- ----------------- ------------ ------------- -------------
Class A Shares $ 183,212 $ 22,921 $160,291
Class B Shares $1,709,816 $1,328,074 $381,742
Class C Shares $ 50,531 $ 1,340 $ 49,191
GENERAL: The Distribution Plan will remain in effect until August 1, 1997, and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by vote of both the Trustees and a majority of the
Trustees who are not "interested persons" or financially interested parties to
such Plan ("Distribution Plan Qualified Trustees"). The Distribution Plan 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. The Distribution Plan may be
terminated at any time by vote of a majority of the Distribution Plan Qualified
Trustees or by vote of the holders of a majority of the respective class of the
Fund's shares (as defined in "Investment Restrictions"). All agreements relating
to the Distribution Plan entered into between the Fund or MFD and other
organizations must be approved by the Board of Trustees, including a majority of
the Distribution Plan Qualified Trustees. Agreements under the Distribution Plan
must be in writing, will be terminated automatically if assigned, and may be
terminated at any time without payment of any penalty, by vote of a majority of
the Distribution Plan Qualified Trustees or by vote of the holders of a majority
of the respective class of the Fund's shares. The Distribution Plan may not be
amended to increase materially the amount of permitted distribution expenses
without the approval of a majority of the respective class of the Fund's shares
(as defined in "Investment Restrictions") or may not be materially amended in
any case without a vote of the Trustees 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 the Distribution Plan or in any related agreement.
10. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Trust's Declaration of Trust permits the Trustees of the Fund to issue an
unlimited number of full and fractional Shares of Beneficial Interest (without
par value) of one or more separate series and to divide or combine the shares of
any series into a greater or lesser number of shares without thereby changing
the proportionate beneficial interests in that series. The Trustees have
currently authorized shares of the Fund and two other series. The Declaration of
Trust further authorizes the Trustees to classify or reclassify any series of
shares into one or more classes. Pursuant thereto, the Trustees have authorized
the issuance of four classes of shares of each of the Trust's three series,
Class A, Class B, Class C shares and Class I shares. Each share of a class of
the Fund represents an equal proportionate interest in the assets of the Fund
allocable to that class. Upon liquidation of the Fund, shareholders of each
class 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 AUDITORS AND FINANCIAL STATEMENTS
Deloitte & Touche LLP are the Fund's independent auditors, providing audit
services, tax return preparation, and assistance and consultation with respect
to the preparation of filings with the SEC.
The Portfolio of Investments at October 31, 1996, the Statement of Assets and
Liabilities at October 31, 1996, the Statements of Operations for the year ended
October 31, 1996, the Statements of Changes in Net Assets for each of the years
in the two-year period ended October 31, 1996, the Notes to Financial Statements
and the Independent Auditors' Report, each of which is included in the Annual
Report to shareholders of the Fund, are incorporated by reference into this SAI
and have been so incorporated in reliance upon the report of Deloitte & Touche
LLP, independent auditors, given upon their authority as experts in accounting
and auditing. A copy of the Annual Report accompanies this SAI.
<PAGE>
APPENDIX A
PERFORMANCE INFORMATION
The performance results and quotations below should not be considered as
representative of the performance of the Fund in the future since the net asset
value and public offering price of shares of the Fund will vary. See
"Determination of Net Asset Value and Performance Information" in the SAI.
PERFORMANCE RESULTS -- CLASS B SHARES
VALUE OF
INITIAL VALUE OF VALUE OF
$10,000 CAPITAL GAIN REINVESTED TOTAL
YEAR ENDED INVESTMENT DISTRIBUTIONS DIVIDENDS VALUE
- ------------ ---------- ------------- ---------- --------
December 31, 1987 ........... $13,238 $ 0 $ 0 $13,238
December 31, 1988 ........... 12,904 0 443 13,347
December 31, 1989 ........... 16,107 363 553 17,023
December 31, 1990 ........... 14,940 712 566 16,218
December 31, 1991 ........... 15,999 803 607 17,409
December 31, 1992 ........... 16,071 999 609 17,679
December 31, 1993 ........... 19,892 2,014 911 22,817
December 31, 1994 ........... 17,309 2,895 1,764 21,968
December 31, 1995 ........... 19,464 4,032 2,280 25,776
December 31, 1996 ........... 21,130 6,068 3,607 30,805
Explanatory Notes: The results in the table assume that income dividends and
capital gain distributions were invested in additional shares. The results also
assume that the initial investment in Class A shares was reduced by the current
maximum applicable sales charge. No adjustment has been made for income taxes,
if any, payable by shareholders.
PERFORMANCE QUOTATIONS
All performance quotations are for the period ended October 31, 1996.
AVERAGE ANNUAL TOTAL RETURNS
-------------------------------
10 YEAR OR
1 YEAR 5 YEAR LIFE OF FUND
------ --------- ------------
Class A shares with sales charge ............ 9.99% 11.08%(1) 10.98%(1)
Class A shares without sales charge ......... 16.71% 12.40%(1) 11.65%(1)
Class B shares with CDSC .................... 11.75% 11.46% 11.30%
Class B shares without CDSC ................. 15.75% 11.72% 11.30%
Class C shares with CDSC .................... 14.82% 11.77%(2) 11.33%(2)
Class C shares without CDSC ................. 15.82% 11.77%(2) 11.33%(2)
(1)Class A share performance includes the performance of the Fund's Class B
shares for periods prior to the commencement of offering of Class A shares on
September 7, 1993. Sales charges, expenses and expense ratios, and therefore
performance, for Class A and Class B shares differ. Class A share performance
has been adjusted to reflect that Class A shares generally are subject to an
initial sales charge (unless the performance quotation does not give effect
to the initial sales charge) whereas Class B shares generally are subject to
a CDSC. Class A share performance has not, however, been adjusted to reflect
differences in operating expenses (e.g., Rule 12b-1 fees), which generally
are higher for Class B shares.
(2)Class C share performance includes the performance of the Fund's Class B
shares for periods prior to the commencement of offering of Class C shares on
January 3, 1994. Sales charges, expenses and expense ratios, and therefore
performance, for Class B and Class C shares differ. Class C share performance
has been adjusted to reflect that Class C shares generally are subject to a
lower CDSC (unless the performance quotation does not give effect to the
CDSC) than Class B shares. Class C share performance has not, however, been
adjusted to reflect differences in operating expenses, which generally are
not significantly different between Class B and Class C shares.
<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 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
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has
been suspended or withdrawn, it may be for reasons unrelated to the quality of
the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted;
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy;
3. There is a lack of essential data pertaining to the issue or issuer;
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
NOTE: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa 1,
A 1, Baa 1, Ba 1 and B 1.
S&P
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay principal
and differ from the higher rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B: Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior debt
that is assigned an actual or implied CCC rating.
C: The rating C is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC- debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service
payments are continued.
CI: The rating CI is reserved for income bonds on which no interest is being
paid.
D: Debt rated D is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The "D" rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) MINUS (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
categories.
NR: Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
FITCH
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA". Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated "F-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 AUDITORS
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
MFS(R)
WORLD
EQUITY FUND
500 BOYLSTON STREET
BOSTON, MA 02116
[logo] M F S(SM)
INVESTMENT MANAGEMENT
We invented the mutual fund(SM) MWE-13-3/97/500 04/204/304
<PAGE>
<PAGE> 1
[MFS LOGO] Annual Report
for Year Ended
October 31, 1996
MFS[Registered Trademark] World Equity Fund
-----------------
[Graphic]
America learns how "We invented the mutual fund" (see page 30)
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter from the Chairman................................................... 1
Fund Facts................................................................. 2
A Discussion with the Portfolio Manager.................................... 3
Portfolio Manager's Profile................................................ 6
Portfolio Concentration.................................................... 7
Performance Summary........................................................ 8
Portfolio of Investments................................................... 10
Financial Statements....................................................... 15
Notes to Financial Statements.............................................. 22
Independent Auditors' Report............................................... 29
MFS Family of Funds........................................................ 32
Trustees and Officers...................................................... 33
</TABLE>
- --------------------------------------------------------------------------------
HIGHLIGHTS
- - FOR THE YEAR ENDED OCTOBER 31, 1996, CLASS A SHARES OF THE FUND PROVIDED A
TOTAL RETURN AT NET ASSET VALUE OF 16.72%, CLASS B SHARES 15.75%, AND CLASS C
SHARES 15.82%.
- - MOST OF THE WORLD'S EQUITY MARKETS GENERATED DOUBLE-DIGIT RETURNS FOR THE
PAST YEAR, WITH THE UNITED STATES UP 24.08% AND EUROPE ADVANCING 21%, WITH
RETURNS RANGING FROM 3.3% IN ITALY TO 39% IN SPAIN.
- - THE NUMBER OF COUNTRIES IN WHICH THE FUND HAS INVESTMENTS HAS INCREASED FROM
20 TO 25, WITH 38% OF THE FUND'S EQUITY HOLDINGS IN EUROPE, 32% IN THE
AMERICAS, AND 30% IN ASIA/PACIFIC.
- - WE FIND THAT COMPANIES WE CHARACTERIZE AS STEADY EARNERS OFFER THE MOST
ATTRACTIVE GROWTH PROSPECTS RELATIVE TO VALUATION. CONSEQUENTLY, THE FUND HAS
LARGE HOLDINGS IN THE LEISURE AND HEALTH CARE INDUSTRIES.
- --------------------------------------------------------------------------------
<PAGE> 3
LETTER FROM THE CHAIRMAN
[Picture of Dear Shareholders:
A. Keith Brodkin]
As we enter the final months of 1996, the U.S.
economy appears to have settled into a pattern of
moderate growth and inflation -- two factors that
we think can be important contributors to a
favorable long-term investment climate. During the
first quarter of 1996, real (inflation-adjusted)
economic growth was 2.3% on an annualized basis,
followed by a rate of 4.7% in the second quarter.
This unexpectedly high level was followed by a more moderate 2.2% pace during
the third quarter. Overall, real growth in gross domestic product has surpassed
our expectations this year and we now expect that growth for all of 1996 could
exceed 2.5%. Although individual consumers appear to be carrying an excessive
debt load, the consumer sector itself, which represents two-thirds of the
economy, continues to support the automobile and housing markets. Consumer
spending has also been positively impacted by widespread job growth and, more
recently, increasing wages. However, the latest statistics appear to show signs
of slower consumer spending. This is particularly true when considering overall
retail sales, which have been flat for several months. Furthermore, the
economies of Europe and Japan continue to be in the doldrums, weakening U.S.
export markets while subduing the capital spending plans of American
corporations. While economic growth should continue, we expect it may slacken
toward the end of the year.
While we do not expect the U.S. stock market to match the extraordinary
performance of 1995, we continue to be positive about the equity market this
year. We believe the equity market represents fair value at current levels,
although the slowdown in corporate earnings growth and interest rate increases
earlier in the year raised some near-term concerns, as was seen in July's stock
market correction. Further interest rate increases, and an acceleration of
inflation coupled with an additional slowdown in corporate earnings growth, may
have a negative effect on the stock market in the near term. To the extent that
some earnings disappointments are taken as a sign that the economy is not
overheating, this may prove beneficial for the equity market's longer-term
health. We believe many of the technology-driven productivity gains that U.S.
companies have made in recent years will continue to enhance corporate
America's competitiveness and profitability. While we have some near-term
concerns, we remain quite constructive on the long-term viability of the equity
market.
1
<PAGE> 4
LETTER FROM THE CHAIRMAN - continued
Outside the United States, we see similar economic backdrops with slow to
moderate growth and low inflation in the developed countries of Europe and
Japan. We believe the long-term underperformance of many of these markets
relative to the United States has created some attractive valuations. European
markets such as the United Kingdom and Germany have recently eased monetary
policy, a trend which may continue as German and other central banks seek
economic stimulus. Corporate earnings growth is expected to improve in these
markets, which may lead to their favorable performance in the U.S. market.
Finally, as you may notice, this report to shareholders incorporates a
number of changes which we hope you will find informative and useful. Following
a discussion with the Portfolio Manager, we have added new information on the
Fund's holdings, including a chart illustrating the portfolio's concentration in
the types of investments that meet its criteria. Near the back of the report,
telephone numbers and addresses are listed if you would like to contact MFS.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
/s/ A. Keith Brodkin
A. Keith Brodkin
Chairman and President
November 12, 1996
- -------------------------------------------------------------------
FUND FACTS
<TABLE>
<S> <C>
STRATEGY: THE FUND'S OBJECTIVE IS TO PROVIDE CAPITAL
APPRECIATION PRIMARILY THROUGH INVESTMENTS
IN STOCKS OF U.S. AND NON-U.S. ISSUERS.
COMMENCEMENT OF
INVESTMENT OPERATIONS: DECEMBER 29, 1986
SIZE: $284.5 MILLION NET ASSETS AS OF OCTOBER
31, 1996
</TABLE>
- -------------------------------------------------------------------
2
<PAGE> 5
A DISCUSSION WITH THE PORTFOLIO MANAGER
[Picture of Dear Shareholders:
David Mannheim]
For the 12 months ended October 31, 1996, Class A
shares of the Fund provided a total return of
16.72%, Class B shares 15.75%, and Class C shares
15.82%. These returns assume the reinvestment of
distributions but exclude the effects of any sales
charges, and compare to a 16.78% return for the
Morgan Stanley Capital International World Index
(the MSCI), a broad, unmanaged index of global
equities.
Q. WHAT DO YOU SEE AS SOME OF THE REASONS FOR THIS PERFORMANCE?
A. In the past year, most of the world's equity markets generated double-digit
returns. As measured by the MSCI, the United States was the best performing
major market in local currencies, with the Standard & Poor's 500 Composite
Index, an unmanaged index of common stock performance, up 23.89%. In Europe,
stocks advanced 21%, according to Morgan Stanley, with returns ranging from 3.3%
in Italy to 39% in Spain. The Far East advanced just 12.2%, with returns ranging
from 4.3% in Singapore to 28.1% in Hong Kong, with Japan at 10.5%. The emerging
markets lagged the developed world; the IFC Composite Index, measured in U.S.
currency, was up 7.2%, with Latin America up 9.3% and Asia ahead 3.4%. The IFC
Composite Index is an unmanaged, market-capitalization-weighted index of the
most active stocks of emerging markets, as defined by the World Bank.
During the past year, currency changes dragged on the Fund's performance,
with the U.S. dollar gaining 11.9% against the Japanese yen and 7.9% against the
German mark. The dollar did decline 2.9% against the British pound, 4.5% against
the Italian lira, and 3.9% against the Australian dollar.
While the Fund's performance was influenced by these market returns, we
continue to believe stock selection drives performance. We have stuck to our
bottom-up approach to stock selection, with a concentration on high-quality
companies which we believe have superior growth prospects and are trading at
attractive values.
Q. COULD YOU DESCRIBE THE BUSINESS AND ECONOMIC ENVIRONMENT YOU FACED OVER THE
PAST YEAR AS IT RELATES TO THE FUND?
A. In general, the world's economies had slower growth than anticipated at the
beginning of the year. The United States has experienced moderate
3
<PAGE> 6
A DISCUSSION WITH THE PORTFOLIO MANAGER - continued
economic growth with subdued inflation, as opposed to earlier concerns about
overly strong growth and increasing inflationary pressures. Europe's economy,
particularly on the Continent, showed little to no growth, while inflation has
fallen. In Japan, the economic recovery has been choppy and modest, with
deflation more of an issue.
As a result, interest rates have fallen around the world, particularly
during the year's second half. This has created a favorable environment for
equities, and stock market valuations have risen as a result.
Q. HOW HAVE THE FUND'S GEOGRAPHIC ALLOCATIONS CHANGED THIS YEAR, AND WHY?
A. While the number of countries in which the Fund has investments has increased
from 20 to 25, there have been only incremental changes to the broad geographic
weightings. The Fund's assets are evenly spread around the world, with 38% of
equity holdings in Europe, 32% in the Americas, and 30% in Asia/Pacific.
As always, stock selection drives the Fund's country weightings. For
example, the Fund's Asia/Pacific holdings have been reduced from 32% of assets
on October 31, 1995, to 30% today. This reflects a 4% reduction in our holdings
in Australia and a 2% reduction in South Korea. There have also been small cuts
in Malaysia and Singapore, although these were partially offset by a 2% increase
in holdings in both Japan and Hong Kong and by new positions in Indonesia and
the Philippines. The reduction in Australia resulted from three of our holdings
reaching what we felt were fair valuations: ANZ Bank, Sydney Harbour Casino, and
Woolworths. The increases in Japan and Hong Kong reflect additions to the
portfolio that include Takeda Chemical, Nitto Denko, Ushio, Hong Kong Land, Wing
Hank Bank, Liu Chong Hing Bank, and Hong Kong Electric.
Q. ARE THERE ANY PARTS OF THE WORLD THAT YOU ARE AVOIDING OR UNDERWEIGHTING?
A. Relative to the MSCI, the Fund is most noticably underweighted in the two
largest markets in the world, the United States and Japan, with weightings of
29% and 13%, respectively. We believe that the United States is disadvantaged by
what we feel is a disproportionate 42.2% weighting in the index relative to the
actual number of investment opportunities available elsewhere in the world.
Therefore, there is a built-in bias to be underweighted in the United States. In
Japan, which comprises 20.8% of the index, we continue to find most companies'
valuations unattractive relative to similar companies elsewhere in the world.
4
<PAGE> 7
A DISCUSSION WITH THE PORTFOLIO MANAGER - continued
Q. ARE THERE ANY PARTICULAR INDUSTRIES OR SECTORS THAT YOU LIKE RIGHT NOW?
A. We continue to find that the companies we characterize as steady earners
offer the most attractive growth prospects relative to valuation. Not
surprisingly, the Fund has large holdings in the leisure and health care
industries. Representative holdings would include Astra in Sweden, St. Jude
Medical and Viacom in the United States, Takeda Chemical in Japan, and Sky City
Casino in New Zealand.
The Fund is also overweighted in the utilities and communications sector
(14% versus 9% of the MSCI). This reflects large concentrations in mobile
telephone operators such as DDI, Telecom Italia Mobile, and Korea Mobile
Telecom, and holdings in electric and telephone utilities operating in what we
see as high-growth economies, such as Korea Electric Power, Chilectra, OTE, and
Hong Kong Electric.
Q. WHAT ABOUT SECTORS THE FUND IS AVOIDING?
A. We have underweighted most of the cyclical sectors because their valuations,
based on average cycle prices, appear to us to be too rich relative to their
growth prospects. For example, the Fund has 4% invested in basic materials such
as chemicals and papers, versus 9% by the MSCI, and most of our weighting is in
industrial gas companies like Praxair and Air Products, both of which we expect
to show above-average growth regardless of the state of the global economy. We
are also underweighted in energy, at 4% of the portfolio versus 6% by the MSCI.
Q. WHICH STOCKS CONTRIBUTED THE MOST TO THE FUND'S PERFORMANCE?
A. A list of major contributors includes companies in most markets around the
world and covers such U.S. companies as Lockheed Martin, which advanced 34.4%
for the year; Cigna, which was up 35.4%; and Federal Home Loan Mortgage Corp.,
up 48.1%. Overseas, Sparbanken in Sweden was up 66.7%, Royal Dutch Petroleum
gained 48.5%, QBE Insurance in Australia advanced 51.3%, and Acerinox of Spain
gained 23.4%.
Q. NOW, HOW ABOUT SOME STOCKS THAT PERFORMED BELOW EXPECTATIONS?
A. That list would include United Healthcare and Office Depot in the United
States, which fell 28.9% and 31.4%, respectively, for the year; Omron in Japan,
which declined 14.6%; and Korea Electric Power, down 21.6%.
5
<PAGE> 8
A DISCUSSION WITH THE PORTFOLIO MANAGER - continued
Q. WHAT CHANGES DO YOU SEE IN THE OVERALL MARKET OR ECONOMIC ENVIRONMENT AS THEY
RELATE TO THE FUND, AND HOW IS THE FUND POSITIONED TO TAKE ADVANTAGE OF THESE
CHANGES?
A. While our inflation outlook is subdued, we believe that in most markets
around the world, interest rates are unlikely to repeat their recent decline.
With this threat removed, corporate earnings growth should be the key to future
performance. In this environment, stock selection becomes even more critical,
and by identifying those companies that, on a global basis, can sustain
above-average earnings growth and trade at attractive relative valuations, we
believe the Fund can generate superior investment returns.
Respectfully,
/s/ David Mannheim
David Mannheim
Portfolio Manager
- --------------------------------------------------------------------------------
PORTFOLIO MANAGER'S PROFILE
DAVID MANNHEIM IS A VICE PRESIDENT OF MFS INVESTMENT MANAGEMENT AND PORTFOLIO
MANAGER OF MFS WORLD EQUITY FUND, MFS WORLD ASSET ALLOCATION FUND, AND MERIDIAN
WORLD EQUITY FUND. MR. MANNHEIM JOINED MFS IN 1988 AND WAS NAMED AN INVESTMENT
OFFICER IN 1990, ASSISTANT VICE PRESIDENT IN 1991, AND VICE PRESIDENT AND
PORTFOLIO MANAGER OF MFS WORLD EQUITY FUND IN 1992. HE IS A GRADUATE OF AMHERST
COLLEGE AND MASSACHUSETTS INSTITUTE OF TECHNOLOGY'S SLOAN SCHOOL OF MANAGEMENT.
- --------------------------------------------------------------------------------
6
<PAGE> 9
PORTFOLIO CONCENTRATION AS OF OCTOBER 31, 1996
TOP TEN HOLDINGS
<TABLE>
<S> <C>
POWERGEN PLC FEDERAL HOME LOAN MORTGAGE CORP.
British electric utility U.S. mortgage banker and underwriter
DDI CORP. ASTRA AB
Japanese telecommunications company Swedish pharmaceutical manufacturer
FEDERATED DEPARTMENT STORES CABLETRON SYSTEMS
U.S. retailer Computer network company
ABB AB ST. JUDE MEDICAL
Swiss engineering conglomerate U.S. medical instrument manufacturer
KIMBERLY-CLARK LION NATHAN
U.S. paper products company New Zealand brewer
</TABLE>
LARGEST SECTORS
[Pie Chart]
<TABLE>
<S> <C>
Utilities and Communications 14.2%
Financial Services 11.6%
Industrial Goods and Services 10.3%
Retailing 9.5%
Health Care 9.1%
Other Sectors* 45.3%
<FN>
* For a more complete breakdown refer to Portfolio of Investments.
</TABLE>
7
<PAGE> 10
PERFORMANCE SUMMARY
The information below and on the following page illustrates the historical
performance of MFS World Equity Fund Class B shares in comparison to various
market indicators. Fund results in the graph do not reflect the deduction of any
contingent deferred sales charge (CDSC) since the CDSC is not applicable after a
six-year period. Benchmark comparisons are unmanaged and do not reflect any fees
or expenses. You cannot invest in an index.
All results reflect the reinvestment of all dividends and capital gains.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the Period from January 1, 1987 to October 31, 1996)
<TABLE>
[Graphic]
<CAPTION>
1/1/87 10/88 10/90 10/92 10/94 10/96
<S> <C> <C> <C> <C> <C> <C>
MFS World Equity Class B 10,000 13,393 16,230 16,878 22,926 28,945
Consumer Price Index 10,000 10,872 12,075 12,826 13,522 14,321
S&P 500 Composite Index 10,000 12,236 14,291 20,963 25,008 39,152
MSCI World Index 10,000 13,856 14,094 15,645 21,607 27,776
</TABLE>
<TABLE>
<CAPTION>
Life of
AVERAGE ANNUAL TOTAL RETURNS 1 Year 3 Years 5 Years Fund++
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MFS World Equity Fund (Class A) at net
asset value +16.72% +11.23% +12.40% +11.65%
- --------------------------------------------------------------------------------
MFS World Equity Fund (Class A) including
5.75% sales charge + 9.99% + 9.06% +11.08% +10.98%
- --------------------------------------------------------------------------------
MFS World Equity Fund (Class B) without
CDSC +15.75% +10.17% +11.72% +11.30%
- --------------------------------------------------------------------------------
MFS World Equity Fund (Class B) with CDSC +11.75% + 9.34% +11.46% +11.30%
- --------------------------------------------------------------------------------
MFS World Equity Fund (Class C) without
CDSC +15.82% +10.26% +11.77% +11.33%
- --------------------------------------------------------------------------------
MFS World Equity Fund (Class C) with CDSC +14.82% +10.26% +11.77% +11.33%
- --------------------------------------------------------------------------------
Average global fund* +15.52% + 9.50% +11.00% +11.25%
- --------------------------------------------------------------------------------
Morgan Stanley Capital International (MSCI)
World Index +16.78% +11.62% +11.10% +11.44%
- --------------------------------------------------------------------------------
Standard & Poor's 500 Composite Index+ +23.89% +17.57% +15.47% +14.60%
- --------------------------------------------------------------------------------
Consumer Price Index** + 3.01% + 2.81% + 2.88% + 3.68%
- --------------------------------------------------------------------------------
</TABLE>
* Source: Lipper Analytical Services.
** The Consumer Price Index is a popular measure of change in prices.
+ Source: CDA/Wiesenberger.
++ Commencement of investment operations December 29, 1986.
8
<PAGE> 11
PERFORMANCE SUMMARY - continued
Class A (SEC) results include the maximum 5.75% sales charge. Class B SEC
results reflect the applicable contingent deferred sales charge (CDSC), which
declines over six years as follows: 4%, 4%, 3%, 3%, 2%, 1%, 0%. Class C shares
have no initial sales charge but, along with Class B shares, have higher annual
fees and expenses than Class A shares. Class C share purchases made on or after
April 1, 1996 will be subject to a 1% CDSC if redeemed within 12 months of
purchase.
Class A and Class C share performance includes the performance of the Fund's
Class B shares for periods prior to the commencement of offering of Class A
shares on September 7, 1993 and of Class C shares on January 3, 1994. Sales
charges and operating expenses for Class A, Class B, and Class C shares differ.
The Class B share performance, which is included within the Class A share SEC
performance, has been adjusted to reflect the initial sales charge generally
applicable to Class A shares rather than the CDSC generally applicable to Class
B shares. The Class B share performance included within the Class C share SEC
performance has been adjusted to reflect the lower CDSC generally applicable to
Class C shares, rather than the higher CDSC generally applicable to Class B
shares. Class A and Class C share performance has not been adjusted, however, to
reflect differences in operating expenses (e.g., Rule 12b-1 fees), which
generally are higher for Class B shares, and not significantly different for
Class C shares.
Fund results reflect any applicable expense subsidies and waivers, without which
the performance results would have been less favorable. Subsidies and waivers
may be rescinded at any time. See the prospectus for details.
Investment return and principal value will fluctuate, and shares, when redeemed,
may be worth more or less than their original cost. Past performance is no
guarantee of future results.
- --------------------------------------------------------------------------------
TAX FORM SUMMARY
The Fund is estimated to have derived approximately 68.9% of its
ordinary income from dividends paid by foreign companies, and to have
paid foreign taxes equivalent to approximately 8.8% of its ordinary
income.
For the year ended October 31, 1996, the amount of distributions from
income eligible for the 70% dividends-received deduction for
corporations came to 10.43%.
FEDERAL INCOME TAX INFORMATION ON DISTRIBUTIONS
For the year ended October 31, 1996 distributions from long-term capital
gains are $6,681,382.
- --------------------------------------------------------------------------------
9
<PAGE> 12
PORTFOLIO OF INVESTMENTS - October 31, 1996
COMMON STOCKS - 93.5%
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
ISSUER SHARES VALUE
- ------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Stocks - 28.8%
Aerospace - 2.2%
Allied Signal, Inc. 35,500 $2,325,250
Lockheed-Martin Corp. 44,000 3,943,500
----------
$6,268,750
- ------------------------------------------------------------------------------------
Apparel and Textiles - 0.8%
Owens Corning Fiberglass Corp. 55,000 $2,131,250
- ------------------------------------------------------------------------------------
Automotive - 1.0%
Goodrich (B.F.) Co. 66,200 $2,805,225
- ------------------------------------------------------------------------------------
Business Services - 1.4%
Alco Standard Corp. 45,500 $2,110,062
Block H & R Incorporated 72,000 1,782,000
----------
$3,892,062
- ------------------------------------------------------------------------------------
Chemicals - 2.1%
Air Products & Chemicals, Inc. 48,000 $2,880,000
Praxair, Inc. 68,000 3,009,000
----------
$5,889,000
- ------------------------------------------------------------------------------------
Computer Software - Systems - 1.0%
Computer Associates International, Inc. 49,000 $2,897,125
- ------------------------------------------------------------------------------------
Consumer Goods and Services - 0.6%
Philip Morris Cos., Inc. 18,500 $1,713,563
- ------------------------------------------------------------------------------------
Entertainment - 1.0%
Viacom, Inc. "B"* 87,251 $2,846,564
- ------------------------------------------------------------------------------------
Financial Institutions - 1.6%
Federal Home Loan Mortgage Corp. 45,500 $4,595,500
- ------------------------------------------------------------------------------------
Food and Beverage Products - 1.0%
PepsiCo. Inc. 96,000 $2,844,000
- ------------------------------------------------------------------------------------
Forest and Paper Products - 1.7%
Kimberly-Clark Corp. 52,500 $4,895,625
- ------------------------------------------------------------------------------------
Insurance - 1.0%
Cigna Corp. 22,500 $2,936,250
- ------------------------------------------------------------------------------------
Medical and Health Products - 1.6%
Pharmacia & Upjohn, Inc. 51,000 $1,836,000
Rhone-Poulenc Rorer, Inc. 42,300 2,839,387
----------
$4,675,387
- ------------------------------------------------------------------------------------
Medical and Health Technology and Services - 2.3%
St. Jude Medical, Inc.* 101,000 $3,989,500
United Healthcare Corp. 68,000 2,575,500
----------
$6,565,000
- ------------------------------------------------------------------------------------
Oils - 1.0%
Mobil Corp. 23,000 $2,685,250
- ------------------------------------------------------------------------------------
Printing and Publishing - 1.0%
Gannett Co., Inc. 39,000 $2,959,125
- ------------------------------------------------------------------------------------
Railroads - 1.3%
Burlington Northern Santa Fe Railway Co. 43,500 $3,583,313
- ------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 13
PORTFOLIO OF INVESTMENTS - continued
COMMON STOCKS - CONTINUED
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
ISSUER SHARES VALUE
- -------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Stocks - continued
Restaurants and Lodging - 1.3%
Host Marriott Corp. 148,700 $ 2,286,263
Mandarin Oriental 1,052,000 1,420,200
-----------
$ 3,706,463
- -------------------------------------------------------------------------------------
Stores - 3.7%
Federated Department Stores, Inc.* 168,000 $ 5,544,000
Office Depot, Inc.* 107,000 2,099,875
Rite Aid Corporation 58,000 1,972,000
Thrifty Payless Holdings, Inc., "B"* 38,000 812,250
-----------
$10,428,125
- -------------------------------------------------------------------------------------
Telecommunications - 1.3%
Cabletron Systems, Inc.* 60,500 $ 3,773,687
- -------------------------------------------------------------------------------------
Total U.S. Stocks $82,091,264
- -------------------------------------------------------------------------------------
Foreign Stocks - 64.7%
Argentina - 0.1%
Mirgor Sacifia, ADR (Auto Parts)## 97,600 $ 156,160
- -------------------------------------------------------------------------------------
Australia - 2.6%
QBE Insurance Group Ltd. (Insurance) 723,121 $ 3,822,606
Southern Star Group Limited
(Entertainment)## 574,000 809,202
Seven Network Ltd. (Entertainment) 909,000 2,807,720
-----------
$ 7,439,528
- -------------------------------------------------------------------------------------
Brazil - 0.5%
Multicanal Participacoes S.A.
(Telecommunications) 105,800 $ 1,481,200
- -------------------------------------------------------------------------------------
Canada - 1.6%
Canadian National Railway Co. (Railroads) 163,000 $ 4,482,500
- -------------------------------------------------------------------------------------
Chile - 0.7%
Chilectra S.A., ADR (Utilities - Electric) 38,500 $ 2,088,625
- -------------------------------------------------------------------------------------
Finland - 2.0%
Aamulehti Ii (Publishing) 59,900 $ 1,754,084
Huhtamaki Oy (Conglomerates) 41,000 1,778,370
Tt Tieto Oy (Computer Software) 33,300 2,226,697
-----------
$ 5,759,151
- -------------------------------------------------------------------------------------
France - 2.0%
Michelin, "B" (Tire and Rubber) 44,000 $ 2,116,292
Union des Assurances Federales S.A.
(Broadcasting) 31,000 3,478,049
-----------
$ 5,594,341
- -------------------------------------------------------------------------------------
Germany - 3.0%
Adidas AG (Stores) 45,200 $ 3,864,928
Henkel Kgaa (Chemicals) 48,000 2,148,617
Tarkett AG (Building Materials)## 31,600 682,793
Volkswagen AG (Automotive) 4,800 1,885,375
-----------
$ 8,581,713
- -------------------------------------------------------------------------------------
Greece - 0.5%
Ote Greek Telecom (Telecommunications) 86,000 $ 1,515,823
- -------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 14
PORTFOLIO OF INVESTMENTS - continued
COMMON STOCKS - CONTINUED
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
ISSUER SHARES VALUE
- -------------------------------------------------------------------------------------
<S> <C> <C>
Foreign Stocks - continued
Hong Kong - 4.2%
Asia Satellite Telecommunications
(Telecommunications) 46,000 $ 1,230,500
Giordano International Ltd. (Retail) 2,117,000 2,135,701
Hong Kong Electric Holdings Ltd. (Real
Estate) 450,000 1,440,498
Hong Kong Land Holdings (Real Estate) 621,000 1,384,830
Liu Chong Hing Bank (Financial Institutions) 1,293,000 1,881,378
Peregrine Investment Holdings (Finance) 769,000 1,238,285
Wing Hang Bank Limited
(Banks and Credit Companies) 655,000 2,634,673
-----------
$11,945,865
- -------------------------------------------------------------------------------------
Indonesia - 0.7%
Bank Negara Indonesia (Banks)+ 2,072,600 $ 756,651
Semen Gresik (Building Materials) 463,000 1,332,345
-----------
$ 2,088,996
- -------------------------------------------------------------------------------------
Italy - 1.4%
Telecom Italia RNC (Utilities - Telephone) 454,000 $ 937,609
Telecom Italia DRNC (Utilities - Telephone) 2,630,000 2,997,299
-----------
$ 3,934,908
- -------------------------------------------------------------------------------------
Japan - 12.0%
Bridgestone Corp. (Tire and Rubber) 137,000 $ 2,305,548
Canon, Inc. (Office Equipment) 185,000 3,534,928
Daiwa House Industrial Co. (Housing) 88,000 1,218,687
DDI Corp. (Telecommunications) 810 6,070,208
East Japan Railway Co. (Railroads) 409 1,874,897
Kinki Coca-Cola (Beverages) 89,000 1,162,328
Kirin Beverage (Beverages) 143,000 1,905,163
Matsushita Electric (Electrical Equipment) 109,000 1,738,803
Murata Manufacturing Co., Ltd. (Electrical
Equipment) 59,000 1,892,716
Nitto Denko Corporation (Industrial Goods
and Services) 183,000 2,710,755
Omron Corp. (Electronics) 150,000 2,668,946
Osaka Sanso Kogyo (Chemicals) 456,000 1,506,810
Takeda Chemical Inds (Pharmaceuticals) 212,000 3,623,455
Ushio Incorporated (Electronics) 194,000 2,023,490
-----------
$34,236,734
- -------------------------------------------------------------------------------------
Malaysia - 0.7%
New Straits Times Press Berhad
(Printing and Publishing) 397,000 $ 2,090,301
- -------------------------------------------------------------------------------------
Netherlands - 1.7%
Ihc Caland NV (Transportation - Marine) 37,300 $ 2,076,242
Royal Dutch Petroleum Co. (Oils) 17,300 2,849,268
-----------
$ 4,925,510
- -------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 15
PORTFOLIO OF INVESTMENTS - continued
COMMON STOCKS - CONTINUED
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
ISSUER SHARES VALUE
- -------------------------------------------------------------------------------------
<S> <C> <C>
Foreign Stocks - continued
New Zealand - 3.1%
Sky City Ltd. (Entertainment) 673,175 $ 3,855,072
Lion Nathan Ltd. (Food and Beverage
Products) 1,882,000 4,852,501
-----------
$ 8,707,573
- -------------------------------------------------------------------------------------
Peru - 0.4%
Telefonica del Peru S.A.
(Telecommunications) 59,000 $ 1,216,875
- -------------------------------------------------------------------------------------
Philippines - 0.9%
Alison's Cement Corp. (Building Materials)## 2,885,000 $ 1,099,466
Philipino Telephone (Telecommunications) 1,437,700 1,273,877
-----------
$ 2,373,343
- -------------------------------------------------------------------------------------
Singapore - 0.8%
Hong Leong Finance Ltd. (Financial Services) 722,000 $ 2,204,972
- -------------------------------------------------------------------------------------
South Korea - 1.6%
Korea Electric Power Corp.
(Utilities - Electric) 69,230 $ 2,041,613
Korea Mobile Telecommunications
(Utilities - Telephone) 2,595 2,602,873
-----------
$ 4,644,486
- -------------------------------------------------------------------------------------
Spain - 3.5%
Fab Autom Renault (Automotive) 32,000 $ 637,998
Cubiertas Y Mzov
(Engineering - Construction) 39,000 2,780,923
Repsol S.A. (Oils) 81,500 2,654,007
Acerinox S.A. (Iron and Steel) 32,450 3,881,822
-----------
$ 9,954,750
- -------------------------------------------------------------------------------------
Sweden - 6.5%
Abb AB (Electrical Equipment) 48,000 $ 5,349,958
Astra AB, Free, "B" (Pharmaceuticals) 107,000 4,881,016
Enator Ab (Computer Services) 97,000 2,153,425
Nobel Biocare AB (Medical and Health
Products) 93,500 1,578,119
Sparbanken Sverige AB, "A"
(Banks and Credit Companies) 195,000 3,083,707
Volvo AB (Automotive) 67,000 1,390,634
-----------
$18,436,859
- -------------------------------------------------------------------------------------
Switzerland - 1.0%
Ciba-Geigy AG (Medical and Health Products) 2,300 $ 2,820,874
- -------------------------------------------------------------------------------------
Thailand - 0.9%
Siam City Cement Co., Ltd. (Building
Materials) 140,800 $ 883,035
Total Access Communications Public Co., Ltd.
(Telecommunications) 224,000 1,546,980
-----------
$ 2,430,015
- -------------------------------------------------------------------------------------
United Kingdom - 12.3%
ASDA Group PLC (Retail) 2,186,000 $ 4,159,969
British Aerospace (Aerospace) 172,300 3,270,471
British Petroleum (Oils) 283,000 3,039,127
Capital Radio PLC (Broadcasting) 117,200 1,105,630
Jarvis Hotels PLC (Lodging)+ 575,000 1,487,028
</TABLE>
13
<PAGE> 16
PORTFOLIO OF INVESTMENTS - continued
COMMON STOCKS - CONTINUED
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
ISSUER SHARES VALUE
- --------------------------------------------------------------------------------------
<S> <C> <C>
Foreign Stocks - continued
United Kingdom - continued
Kwik-Fit Holdings PLC (Retail) 674,900 $ 2,441,230
Lloyds Tsb Group PLC (Banks) 367,386 2,327,471
New London Capital PLC (Financial
Services)## 670,000 1,215,077
PowerGen PLC (Utilities - Electric) 1,665,854 13,818,511
Storehouse PLC (Retail) 454,749 2,059,923
------------
$ 34,924,437
- --------------------------------------------------------------------------------------
Total Foreign Stocks $184,035,539
- --------------------------------------------------------------------------------------
Total Common Stocks (Identified Cost, $231,146,893) $266,126,803
- --------------------------------------------------------------------------------------
WARRANTS
- --------------------------------------------------------------------------------------
Hong Kong
Peregrine Investment Holdings
(Identified Cost, $9,538) 76,900 $ 14,422
<CAPTION>
- --------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED)
- --------------------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM OBLIGATIONS - 5.8%
- --------------------------------------------------------------------------------------
Federal Farm Credit Bank, due 11/05/96 $ 340 $ 339,804
Federal Home Loan Mortgage Assn., due
11/13/96 2,900 2,894,993
Federal National Mortgage Assn., due
11/19/96 7,225 7,206,251
General Electric Capital Corp., due 11/01/96 5,945 5,945,000
- --------------------------------------------------------------------------------------
Total Short-Term Obligations, at Amortized Cost $ 16,386,048
- --------------------------------------------------------------------------------------
Total Investments (Identified Cost, $247,542,479) $282,527,273
OTHER ASSETS, LESS LIABILITIES - 0.7% 2,023,417
- --------------------------------------------------------------------------------------
Net Assets - 100.0% $284,550,690
- --------------------------------------------------------------------------------------
</TABLE>
*Non-income producing security.
##SEC Rule 144A restriction.
+Restricted security.
See notes to financial statements
14
<PAGE> 17
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
OCTOBER 31, 1996
- --------------------------------------------------------------------------------
<S> <C>
Assets:
Investments, at value (identified cost, $247,542,479) $282,527,273
Cash 99,859
Foreign currency, at value (identified cost, $768,967) 774,218
Receivable for Fund shares sold 5,429,597
Receivable for investments sold 1,428,862
Dividends receivable 293,002
Net receivable for forward foreign currency exchange contracts
purchased 81,860
Other assets 99,602
------------
Total assets $290,734,273
------------
Liabilities:
Payable for investments purchased $ 4,955,735
Payable for Fund shares reacquired 830,602
Net payable for forward foreign currency exchange contracts sold 82,112
Payable to affiliates -
Management fee 7,702
Shareholder servicing agent fee 1,505
Distribution fee 73,924
Accrued expenses and other liabilities 232,003
------------
Total liabilities $ 6,183,583
------------
Net assets $284,550,690
------------
Net assets consist of:
Paid-in capital $220,466,965
Unrealized appreciation on investments and translation
of assets and liabilities in foreign currencies 34,993,721
Accumulated undistributed net realized gain
on investments and foreign currency transactions 29,131,434
Accumulated net investment loss (41,430)
------------
Total $284,550,690
------------
Shares of beneficial interest outstanding 15,478,006
------------
Class A shares:
Net asset value and redemption price per share
(net assets of $94,909,355 / 5,145,398 shares of beneficial
interest outstanding) $18.45
------
Offering price per share (100 / 94.25) $19.58
------
Class B shares:
Net asset value and offering price per share
(net assets of $182,138,282 / 9,921,316 shares of beneficial
interest outstanding) $18.36
------
Class C shares:
Net asset value and offering price per share
(net assets of $7,503,053 / 411,292 shares of beneficial
interest outstanding) $18.24
------
</TABLE>
On sales of $50,000 or more, the offering price of Class A shares is reduced. A
contingent deferred sales charge may be imposed on redemptions of Class A, Class
B, and Class C shares.
See notes to financial statements
15
<PAGE> 18
FINANCIAL STATEMENTS - continued
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1996
- --------------------------------------------------------------------------------
<S> <C>
Net investment income:
Income -
Dividends $ 4,883,198
Interest 700,562
Foreign taxes withheld (508,479)
-----------
Total investment income $ 5,075,281
-----------
Expenses -
Management fee $ 2,493,195
Trustees' compensation 41,618
Shareholder servicing agent fee (Class A) 109,927
Shareholder servicing agent fee (Class B) 376,160
Shareholder servicing agent fee (Class C) 7,580
Distribution and service fee (Class A) 183,212
Distribution and service fee (Class B) 1,709,816
Distribution and service fee (Class C) 50,531
Custodian fee 211,477
Postage 61,227
Printing 59,150
Auditing fees 44,745
Legal fees 2,723
Miscellaneous 243,989
-----------
Total expenses $ 5,595,350
Fees paid indirectly (26,276)
-----------
Net expenses $ 5,569,074
-----------
Net investment loss $ (493,793)
-----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $31,942,068
Foreign currency transactions (2,194,366)
-----------
Net realized gain on investments and foreign currency
transactions $29,747,702
-----------
Change in unrealized appreciation -
Investments $ 5,199,094
Translation of assets and liabilities in foreign currencies 1,828,842
-----------
Net unrealized gain on investments $ 7,027,936
-----------
Net realized and unrealized gain on investments and foreign
currency $36,775,638
-----------
Increase in net assets from operations $36,281,845
-----------
</TABLE>
See notes to financial statements
16
<PAGE> 19
FINANCIAL STATEMENTS - continued
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1996 1995
- ----------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment loss $ (493,793) $ (391,803)
Net realized gain on investments and
foreign currency transactions 29,747,702 9,883,882
Net unrealized gain on investments and
foreign currency translation 7,027,936 9,058,497
------------- ------------
Increase in net assets from operations $ 36,281,845 $ 18,550,576
------------- ------------
Distributions declared to shareholders -
From net realized gain on investments and
foreign currency transactions (Class A) $ (3,152,132) $ (2,000,929)
From net realized gain on investments and
foreign currency transactions (Class B) (6,611,169) (15,860,996)
From net realized gain on investments and
foreign currency transactions (Class C) (153,959) (151,274)
------------- ------------
Total distributions declared to shareholders $ (9,917,260) $(18,013,199)
------------- ------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 277,646,024 $150,342,597
Net asset value of shares issued to shareholders
in reinvestment of distributions 9,129,534 16,618,722
Cost of shares reacquired (239,947,155) (149,986,942)
------------- ------------
Increase in net assets from
Fund share transactions $ 46,828,403 $ 16,974,377
------------- ------------
Total increase in net assets $ 73,192,988 $ 17,511,754
Net assets:
At beginning of period 211,357,702 193,845,948
------------- ------------
At end of period (including accumulated net
investment loss of $41,430 and $71,455,
respectively) $ 284,550,690 $211,357,702
------------- ------------
</TABLE>
See notes to financial statements
17
<PAGE> 20
FINANCIAL STATEMENTS - continued
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------------
1996 1995 1994 1993*
- -----------------------------------------------------------------------------------
CLASS A
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each
period):
Net asset value - beginning of period $ 16.68 $ 16.95 $ 16.56 $15.71
------- ------- ------- ------
Income from investment operations# -
Net investment income $ 0.07 $ 0.09 $ 0.03 $ 0.01
Net realized and unrealized gain on
investments and foreign currency
transactions 2.60 1.37 1.13 0.84
------- ------- ------- ------
Total from investment operations $ 2.67 $ 1.46 $ 1.16 $ 0.85
------- ------- ------- ------
Less distributions declared to shareholders -
In excess of net investment income $ -- $ -- $ (0.07) $ --
From net realized gain on investments and
foreign currency transactions (0.90) (1.73) (0.70) --
------- ------- ------- ------
Total distributions declared to
shareholders $ (0.90) $ (1.73) $ (0.77) $ --
------- ------- ------- ------
Net asset value - end of period $ 18.45 $ 16.68 $ 16.95 $16.56
------- ------- ------- ------
Total return++ 16.72% 10.16% 7.03% 5.41%++
Ratios (to average net assets)/Supplemental
data[Section]:
Expenses## 1.65% 1.61% 1.54% 1.68%+
Net investment income 0.38% 0.58% 0.15% 0.94%+
Portfolio turnover 83% 73% 99% 70%
Average commission rate### $0.0200 $ -- $ -- $ --
Net assets at end of period (000 omitted) $94,909 $52,164 $16,968 $2,076
* For the period from the commencement of offering of Class A shares,
September 7, 1993 to October 31, 1993.
+ Annualized.
++ Not annualized.
++ Total returns for Class A shares do not include the applicable sales
charge. If the charge had been included, the results would have been lower.
# Per share data for the periods subsequent to October 31, 1993 is based on
average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
### Average commission rate is calculated for funds with fiscal years beginning
on or after September 1, 1995.
</TABLE>
See notes to financial statements
18
<PAGE> 21
FINANCIAL STATEMENTS - continued
FINANCIAL HIGHLIGHTS - CONTINUED
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31, YEAR ENDED NOVEMBER 30,
------------------------------- ------------ -----------------------
1996 1995 1994 1993* 1992 1991
- -----------------------------------------------------------------------------------------------
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 $ 16.55 $ 16.78 $ 16.53 $ 13.50 $ 12.40 $ 12.94
-------- -------- -------- -------- -------- -------
Income from investment
operations# -
Net investment
income (loss) $ (0.08) $ (0.05) $ (0.17) $ (0.10) $ (0.04) $ 0.17
Net realized and
unrealized gain
(loss) on
investments and
foreign currency
transactions 2.60 1.37 1.13 3.28 1.17 (0.37)
-------- -------- -------- -------- -------- -------
Total from
investment
operations $ 2.52 $ 1.32 $ 0.96 $ 3.18 $ 1.13 $ (0.20)
-------- -------- -------- -------- -------- -------
Less distributions declared
to shareholders -
In excess of net
investment income $ -- $ -- $ (0.01) $ -- $ -- $ --
-------- -------- -------- -------- -------- -------
From net realized
gain on
investments and
foreign currency
transactions (0.71) (1.55) (0.70) (0.15) (0.03) (0.15)
-------- -------- -------- -------- -------- -------
From paid-in capital -- -- -- -- -- (0.19)
Total
distributions
declared to
shareholders $ (0.71) $ (1.55) $ (0.71) $ (0.15) $ (0.03) $ (0.34)
-------- -------- -------- -------- -------- -------
Net asset value - end
of period $ 18.36 $ 16.55 $ 16.78 $ 16.53 $ 13.50 $ 12.40
-------- -------- -------- -------- -------- -------
Total return 15.75% 9.07% 5.91% 23.80%++ 9.13% (1.57)%
Ratios (to average net assets)/Supplemental data:
Expenses## 2.45% 2.55% 2.58% 2.66%+ 2.91% 2.88%
Net investment
income (loss) (0.44)% (0.35)% (1.01)% (0.71)%+ (0.31)% 1.35%
Portfolio turnover 83% 73% 99% 70% 110% 160%
Average commission
rate### $ 0.0200 $ -- $ -- $ -- $ -- $ --
Net assets at end of
period (000 omitted) $182,139 $156,286 $175,438 $145,575 $101,550 $82,890
* For the 11 months ended October 31, 1993.
+ Annualized.
++ Not annualized.
# Per share data for the periods subsequent to October 31, 1993 is based on
average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
### Average commission rate is calculated for funds with fiscal years beginning
on or after September 1, 1995.
</TABLE>
See notes to financial statements
19
<PAGE> 22
FINANCIAL STATEMENTS - continued
FINANCIAL HIGHLIGHTS - CONTINUED
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
--------------------------------------
1990 1989 1988 1987*
- -----------------------------------------------------------------------------------
CLASS B
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 12.96 $ 11.21 $ 10.12 $ 8.47
------- ------- ------- -------
Income from investment operations -
Net investment income (loss) $ 0.13 $ 0.09 $ 0.14 $ (0.02)
Net realized and unrealized gain on
investments and foreign currency
transactions 0.14 2.03 0.95 1.67
------- ------- ------- -------
Total from investment operations $ 0.27 $ 2.12 $ 1.09 $ 1.65
------- ------- ------- -------
Less distributions declared to
shareholders -
From net investment income $ -- $ (0.21) $ -- $ --
------- ------- ------- -------
From net realized gain on investments and
foreign currency transactions (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
------- ------- ------- -------
Total return 2.02% 19.58% 10.77% 19.48%++
Ratios (to average net assets)/Supplemental
data:
Expenses 2.93% 3.05% 2.48% 2.50%+
Net investment income (loss) 1.07% 0.77% 1.29% (0.29)%+
Portfolio turnover 173% 190% 276% 272%
Net assets at end of period (000 omitted) $81,505 $50,827 $42,806 $37,248
* For the period from the commencement of investment operations, December 29,
1986 to November 30, 1987.
+ Annualized.
++ Not annualized.
</TABLE>
See notes to financial statements
20
<PAGE> 23
FINANCIAL STATEMENTS - continued
FINANCIAL HIGHLIGHTS - CONTINUED
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31,
------------------------------
1996 1995 1994*
- -----------------------------------------------------------------------------------
CLASS C
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 16.53 $ 16.80 $ 16.75
------- ------- -------
Income from investment operations -
Net investment loss $ (0.06) $ (0.05) $ (0.09)
Net realized and unrealized gain on investments
and foreign currency transactions 2.57 1.37 .014
------- ------- -------
Total from investment operations $ 2.51 $ 1.32 $ 0.05
------- ------- -------
Less distributions declared to shareholders
from net realized gain on investments
and foreign currency transactions $ (0.80) $ (1.59) $ --
------- ------- -------
Net asset value - end of period $ 18.24 $ 16.53 $ 16.80
------- ------- -------
Total return 15.82% 9.20% 0.30%++
Ratios (to average net assets)/Supplemental data:
Expenses## 2.39% 2.49% 2.55%+
Net investment loss (0.34)% (0.31)% (0.72)%+
Portfolio turnover 83% 73% 99%
Average commission rate### $0.0200 $ -- $ --
Net assets at end of period (000 omitted) $ 7,503 $ 2,908 $ 1,440
* For the period from the commencement of offering of Class C shares, January
3, 1994 to October 31, 1994.
+ Annualized.
++ Not annualized.
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
### Average commission rate is calculated for funds with fiscal years beginning
on or after September 1, 1995.
</TABLE>
See notes to financial statements
21
<PAGE> 24
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
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Investments
in foreign securities are vulnerable to the effects of changes in the relative
values of the local currency and the U.S. dollar and to the effects of the
changes in each country's legal, political, and economic environment.
Investment Valuations - Equity securities listed on securities exchanges or
reported through the NASDAQ system are valued at last sale prices. Unlisted
equity securities or listed equity securities for which last sale prices are not
available are valued at last quoted bid prices. Debt securities (other than
short-term obligations which mature in 60 days or less), including listed issues
and forward contracts, are valued on the basis of valuations furnished by
dealers or by a pricing service with consideration to factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data, without exclusive reliance upon exchange or over-the-counter prices.
Short-term obligations, which mature in 60 days or less, are valued at amortized
cost, which approximates market value. Non-U.S. dollar denominated short-term
obligations are valued at amortized cost as calculated in the base currency and
translated into U.S. dollars at the closing daily exchange rate. Securities for
which there are no such quotations or valuations are valued at fair value as
determined in good faith by or at the direction of the Trustees.
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases and
sales of foreign investments, income and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates of
such transactions. Gains and losses attributable to foreign currency exchange
rates on sales of securities are recorded for financial statement purposes as
net realized gains and losses on investments. Gains and losses attributable to
foreign exchange rate movements on income and expenses are recorded for
financial statement purposes as foreign currency transaction gains and losses.
That portion of both realized and unrealized
22
<PAGE> 25
NOTES TO FINANCIAL STATEMENTS - continued
gains and losses on investments that results from fluctuations in foreign
currency exchange rates is not separately disclosed.
Forward Foreign Currency Exchange Contracts - The Fund may enter into forward
foreign currency exchange contracts for the purchase or sale of a specific
foreign currency at a fixed price on a future date. Risks may arise upon
entering into these contracts from the potential inability of counterparties to
meet the terms of their contracts and from unanticipated movements in the value
of a foreign currency relative to the U.S. dollar. The Fund will enter into
forward contracts for hedging purposes as well as for non-hedging purposes. For
hedging purposes, the Fund may enter into contracts to deliver or receive
foreign currency it will receive from or require for its normal investment
activities. It may also use contracts in a manner intended to protect foreign
currency-denominated securities from declines in value due to unfavorable
exchange rate movements. For non-hedging purposes, the Fund may enter into
contracts with the intent of changing the relative exposure of the Fund's
portfolio of securities to different currencies to take advantage of anticipated
changes. The forward foreign currency exchange contracts are adjusted by the
daily exchange rate of the underlying currency and any gains or losses are
recorded for financial statement purposes as unrealized until the contract
settlement date.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
original issue discount are amortized or accreted for financial statement and
tax reporting purposes as required by federal income tax regulations. Dividend
income is recorded on the ex-dividend date for dividends received in cash.
Dividend payments received in additional securities are recorded on the
ex-dividend date in an amount equal to the value of the security on such date.
Fees Paid Indirectly - The Fund's custodian bank calculates its fee based on the
Fund's average daily net assets. The fee is reduced according to a fee
arrangement, which provides for custody fees to be reduced based on a formula
developed to measure the value of cash deposited with the custodian by the Fund.
This amount is shown as a reduction of expenses on the Statement of Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided. The Fund files a tax
return annually using tax accounting methods required under provisions of the
Code which may differ from generally accepted accounting principles, the basis
on which these financial statements are prepared. Accordingly, the amount of net
investment income and net realized gain reported on these financial statements
may differ from that reported on the Fund's tax return and, consequently, the
character of distributions to shareholders reported
23
<PAGE> 26
NOTES TO FINANCIAL STATEMENTS - continued
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. The Fund expects to pass through to shareholders foreign
income taxes paid. The election increases the taxable distributions of the Fund
by the amount of the foreign taxes paid. An individual shareholder who itemizes
deductions, or a corporate shareholder, will be able to claim an offsetting
deduction or a tax credit (but not both) on their federal income tax returns.
Individuals who do not itemize deductions may claim a foreign tax credit but not
a deduction. The foreign source income is considered passive income for the
purpose of computing the foreign tax credit limitations. Distributions to
shareholders are recorded on the ex-dividend date.
The Fund distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a tax return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or accumulated net realized
gains. During the year ended October 31, 1996, $525,969 was reclassified from
accumulated undistributed net realized gain on investments and foreign currency
transactions to accumulated net investment loss and paid-in capital due to
differences between book and tax accounting for operating losses and currency
transactions. This change had no effect on the net assets or net asset value per
share. At October 31, 1996, accumulated undistributed net investment loss and
realized gain on investments and foreign currency transactions under book
accounting were different from tax accounting due to temporary differences in
accounting for distributions.
Multiple Classes of Shares of Beneficial Interest - The Fund offers Class A,
Class B, and Class C shares. The three classes of shares differ in their
respective shareholder servicing agent, distribution and service fees. All
shareholders bear the common expenses of the Fund pro rata based on average
daily net assets of each class, without distinction between share classes.
Dividends are declared separately for each class. No class has preferential
dividend rights; differences in per share dividend rates are generally due to
differences in separate class expenses.
(3) TRANSACTIONS WITH AFFILIATES
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is
24
<PAGE> 27
NOTES TO FINANCIAL STATEMENTS - continued
computed daily and paid monthly at an annual rate of 1.00% of average daily net
assets.
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 Fund Distributors, Inc. (MFD),
and MFS Service Center, Inc. (MFSC). The Fund has an unfunded defined benefit
plan for all its independent Trustees and Mr. Bailey. Included in Trustees'
compensation is a net periodic pension expense of $11,143 for the year ended
October 31, 1996.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$35,038 for the year ended October 31, 1996, as its portion of the sales charge
on sales of Class A shares of the Fund. The Trustees have adopted separate
distribution plans for Class A, Class B, and Class C shares pursuant to Rule
12b-1 of the Investment Company Act of 1940 as follows:
The Class A distribution plan provides that the Fund will pay MFD up to 0.35%
per annum of its average daily net assets attributable to Class A shares in
order that MFD may pay expenses on behalf of the Fund related to the
distribution and servicing of its shares. These expenses include a service fee
to each securities dealer that enters into a sales agreement with MFD of up to
0.25% per annum of the Fund's average daily net assets attributable to Class A
shares which are attributable to that securities dealer, a distribution fee to
MFD of up to 0.10% per annum of the Fund's average daily net assets attributable
to Class A shares, commissions to dealers and payments to MFD wholesalers for
sales at or above a certain dollar level, and other such distribution-related
expenses that are approved by the Fund. MFD retains the service fee for accounts
not attributable to a securities dealer which amounted to $22,921 for the year
ended October 31, 1996. Payment of the 0.10% per annum Class A distribution fee
will commence on such date as the Trustees of the Trust may determine. Fees
incurred under the distribution plan during the year ended October 31, 1996 were
0.25% of average daily net assets attributable to Class A shares on an
annualized basis.
The Class B and Class C distribution plans provide that the Fund will pay MFD a
distribution fee of 0.75% per annum, and a service fee of up to 0.25% per annum,
of the Fund's average daily net assets attributable to Class B and Class C
shares. MFD will pay to securities dealers that enter into a sales agreement
with MFD all or a portion of the service fee attributable to Class B and Class C
shares, and will pay to such securities dealers all of the distribution fee
attributable to Class C shares. The service fee is intended to be additional
consideration for services rendered by the dealer with respect to Class B and
Class C shares. MFD retains the service fee for accounts not attributable to a
securities dealer, which amounted to $45,712 and $1,340 for Class B and Class C
shares, respectively, for the year ended October 31,
25
<PAGE> 28
NOTES TO FINANCIAL STATEMENTS - continued
1996. Fees incurred under the distribution plans during the year ended October
31, 1996 were 1.00% of average daily net assets attributable to Class B and
Class C shares on an annualized basis.
Purchases over $1 million of Class A shares and certain purchases into
retirement plans are subject to a contingent deferred sales charge in the event
of a shareholder redemption within 12 months following such purchase. A
contingent deferred sales charge is imposed on shareholder redemptions of Class
B shares in the event of a shareholder redemption within six years of purchase.
A contingent deferred sales charge is imposed on shareholder redemptions of
Class C shares in the event of a shareholder redemption within 12 months of
purchases made on or after April 1, 1996. MFD receives all contingent deferred
sales charges. Contingent deferred sales charges imposed during the year ended
October 31, 1996 were $11,608, $187,701, and $361 for Class A, Class B, and
Class C shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as a
percentage of the average daily net assets of each class of shares at an
effective annual rate of up to 0.15%, up to 0.22%, and up to 0.15% attributable
to Class A, Class B, and Class C shares, respectively.
(4) PORTFOLIO SECURITIES
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions and short-term obligations, aggregated
$216,890,600 and $197,137,147, 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:
<TABLE>
<S> <C>
Aggregate cost $247,604,977
------------
Gross unrealized appreciation $ 43,456,599
Gross unrealized depreciation (8,534,303)
------------
Net unrealized appreciation $ 34,922,296
============
</TABLE>
26
<PAGE> 29
NOTES TO FINANCIAL STATEMENTS - continued
(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 YEAR ENDED
OCTOBER 31, 1996 OCTOBER 31, 1995
-------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 8,201,319 $ 145,253,452 4,007,859 $ 63,217,135
Shares issued to shareholders
in reinvestment of
distributions 172,379 2,799,430 129,779 1,883,186
Shares reacquired (6,355,583) (113,016,532) (2,011,280) (32,143,857)
---------- ------------- ---------- ------------
Net increase 2,018,115 $ 35,036,350 2,126,358 $ 32,956,464
---------- ------------- ---------- ------------
</TABLE>
Class B Shares
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
OCTOBER 31, 1996 OCTOBER 31, 1995
-------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 7,209,459 $ 125,696,939 5,493,342 $ 85,113,083
Shares issued to shareholders
in reinvestment of
distributions 381,169 6,206,034 1,006,721 14,610,342
Shares reacquired (7,113,969) (124,208,958) (7,507,506) (117,113,709)
---------- ------------- ---------- ------------
Net increase (decrease) 476,659 $ 7,694,015 (1,007,443) $(17,390,284)
---------- ------------- ---------- ------------
</TABLE>
Class C Shares
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
OCTOBER 31, 1996 OCTOBER 31, 1995
----------------------- --------------------
SHARES AMOUNT SHARES AMOUNT
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 381,981 $ 6,695,633 128,767 $2,012,379
Shares issued to shareholders
in reinvestment of
distributions 7,678 124,070 8,646 125,194
Shares reacquired (154,314) (2,721,665) (47,177) (729,376)
-------- ----------- ------- ----------
Net increase 235,345 $ 4,098,038 90,236 $1,408,197
-------- ----------- ------- ----------
</TABLE>
(6) LINE OF CREDIT
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $350 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Fund shares. Interest is charged to each
fund, based on its borrowings, at a rate equal to the bank's base rate. In
addition, a commitment fee, based on the average daily unused portion of the
line of credit, is allocated among the participating funds at the end of each
quarter. The commitment fee allocated to the Fund for the year ended October 31,
1996 was $2,777.
(7) FINANCIAL INSTRUMENTS
The Fund trades financial instruments with off-balance sheet risk in the normal
course of its investing activities in order to manage exposure to market risks
such as interest rates and foreign currency exchange rates. These financial
instruments include forward foreign currency exchange contracts. The notional or
contractual
27
<PAGE> 30
NOTES TO FINANCIAL STATEMENTS - continued
amounts of these instruments represent the investment the Fund has in particular
classes of financial instruments and does not necessarily represent the amounts
potentially subject to risk. The measurement of the risks associated with these
instruments is meaningful only when all related and offsetting transactions are
considered. A summary of obligations under these financial instruments at
October 31, 1996 as follows:
Forward Foreign Currency Exchange Contracts
<TABLE>
<CAPTION>
NET UNREALIZED
CONTRACTS TO IN CONTRACTS APPRECIATION
DELIVER/RECEIVE EXCHANGE FOR AT VALUE (DEPRECIATION)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales
11/01/96 CAD 2,394,003 $ 1,749,734 $ 1,787,370 $(37,636)
11/15/96 ESP 509,819,928 3,999,623 3,984,243 15,380
2/03/97 SEK 120,261,478 18,262,943 18,322,799 (59,856)
----------- ----------- --------
$24,012,300 $24,094,412 $(82,112)
----------- ----------- --------
Purchases
11/01/96 CAD 2,394,003 $ 1,753,720 $ 1,787,370 $ 33,650
2/03/97 SEK 84,703,202 12,857,000 12,905,210 48,210
----------- ----------- --------
$14,610,720 $14,692,580 $ 81,860
=========== =========== ========
</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.
CAD = Canadian Dollars
ESP = Spanish Pesetas
SEK = Swedish Kronor
At October 31, 1996, the Fund had sufficient cash and/or securities to cover any
commitments under these contracts.
(8) RESTRICTED SECURITIES
The Fund may invest not more than 15% of its net assets in securities which are
subject to legal or contractual restrictions on resale. At October 31, 1996, the
Fund owned the following restricted securities (constituting 1.56% of net
assets) which may not be publicly sold without registration under Securities Act
of 1933. The Fund does not have the right to demand that such securities be
registered. The value of these securities is determined by valuations supplied
by a pricing service or brokers or, if not available, in good faith by or at the
direction of the Trustees.
<TABLE>
<CAPTION>
DATE OF
DESCRIPTION ACQUISITION SHARES COST VALUE
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Bank Negara Indonesia 10/25/96 2,072,600 $ 764,972 $ 756,651
Hong Leong Finance Ltd. 5/16/95 - 9/27/95 722,000 2,524,941 2,204,972
Jarvis Hotels PLC 6/21/96 - 7/02/96 575,000 1,540,897 1,487,028
----------
$4,448,651
----------
</TABLE>
28
<PAGE> 31
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 (a Series of MFS Series
Trust VI) as of October 31, 1996, the related statement of operations for the
year then ended, the statement of changes in net assets for the years ended
October 31, 1996 and 1995, and the financial highlights for each of the years in
the four-year period ended October 31, 1996 and the six-year period ended
November 30, 1992. These financial statements and financial highlights are the
responsibility of the Trust'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 as of
October 31, 1996, by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other auditing procedures.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS World Equity
Fund at October 31, 1996, the results of its operations, the changes in its net
assets, and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
November 29, 1996
29
<PAGE> 32
ADS ILLUSTRATE MFS' UNPARALLELED EXPERIENCE
[GRAPHIC]
MFS' new advertisements look back at some of the most important events of the
twentieth century to demonstrate a simple point -- no other fund company can
match MFS' experience. MFS has been managing money for investors since 1924
when we "invented" the nation's first fund, Massachusetts Investors Trust.
Print and broadcast ads will offer dramatic portraits of what that 72 years'
worth of experience means. By the time the Apollo rockets began taking off for
the moon, for example, MFS had already been exploring the universe of stocks for
more than four decades. The company was also on the scene, as other ads will
illustrate, when Louis Armstrong was redefining jazz and when the great
racehorse Whirlaway was galloping to a Triple Crown victory.
An MFS Chairman Keith Brodkin emphasizes, in today's increasingly competitive
mutual fund industry, it's important to have a recognizable brand name. The
goal of the MFS ad campaign is to increase public awareness of the company and
its unique role in the industry as the inventor of the mutual fund.
The across-the-board strength of the MFS Family of Funds[Registered Trademark]
will be highlighted in the print ads, which cite the performance results and
Morningstar ratings of various MFS funds.
The broadcast ads appear on a number of cable and network television news and
sports programs. The print ads appear in newspapers such as The Wall Street
Journal and USA Today; in financial magazines such as Kiplinger's Personal
Finance and Money, and in leisure magazines such as Golf Digest and Tennis.
(The cost of the campaign is being underwritten by MFS. It is neither a fund
shareholder nor an annuity contractholder expense.)
30
<PAGE> 33
IT'S EASY TO CONTACT US
[PHONE] MFS AUTOMATED INFORMATION
ACCOUNT INFORMATION:
Call 1-800-MFS-TALK (1-800-637-8255)
anytime.
INVESTMENT OUTLOOK:
Call 1-800-637-4458 anytime for the MFS outlook
on the bond and stock markets.
[QUESTION MFS PERSONAL SERVICE
MARK]
ACCOUNT SERVICE/LITERATURE:
Call 1-800-225-2606 any business day
from 8 a.m. to 8 p.m. Eastern time.
PRODUCT INFORMATION:
Call 1-800-637-2929 any business day
from 9 a.m. to 5 p.m. Eastern time.
IRA SERVICE:
Call 1-800-637-1255 any business day
from 9 a.m. to 5 p.m. Eastern time.
SERVICE FOR THE HEARING-IMPAIRED:
Call 1-800-637-6576 any business day
from 9 a.m. to 5 p.m. Eastern time (TDD required).
[ENVELOPE] MFS ADDRESSES
MFS Service Center, Inc.
P.O. Box 2281
Boston, MA 02107-9906
WORLD WIDE WEB:
www.mfs.com
31
<PAGE> 34
THE MFS FAMILY OF FUNDS[Registered Trademark]
AMERICA'S OLDEST MUTUAL FUND GROUP
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 advisor or call MFS at
1-800-225-2606 any business day from 8 a.m. to 8 p.m. Eastern time (or leave a
message anytime). This material should be read carefully before investing or
sending money.
<TABLE>
<CAPTION>
STOCK WORLD
- ---------------------------------------------------------- -------------------------------------------------------------------------
<S> <C>
Massachusetts Investors Trust MFS[Registered Trademark] Foreign & Colonial Emerging Markets Equity Fund
Massachusetts Investors Growth Stock Fund MFS[Registered Trademark] Foreign & Colonial International Growth Fund
MFS[Registered Trademark] Capital Growth Fund MFS[Registered Trademark] Foreign & Colonial International Growth and
MFS[Registered Trademark] Emerging Growth Fund Income Fund
MFS[Registered Trademark] Gold & Natural Resources Fund MFS[Registered Trademark] World Asset Allocation Fund
MFS[Registered Trademark] Growth Opportunities Fund MFS[Registered Trademark] World Equity Fund
MFS[Registered Trademark] Managed Sectors Fund MFS[Registered Trademark] World Governments Fund
MFS[Registered Trademark] OTC Fund MFS[Registered Trademark] World Growth Fund
MFS[Registered Trademark] Research Fund MFS[Registered Trademark] World Total Return Fund
MFS[Registered Trademark] Value Fund
NATIONAL TAX-FREE BOND
-------------------------------------------------------------------------
STOCK AND BOND MFS[Registered Trademark] Municipal Bond Fund
- ---------------------------------------------------------- MFS[Registered Trademark] Municipal High Income Fund
MFS[Registered Trademark] Total Return Fund MFS[Registered Trademark] Municipal Income Fund
MFS[Registered Trademark] Utilities Fund
STATE TAX-FREE BOND
BOND -------------------------------------------------------------------------
- ---------------------------------------------------------- Alabama, Arkansas, California, Florida,
MFS[Registered Trademark] Bond Fund Georgia, Maryland, Massachusetts,
MFS[Registered Trademark] Government Mortgage Fund Mississippi, New York, North Carolina,
MFS[Registered Trademark] Government Securities Fund Pennsylvania, South Carolina, Tennessee,
MFS[Registered Trademark] High Income Fund Virginia, West Virginia
MFS[Registered Trademark] Intermediate Income Fund
MFS[Registered Trademark] Strategic Income Fund MONEY MARKET
-------------------------------------------------------------------------
LIMITED MATURITY BOND MFS[Registered Trademark] Cash Reserve Fund
- ---------------------------------------------------------- MFS[Registered Trademark] Government Money Market Fund
MFS[Registered Trademark] Government Limited Maturity Fund MFS[Registered Trademark] Money Market Fund
MFS[Registered Trademark] Limited Maturity Fund
MFS[Registered Trademark] Municipal Limited Maturity Fund
</TABLE>
32
<PAGE> 35
MFS[Registered Trademark] WORLD EQUITY FUND[Service Mark]
<TABLE>
<S> <C>
TRUSTEES ASSISTANT SECRETARY
A. Keith Brodkin* - Chairman and President James R. Bordewick, Jr.*
Richard B. Bailey* - Private Investor; CUSTODIAN
Former Chairman and Director (until 1991), State Street Bank and Trust Company
Massachusetts Financial Services Company;
Director, Cambridge Bancorp; Director, AUDITORS
Cambridge Trust Company Deloitte & Touche LLP
Marshall N. Cohan - Private Investor INVESTOR INFORMATION
For MFS stock and bond market outlooks, call
Lawrence H. Cohn - Chief of Cardiac toll free: 1-800-637-4458 anytime from a
Surgery, Brigham and Women's Hospital; touch-tone telephone.
Professor of Surgery, Harvard Medical School
For information on MFS mutual funds,
The Hon. Sir J. David Gibbons, KBE - Chief call your financial adviser or, for an
Executive Officer, Edmund Gibbons Ltd.; information kit, call toll free:
Chairman, Bank of N.T. Butterfield & Son Ltd. 1-800-637-2929 any business day from
9 a.m. to 5 p.m. Eastern time (or leave
Abby M. O'Neill - Private Investor; a message anytime).
Director, Rockefeller Financial Services, Inc.
(investment advisers) INVESTOR SERVICE
MFS Service Center, Inc.
Walter E. Robb, III - President and Treasurer, P.O. Box 2281
Benchmark Advisors, Inc. (corporate financial Boston, MA 02107-9906
consultants); President, Benchmark Consulting
Group, Inc. (office services); Trustee, Landmark For general information, call toll free:
Funds (mutual funds) 1-800-225-2606 any business day from
8 a.m. to 8 p.m. Eastern time.
Arnold D. Scott* - Senior Executive Vice
President, Director and Secretary, For service to speech- or hearing-impaired, call
Massachusetts Financial Service Company toll free: 1-800-637-6576 any business day
from 9 a.m. to 5 p.m. Eastern time. To use
Jeffrey L. Shames* - President and Director, this service, your phone must be equipped with
Massachusetts Financial Services Company a Telecommunications Device for the Deaf.
J. Dale Sherratt - President, Insight Resources, For share prices, account balances, and
Inc. (acquisition planning specialists) exchanges, call toll free: 1-800-MFS-TALK
(1-800-637-8255) anytime from a touch-tone
Ward Smith - Former Chairman (until 1994), telephone.
NACCO Industries; Director, Sundstrand
Corporation WORLD WIDE WEB
www.mfs.com
INVESTMENT ADVISER
Massachusetts Financial Services Company [DALBAR LOGO] For the third year in a row, MFS
500 Boylston Street earned a #1 ranking in the DALBAR, Inc. Broker/Dealer
Boston, MA 02116-3741 Survey, Main Office Operations Service Quality Category.
The firm achieved a 3.48 overall score on a scale of 1
DISTRIBUTOR to 4 in the 1996 survey. A total of 110 firms responded,
MFS Fund Distributors, Inc. offering input on the quality of service they received from
500 Boylston Street 29 mutual fund companies nationwide. The survey contained
Boston, MA 02116-3741 questions about service quality in 15 categories, including
"knowledge of phone service contacts," "accuracy of
PORTFOLIO MANAGER transaction processing," and "overall ease of doing business
David Mannheim* with the firm."
TREASURER
W. Thomas London*
ASSISTANT TREASURER
James O. Yost*
SECRETARY
Stephen E. Cavan*
* Affiliated with the Investment Adviser
</TABLE>
33
<PAGE> 36
<TABLE>
<CAPTION>
<S> <C> <C>
MFS[Registered Trademark] WORLD [LOGO]
EQUITY FUND ----------------------
500 Boylston Street BULK RATE
Boston, MA 02116 U.S. POSTAGE
[LOGO] PAID
PERMIT #55638
BOSTON, MA
----------------------
(C)1996 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116 MWE-2-12/96 47M 04/204/304
</TABLE>
<PAGE>
PART C
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
MFS WORLDWIDE TOTAL RETURN FUND
(A) FINANCIAL STATEMENTS INCLUDED IN PART A:
For the seven years ended October 31, 1996:
FINANCIAL STATEMENTS INCLUDED IN PART B:
At October 31, 1996:
Portfolio of Investments*
Statement of Assets and Liabilities*
For the two years ended October 31, 1996:
Statement of Changes in Net Assets*
For the year ended October 31, 1996:
Statement of Operations*
- -------------------------------
* Incorporated herein by reference to the Fund's Annual Report to
Shareholders dated October 31, 1996, filed with the Securities and Exchange
Commission ("SEC") on January 7, 1997.
MFS UTILITIES FUND
(A) FINANCIAL STATEMENTS INCLUDED IN PART A:
For the period from the commencement of operations
on February 14, 1992 to October 31, 1992 and the
four years ended October 31, 1996:
Financial Highlights
FINANCIAL STATEMENTS INCLUDED IN PART B:
At October 31, 1996:
Portfolio of Investments*
Statement of Assets and Liabilities*
For the two years ended October 31, 1996:
Statement of Changes in Net Assets*
For the year ended October 31, 1996:
Statement of Operations*
- --------------------------
* Incorporated herein by reference to the Fund's Annual Report to
Shareholders dated October 31, 1996, filed with the SEC on January 8, 1997.
MFS WORLD EQUITY FUND
(A) FINANCIAL STATEMENTS INCLUDED IN PART A:
For the period from the commencement of investment
operations on December 29, 1986 to November 30,
1987, for the five years ended November 30, 1992,
for the period ended October 31, 1993 and the
three years ended October 31, 1996:
Financial Highlights
FINANCIAL STATEMENTS INCLUDED IN PART B:
At October 31, 1996:
Portfolio of Investments*
Statement of Assets and Liabilities*
For the year ended October 31, 1996:
Statement of Operations*
For the two years ended October 31, 1996:
Statement of Changes in Net Assets*
- -------------------------------
* Incorporated herein by reference to the Fund's Annual Report to
Shareholders dated October 31, 1996, filed with the SEC on January 8, 1997.
-------------------------
<TABLE>
(B) EXHIBITS
<S> <C> <C>
1 (a) Amended and Restated Declaration of Trust of the Registrant, dated
February 2, 1995. (1)
(b) Amendment to Declaration of Trust, dated June 12, 1996. (9)
(c) Amendment to the Declaration of Trust redesignating Class P shares as
Class I Shares, dated December 19, 1996; filed herewith.
2 Amended and Restated By-Laws, dated December 14, 1994. (1)
3 Not Applicable.
4 Form of Certificate representing ownership of the Registrant's Classes of
Shares. (7)
5 (a) Investment Advisory Agreement between MFS Worldwide Total Return Trust
and Massachusetts Financial Services Company, dated August 10, 1990. (1)
(b) Investment Advisory Agreement for MFS Utilities Fund, dated September 1,
1993. (1)
(c) Investment Advisory Agreement for MFS World Equity Fund, dated September
1, 1993. (1)
6 (a) Dealer Agreement between MFS Fund Distributors, Inc. ("MFD") and a
dealer, dated December 28, 1994 and the Mutual Fund Agreement between MFD
and a bank or NASD affiliate, dated December 28, 1994. (2)
(b) Distribution Agreement between the Trust and MFS Fund Distributors, Inc.,
dated January 1, 1995. (1)
7 Retirement Plan for Non-Interested Person Trustees, dated January 1,
1991. (1)
8 (a) Custodian Agreement between Registrant and State Street Bank and Trust
Company, dated August 10, 1990. (1)
(b) Amendment to Custodian Agreement, dated September 5, 1990. (1)
(c) Amendment to Custodian Agreement, dated September 11, 1991. (1)
9 (a) Shareholder Servicing Agreement between the Registrant and MFS Service
Center, Inc., dated August 10, 1990. (1)
(b) Amendment to Shareholder Servicing Agent Agreement, dated January 1,
1997; filed herewith.
(c) Exchange Privilege Agreement dated September 1, 1995. (6)
(d) Dividend Disbursing Agency Agreement, dated August 10, 1990. (1)
(e) Loan Agreement by and among the Banks named therein, the MFS Funds named
therein, and The First National Bank of Boston, dated February 21, 1995. (3)
10 Consent and Opinion of Counsel for the fiscal year ended October 31, 1996
filed with the Rule 24f-2 Notice on December 26, 1996.
11 (a) Consent of Ernst & Young LLP - MFS World Total Return and MFS Utilities
Fund; filed herewith.
(b) Consent of Deloitte & Touche LLP - MFS World Equity Fund; filed herewith.
12 Not Applicable.
13 Not Applicable.
14 (a) Forms for Individual Retirement Account Disclosure Statement as currently
in effect. (5)
(b) Forms for MFS 403(b) Custodial Account Agreement as currently in effect. (5)
(c) Forms for MFS Prototype Paired Defined Contribution Plans and Fund
Agreement as currently in effect. (5)
15 Master Distribution Plan pursuant to Rule 12b-1 under the Investment
Company Act of 1940, effective January 1, 1997. (8)
16 Schedule of Computation of Performance Quotations-Average Annual Total
Rate of Return, Aggregate Total Rate of Return and Standardized Yield. (2)
17 Financial Data Schedules for each Class of each Series; filed herewith.
18 Plan pursuant to Rule 18f-3(d) under the Investment Company Act of 1940. (7)
Power of Attorney, dated August 11, 1994. (1)
- -----------------------------
(1) Incorporated by reference to Registrant's Post-Effective Amendment No. 8 filed with the SEC via EDGAR on
October 23, 1995.
(2) Incorporated by reference to MFS Municipal Series Trust (File Nos. 2-92915 and 811-4096) Post-Effective
Amendment No. 26 filed with the SEC via EDGAR on February 22, 1995.
(3) Incorporated by reference to Amendment No. 8 on Form N-2 for MFS Municipal Income Trust (File No. 811-4841)
filed with the SEC via EDGAR on February 28, 1995.
(4) Incorporated by reference to MFS Municipal Series Trust (File Nos. 2-92915 and 811-4096) Post-Effective
Amendment No. 28, filed with the SEC via EDGAR on July 28, 1995.
(5) Incorporated by reference to MFS Series Trust IX (File Nos. 2-50409 and 811-2464) Post-Effective Amendment
No. 32 filed with the SEC via EDGAR on August 28, 1995.
(6) Incorporated by reference to MFS Series Trust X (File Nos. 33-1657 and 811-4492) Post-Effective Amendment
No. 13 filed with the SEC via EDGAR on November 28, 1995.
(7) Incorporated by reference to MFS Series Trust I (File Nos. 33-7638 and 811-4777) Post-Effective Amendment
No. 25 filed with the SEC via EDGAR on August 27, 1996.
(8) Incorporated by reference to MFS Series Trust I (File Nos. 33-7638 and 811-4777) Post-Effective Amendment
No. 27 filed with the SEC via EDGAR on December 27, 1996.
(9) Incorporated by reference to Registrant's Post-Effective Amendment No. 10 filed with the SEC via EDGAR on
August 28, 1996.
(10) Incorporated by reference to MFS Series Trust VIII (File Nos. 33-37972 and 811-5262) Post-Effective
Amendment No. 13 filed with the SEC via EDGAR on February 28, 1996.
</TABLE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
<TABLE>
FOR MFS WORLD TOTAL RETURN FUND
<CAPTION>
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
<S> <C> <C>
Class A Shares of Beneficial Interest 13,492
(without par value) (as at January 31, 1997)
Class B Shares of Beneficial Interest 7,510
(without par value) (as at January 31, 1997)
Class C Shares of Beneficial Interest 1,111
(without par value) (as at January 31, 1997)
Class I Shares of Beneficial Interest 2
(without par value) (as at January 31, 1997)
FOR MFS UTILITIES FUND
<CAPTION>
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
<S> <C> <C>
Class A Shares of Beneficial Interest 4,238
(without par value) (as at January 31, 1997)
Class B Shares of Beneficial Interest 3,948
(without par value) (as at January 31, 1997)
Class C Shares of Beneficial Interest 665
(without par value) (as at January 31, 1997)
Class I Shares of Beneficial Interest 3
(without par value) (as at January 31, 1997)
FOR MFS WORLD EQUITY FUND
<CAPTION>
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
<S> <C> <C>
Class A Shares of Beneficial Interest 18,479
(without par value) (as at January 31, 1997)
Class B Shares of Beneficial Interest 20,463
(without par value) (as at January 31, 1997)
Class C Shares of Beneficial Interest 733
(without par value) (as at January 31, 1997)
Class I Shares of Beneficial Interest 3
(without par value) (as at January 31, 1997)
</TABLE>
ITEM 27. INDEMNIFICATION
Reference is hereby made to (a) Article V of the Registrant's
Amended and Restated Declaration of Trust dated February 2, 1995; and (b)
Section 9 of the Shareholder Servicing Agent Agreement, both of which were filed
with the SEC on October 23, 1995 as part of the Registrant's Post-Effective
Amendment No. 8.
The Trustees and officers of the Registrant and the personnel
of the Registrant's investment adviser and distributor are insured under an
errors and omissions liability insurance policy. The Registrant and its officers
are also insured under the fidelity bond required by Rule 17g-1 under the
Investment Company Act of 1940, as amended.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
MFS serves as investment adviser to the following open-end
Funds comprising the MFS Family of Funds: Massachusetts Investors Trust,
Massachusetts Investors Growth Stock Fund, MFS Growth Opportunities Fund, MFS
Government Securities Fund, MFS Government Limited Maturity Fund, MFS Series
Trust I (which has thirteen series: MFS Managed Sectors Fund, MFS Cash Reserve
Fund, MFS World Asset Allocation Fund, MFS Aggressive Growth Fund, MFS Research
Growth and Income Fund, MFS Core Growth Fund, MFS Equity Income Fund, MFS
Special Opportunities Fund, MFS Convertible Securities Fund, MFS Blue Chip Fund,
MFS New Discovery Fund, MFS Science and Technology Fund and MFS Research
International Fund), MFS Series Trust II (which has four series: MFS Emerging
Growth Fund, MFS Capital Growth Fund, MFS Intermediate Income Fund and MFS Gold
& Natural Resources Fund), MFS Series Trust III (which has two series: MFS High
Income Fund and MFS Municipal High Income Fund), MFS Series Trust IV (which has
four series: MFS Money Market Fund, MFS Government Money Market Fund, MFS
Municipal Bond Fund and MFS OTC Fund), MFS Series Trust V (which has two series:
MFS Total Return Fund and MFS Research Fund), MFS Series Trust VI (which has
three series: MFS World Total Return Fund, MFS Utilities Fund and MFS World
Equity Fund), MFS Series Trust VII (which has two series: MFS World Governments
Fund and MFS Value Fund), MFS Series Trust VIII (which has two series: MFS
Strategic Income Fund and MFS World Growth Fund), MFS Series Trust IX (which has
three series: MFS Bond Fund, MFS Limited Maturity Fund and MFS Municipal Limited
Maturity Fund), MFS Series Trust X (which has four series: MFS Government
Mortgage Fund, MFS/Foreign & Colonial Emerging Markets Equity Fund, MFS/Foreign
& Colonial International Growth Fund and MFS/Foreign & Colonial International
Growth and Income Fund), and MFS Municipal Series Trust (which has 16 series:
MFS Alabama Municipal Bond Fund, MFS Arkansas Municipal Bond Fund, MFS
California Municipal Bond Fund, MFS Florida Municipal Bond Fund, MFS Georgia
Municipal Bond Fund, MFS Maryland Municipal Bond Fund, MFS Massachusetts
Municipal Bond Fund, MFS Mississippi Municipal Bond Fund, MFS New York Municipal
Bond Fund, MFS North Carolina Municipal Bond Fund, MFS Pennsylvania Municipal
Bond Fund, MFS South Carolina Municipal Bond Fund, MFS Tennessee Municipal Bond
Fund, MFS Virginia Municipal Bond Fund, MFS West Virginia Municipal Bond Fund
and MFS Municipal Income Fund) (the "MFS Funds"). The principal business address
of each of the MFS Funds is 500 Boylston Street, Boston, Massachusetts 02116.
MFS also serves as investment adviser of the following
no-load, open-end Funds: MFS Institutional Trust ("MFSIT") (which has seven
series), MFS Variable Insurance Trust ("MVI") (which has twelve series) and MFS
Union Standard Trust ("UST"). The principal business address of each of the
aforementioned funds is 500 Boylston Street, Boston, Massachusetts 02116.
In addition, MFS serves as investment adviser to the following
closed-end funds: MFS Municipal Income Trust, MFS Multimarket Income Trust, MFS
Government Markets Income Trust, MFS Intermediate Income Trust, MFS Charter
Income Trust and MFS Special Value Trust (the "MFS Closed-End Funds"). The
principal business address of each of the MFS Closed-End Funds is 500 Boylston
Street, Boston, Massachusetts 02116.
Lastly, MFS serves as investment adviser to MFS/Sun Life
Series Trust ("MFS/SL"), Money Market Variable Account, High Yield Variable
Account, Capital Appreciation Variable Account, Government Securities Variable
Account, World Governments Variable Account, Total Return Variable Account and
Managed Sectors Variable Account. The principal business address of each of the
aforementioned funds is One Sun Life Executive Park, Wellesley Hills,
Massachusetts 02181.
MFS International Ltd. ("MIL"), a limited liability company
organized under the laws of Bermuda and a subsidiary of MFS, whose principal
business address is Cedar House, 41 Cedar Avenue, Hamilton HM12 Bermuda, serves
as investment adviser to and distributor for MFS American Fund (which has six
portfolios: MFS American Funds-U.S. Equity Fund, MFS American Funds-U.S.
Emerging Growth Fund, MFS American Funds-U.S. High Yield Bond Fund, MFS American
Funds - U.S. Dollar Reserve Fund, MFS American Funds-Charter Income Fund and MFS
American Funds-U.S. Research Fund) (the "MIL Funds"). The MIL Funds are
organized in Luxembourg and qualify as an undertaking for collective investments
in transferable securities (UCITS). The principal business address of the MIL
Funds is 47, Boulevard Royal, L-2449 Luxembourg.
MIL also serves as investment adviser to and distributor for
MFS Meridian U.S. Government Bond Fund, MFS Meridian Charter Income Fund, MFS
Meridian Global Government Fund, MFS Meridian U.S. Emerging Growth Fund, MFS
Meridian Global Equity Fund, MFS Meridian Limited Maturity Fund, MFS Meridian
World Growth Fund, MFS Meridian Money Market Fund, MFS Meridian World Total
Return Fund, MFS Meridian U.S. Equity Fund, MFS Meridian Research Fund and MFS
Emerging Markets Debt Fund (collectively the "MFS Meridian Funds"). Each of the
MFS Meridian Funds is organized as an exempt company under the laws of the
Cayman Islands. The principal business address of each of the MFS Meridian Funds
is P.O. Box 309, Grand Cayman, Cayman Islands, British West Indies.
MFS International (U.K.) Ltd. ("MIL-UK"), a private limited
company registered with the Registrar of Companies for England and Wales whose
current address is 4 John Carpenter Street, London, England ED4Y 0NH, is
involved primarily in marketing and investment research activities with respect
to private clients and the MIL Funds and the MFS Meridian Funds.
MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary
of MFS, serves as distributor for the MFS Funds, MVI, UST and MFSIT.
Clarendon Insurance Agency, Inc. ("CIAI"), a wholly owned
subsidiary of MFS, serves as distributor for certain life insurance and annuity
contracts issued by Sun Life Assurance Company of Canada (U.S.).
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary
of MFS, serves as shareholder servicing agent to the MFS Funds, the MFS
Closed-End Funds, MFSIT, MVI and UST.
MFS Institutional Advisors, Inc. ("MFSI"), a wholly owned
subsidiary of MFS, provides investment advice to substantial private clients.
MFS Retirement Services, Inc. ("RSI"), a wholly owned
subsidiary of MFS, markets MFS products to retirement plans and provides
administrative and record keeping services for retirement plans.
MFS
The Directors of MFS are A. Keith Brodkin, Jeffrey L. Shames,
Arnold D. Scott, Donald A. Stewart and John D. McNeil. Mr. Brodkin is the
Chairman, Mr. Shames is the President, Mr. Scott is a Senior Executive Vice
President and Secretary, Bruce C. Avery, William S. Harris, William W. Scott,
Jr., and Patricia A. Zlotin are Executive Vice Presidents, Stephen E. Cavan is a
Senior Vice President, General Counsel and an Assistant Secretary, Robert T.
Burns is a Senior Vice President, Associate General Counsel and an Assistant
Secretary of MFS, and Thomas B. Hastings is a Vice President and Treasurer of
MFS.
MASSACHUSETTS INVESTORS TRUST
MASSACHUSETTS INVESTORS GROWTH STOCK FUND
MFS GROWTH OPPORTUNITIES FUND
MFS GOVERNMENT SECURITIES FUND
MFS SERIES TRUST I
MFS SERIES TRUST V
MFS SERIES TRUST VI
MFS SERIES TRUST X
MFS GOVERNMENT LIMITED MATURITY FUND
A. Keith Brodkin is the Chairman and President, Stephen E.
Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost, Vice
President of MFS, is the Assistant Treasurer, James R. Bordewick, Jr., Senior
Vice President and Associate General Counsel of MFS, is the Assistant Secretary.
MFS SERIES TRUST II
A. Keith Brodkin is the Chairman and President, Leslie J.
Nanberg, Senior Vice President of MFS, is a Vice President, Stephen E. Cavan is
the Secretary, W. Thomas London is the Treasurer, James O. Yost is the Assistant
Treasurer, and James R. Bordewick, Jr., is the Assistant Secretary.
MFS GOVERNMENT MARKETS INCOME TRUST
MFS INTERMEDIATE INCOME TRUST
A. Keith Brodkin is the Chairman and President, Leslie J.
Nanberg, Senior Vice President of MFS, is a Vice President, Stephen E. Cavan is
the Secretary, W. Thomas London is the Treasurer, James O. Yost is the Assistant
Treasurer, and James R. Bordewick, Jr., is the Assistant Secretary.
MFS SERIES TRUST III
A. Keith Brodkin is the Chairman and President, James T.
Swanson, Robert J. Manning, Cynthia M. Brown and Joan S. Batchelder, Senior Vice
Presidents of MFS, Bernard Scozzafava, Vice President of MFS, and Matthew
Fontaine, Assistant Vice President of MFS, are Vice Presidents, Sheila
Burns-Magnan, Assistant Vice President of MFS, and Daniel E. McManus, Vice
President of MFS, are Assistant Vice Presidents, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost is the Assistant
Treasurer, and James R. Bordewick, Jr., is the Assistant Secretary.
MFS SERIES TRUST IV
MFS SERIES TRUST IX
A. Keith Brodkin is the Chairman and President, Robert A.
Dennis and Geoffrey L. Kurinsky, Senior Vice Presidents of MFS, are Vice
Presidents, Stephen E. Cavan is the Secretary, W. Thomas London is the
Treasurer, James O. Yost is the Assistant Treasurer and James R. Bordewick, Jr.,
is the Assistant Secretary.
MFS SERIES TRUST VII
A. Keith Brodkin is the Chairman and President, Leslie J.
Nanberg and Stephen C. Bryant, Senior Vice Presidents of MFS, are Vice
Presidents, Stephen E. Cavan is the Secretary, W. Thomas London is the
Treasurer, James O. Yost is the Assistant Treasurer and James R. Bordewick, Jr.,
is the Assistant Secretary.
MFS SERIES TRUST VIII
A. Keith Brodkin is the Chairman and President, Jeffrey L.
Shames, Leslie J. Nanberg, Patricia A. Zlotin, James T. Swanson and John D.
Laupheimer, Jr., Vice President of MFS, are Vice Presidents, Stephen E. Cavan is
the Secretary, W. Thomas London is the Treasurer, James O. Yost is the Assistant
Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
MFS MUNICIPAL SERIES TRUST
A. Keith Brodkin is the Chairman and President, Cynthia M.
Brown and Robert A. Dennis are Vice Presidents, David B. Smith, Geoffrey L.
Schechter and David R. King, Vice Presidents of MFS, are Vice Presidents, Daniel
E. McManus, Vice President of MFS, is an Assistant Vice President, Stephen E.
Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost is the
Assistant Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
MFS VARIABLE INSURANCE TRUST
MFS UNION STANDARD TRUST
MFS INSTITUTIONAL TRUST
A. Keith Brodkin is the Chairman and President, Stephen E.
Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost is the
Assistant Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
MFS MUNICIPAL INCOME TRUST
A. Keith Brodkin is the Chairman and President, Cynthia M.
Brown and Robert J. Manning are Vice Presidents, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost, is the Assistant
Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
MFS MULTIMARKET INCOME TRUST
MFS CHARTER INCOME TRUST
A. Keith Brodkin is the Chairman and President, Leslie J.
Nanberg and James T. Swanson are Vice Presidents, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost, Vice President of
MFS, is the Assistant Treasurer and James R. Bordewick, Jr., is the Assistant
Secretary.
MFS SPECIAL VALUE TRUST
A. Keith Brodkin is the Chairman and President, Jeffrey L.
Shames and Robert J. Manning are Vice Presidents, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost, is the Assistant
Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
MFS/SUN LIFE SERIES TRUST
John D. McNeil, Chairman and Director of Sun Life Assurance
Company of Canada, is the Chairman, Stephen E. Cavan is the Secretary, W. Thomas
London is the Treasurer, James O. Yost, is the Assistant Treasurer and James R.
Bordewick, Jr., is the Assistant Secretary.
MONEY MARKET VARIABLE ACCOUNT
HIGH YIELD VARIABLE ACCOUNT
CAPITAL APPRECIATION VARIABLE ACCOUNT
GOVERNMENT SECURITIES VARIABLE ACCOUNT
TOTAL RETURN VARIABLE ACCOUNT
WORLD GOVERNMENTS VARIABLE ACCOUNT
MANAGED SECTORS VARIABLE ACCOUNT
John D. McNeil is the Chairman, Stephen E. Cavan is the
Secretary, and James R. Bordewick, Jr., is the Assistant Secretary.
MIL
A. Keith Brodkin is a Director and the Chairman, Arnold D.
Scott and Jeffrey L. Shames are Directors, Ziad Malek, Senior Vice President of
MFS, is the President, Thomas J. Cashman, Jr., a Senior Vice President of MFS,
is a Senior Vice President, Stephen E. Cavan is a Director, Senior Vice
President and the Clerk, James R. Bordewick, Jr. is a Director, Vice President
and an Assistant Clerk, Robert T. Burns is an Assistant Clerk, Joseph W. Dello
Russo, Senior Vice President and Chief Financial Officer of MFS, is the
Treasurer and Thomas B. Hastings is the Assistant Treasurer.
MIL-UK
A. Keith Brodkin is a Director and the Chairman, Arnold D.
Scott, Jeffrey L. Shames, and James R. Bordewick, Jr., are Directors, Stephen E.
Cavan is a Director and the Secretary, Ziad Malek is the President, James E.
Russell is the Treasurer, and Robert T. Burns is the Assistant Secretary.
MIL FUNDS
A. Keith Brodkin is the Chairman, President and a Director,
Richard B. Bailey, John A. Brindle, Richard W. S. Baker and William F. Waters
are Directors, Stephen E. Cavan is the Secretary, W. Thomas London is the
Treasurer, James O. Yost is the Assistant Treasurer and James R. Bordewick, Jr.,
is the Assistant Secretary, and Ziad Malek is a Senior Vice President.
MFS MERIDIAN FUNDS
A. Keith Brodkin is the Chairman, President and a Director,
Richard B. Bailey, John A. Brindle, Richard W. S. Baker, Arnold D. Scott,
Jeffrey L. Shames and William F. Waters are Directors, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James R. Bordewick, Jr., is the
Assistant Secretary, James O. Yost is the Assistant Treasurer, and Ziad Malek is
a Senior Vice President.
MFD
A. Keith Brodkin is the Chairman and a Director, Arnold D.
Scott and Jeffrey L. Shames are Directors, William W. Scott, Jr., an Executive
Vice President of MFS, is the President, Stephen E. Cavan is the Secretary,
Robert T. Burns is the Assistant Secretary, Joseph W. Dello Russo is the
Treasurer, and Thomas B. Hastings is the Assistant Treasurer.
CIAI
A. Keith Brodkin is the Chairman and a Director, Arnold D.
Scott and Jeffrey L. Shames are Directors, Cynthia Orcott is President, Bruce C.
Avery is the Vice President, Joseph W. Dello Russo is the Treasurer, Thomas B.
Hastings is the Assistant Treasurer, Stephen E. Cavan is the Secretary, and
Robert T. Burns is the Assistant Secretary.
MFSC
A. Keith Brodkin is the Chairman and a Director, Arnold D.
Scott and Jeffrey L. Shames are Directors, Joseph A. Recomendes, a Senior Vice
President of MFS, is Vice Chairman and a Director, Janet A. Clifford is the
Executive Vice President, Joseph W. Dello Russo is the Treasurer, Thomas B.
Hastings is the Assistant Treasurer, Stephen E. Cavan is the Secretary, and
Robert T. Burns is the Assistant Secretary.
MFSI
A. Keith Brodkin is the Chairman and a Director, Jeffrey L.
Shames, and Arnold D. Scott are Directors, Thomas J. Cashman, Jr., is the
President and a Director, Leslie J. Nanberg is a Senior Vice President, a
Managing Director and a Director, George F. Bennett, Carol A. Corley, John A.
Gee, Brianne Grady and Kevin R. Parke are Senior Vice Presidents and Managing
Directors, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer and Robert T. Burns is the Secretary.
RSI
William W. Scott, Jr. and Bruce C. Avery are Directors, Arnold
D. Scott is the Chairman and a Director, Joseph W. Dello Russo is the Treasurer,
Thomas B. Hastings is the Assistant Treasurer, Stephen E. Cavan is the
Secretary, Robert T. Burns is the Assistant Secretary and Sharon A. Brovelli and
Martin E. Beaulieu are Senior Vice Presidents.
In addition, the following persons, Directors or officers of
MFS, have the affiliations indicated:
<TABLE>
<S> <C> <C>
A. Keith Brodkin Director, Sun Life Assurance Company of Canada (U.S.),
One Sun Life Executive Park, Wellesley Hills,
Massachusetts
Director, Sun Life Insurance and Annuity Company of New
York, 67 Broad Street, New York, New York
Donald A. Stewart President and a Director, Sun Life Assurance Company of
Canada, Sun Life Centre, 150 King Street West, Toronto,
Ontario, Canada (Mr. Stewart is also an officer and/or
Director of various subsidiaries and affiliates of Sun
Life)
John D. McNeil Chairman, Sun Life Assurance Company of Canada, Sun Life
Centre, 150 King Street West, Toronto, Ontario, Canada
(Mr. McNeil is also an officer and/or Director of
various subsidiaries and affiliates of Sun Life)
Joseph W. Dello Russo Director of Mutual Fund Operations, The Boston Company,
Exchange Place, Boston, Massachusetts (until August,
1994)
</TABLE>
ITEM 29. DISTRIBUTORS
(a) Reference is hereby made to Item 28 above.
(b) Reference is hereby made to Item 28 above; the
principal business address of each of these persons is 500 Boylston Street,
Boston, Massachusetts 02116.
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The accounts and records of the Registrant are located, in
whole or in part,at the office of the Registrant and the following locations:
<TABLE>
<CAPTION>
NAME ADDRESS
---- -------
<S> <C> <C>
Massachusetts Financial Services 500 Boylston Street
Company (investment adviser) Boston, MA 02116
MFS Fund Distributors, Inc. 500 Boylston Street
(principal underwriter) Boston, MA 02116
State Street Bank and State Street South
Trust Company (custodian) 5 - West
North Quincy, MA 02171
MFS Service Center, Inc. 500 Boylston Street
(transfer agent) Boston, MA 02116
</TABLE>
ITEM 31. MANAGEMENT SERVICES
Not applicable.
ITEM 32. UNDERTAKINGS
(a) Not applicable.
(b) Not applicable.
(c) Registrant undertakes to furnish each person to
whom a prospectus is delivered with a copy of its latest annual report to
shareholders upon request and without charge.
(d) Insofar as indemnification for liability arising
under the Securities Act of 1933 may be permitted to trustees, officers and
controlling persons of the Registrant pursuant to the provisions set forth in
Item 27 of this Part C, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a trustee,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the Securities being Registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of Boston and
The Commonwealth of Massachusetts on the 25th day of February 1997.
MFS SERIES TRUST VI
By: JAMES R. BORDEWICK, JR.
Name: James R. Bordewick, Jr.
Title: Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to its Registration Statement has been signed below by
the following persons in the capacities indicated on February 25, 1997.
SIGNATURE TITLE
--------- -----
A. KEITH BRODKIN* Chairman, President (Principal Executive
- -------------------------- Officer) and Trustee
A. Keith Brodkin
W. THOMAS LONDON* Treasurer (Principal Financial Officer
- -------------------------- and Principal Accounting Officer)
W. Thomas London
RICHARD B. BAILEY* Trustee
- --------------------------
Richard B. Bailey
MARSHALL N. COHAN* Trustee
- --------------------------
Marshall N. Cohan
LAWRENCE H. COHN, M.D.* Trustee
- --------------------------
Lawrence H. Cohn, M.D.
SIR J. DAVID GIBBONS* Trustee
- --------------------------
Sir J. David Gibbons
ABBY M. O'NEILL* Trustee
- --------------------------
Abby M. O'Neill
WALTER E. ROBB, III* Trustee
- --------------------------
Walter E. Robb, III
ARNOLD D. SCOTT* Trustee
- --------------------------
Arnold D. Scott
JEFFREY L. SHAMES* Trustee
- --------------------------
Jeffrey L. Shames
J. DALE SHERRATT* Trustee
- --------------------------
J. Dale Sherratt
WARD SMITH* Trustee
- --------------------------
Ward Smith
*By: JAMES R. BORDEWICK, JR.
Name: James R. Bordewick, Jr.
as Attorney-in-fact
Executed by James R. Bordewick, Jr. on
behalf of those indicated pursuant to a
Power of Attorney dated August 11,
1994, previously filed with the
Securities and Exchange Commission
with Post-Effective Amendment No. 8 on
October 23, 1995.
<PAGE>
<TABLE>
INDEX TO EXHIBITS
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO.
- ----------- ---------------------- --------
<S> <C> <C>
1 (c) Amendment to the Declaration of Trust redesignating Class P
shares as Class I Shares, dated December 19, 1996.
9 (b) Amendment to Shareholder Servicing Agent Agreement, dated
January 1, 1997.
11 (a) Consent of Ernst & Young LLP - MFS World Total Return and MFS
Utilities Fund.
(b) Consent of Deloitte & Touche LLP - MFS World Equity Fund.
17 Financial Data Schedules for each Class of each Series.
</TABLE>
<PAGE>
EXHIBIT NO. 99.1(c)
MFS SERIES TRUST VI
CERTIFICATION OF AMENDMENT
TO THE DECLARATION OF TRUST
REDESIGNATION
OF CLASS P SHARES AS CLASS I SHARES
The undersigned, being a majority of the Trustees of MFS Series Trust
VI (the "Trust"), a business trust organized under the laws of The Commonwealth
of Massachusetts pursuant to an Amended and Restated Declaration of Trust dated
January 6, 1995 as amended (the "Declaration"), acting pursuant to Section 6.10
of the Declaration, do hereby redesignate the shares previously designated as
Class P shares of each series of the Trust as Class I shares.
IN WITNESS WHEREOF, a majority of the Trustees of the Trust have executed
this amendment, in one or more counterparts, all constituting a single
instrument, as an instrument under seal in The Commonwealth of Massachusetts, as
of this 11th day of December, 1996.
A. KEITH BRODKIN WALTER E. ROBB, III
- --------------------------- -----------------------
A. Keith Brodkin Walter E. Robb, III
76 Farm Road 35 Farm Road
Sherborn, MA 01770 Sherborn, MA 01770
RICHARD B. BAILEY ARNOLD D. SCOTT
- --------------------------- -----------------------
Richard B. Bailey Arnold D. Scott
63 Atlantic Avenue 20 Rowes Wharf
Boston, MA 02110 Boston, MA 02110
MARSHALL N. COHAN JEFFREY L. SHAMES
- --------------------------- -----------------------
Marshall N. Cohan Jeffrey L. Shames
2524 Bedford Mews Drive 60 Brookside Road
Wellington, FL 33414 Needham, MA 02192
LAWRENCE H. COHN J. DALE SHERRATT
- --------------------------- -----------------------
Lawrence H. Cohn J. Dale Sherratt
45 Singletree Road 86 Farm Road
Chestnut Hill, MA 02167 Sherborn, MA 01770
SIR J. DAVID GIBBONS WARD SMITH
- --------------------------- -----------------------
Sir J. David Gibbons Ward Smith
"Leeward" 36080 Shaker Blvd
5 Leeside Drive Hunting Valley, OH 44022
"Point Shares"
Pembroke, Bermuda HM 05
ABBY M. O'NEILL
- ---------------------------
Abby M. O'Neill
200 Sunset Road
Oyster Bay, NY 11771
<PAGE>
EXHIBIT NO. 99.9(b)
MFS SERIES TRUST VI
500 BOYLSTON STREET o BOSTON o MASSACHUSETTS o 02116
(617) o 954-5000
January 1, 1997
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116
Dear Sir/Madam:
This will confirm our understanding that Exhibit B to the Shareholder Servicing
Agent Agreement between us, dated August 1, 1985, as amended, is hereby amended,
effective immediately, to read in its entirety as set forth on Attachment 1
hereto.
Please indicate your acceptance of the foregoing by signing below.
Sincerely,
MFS SERIES TRUST VI
By: W. THOMAS LONDON
-------------------
W. Thomas London
Treasurer
Accepted and Agreed:
MFS SERVICE CENTER, INC.
By: JOSEPH W. DELLO RUSSO
---------------------------
Joseph W. Dello Russo
Treasurer
<PAGE>
ATTACHMENT 1
January 1, 1997
EXHIBIT B TO THE SHAREHOLDER
SERVICING AGENT AGREEMENT BETWEEN
MFS SERVICE CENTER, INC. ("MFSC")
AND MFS SERIES TRUST VI (THE "FUND")
The fees to be paid by the Fund on behalf of its series with respect to all
shares of each series of the Fund to MFSC, for MFSC's services as shareholder
servicing agent, shall be 0.13% of the average daily net assets of the Fund.
<PAGE>
Exhibit 99.11(a)
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference made to our firm under the captions "Condensed
Financial Information" in the Prospectus and "Independent Auditors and Financial
Statements" in the Statement of Additional Information and to the incorporation
by reference in this Post-Effective Amendment No. 11 to Registration Statement
No. 33-34502 on Form N-1A of our report dated December 12, 1996, on the
financial statements and financial highlights of MFS World Total Return and MFS
Utilities Fund included in the 1996 Annual Report to Shareholders.
Ernst & Young LLP
--------------------
Ernst & Young LLP
Boston, Massachusetts
February 24, 1997
<PAGE>
Exhibit 99.11(b)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Post-Effective Amendment
No. 11 to Registration Statement No. 33-34502 of MFS Series Trust VI of our
report dated November 29, 1996 appearing in the annual report to shareholders
for the year ended October 31, 1996, of MFS World Equity Fund, a series of MFS
Series Trust VI, and to the references to us under the headings "Condensed
Financial Information" in the Prospectus and "Independent Auditors and Financial
Statements" in the Statement of Additional Information, which is part of such
Registration Statement.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 24, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000863032
<NAME> MFS SERIES TRUST VI
<SERIES>
<NUMBER> 011
<NAME> MFS WORLD TOTAL RETURN FUND CLASS A
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<INVESTMENTS-AT-COST> 187233072
<INVESTMENTS-AT-VALUE> 217364891
<RECEIVABLES> 4278998
<ASSETS-OTHER> 2030
<OTHER-ITEMS-ASSETS> 51200
<TOTAL-ASSETS> 221697119
<PAYABLE-FOR-SECURITIES> 3585006
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2233069
<TOTAL-LIABILITIES> 5818075
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 175324281
<SHARES-COMMON-STOCK> 10197969
<SHARES-COMMON-PRIOR> 9536061
<ACCUMULATED-NII-CURRENT> 887122
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 10412666
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 29254975
<NET-ASSETS> 215879044
<DIVIDEND-INCOME> 3798557
<INTEREST-INCOME> 5226669
<OTHER-INCOME> (284638)
<EXPENSES-NET> (3760777)
<NET-INVESTMENT-INCOME> 4979811
<REALIZED-GAINS-CURRENT> 10409811
<APPREC-INCREASE-CURRENT> 13407417
<NET-CHANGE-FROM-OPS> 28797039
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (6143145)
<DISTRIBUTIONS-OF-GAINS> (54351)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2084100
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