<PAGE>
As filed with the Securities and Exchange Commission on December 30, 1998
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. 13
AND
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 15
MFS(R) 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)
|_| on [date] pursuant to paragraph (b)
|_| 60 days after filing pursuant to paragraph (a)(i)
|X| on February 28, 1999 pursuant to paragraph (a)(i)
|_| 75 days after filing pursuant to paragraph (a)(ii)
|_| on [date] pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
|_| this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
================================================================================
<PAGE>
MFS(R) GLOBAL TOTAL RETURN FUND
SUPPLEMENT DATED MARCH 1, 1999 TO THE CURRENT PROSPECTUS
THIS SUPPLEMENT DESCRIBES THE FUND'S CLASS I SHARES, AND IT SUPPLEMENTS CERTAIN
INFORMATION IN THE FUND'S PROSPECTUS DATED MARCH 1, 1999. THE CAPTION HEADINGS
USED IN THIS SUPPLEMENT CORRESPOND WITH THE CAPTION HEADINGS USED IN THE
PROSPECTUS.
You may purchase class I shares only if you are an eligible institutional
investor, as described under the caption "Description of Share Classes" below.
1. RISK RETURN SUMMARY
PERFORMANCE TABLE. The "Performance Table" is supplemented as follows:
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
1 YEAR 5 YEARS LIFE*
------ ------- -----
Class I shares % % %
[Broad-based securities market index] % % %
[Optional Lipper category] % % %
[Optional additional index] % % %
- --------------
* For the period from the commencement of the fund's investment operations
on September 4, 1990, through December 31, 1998.
** The Standard & Poor's 500 Composite Index is a market capitalization
weighted price index composed of 500 widely held companies.
+ Source: CDA/Wisenberger
The fund initially offered class A shares on September 4, 1990 and class I
shares on January 2, 1997. Class I share performance includes the performance of
the fund's class A shares for periods prior to the offering of class I shares.
Class I share performance generally would have been higher than class A share
performance had class I shares been offered for the entire period, because
operating expenses (e.g., distribution and service fees) attributable to class I
shares are lower than those of class A shares. Class I share performance has
been adjusted to take into account the fact that class I shares have no initial
sales charge.
2. EXPENSE SUMMARY
EXPENSE TABLE. The "Expense Table" is supplemented as follows:
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
Management Fees.................................. 0.83%
Distribution and Service (12b-1) Fees............ 0.00%
Other Expenses(1)................................ 0.33%
Total Annual Fund Operating Expenses............. 1.16%
- -----------------------
(1) The fund has an expense offset arrangement which reduces the fund's
custodian fee based upon the amount of cash maintained by the fund
with its custodian and dividend disbursing agent. The fund may enter
into other similar arrangements and directed brokerage arrangements,
which would also have the effect of reducing the fund's expenses.
"Other Expenses" do not take into account these expense reductions,
and therefore do not represent the actual expenses of the fund.
<PAGE>
EXAMPLE OF EXPENSES. The "Example of Expenses" table is supplemented as
follows:
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
----------- ------ ------ ------ -------
Class I shares $118 $368 $638 $1,409
3. DESCRIPTIONS OF SHARE CLASSES
The "Description of Share Classes" is supplemented as follows:
If you are an eligible institutional investor (as described below), you may
purchase class I shares at net asset value without an initial sales charge or
CDSC upon redemption. Class I shares do not have annual distribution and service
fees, and do not convert to any other class of shares of the fund.
The following eligible institutional investors may purchase class I shares:
o certain retirement plans established for the benefit of employees of MFS
and employees of MFS' affiliates; and
o any fund distributed by MFS, if the fund seeks to achieve its investment
objective by investing primarily in shares of the fund and other MFS
funds.
In no event will the fund, MFS, MFD or any of their affiliates pay any sales
commissions or compensation to any third party in connection with the sale of
class I shares. The payment of any such sales commission or compensation would,
under the fund's policies, disqualify the purchaser as an eligible investor in
class I shares.
4. HOW TO PURCHASE, EXCHANGE AND REDEEM SHARES
The discussion of "How to Purchase, Exchange and Redeem Shares" is supplemented
as follows:
You may purchase, redeem and exchange class I shares only through your MFD
representative or by contacting MFSC (see the back cover of the Prospectus for
address and phone number). You may exchange your class I shares for class I
shares of another MFS Fund (if you are eligible to purchase them) and for shares
of the MFS Money Market Fund at net asset value.
5. FINANCIAL HIGHLIGHTS
The "Financial Highlights" table is supplemented as follows:
FINANCIAL STATEMENTS - CLASS I SHARES
YEAR ENDED PERIOD ENDED
OCTOBER 31, 1998 OCTOBER 31, 1997*
---------------- -----------------
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $13.86 $12.51
------ ------
Income from investment operations# -
Net investment income $ 0.33 $ 0.30
Net realized and unrealized gain on
investments and foreign currency
transactions 1.56 1.21
------ ------
Total from investment
operations $ 1.89 $1.51
------ ------
Less distributions declared to shareholders -
From net investment income $(0.23) $(0.16)
------ ------
From net realized gain on investments and
foreign currency transactions (0.92) --
------ ------
Total distributions declared to
shareholders $(1.15) $(0.16)
------ ------
Net asset value - end of period $14.60 $13.86
------ ------
Total return 14.78% 12.08%++
Ratios (to average net assets)/Supplemental
data
Expenses## 1.16% 1.24%+
Net investment income 2.33% 2.72%+
Portfolio turnover
183% 143%
Net assets at end of period (000 omitted)
$1,837 $1,848
- -------------
* For the period from the inception of Class I shares, January 2, 1997, through
October 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The fund has an expense offset arrangement which reduces the fund's custodian
fee based upon the amount of cash maintained by the fund with its custodian
and dividend disbursing agent. The fund's expenses are calculated without
reduction for this expense offset arrangement.
THE DATE OF THIS SUPPLEMENT IS MARCH 1, 1999.
<PAGE>
MFS(R) GLOBAL TOTAL RETURN FUND
MARCH 1, 1999
PROSPECTUS
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
- --------------------------------------------------------------------------------
This Prospectus describes the MFS Global Total Return Fund. The investment
objective of the fund is total return by providing above-average income
(compared to a portfolio invested entirely in equity securities) and
opportunities for growth of capital and income.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED THE FUND'S SHARES OR
DETERMINED WHETHER THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANYONE WHO TELLS
YOU OTHERWISE IS COMMITTING A CRIME.
<PAGE>
TABLE OF CONTENTS
Page
I Risk Return Summary ................................... 1
II Expense Summary ....................................... 7
III Investment Objective, Strategies and Principal Risks .. 9
IV Management of the Fund ................................ 14
V Description of Share Classes .......................... 15
VI How to Purchase, Exchange and Redeem Shares ........... 18
VII Investor Services and Programs ........................ 22
VIII Other Information ..................................... 24
IX Financial Highlights .................................. 27
Appendix A -- Investment Techniques and Practices ..... A-1
Appendix B -- Sales Charge Categories Available to
Certain Retirement Plans ............................ B-1
<PAGE>
- --------------------------
I RISK RETURN SUMMARY
- --------------------------
o INVESTMENT OBJECTIVE
Total return by providing above-average income (compared to a portfolio
invested entirely in equity securities) and opportunities for growth of
capital and income.
o PRINCIPAL INVESTMENT STRATEGIES
The fund is a global "balanced fund" and invests in a combination of
global equity and fixed income securities. Under normal market conditions,
the fund invests:
o at least 40%, but not more than 75%, of its total assets in equity
securities, which may include common stocks and related securities, such
as preferred stock, convertible securities, warrants and depositary
receipts, and
o at least 25% of its total assets in fixed income securities.
The fund may vary the percentage of its assets invested in any one type of
security (within the limits described above) in accordance with its
investment adviser's interpretation of economic and money market
conditions, fiscal and monetary policy and underlying security values. The
fund's investment adviser is Massachusetts Financial Services Company
(referred to as MFS or the adviser). The fund may also vary the percentage
of its assets issued abroad and denominated in foreign currencies in
accordance with MFS' view 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.
FOREIGN INVESTMENTS. The fund may invest in foreign securities and may
have exposure to foreign currencies through its investment in these
securities, its direct holdings of foreign currencies and through its use
of foreign currency exchange contracts for the purchase or sale of a fixed
quantity of a foreign currency at a future date. The fund's investments in
foreign securities may include equity and fixed income securities of
foreign companies, fixed income securities issued by foreign governments
and Brady Bonds.
EQUITY INVESTMENTS. The fund's equity investments include securities of
both non-U.S. issuers and U.S. issuers. With respect to U.S. issuers, the
fund focuses on those companies that have the potential to derive a
meaningful portion of their revenues and earnings from foreign markets. In
managing the fund, MFS seeks to purchase securities of well-known and
established companies. MFS looks particularly for equity securities issued
by companies with relatively large market capitalizations (i.e., market
capitalizations of $5 billion or more) and which have:
o steady earnings with a predictable growth rate, and
o attractive valuations based on current and expected earnings or cash flow.
MFS uses a bottom-up, as opposed to a top-down, investment style in
managing the equity-oriented funds (such as the equity portion of the
fund) it advises. This means that securities are selected based upon
fundamental analysis of individual companies performed by the fund's
portfolio manager and MFS' large group of equity research analysts.
FIXED INCOME INVESTMENTS. The fund invests in securities which pay a fixed
interest rate, which include:
o securities issued by foreign governments, which are either:
|> issued or guaranteed as to payment of principal and interest by
foreign governments, foreign government agencies, foreign
semi-governmental entities or supra-national entities, or
|> interests issued by entities organized and operated for the purpose
of restructuring the investment characteristics of foreign
government securities.
o U.S. government securities, which are bonds or other debt obligations
issued by, or whose principal and interest payments are guaranteed by, the
U.S. government or one of its agencies or instrumentalities,
o corporate bonds, which are bonds or other debt obligations issued by
corporations or similar entities, and
o mortgage-backed and asset-backed securities, which represent interests in
a pool of assets such as mortgage loans, car loan receivables, or credit
card receivables.
In selecting fixed income investments for the fund, MFS considers the
views of its large group of fixed income portfolio managers and research
analysts. This group periodically assesses the three-month outlook for
various segments of the fixed income markets. This three-month "horizon"
outlook is used by the portfolio manager(s) of MFS' fixed income oriented
funds (including the fixed income portion of the fund) as a tool in making
or adjusting the fund's asset allocations to various segments of the fixed
income markets. In assessing the credit quality of fixed income
securities, MFS does not rely solely on the credit ratings assigned by
credit rating agencies, but rather performs its own independent credit
analysis.
The fund may engage in active and frequent trading to achieve its
principal investment strategies. This may result in the realization and
distribution to shareholders of higher capital gains as compared to a fund
with less active trading policies, which would increase your tax
liability. Frequent trading also increases transaction costs, which could
detract from the fund's performance.
The fund is a non-diversified mutual fund. This means that the fund may
invest a relatively high percentage of its assets in one or a few issuers.
o PRINCIPAL RISKS OF AN INVESTMENT
Your investment in the fund is subject to certain risks:
o Allocation Risk: The fund will allocate its investments between equity and
fixed income securities, among various segments of the fixed income
markets, and among different countries based upon judgments made by MFS.
The fund could miss attractive investment opportunities by underweighting
markets where there are significant returns, and could lose value by
overweighting markets where there are significant declines.
o Foreign Markets Risk: The fund's investment in foreign securities involves
additional risks relating to political, social and economic developments
abroad. Other risks from these investments result from the differences
between the regulations to which U.S. and foreign issuers and markets are
subject.
o Currency Risk: The fund's exposure to foreign currencies may cause the
value of the fund to decline in the event that the U.S. dollar strengthens
against these currencies, or in the event that foreign governments
intervene in the currency markets.
o Market and Company Risk: The value of the equity securities in which the
fund invests may decline due to changing economic, political or market
conditions, or due to the financial condition of the company which issued
the security.
o Interest Rate Risk: When interest rates rise, the prices of fixed income
and convertible securities in the fund's portfolio will generally fall.
Conversely, when interest rates fall, the prices of fixed income and
convertible securities in the fund's portfolio will generally rise.
o Maturity Risk: Interest rate risk will affect the price of a fixed income
security more if the security has a longer maturity. The average maturity
of the fund's fixed income investments will affect the volatility of the
fund's share price.
o Credit Risk: The fund is subject to the risk that the issuer of a fixed
income security will not be able to pay principal and interest when due.
o Mortgage and Asset-Backed Securities Risk:
|> Maturity Risk: Mortgage-backed and asset-backed securities do not
have a fixed maturity and their expected maturities may vary when
interest rates rise or fall.
|> Credit Risk: As with any fixed income security, mortgage-backed and
asset- backed securities are subject to the risk of default on
principal and interest payments. It may be difficult to enforce
rights against the assets underlying mortgage-backed and asset-
backed securities in the case of default.
o Non-Diversified Status: Because the fund may invest in assets in a small
number of issuers, the fund is more susceptible to any single economic,
political or regulatory event affecting those issuers than is a
diversified fund.
o As with any mutual fund, you could lose money on your investment in the
fund.
An investment in the fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the fund by showing changes in the fund's
performance over time. The chart and table provide past performance
information. The fund's past performance does not necessarily indicate how
the fund will perform in the future. The performance information in the
chart and table is based upon calendar year periods, while the performance
information presented under the caption "Financial Highlights" and in the
fund's shareholder reports is based upon the fund's fiscal year.
Therefore, these performance results differ.
BAR CHART
The bar chart shows changes in the annual total returns of the fund's
class A shares for each calendar year since class A shares were first
offered. The chart and related notes do not take into account any sales
charges that you may be required to pay upon purchase or redemption of the
fund's shares, but do include the reinvestment of distributions. Any sales
charge will reduce your return. The return of the fund's other classes of
shares will differ from the class A returns shown in the bar chart,
depending upon the expenses of those classes.
1991 20.91%
1992 5.03%
1993 21.50%
1994 (3.07)%
1995 20.29%
1996 15.34%
1997 13.22%
1998
During the period shown in the bar chart, the highest quarterly return was
% (for the calendar quarter ended , 199 ) and the lowest
quarterly return was % (for the calendar quarter ended , 199 ).
<PAGE>
PERFORMANCE TABLE
This table shows how the average annual total returns of each class of the
fund compares to various market indicators and assumes the reinvestment of
distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
..........................................................................
1 Year 5 Years Life*
------ ------- -----
Class A shares % % %
Class B shares % % %
Class C shares % % %
Standard & Poor's 500 Composite Index** % % %
Morgan Stanley Capital International World
Index*** % % %
J.P. Morgan Global Government Bond Index**** % % %
- ----------
* For the period from the commencement of the fund's investment
operations on September 4, 1990, through December 31, 1998.
+ Source: Lipper Analytical Services, Inc.
++ Source: CDA/Wiesenberger.
** The Standard & Poors 500 Composite Index is a market capitalization
weighted price index composed of 500 widely held common stocks.
*** The Morgan Stanley Capital International (MSCI) World Index is an
unmanaged market-capitalization-weighted total return index which
measures the performance of 23 developed-country global stock markets,
including the United States, Canada, Europe, Australia, New Zealand,
and the Far East.
**** The J.P. Morgan Global Government Bond Index is an unmanaged aggregate
of actively traded government bonds issued from 13 countries (including
the United States) with remaining maturities of at least one year.
Share performance is calculated according to Securities and Exchange
Commission rules. Class A share performance takes into account the
deduction of the 4.75% maximum sales charge. Class B share performance
takes into account the deduction of the applicable contingent deferred
sales charge (referred to as a CDSC), which declines over six years from
4% to 0%. Class C share performance takes into account the deduction of
the 1% CDSC.
The fund initially offered class A shares on September 4, 1990, class B
shares on September 7, 1993 and class C shares on January 3, 1994. Class B
and class C share performance includes the performance of the fund's class
A shares for periods prior to the offering of class B and class C shares.
Class B and class C share performance generally would have been lower than
class A share performance had class B and class C shares been offered for
the entire period, because certain operating expenses (e.g., distribution
and service fees) attributable to class B and class C shares are higher
than those of class A shares. Class B and class C share performance has
been adjusted to take into account the CDSC applicable to class B and
class C shares, rather than the initial sales charge applicable to class A
shares.
If you would like the fund's current yield, contact the MFS Service Center
at the toll-free number set forth on the back cover page.
<PAGE>
- -----------------------
II EXPENSE SUMMARY
- -----------------------
o EXPENSE TABLE
This table describes the fees and expenses that you may pay when you buy,
redeem and hold shares of the fund.
SHAREHOLDER FEES (fees paid directly from your investment)
..........................................................................
CLASS A CLASS B CLASS C
Maximum Sales Charge (Load) Imposed
on Purchases (as a percentage of
offering price) ................... 4.75% 0.00% 0.00%
Maximum Deferred Sales Charge (Load)
(as a percentage of original purchase
price or redemption proceeds,
whichever is less) ................ See Below(1) 4.00% 1.00%
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund assets)
............................................................................
Management Fees ..................... 0.83% 0.83% 0.83%
Distribution and Service (12b-1)
Fees(2) ............................. 0.35% 1.00% 1.00%
Other Expenses(3) ................... 0.33% 0.33% 0.33%
----- ----- -----
Total Annual Fund Operating Expenses 1.51% 2.16% 2.16%
- ----------
(1) An initial sales charge will not be deducted from your purchase if you
buy $1 million or more of class A shares, or if you are investing
through a retirement plan and your class A purchase meets certain
requirements. However, in this case, a contingent deferred sales charge
(referred to as a CDSC) of 1% may be deducted from your redemption
proceeds if you redeem your investment within 12 months.
(2) The fund adopted a distribution plan under Rule 12b-1 that permits it to
pay marketing and other fees to support the sale and distribution of
class A, B and C shares and the services provided to you by your
financial adviser (referred to as distribution and service fees).
(3) The fund has an expense offset arrangement which reduces the fund's
custodian fee based upon the amount of cash maintained by the fund with
its custodian and dividend disbursing agent. The fund may enter into
other similar arrangements and directed brokerage arrangements, which
would also have the effect of reducing the fund's expenses. "Other
Expenses" do not take into account these expense reductions, and are
therefore higher than the actual expenses of the fund.
<PAGE>
o EXAMPLE OF EXPENSES
These examples are intended to help you compare the cost of investing in
the fund with the cost of investing in other mutual funds.
The examples assume that:
o You invest $10,000 in the fund for the time periods indicated and you
redeem your shares at the end of the time periods;
o Your investment has a 5% return each year and dividends and other
distributions are reinvested; and
o The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, under these assumptions
your costs would be:
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
----------------------------------------------------------------------------
Class A shares $621 $930 $1,260 $2,191
Class B shares
Assuming redemption at end of
period $619 $976 $1,359 $2,320
Assuming no redemption $219 $676 $1,159 $2,320
Class C shares
Assuming redemption at end of
period $319 $676 $1,159 $2,493
Assuming no redemption $219 $676 $1,159 $2,493
<PAGE>
- -------------------------------------------------------------
III INVESTMENT OBJECTIVE, STRATEGIES AND PRINCIPAL RISKS
- -------------------------------------------------------------
o INVESTMENT OBJECTIVE
The fund's investment objective is to seek total return by providing
above-average income (compared to a portfolio invested entirely in equity
securities) and opportunities for growth of capital and income. The fund's
objective may be modified without shareholder approval.
o HOW THE FUND INTENDS TO ACHIEVE ITS OBJECTIVE
The fund is a "global balanced fund," and invests in a combination of
global equity and fixed income securities. Under normal market conditions,
the fund invests:
o at least 40%, but not more than 75%, of its total assets in equity
securities, which may include common stocks and related securities such as
preferred stock, warrants or rights convertible into stock, and depositary
receipts for those securities, and
o at least 25% of its total assets in fixed income securities.
The fund may vary the percentage of its assets invested in any one type of
security (within the limits described above) in accordance with MFS'
interpretation of economic and money market conditions, fiscal and monetary
policy and underlying security values. The fund may also vary the percentage
of its assets issued abroad and denominated in foreign currencies in
accordance with MFS' view 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.
FOREIGN INVESTMENTS. The fund invests in foreign securities such as:
o equity securities of foreign companies,
o fixed income securities of foreign companies,
o fixed income securities issued by foreign governments; which are:
|> issued or guaranteed as to payment of principal and interest by
foreign governments, foreign government agencies, foreign
semi-governmental entities, or supra-national entities, or
|> interests issued by entities organized and operated for the purpose of
restructuring the investment characteristics of foreign government
securities, and
o Brady Bonds, which are long-term bonds issued as part of a restructuring
of commercial loans to emerging market countries
The fund may have exposure to foreign currencies through its investments
in foreign securities, its direct holdings of foreign currencies, or
through its use of foreign currency exchange contracts for the purchase or
sale of a fixed quantity of a foreign currency at a future date.
EQUITY INVESTMENTS. The fund's equity investments include securities of
both non-U.S. and U.S. issuers. With respect to U.S. issuers, the fund
focuses on those companies that have the potential to derive a meaningful
portion of their revenues and earnings in foreign markets. In managing the
fund, MFS seeks to purchase securities of well-known and established
companies. MFS looks particularly for equity securities issued by
companies with relatively large market capitalizations (i.e., market
capitalizations of $5 billion or more) and which have:
o steady earnings with a predictable growth rate, and
o attractive valuations based on current and expected earnings or cash flow.
MFS uses a bottom-up, as opposed to a top-down, investment style in
managing the equity-oriented funds (such as the equity portion of the
fund) it advises. This means that securities are selected based upon
fundamental analysis performed by the fund's portfolio manager and MFS'
large group of equity research analysts. Securities are not selected based
upon the type of industries to which they belong.
FIXED INCOME INVESTMENTS. The fund invests in securities which pay a fixed
interest rate, which include:
o Securities issued by foreign governments, as described under "Foreign
Investments," above,
o U.S. government securities, which are bonds or other debt obligations
issued by, or whose principal and interest payments are guaranteed by, the
U.S. government or one of its agencies or instrumentalities,
o corporate bonds, which are bonds or other debt obligations issued by
corporations or similar entities, including foreign corporations, and
o mortgage-backed and asset-backed securities, which represent interests in
a pool of assets such as mortgage loans, car loan receivables, or credit
card receivables. These investments entitle the fund to a share of the
principal and interest payments made on the underlying mortgage, car loan,
or credit card. For example, if the fund invests in a pool that includes
your mortgage loan, a share of the principal and interest payments on your
mortgage would pass to the fund.
In selecting fixed income investments for the fund, MFS considers the
views of its large group of fixed income portfolio managers and research
analysts. Every two weeks, this group convenes to assess the three-month
outlook for various segments of the fixed income markets. The group analyzes
changes in inflation rates, economic growth and other fiscal measures to
assess the probable changes in long and short term U.S. treasury interest
rates. Using that assessment, the group then determines the probable
difference between the yield on U.S. Treasury securities and the yield on
other types of fixed income securities, and then draws conclusions on the
probable total returns of these various types of fixed income securities.
This three-month "horizon" outlook is used by the portfolio manager(s) of
MFS' fixed income oriented funds (including the fixed income portion of the
fund) as a tool in making or adjusting the fund's asset allocations to these
various segments of the fixed income markets. In assessing the credit
quality of fixed income securities, MFS does not rely solely on the credit
ratings assigned by credit rating agencies, but rather performs its own
independent credit analysis.
OTHER CONSIDERATIONS. The fund is a non-diversified mutual fund. This
means that the fund may invest a relatively high percentage of its assets
in one or a few issuers.
The fund may depart from its principal investment strategies by
temporarily investing for defensive purposes when adverse market, economic
or political conditions exist. While the fund invests defensively, it may
not be able to pursue its investment objective. The fund's defensive
investment position may not be effective in protecting its value.
The fund may engage in active and frequent trading to achieve its
principal investment strategies. This may result in the realization and
distribution to shareholders of higher capital gains as compared to a fund
with less active trading policies, which would increase your tax
liability. Frequent trading also increases transaction costs, which could
detract from the fund's performance.
The fund may invest in various types of securities and engage in various
investment techniques and practices which are not the principal focus of
the fund and therefore are not described in this Prospectus. The types of
securities and investment techniques and practices in which the fund may
engage are identified in Appendix A to this Prospectus, and are discussed,
together with their risks, in the fund's Statement of Additional
Information (referred to as the SAI), which you may obtain by contacting
MFS Service Center, Inc. (see back cover for address and phone number).
o PRINCIPAL RISKS
The principal risks of investing in the fund and the circumstances
reasonably likely to cause the value of your investment in the fund to
decline are described below. As with any non-money market mutual fund, the
share price of the fund will change daily based on market conditions and
other factors. Please note that there are many circumstances which could
cause the value of your investment in the fund to decline, and which could
prevent the fund from achieving its objective, that are not described
here.
The principal risks of investing in the fund are:
o Allocation Risk: The fund will allocate its investments between equity and
fixed income securities, and among various segments of the fixed income
markets, and among different countries based upon judgments made by MFS.
The fund could miss attractive investment opportunities by underweighting
markets where there are significant returns, and could lose value by
overweighting markets where there are significant declines.
o Foreign Securities: Investments in foreign securities involve risks
relating to political, social and economic developments abroad, as well as
risks resulting from the differences between the regulations to which U.S.
and foreign issuers and markets are subject:
|> These risks may include the seizure by the government of company
assets, excessive taxation, withholding taxes on dividends and
interest, limitations on the use or transfer of portfolio assets, and
political or social instability.
|> Enforcing legal rights may be difficult, costly and slow in foreign
countries, and there may be special problems enforcing claims against
foreign governments.
|> Foreign companies may not be subject to accounting standards or
governmental supervision comparable to U.S. companies, and there may
be less public information about their operations.
|> Foreign markets may be less liquid and more volatile than U.S.
markets.
|> Foreign securities often trade in currencies other than the U.S.
dollar, and the fund may directly hold foreign currencies and
purchase and sell foreign currencies through forward exchange
contracts. Changes in currency exchange rates will affect the fund's
net asset value, the value of dividends and interest earned, and
gains and losses realized on the sale of securities. An increase in
the strength of the U.S. dollar relative to these other currencies
may cause the value of the fund to decline. Certain foreign
currencies may be particularly volatile, and foreign governments may
intervene in the currency markets, causing a decline in value or
liquidity in the fund's foreign currency holdings. By entering into
forward foreign currency exchange contracts, the fund may be required
to forego the benefits of advantageous changes in exchange rates and,
in the case of forward contracts entered into for the purpose of
increasing return, the fund may sustain losses which will reduce its
gross income. Forward foreign currency exchange contracts involve the
risk that the party with which the fund enters the contract may fail
to perform its obligations to the fund.
o Market Risk: This is the risk that the price of a security held by the
fund will fall due to changing economic, political or market conditions or
disappointing earnings results.
o Company Risk: Prices of securities react to the economic condition of the
company that issued the security. The fund's equity investments in an
issuer may rise and fall based on the issuer's actual and anticipated
earnings, changes in management and the potential for takeovers and
acquisitions.
o Interest Rate Risk: When interest rates rise, the prices of fixed income
securities in the fund's portfolio will generally fall. Conversely, when
interest rates fall, the prices of fixed income securities in the fund's
portfolio will generally rise.
o Maturity Risk: Interest rate risk will affect the price of a fixed income
security more if the security has a longer maturity. Fixed income
securities with longer maturities will therefore be more volatile than
other fixed income securities with shorter maturities. Conversely, fixed
income securities with shorter maturities will be less volatile but
generally provide lower returns than fixed income securities with longer
maturities. The average maturity of the fund's fixed income investments
will affect the volatility of the fund's share price.
o Credit Risk: Credit risk is the risk that the issuer of a fixed income
security will not be able to pay principal and interest when due. Rating
agencies assign credit ratings to certain fixed income securities to
indicate their credit risk. The price of a fixed income security will
generally fall if the issuer defaults on its obligation to pay principal
or interest, the rating agencies downgrade the issuer's credit rating or
other news affects the market's perception of the issuer's credit risk.
o Mortgage and Asset-Backed Securities:
|> Maturity Risk:
+ Mortgage-Backed Securities: A mortgage-backed security will
mature when all the mortgages in the pool mature or are prepaid.
Therefore, mortgage-backed securities do not have a fixed
maturity, and their expected maturities may vary when interest
rates rise or fall.
/\ When interest rates fall, homeowners are more likely to
prepay their mortgage loans. An increased rate of
prepayments on the fund's mortgage-backed securities will
result in an unforeseen loss of interest income to the fund.
Because prepayments increase when interest rates fall, the
price of mortgage-backed securities does not increase as
much as other fixed income securities when interest rates
fall.
/\ When interest rates rise, homeowners are less likely to
prepay their mortgage loans. A decreased rate of prepayments
lengthens the expected maturity of a mortgage-backed
security. Therefore, the prices of mortgage-backed
securities may decrease more than prices of other fixed
income securities when interest rates rise.
+ Collateralized Mortgage Obligations: The fund may invest in
mortgage-backed securities called collateralized mortgage
obligations (CMOs). CMOs are issued in separate classes with
different stated maturities. As the mortgage pool experiences
prepayments, the pool pays off investors in classes with shorter
maturities first. By investing in CMOs, the fund may manage the
prepayment risk of mortgage-backed securities. However,
prepayments may cause the actual maturity of a CMO to be
substantially shorter than its stated maturity.
+ Asset-Backed Securities: Asset-backed securities have prepayment
risks similar to mortgage-backed securities.
|> Credit Risk: As with any fixed income security, mortgage-backed and
asset- backed securities are subject to the risk of default on
principal and interest payments. It may be difficult to enforce
rights against the assets underlying mortgage-backed and asset-
backed securities in the case of default. The U.S. government or its
agencies may guarantee the payment of principal and interest on some
mortgage-backed securities. Mortgage- backed securities and
asset-backed securities issued by private lending institutions or
other financial intermediaries may be supported by insurance or other
forms of guarantees.
<PAGE>
- ------------------------------
IV MANAGEMENT OF THE FUND
- ------------------------------
o INVESTMENT ADVISER
Massachusetts Financial Services Company (referred to as MFS or the
adviser) is the fund's investment adviser. MFS is America's oldest mutual
fund organization. MFS and its predecessor organizations have a history of
money management dating from 1924 and the founding of the first mutual
fund, Massachusetts Investors Trust. Net assets under the management of
the MFS organization were approximately $ billion on behalf of
approximately million investor accounts as of January 31, 1999. As of
such date, the MFS organization managed approximately $ billion of net
assets in equity funds and equity portfolios and $ billion of net
assets in fixed income funds and fixed income portfolios. Approximately
$ billion of the assets managed by MFS are invested in securities of
foreign issuers and foreign denominated securities of U.S. issuers. MFS is
located at 500 Boylston Street, Boston, Massachusetts 02116.
MFS provides overall investment advisory services and facilities to the
fund, for which the fund pays MFS an annual management fee equal to the
sum of 0.65% of the fund's average daily net assets and 5% of the fund's
gross income.
o PORTFOLIO MANAGER
The fund's portfolio manager is Frederick J. Simmons, a Senior Vice
President of MFS. Mr. Simmons has been the portfolio manager of the fund
since 1991 and has been employed as a portfolio manager by MFS since 1971.
o ADMINISTRATOR
MFS provides the fund with certain financial, legal, compliance,
shareholder communications and other administrative services. MFS is
reimbursed by the fund for a portion of the costs it incurs in providing
these services.
o DISTRIBUTOR
MFS Fund Distributors, Inc. (referred to as MFD), a wholly owned
subsidiary of MFS, is the distributor of shares of the fund.
o SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (referred to as MFSC), a wholly owned subsidiary
of MFS, performs transfer agency and certain other services for the fund,
for which it receives compensation from the fund.
<PAGE>
- -----------------------------------
V DESCRIPTION OF SHARE CLASSES
- -----------------------------------
The fund offers class A, B and C shares through this prospectus. The fund
also offers an additional class of shares, class I shares, exclusively to
certain institutional investors. Class I shares are made available through
a separate prospectus supplement provided to institutional investors
eligible to purchase them.
o SALES CHARGES
You may be subject to an initial sales charge when you purchase, or a CDSC
when you redeem, class A, B or C shares. These sales charges are described
below. In certain circumstances, these sales charges are waived. These
circumstances are described in the SAI. Special considerations concerning
the calculation of the CDSC that apply to each of these classes of shares
are described below under the heading "Calculation of CDSC."
If you purchase your fund shares through a financial adviser (such as a
broker or bank), the adviser may receive commissions or other concessions
which are paid from various sources, such as from the sales charges and
distribution and service fees, or from MFS or MFD. These commissions and
concessions are described in the SAI.
o CLASS A SHARES
You may purchase class A shares at net asset value plus an initial sales
charge (referred to as the offering price), but in some cases you may
purchase class A shares without an initial sales charge but subject to a
1% CDSC upon redemption within one year. Class A shares have annual
distribution and service fees up to a maximum of 0.35% of net assets
annually.
PURCHASES SUBJECT TO AN INITIAL SALES CHARGE. The amount of the initial
sales charge you pay when you buy class A shares differs depending upon
the amount you invest, as follows:
SALES CHARGE* AS PERCENTAGE OF:
-------------------------------
Offering Net Amount
Amount of Purchase Price Invested
Less than $100,000 4.75% 4.99%
$100,000 but less than $250,000 4.00 4.17
$250,000 but less than $500,000 2.95 3.04
$500,000 but less than $1,000,000 2.20 2.25
$1,000,000 or more None** None**
- ----------
* Because of rounding in the calculation of offering price, actual sales
charges you pay may be more or less than those calculated using these
percentages.
** A 1% CDSC will apply to such purchases, as discussed below.
PURCHASES SUBJECT TO A CDSC (BUT NOT AN INITIAL SALES CHARGE). You pay no
initial sales charge when you invest $1 million or more in class A shares.
However, a CDSC of 1% will be deducted from your redemption proceeds if
you redeem within 12 months of your purchase. This pricing structure also
applies to investments in class A shares by certain retirement plans, as
described in Appendix B.
o CLASS B SHARES
You may purchase class B shares at net asset value without an initial
sales charge, but if you redeem your shares within the first six years you
may be subject to a CDSC (declining from 4.00% during the first year to 0%
after six years). Class B shares have annual distribution and service fees
up to a maximum of 1.00% of net assets annually.
The CDSC is imposed according to the following schedule:
CONTINGENT DEFERRED
YEAR OF REDEMPTION AFTER PURCHASE SALES CHARGE
- ---------------------------------------------------------------------------
First 4%
Second 4%
Third 3%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh and following 0%
If you hold class B shares for approximately eight years, they will
convert to class A shares of the fund. All class B shares you purchased
through the reinvestment of dividends and distributions will be held in a
separate sub-account. Each time any class B shares in your account convert
to class A shares, a proportionate number of the class B shares in the
sub-account will also convert to class A shares.
o CLASS C SHARES
You may purchase class C shares at net asset value without an initial
sales charge, but if you redeem your shares within the first year you may
be subject to a CDSC of 1.00%. Class C shares have annual distribution and
service fees up to a maximum of 1.00% of net assets annually. Class C
shares do not convert to any other class of shares of the fund.
o CALCULATION OF CDSC
As discussed above, certain investments in class A, B and C shares will be
subject to a CDSC. Three different aging schedules apply to the
calculation of the CDSC:
o Purchases of class A shares made on any day during a calendar month will
age one month on the last day of the month, and each subsequent month.
o Purchases of class C shares, and purchases of class B shares on or after
January 1, 1993, made on any day during a calendar month will age one year
at the close of business on the last day of that month in the following
calendar year, and each subsequent year.
o Purchases of class B shares prior to January 1, 1993 made on any day
during a calendar year will age one year at the close of business on
December 31 of that year, and each subsequent year.
No CDSC is assessed on the value of your account represented by
appreciation or additional shares acquired through the automatic
reinvestment of dividends or capital gain distributions. Therefore, when
you redeem your shares, only the value of the shares in excess of these
amounts (i.e., your direct investment) is subject to a CDSC.
The CDSC will be applied in a manner that results in the CDSC being
imposed at the lowest possible rate, which means that the CDSC will be
applied against the lesser of your direct investment or the total cost of
your shares. The applicability of a CDSC will not be affected by exchanges
or transfers of registration, except as described in the SAI.
o DISTRIBUTION AND SERVICE FEES
The fund has adopted a plan under Rule 12b-1 that permits it to pay
marketing and other fees to support the sale and distribution of class A,
B and C shares and the services provided to you by your financial adviser.
These annual distribution and service fees may equal up to 0.35% for class
A shares and 1.00% for each of class B and class C shares, and are paid
out of the assets of these classes. Over time, these fees will increase
the cost of your shares and may cost you more than paying other types of
sales charges.
<PAGE>
VI HOW TO PURCHASE, EXCHANGE AND REDEEM SHARES
You may purchase, exchange and redeem class A, B and C shares of the fund
in the manner described below. In addition, you may be eligible to
participate in certain investor services and programs to purchase,
exchange and redeem these classes of shares, which are described in the
next section under the caption "Investor Services and Programs."
o HOW TO PURCHASE SHARES
INITIAL PURCHASE. You can establish an account by having your financial
adviser process your purchase. The minimum initial investment is $1,000.
However, in the following circumstances the minimum initial investment is
only $50 per account:
o if you establish an automatic investment plan;
o if you establish an automatic exchange plan; or
o if you establish an account under either:
|> tax-deferred retirement programs (other than IRAs) where investments
are made by means of group remittal statements; or
|> employer sponsored investment programs.
The minimum initial investment for IRAs is $250 per account. The maximum
investment in class C shares is $1,000,000 per transaction. Class C shares
are not available for purchase by any retirement plan qualified under
Section 401(a) or 403(b) of the Internal Revenue Code if the plan or its
sponsor subscribes to certain recordkeeping services made available by
MFSC, such as the MFS Fundamental 401(k) Plan.
ADDING TO YOUR ACCOUNT. There are several easy ways you can make
additional investments of at least $50 to your account:
o send a check with the returnable portion of your statement;
o ask your financial adviser to purchase shares on your behalf;
o wire additional investments through your bank (call MFSC first for
instructions); or
o authorize transfers by phone between your bank account and your MFS
account (the maximum purchase amount for this method is $100,000). You
must elect this privilege on your account application if you wish to use
it.
o HOW TO EXCHANGE SHARES
You can exchange your shares for shares of the same class of certain other
MFS funds at net asset value by having your financial adviser process your
exchange request or by contacting MFSC directly. The minimum exchange
amount is generally $1,000 ($50 for exchanges made under the automatic
exchange plan). Shares otherwise subject to a CDSC will not be charged a
CDSC in an exchange. However, when you redeem the shares acquired through
the exchange, the shares you redeem may be subject to a CDSC, depending
upon when you originally purchased the shares you exchanged. For purposes
of computing the CDSC, the length of time you have owned your shares will
be measured from the date of original purchase and will not be affected by
any exchange.
Sales charges may apply to exchanges made from the MFS money market
funds. Certain qualified retirement plans may make exchanges between the
MFS Funds and the MFS Fixed Fund, a bank collective investment fund, and
sales charges may also apply to these exchanges. Call MFSC for information
concerning these sales charges.
Exchanges are subject to the MFS Funds' market timing policies, which
are policies designed to protect the funds and their shareholders from the
effect of frequent exchanges. These market timing policies are described
below under the caption "Market Timing Policies." You should read the
prospectus of the MFS fund into which you are exchanging and consider the
differences in objectives, policies and rules before making any exchange.
o HOW TO REDEEM SHARES
You may redeem your shares either having your financial adviser process
your redemption or by contacting MFSC directly. The fund sends out your
redemption proceeds within seven days after your request is received in
good order. "Good order" generally means that the stock power, written
request for redemption, letter of instruction or certificate must be
endorsed by the record owner(s) exactly as the shares are registered. In
addition, you need to have your signature guaranteed and/or submit
additional documentation to redeem your shares. See "Signature Guarantee/
Additional Documentation" below, or contact MFSC for details (see back
cover page for address and phone number).
Under unusual circumstances such as when the New York Stock Exchange is
closed, trading on the Exchange is restricted or if there is an emergency,
the fund may suspend redemptions or postpone payment. If you purchased the
shares you are redeeming by check, the fund may delay the payment of the
redemption proceeds for up to 15 days from the purchase date to assure
that the check has cleared.
REDEEMING DIRECTLY THROUGH MFSC.
o BY TELEPHONE. You can call MFSC to have shares redeemed from your account
and the proceeds wired or mailed (depending on the amount redeemed)
directly to a pre- designated bank account. MFSC will request personal or
other information from you and will generally record the calls. MFSC will
be responsible for losses that result from unauthorized telephone
transactions if it does not follow reasonable procedures designed to
verify your identity. You must elect this privilege on your account
application if you wish to use it.
o BY MAIL. To redeem shares by mail, you can send a letter to MFSC with the
name of your fund, your account number, and the number of shares or dollar
amount to be sold.
REDEEMING THROUGH YOUR FINANCIAL ADVISER. You can call your financial
adviser to process a redemption on your behalf. Your financial adviser
will be responsible for furnishing all necessary documents to MFSC and may
charge you for this service.
SIGNATURE GUARANTEE/ADDITIONAL DOCUMENTATION. In order to protect against
fraud, the fund requires that your signature be guaranteed in order to
redeem your shares. Your signature may be guaranteed by an eligible bank,
broker, dealer, credit union, national securities exchange, registered
securities association, clearing agency, or savings association. MFSC may
require additional documentation for certain types of registrations and
transactions. Signature guarantees and this additional documentation shall
be accepted in accordance with policies established by MFSC, and MFSC may
make certain de minimis exceptions to these requirements.
o OTHER CONSIDERATIONS
RIGHT TO REJECT PURCHASE AND EXCHANGE ORDERS. Purchases and exchanges
should be made for investment purposes only. The MFS Funds each reserve
the right to reject or restrict any specific purchase or exchange request.
Because an exchange request involves both a request to redeem shares of
one fund and to purchase shares of another fund, the MFS Funds consider
the underlying redemption and purchase requests conditioned upon the
acceptance of each of these underlying requests. Therefore, in the event
that the MFS Funds reject an exchange request, neither the redemption nor
the purchase side of the exchange will be processed.
MARKET TIMING POLICIES. The MFS Funds are not designed for professional
market timing organizations or other entities using programmed or frequent
exchanges. The MFS Funds define a "market timer" as an individual, or
organization acting on behalf of one or more individuals, if:
o the individual or organization makes during the calendar year either (i)
six or more exchange requests among the MFS Funds or (ii) three or more
exchange requests out of any of the MFS high yield bond funds or MFS
municipal bond funds; and
o any one of such exchange requests represents shares equal in value to $1
million or more.
Accounts under common ownership or control, including accounts
administered by market timers, will be aggregated for purposes of this
definition.
The MFS Funds may impose specific limitations on market timers,
including:
o delaying for up to seven days the purchase side of an exchange request by
market timers;
o rejecting or otherwise restricting purchase or exchange requests by market
timers; and
o permitting exchanges by market timers only into certain MFS Funds.
REINSTATEMENT PRIVILEGE. After you have redeemed shares, you have a one-
time right to reinvest the proceeds within 90 days of the redemption at
the current net asset value (without an initial sales charge). If the
redemption involved a CDSC, your account will be credited with the
appropriate amount of the CDSC paid; however, your new shares will be
subject to a CDSC which will be determined from the date you originally
purchased the shares redeemed. This privilege applies to shares of the MFS
money market funds only under certain circumstances.
IN-KIND DISTRIBUTIONS. The MFS Funds have reserved the right to pay
redemption proceeds by a distribution in-kind of portfolio securities
(rather than cash). In the event that the fund makes an in-kind
distribution, you could incur the brokerage and transaction charges when
converting the securities to cash. The fund does not expect to make in-
kind distributions, and if it does, the fund will pay, during any 90-day
period, your redemption proceeds in cash up to either $250,000 or 1% of
the fund's net assets, whichever is less.
INVOLUNTARY REDEMPTIONS/SMALL ACCOUNTS. Because it is costly to maintain
small accounts, the MFS Funds have generally reserved the right to
automatically redeem shares and close your account when it contains less
than $500 due to your redemptions or exchanges. Before making this
automatic redemption, you will be notified and given 60 days to make
additional investments to avoid having your shares redeemed.
<PAGE>
- ---------------------------------------
VII INVESTOR SERVICES AND PROGRAMS
- ---------------------------------------
As a shareholder of the fund, you have available to you a number of
services and investment programs. Some of these services and programs may
not be available to you if your shares are held in the name of your
financial adviser or if your investment in the fund is made through a
retirement plan.
o DISTRIBUTION OPTIONS
The following distribution options are generally available to all accounts
and you may change your distribution option as often as you desire by
notifying MFSC:
o Dividends and capital gain distributions reinvested in additional shares
(this option will be assigned if no other option is specified);
o Dividends in cash; capital gain distributions reinvested in additional
shares; or
o Dividends and capital gain distributions in cash.
Reinvestments (net of any tax withholding) will be made in additional full
and fractional shares of the same class of shares at the net asset value
as of the close of business on the record date. Dividends and capital gain
distributions in amounts less than $10 will automatically be reinvested in
additional shares of the fund. If you have elected to receive dividends
and/or capital gain distributions in cash, and the postal or other
delivery service is unable to deliver checks to your address of record, or
you do not respond to mailings from MFSC with regard to uncashed
distribution checks, your distribution option will automatically be
converted to having all dividends and other distributions reinvested in
additional shares. Your request to change a distribution option must be
received by MFSC by the record date for a dividend or distribution in
order to be effective for that dividend or distribution. No interest will
accrue on amounts represented by uncashed distribution or redemption
checks.
o PURCHASE AND REDEMPTION PROGRAMS
For your convenience, the following purchase and redemption programs are
made available to you with respect to class A, B and C shares, without
extra charge:
AUTOMATIC INVESTMENT PLAN. You can make cash investments of $50 or more
through your checking account or savings account on any day of the month.
If you do not specify a date, the investment will automatically occur on
the first business day of the month.
AUTOMATIC EXCHANGE PLAN. If you have an account balance of at least $5,000
in any MFS fund, you may participate in the automatic exchange plan, a
dollar-cost averaging program. This plan permits you to make automatic
monthly or quarterly exchanges from your account in an MFS fund for shares
of the same class of shares of other MFS funds. You may make exchanges of
at least $50 to up to six different funds under this plan. Exchanges will
generally be made at net asset value without any sales charges. If you
exchange shares out of the MFS Money Market Fund or MFS Government Money
Market Fund, or if you exchange class A shares out of the MFS Cash Reserve
Fund, into class A shares of any other MFS fund, you will pay the initial
sales charge if you have not already paid this charge on these shares.
REINVEST WITHOUT A SALES CHARGE. You can reinvest dividend and capital
gain distributions into your account without a sales charge to add to your
investment easily and automatically.
DISTRIBUTION INVESTMENT PROGRAM. You may purchase shares of any MFS fund
without paying an initial sales charge or a CDSC upon redemption by
automatically reinvesting a minimum of $50 of dividend and capital gain
distributions from the same class of another MFS fund.
LETTER OF INTENT (LOI). If you intend to invest $50,000 or more in the MFS
funds (including the MFS Fixed Fund) within 13 months, you may buy class A
shares of the funds at the reduced sales charge as though the total amount
were invested in class A shares in one lump sum. If you intend to invest
$1 million or more under this program, the time period is extended to 36
months. If the intended purchases are not completed within the time
period, shares will automatically be redeemed from a special escrow
account established with a portion of your investment at the time of
purchase to cover the higher sales charge you would have paid had you not
purchased your shares through this program.
RIGHT OF ACCUMULATION. You will qualify for a lower sales charge on your
purchases of class A shares when your new investment in class A shares,
together with the current (offering price) value of all your holdings in
the MFS funds (including the MFS Fixed Fund), reaches a reduced sales
charge level.
SYSTEMATIC WITHDRAWAL PLAN. You may elect to automatically receive (or
designate someone else to receive) regular periodic payments of at least
$100. Each payment under this systematic withdrawal is funded through the
redemption of your fund shares. For class B and C shares, you can receive
up to 10% (15% for certain IRA distributions) of the value of your account
through these payments in any one year (measured at the time you establish
this plan). You will incur no CDSC on class B and C shares redeemed under
this plan. For class A shares, there is no similar percentage limitation;
however, you may incur the CDSC (if applicable) when class A shares are
redeemed under this plan.
<PAGE>
- ---------------------------
VIII OTHER INFORMATION
- ---------------------------
o PRICING OF FUND SHARES
The price of each class of the fund's shares is based on its net asset
value. The net asset value of each class of shares is determined at the
close of regular trading each day that the New York Stock Exchange is open
for trading (generally, 4:00 p.m., Eastern time) (referred to as the
valuation time). To determine net asset value, the fund values its assets
at current market values, or at fair value as determined by the Adviser
under the direction of the Board of Trustees that oversees the fund if
current market values are unavailable. Fair value pricing may be used by
the fund when current market values are unavailable or when an event
occurs after the close of the exchange on which the fund's portfolio
securities are principally traded that is likely to have changed the value
of the securities. The use of fair value pricing by the fund may cause the
net asset value of its shares to differ significantly from the net asset
value that would be calculated using current market values.
You will receive the net asset value next calculated, after the
deduction of applicable sales charges and any required tax withholding, if
your order is complete (has all required information) and MFSC receives
your order by:
o the valuation time, if placed directly by you (not through a financial
adviser such as a broker or bank) to MFSC; or
o MFSC's close of business, if placed through a financial adviser, so long
as the financial adviser (or its authorized designee) received your order
by the valuation time.
The fund invests in certain securities which are primarily listed on
foreign exchanges that trade on weekends and other days when the fund does
not price its shares. Therefore, the value of the fund's shares may change
on days when you will not be able to purchase or redeem the fund's shares.
o DISTRIBUTIONS
The fund intends to pay substantially all of its net income (including net
short-term capital gain) to shareholders as dividends at least semi-
annually. Any realized net capital gains are distributed at least
annually.
o TAX CONSIDERATIONS
The following discussion is very general and therefore prospective
investors are urged to consult their own tax advisers regarding the effect
that an investment in the fund may have on their own tax situation.
TAXABILITY OF DISTRIBUTIONS. As long as the fund qualifies for treatment
as a regulated investment company (which it has in the past and intends to
do in the future), it pays no federal income tax on the earnings it
distributes to shareholders.
You will normally have to pay federal income taxes, and any state or local
taxes, on the distributions you receive from the fund, whether you take
the distributions in cash or reinvest them in additional shares.
Distributions designated as capital gain dividends are taxable as long-
term capital gains. Other distributions are generally taxable as ordinary
income. Some dividends paid in January may be taxable as if they had been
paid the previous December.
The Form 1099 that is mailed to you every January details your
distributions and how they are treated for federal tax purposes.
Fund distributions will reduce the fund's net asset value per share.
Therefore, if you buy shares shortly before the record date of a
distribution, you may pay the full price for the shares and then
effectively receive a portion of the purchase price back as a taxable
distribution.
If you are neither a citizen nor a resident of the U.S., the fund will
withhold U.S. federal income tax at the rate of 30% on taxable dividends
and other payments that are subject to such withholding. You may be able
to arrange for a lower withholding rate under an applicable tax treaty if
you supply the appropriate documentation required by the fund. The fund is
also required in certain circumstances to apply backup withholding at the
rate of 31% on taxable dividends and redemption proceeds paid to any
shareholder (including a shareholder who is neither a citizen nor a
resident of the U.S.) who does not furnish to the fund certain information
and certifications or who is otherwise subject to backup withholding.
Backup withholding will not, however, be applied to payments that have
been subject to 30% withholding. Prospective investors should read the
fund's Account Application for additional information regarding backup
withholding of federal income tax.
TAXABILITY OF TRANSACTIONS. When you redeem, sell or exchange shares, it
is generally considered a taxable event for you. Depending on the purchase
price and the sale price of the shares you redeem, sell or exchange, you
may have a gain or a loss on the transaction. You are responsible for any
tax liabilities generated by your transaction.
o UNIQUE NATURE OF FUND
MFS may serve as the investment adviser to other funds which have similar
investment goals and principal investment policies and risks to the fund,
and which may be managed by the fund's portfolio manager(s). While the
fund may have many similarities to these other funds, its investment
performance will differ from their investment performance. This is due to
a number of differences between the funds, including differences in sales
charges, expense ratios and cash flows.
o YEAR 2000 ISSUES
The fund could be adversely affected if the computer systems used by MFS,
the fund's other service providers or the companies in which the fund
invests do not properly process date-related information from and after
January 1, 2000 (the "Year 2000 Issue"). MFS recognizes the importance of
the Year 2000 Issue and, to address Year 2000 compliance, created a Year
2000 Program Management Office in 1996, which is separately funded, has a
specialized staff and reports directly to MFS senior management. The
Office, with the help of external consultants, is responsible for
ascertaining that all internal systems, data feeds and third party
applications are Year 2000 compliant. While MFS is confident that all MFS
systems will be Year 2000 compliant before the turn of the century, there
are significant systems interdependencies in the domestic and foreign
markets for securities, the business environments in which companies held
by the fund operate and in MFS' own business environment. MFS has been
actively working with the fund's other service providers to identify and
respond to potential problems in an effort to ensure Year 2000 compliance
or develop contingency plans. Year 2000 compliance is also one of the
factors considered by MFS in its ongoing assessment of companies in which
the fund invests. There can be no assurance, however, that these steps
will be sufficient to avoid any adverse impact on the fund.
o PROVISION OF ANNUAL AND SEMIANNUAL REPORTS
To avoid sending duplicate copies of materials to households, only one
copy of the fund's annual and semiannual report will be mailed to
shareholders having the same residential address on the fund's records.
However, any shareholder may contact MFSC (see back cover for address and
phone number) to request that copies of these reports be sent personally
to that shareholder.
<PAGE>
- ----------------------------
IX FINANCIAL HIGHLIGHTS
- ----------------------------
The financial highlights table is intended to help you understand the
fund's financial performance for the past 5 years, or, if the fund has not
been in operation that long, since the time it commenced investment
operations. Certain information reflects financial results for a single
fund share. The total returns in the table represent the rate by which an
investor would have earned (or lost) on an investment in the fund
(assuming reinvestment of all distributions). This information has been
audited by the fund's independent auditors, whose report, together with
the fund's financial statements, are included in the fund's Annual Report
to shareholders. These financial statements are incorporated by reference
into the SAI. The fund's independent auditors are Ernst & Young LLP.
<PAGE>
<TABLE>
CLASS A SHARES
<CAPTION>
.............................................................................................................................
YEAR ENDED OCTOBER 31,
--------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value -- beginning of period $ 13.84 $ 12.73 $ 11.57 $ 10.58 $ 11.19
-------- -------- -------- -------- -------
Income from investment operations# --
Net investment income $ 0.28 $ 0.31 $ 0.34 $ 0.33 $ 0.30
Net realized and unrealized gain on
investments and foreign currency
transactions 1.57 1.61 1.46 0.79 0.15
-------- -------- -------- -------- -------
Total from investment operations $ 1.85 $ 1.92 $ 1.80 $ 1.12 $ 0.45
-------- -------- -------- -------- -------
Less distributions declared to
shareholders -
From net investment income $ (0.18) $ (0.21) $ (0.63) $ (0.08) $ (0.25)
From net realized gain on investments
and foreign currency transactions (0.92) (0.60) (0.01) (0.05) (0.33)
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 $ (1.10) $ (0.81) $ (0.64) $ (0.13) $ (1.06)
======== ======== ======== ======== =======
Net asset value -- end of period $ 14.59 $ 13.84 $ 12.73 $ 11.57 $ 10.58
======== ======== ======== ======== =======
Total return(+) 14.29% 15.71% 16.06% 10.63% 4.10%
Ratios (to average net assets)/
Supplemental data:
Expenses## 1.51% 1.59% 1.63% 1.77% 1.76%
Net investment income 1.99% 2.35% 2.79% 3.06% 2.81%
Portfolio turnover 183% 143% 167% 160% 118%
Net assets at end of period (000
omitted) $174,576 $152,919 $129,843 $110,294 $99,870
- ----------
# Per share data are based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its custodian and dividend disbursing agent. The
Fund's expenses are calculated without reduction for this expense offset arrangement.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
</TABLE>
<PAGE>
<TABLE>
CLASS B SHARES
<CAPTION>
.............................................................................................................................
YEAR ENDED OCTOBER 31,
----------------------------------------------------------------------------
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value -- beginning of period $ 13.82 $ 12.71 $ 11.52 $ 10.54 $ 11.19
-------- ------- ------- ------- -------
Income from investment operations# --
Net investment income $ 0.19 $ 0.22 $ 0.25 $ 0.25 $ 0.25
Net realized and unrealized gain on
investments and foreign currency
transactions 1.56 1.62 1.46 0.77 0.13
-------- ------- ------- ------- -------
Total from investment operations $ 1.75 $ 1.84 $ 1.71 $ 1.02 $ 0.38
-------- ------- ------- ------- -------
Less distributions declared to
shareholders -
From net investment income $ (0.09) $ (0.13) $ (0.47) $ (0.03) $ (0.24)
In excess of net investment income -- -- (0.04) -- --
From net realized gain on investments and
foreign currency transactions (0.92) (0.60) (0.01) (0.01) (0.32)
In excess of net realized gain on
investments and foreign currency
transactions -- -- -- -- (0.38)
From paid-in capital -- -- -- -- (0.09)
-------- ------- ------- ------- -------
Total distributions declared to
shareholders $ (1.01) $ (0.73) $ (0.52) $ (0.04) $ (1.03)
======== ======= ======= ======= =======
Net asset value -- end of period $ 14.56 $ 13.82 $ 12.71 $ 11.52 $ 10.54
======== ======= ======= ======= =======
Total return 13.57% 15.00% 15.29% 9.75% 3.38%
Ratios (to average net assets)/
Supplemental data(S):
Expenses## 2.16% 2.25% 2.34% 2.49% 2.49%
Net investment income 1.33% 1.70% 2.07% 2.34% 2.33%
Portfolio turnover 183% 143% 167% 160% 118%
Net assets at end of period (000 omitted) $113,966 $96,931 $71,788 $57,214 $47,677
- ---------------
# Per share data are based on average shares outstanding.
## For fiscal years ending after September 1,1995, the Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its custodian and dividend disbursing agent. The
fund's expenses are calculated without reduction for this expense offset arrangement.
</TABLE>
<PAGE>
<TABLE>
CLASS C SHARES
.............................................................................................................................
YEAR ENDED OCTOBER 31,
---------------------------------------------------------------------------
1998 1997 1996 1995 1994*
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value -- beginning of period $ 13.82 $ 12.72 $ 11.52 $ 10.53 $ 11.06
------- ------- ------- ------- -------
Income from investment operations# --
Net investment income $ 0.19 $ 0.23 $ 0.26 $ 0.27 $ 0.27
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions 1.56 1.61 1.46 0.76 (0.29)
------- ------- ------- ------- -------
Total from investment operations $ 1.75 $ 1.84 $ 1.72 $ 1.03 $ (0.02)
------- ------- ------- ------- -------
Less distributions declared to shareholders -
From net investment income $ (0.09) $ (0.14) $ (0.51) $ (0.03) $ (0.12)
From net realized gain on investments and
foreign currency transactions (0.92) (0.60) (0.01) (0.01) (0.16)
In excess of net realized gain on
investments and foreign currency
transactions -- -- -- -- (0.18)
From paid-in capital -- -- -- -- (0.05)
------- ------- ------- ------- -------
Total distributions declared to
shareholders $ (1.01) $ (0.74) $ (0.52) $ (0.04) $ (0.51)
======= ======= ======= ======= =======
Net asset value -- end of period $ 14.56 $ 13.82 $ 12.72 $ 11.52 $ 10.53
======= ======= ======= ======= =======
Total return 13.52% 14.97% 15.41% 9.84% (0.15)%++
Ratios (to average net assets)/
Supplemental data:
Expenses## 2.16% 2.24% 2.27% 2.42% 2.39%+
Net investment income 1.33% 1.71% 2.14% 2.41% 2.51%+
Portfolio turnover 183% 143% 167% 160% 118%
Net assets at end of period (000 omitted) $30,580 $21,725 $14,248 $10,894 $10,903
- ---------------
* For the period from the inception of Class C shares, January 3, 1994, through October 31, 1994.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its custodian and dividend disbursing agent. The
Fund's expenses are calculated without reduction for this expense offset arrangement.
</TABLE>
<PAGE>
- --------------
APPENDIX A
- --------------
o INVESTMENT TECHNIQUES AND PRACTICES
In pursuing its investment objective, the fund may engage in the following
investment techniques and practices, which are described, together with
their risks, in the SAI.
INVESTMENT TECHNIQUES/PRACTICES
..........................................................................
SYMBOLS x permitted -- not permitted
- --------------------------------------------------------------------------
Debt Securities
Asset-Backed Securities
Collateralized Mortgage Obligations and Multiclass
Pass-Through Securities --
Corporate Asset-Backed Securities x
Mortgage Pass-Through Securities x
Stripped Mortgage-Backed Securities --
Corporate Securities x
Loans and Other Direct Indebtedness --
Lower Rated Bonds x
Municipal Bonds x
Speculative Bonds x
U.S. Government Securities x
Variable and Floating Rate Obligations x
Zero Coupon Bonds x
Equity Securities x
Foreign Securities Exposure
Brady Bonds x
Depositary Receipts x
Dollar-Denominiated Foreign Debt Securities x
Emerging Markets x
Foreign Securities x
Forward Contracts x
Futures Contracts x
Indexed Securities/Structured Products x
Inverse Floating Rate Obligations x
Investment in Other Investment Companies x
Open-End --
Closed-End x
Lending of Portfolio Securities x
Leveraging Transactions
Bank Borrowings --
Mortgage "Dollar-Roll" Transactions x
Reverse Repurchase Agreements --
Options
Options on Foreign Currencies x
Options on Futures Contracts x
Options on Securities x
Options on Stock Indices x
Reset Options x
"Yield Curve" Options x
Repurchase Agreements x
Restricted Securities x
Short Sales --
Short Sales Against the Box --
Short Term Instruments x
Swaps and Related Derivative Instruments x
Temporary Borrowings x
Temporary Defensive Positions x
Warrants x
"When-Issued" Securities x
<PAGE>
- --------------
APPENDIX B
- --------------
o SALES CHARGE CATEGORIES AVAILABLE TO CERTAIN RETIREMENT PLANS
Purchases made under the following four categories are not subject to an
initial sales charge. However, a CDSC of 1% will be deducted from
redemption proceeds if the redemption is made within 12 months of
purchase. The CDSC is based on the value of the shares redeemed (excluding
reinvested dividend and capital gain distributions) or the total cost of
the shares, whichever is less.
o Investments in class A shares by certain retirement plans subject to the
Employee Retirement Income Security Act of 1974, as amended (referred to
as ERISA), if, prior to July 1, 1996
|> the plan had established an account with MFSC; and
|> the sponsoring organization had demonstrated to the satisfaction of
MFD that either;
+ the employer had at least 25 employees; or
+ the total purchases by the retirement plan of class A shares of
the MFS Family of Funds (the MFS Funds) would be in the amount of
at least $250,000 within a reasonable period of time, as
determined by MFD in its sole discretion.
o Investments in class A shares by certain retirement plans subject to
ERISA, if
|> the retirement plan and/or sponsoring organization participates in
the MFS Fundamental 401(k) Program or any similar recordkeeping
system made available by MFSC (referred to as the MFS participant
recordkeeping system);
|> the plan establishes an account with MFSC on or after July 1, 1996;
|> the total purchases by the retirement plan of class A shares of the
MFS Funds will be in the amount of at least $500,000 within a
reasonable period of time, as determined by MFD in its sole
discretion; and
|> the plan has not redeemed its class B shares in the MFS Funds in
order to purchase class A shares under this category.
o Investments in class A shares by certain retirement plans subject to
ERISA, if
|> the plan establishes an account with MFSC on or after July 1, 1996;
and
|> the plan has, at the time of purchase, a market value of $500,000 or
more invested in shares of any class or classes of the MFS Funds.
THE RETIREMENT PLAN WILL QUALIFY UNDER THIS CATEGORY ONLY IF THE PLAN
OR ITS SPONSORING ORGANIZATION INFORMS MFSC PRIOR TO THE PURCHASES
THAT THE PLAN HAS A MARKET VALUE OF $500,000 OR MORE INVESTED IN
SHARES OF ANY CLASS OR CLASSES OF THE MFS FUNDS; MFSC HAS NO
OBLIGATION INDEPENDENTLY TO DETERMINE WHETHER SUCH A PLAN QUALIFIES
UNDER THIS CATEGORY; AND
o Investments in class A shares by certain retirement plans subject to
ERISA, if
|> the plan establishes an account with MFSC on or after July 1, 1997;
|> the plan's records are maintained on a pooled basis by MFSC; and
|> the sponsoring organization demonstrates to the satisfaction of MFD
that, at the time of purchase, the employer has at least 200 eligible
employees and the plan has aggregate assets of at least $2,000,000.
<PAGE>
MFS(R) GLOBAL TOTAL RETURN FUND
If you want more information about the fund, the following documents are
available free upon request:
ANNUAL/SEMIANNUAL REPORTS. These reports contain information about the
fund's actual investments. Annual reports discuss the effect of recent
market conditions and the fund's investment strategy on the fund's
performance during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI). The SAI, dated March 1, 1999,
provides more detailed information about the fund and is incorporated into
this prospectus by reference.
YOU CAN GET FREE COPIES OF THE ANNUAL/SEMIANNUAL REPORTS, THE SAI AND
OTHER INFORMATION ABOUT THE FUND, AND MAKE INQUIRIES ABOUT THE FUND, BY
CONTACTING:
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116-3741
Telephone: 1-800-225-2606
Internet: http://www.mfs.com
Information about the fund (including its prospectus, SAI and shareholder
reports) can be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C., 20549-6009
Information on the operation of the Public Reference Room may be obtained
by calling the Commission at 1-800-SEC-0330. Reports and other information
about the fund are available on the Commission's Internet website at
http://www.sec.gov, and copies of this information may be obtained, upon
payment of a duplicating fee, by writing the Public Reference Section at
the above address.
The fund's Investment Company Act file number is 811-6102.
<PAGE>
MFS(R) GLOBAL TOTAL RETURN FUND
MARCH 1, 1999
[Logo] M F S(R)
INVESTMENT MANAGEMENT
75 YEARS
WE INVENTED THE MUTUAL FUND(R)
STATEMENT OF ADDITIONAL
A SERIES OF MFS SERIES TRUST VI INFORMATION
500 BOYLSTON STREET, BOSTON, MA 02116
(617) 954-5000
This Statement of Additional Information, as amended or supplemented from time
to time (the "SAI"), sets forth information which may be of interest to
investors but which is not necessarily included in the Fund's Prospectus dated
March 1, 1999. This SAI should be read in conjunction with the Prospectus. The
Fund's financial statements are incorporated into this SAI by reference to the
Fund's most recent Annual Report to shareholders. A copy of the Annual Report
accompanies this SAI. You may obtain a copy of the Fund's Prospectus and Annual
Report without charge by contacting MFS Service Center, Inc. (see back cover for
address and phone number).
This SAI is divided into two Parts -- Part I and Part II. Part I contains
information that is particular to the Fund, while Part II contains information
that generally applies to each of the funds in the MFS Family of Funds (the "MFS
Funds"). Each Part of the SAI has a variety of appendices which can be found at
the end of Part I and Part II, respectively.
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE
INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
PART I
Part I of this SAI contains information that is particular to the Fund.
TABLE OF CONTENTS
Page
I Definitions ......................................................... 1
II Management of the Fund .............................................. 1
The Fund ............................................................ 1
Trustees and Officers -- Identification and Background .............. 1
Trustees Compensation ............................................... 1
Affiliated Service Provider Compensation ............................ 1
III Sales Charges and Distribution Plan Payments ........................ 1
Sales Charges ....................................................... 1
Distribution Plan Payments ......................................... 1
IV Portfolio Transactions and Brokerage Commissions .................... 1
V Share Ownership ..................................................... 1
VI Performance Information ............................................. 1
VII Investment Techniques, Practices, Risks and Restrictions ............ 1
Investment Techniques, Practices and Risks .......................... 1
Investment Restrictions ............................................. 1
VIII Tax Considerations .................................................. 3
IX Independent Auditors and Financial Statements ....................... 3
Appendix A -- Trustees and Officers -- Identification and Background A
Appendix B -- Trustee Compensation .................................. B
Appendix C -- Affiliated Service Provider Compensation .............. C
Appendix D -- Sales Charges and Distribution Plan Payments .......... D
Appendix E -- Portfolio Transactions and Brokerage Commissions ...... E
Appendix F -- Share Ownership ....................................... F
Appendix G -- Performance Information ............................... G
(I) DEFINITIONS
"Fund" - MFS Global Total Return Fund, a series of the Trust. The Fund
was known as "MFS World Total Return Fund" prior to August 24, 1998.
"Trust" - MFS Series Trust VI, a Massachusetts business trust, organized
in 1991. The Trust was known as "MFS Worldwide Total Return Fund" prior
to June 29, 1993, and as "MFS Worldwide Total Return Trust" prior to
August 3, 1992.
"MFS" or the "Adviser" - Massachusetts Financial Services Company, a
Delaware corporation.
"MFD" - MFS Fund Distributors, Inc., a Delaware corporation.
"MFSC" - MFS Service Center, Inc., a Delaware corporation.
"Prospectus" - The Prospectus of the Fund, dated March 1, 1999, as
amended or supplemented from time to time.
(II) MANAGEMENT OF THE FUND
THE FUND
The Fund is a non-diversified series of the Trust. The Trust is an open-
end management investment company.
TRUSTEES AND OFFICERS - IDENTIFICATION AND BACKGROUND
The identification and background of the Trustees and officers of the
Trust are set forth in Appendix A of this Part I.
TRUSTEE COMPENSATION
Compensation paid to the non-interested Trustees and to Trustees who are
not officers of the Trust, for certain specified periods, is set forth
in Appendix B of this Part I.
AFFILIATED SERVICE PROVIDER COMPENSATION
Compensation paid by the Fund to its affiliated service providers -- to
MFS, for investment advisory and administrative services, and to MFSC,
for transfer agency services -- for certain specified periods is set
forth in Appendix C to this Part I.
(III) SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS
SALES CHARGES
Sales charges paid in connection with the purchase and sale of Fund
shares for certain specified periods are set forth in Appendix D to this
Part I, together with the Fund's schedule of dealer reallowances.
DISTRIBUTION PLAN PAYMENTS
Payments made by the Fund under the Distribution Plan for its most
recent fiscal year end are set forth in Appendix D to this Part I.
(IV) PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Brokerage commissions paid by the Fund for certain specified periods,
and information concerning purchases by the Fund of securities issued by
its regular broker-dealers for its most recent fiscal year, are set
forth in Appendix E to this Part I.
(V) SHARE OWNERSHIP
Information concerning the ownership of Fund shares by Trustees and
officers of the Trust as a group, by investors who control the Fund, if
any, and by investors who own 5% or more of any class of Fund shares, if
any, is set forth in Appendix F to this Part I.
(VI) PERFORMANCE INFORMATION
Performance information, as quoted by the Fund in sales literature and
marketing materials, is set forth in Appendix G to this Part I.
(VII) INVESTMENT TECHNIQUES, PRACTICES, RISKS AND RESTRICTIONS
INVESTMENT TECHNIQUES, PRACTICES AND RISKS
The investment objective and principal investment policies of the Fund
are described in the Prospectus. In pursuing its investment objective
and principal investment policies, the Fund may engage in a number of
investment techniques and practices, which involve certain risks. These
investment techniques and practices, which may be changed without
shareholder approval unless indicated otherwise, are identified in
Appendix A to the Prospectus, and are more fully described, together
with their associated risks, in Part II of this SAI. The following
percentage limitations apply to these investment techniques and
practices.
o Foreign Securities Exposure may not exceed 90% of the Fund's net
assets
o Junk Bond Exposure may not exceed 5% of the Fund's net assets
o Lending of Portfolio Securities may not exceed 30% of the Fund's net
assets.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions which cannot be changed
without the approval of the holders of a majority of the Fund's shares
(which, as used in this SAI, means the lesser of (i) more than 50% of
the outstanding shares of the Trust or a series or class, as applicable,
or (ii) 67% or more of the outstanding shares of the Trust or a series
or class, as applicable, present at a meeting at which holders of more
than 50% of the outstanding shares of the Trust or a series or class, as
applicable, are represented in person or by proxy).
Terms used below (such as Options and Futures Contracts) are defined
in Part II of this SAI.
The Fund may not:
(1) Borrow amounts in excess of 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 has the following nonfundamental policies which
may be changed without shareholder approval:
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. 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.
Except with respect to Investment Restriction (1) and the Fund's
policy on investing in illiquid securities, these investment
restrictions are adhered to at the time of purchase or utilization of
assets; a subsequent change in circumstances will not be considered to
result in a violation of policy.
(VIII) TAX CONSIDERATIONS
For a discussion of tax considerations, see Part II of this SAI.
(IX) INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS
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 Securities and Exchange Commission.
The Portfolio of Investments and the Statement of Assets and
Liabilities at October 31, 1998, the Statement of Operations for the
year ended October 31, 1998, the Statement of Changes in Net Assets for
the two years ended October 31, 1998, the Notes to Financial Statements
and the Report of the Independent Auditors, each of which is included in
the Annual Report to Shareholders of the Fund, are incorporated by
reference into this SAI in reliance upon the report of Ernst & Young
LLP, independent auditors, given upon their authority as experts in
accounting and auditing. A copy of the Annual Report accompanies this
SAI.
<PAGE>
PART I - APPENDIX A
TRUSTEES AND OFFICERS - IDENTIFICATION AND BACKGROUND
The Trustees and officers of the Trust are listed below, together with
their principal occupations during the past five years. (Their titles may
have varied during that period.)
TRUSTEES
JEFFREY L. SHAMES* (born 6/2/55)
Massachusetts Financial Services Company, Chairman and Chief Executive
Officer
RICHARD B. BAILEY* (born 9/14/26)
Private Investor; Massachusetts Financial Services Company, former
Chairman and Director (prior to September 30, 1991); Cambridge Bancorp,
Director; Cambridge Trust Company, Director
MARSHALL N. COHAN (born 11/14/26)
Private Investor
Address: 2524 Bedford Mews Drive, Wellington, Florida
LAWRENCE H. COHN, M.D., (born 3/11/37)
Brigham and Women's Hospital, Chief of Cardiac Surgery;
Harvard Medical School, Professor of Surgery
Address: 75 Francis Street, Boston, Massachusetts
THE HON. SIR J. DAVID GIBBONS, KBE (born 6/15/27)
Edmund Gibbons Limited, Chief Executive Officer;
Colonial Insurance Company Ltd., Director and Chairman
Address: 21 Reid Street, Hamilton, Bermuda
ABBY M. O'NEILL (born 4/27/28)
Private Investor; Rockefeller Financial Services, Inc.
(investment advisers), Director
Address: 30 Rockefeller Plaza, Room 5600, New York,
New York
WALTER E. ROBB, III (born 8/18/26)
Benchmark Advisors, Inc. (corporate financial consultants), President and
Treasurer; Benchmark Consulting Group, Inc. (office services), President;
CitiFunds and CitiSelect Folios (mutual funds), Trustee
Address: 110 Broad Street, Boston, Massachusetts
ARNOLD D. SCOTT* (born 12/16/42)
Massachusetts Financial Services Company, Senior Executive Vice President
and Secretary
J. DALE SHERRATT (born 9/23/38)
Insight Resources, Inc. (acquisition planning specialists),
President; Wellfleet Investments (investor in health care
companies), Managing General Partner (since 1993)
Address: 294 Washington Street, Boston, Massachusetts
WARD SMITH (born 9/13/30)
NACCO Industries (holding company), Chairman (prior to June 1994);
Sundstrand Corporation (diversified mechanical
manufacturer), Director
Address: 36080 Shaker Blvd., Hunting Valley, Ohio
OFFICERS
W. THOMAS LONDON,* Treasurer (born 3/1/44)
Massachusetts Financial Services Company, Senior
Vice President
JAMES O. YOST,* Assistant Treasurer (born 6/12/60)
Massachusetts Financial Services Company, Vice President
ELLEN MOYNIHAN,* Assistant Treasurer (born 11/13/57)
Massachusetts Financial Services Company, Vice President (since September
1996); Deloitte & Touch LLP, Senior Manager (prior to September 1996)
MARK E. BRADLEY,* Assistant Treasurer (born 11/23/59)
Massachusetts Financial Services Company, Vice President (since March
1997); Putnam Investments, Vice President (from September 1994 until March
1997); Ernst & Young LLP, Senior Tax Manager (prior to September 1994)
STEPHEN E. CAVAN,* Secretary and Clerk (born 11/6/53)
Massachusetts Financial Services Company, Senior Vice President, General
Counsel and Assistant Secretary
JAMES R. BORDEWICK, JR.,* Assistant Secretary
(born 3/6/59) Massachusetts Financial Services Company,
Senior Vice President and Associate General Counsel
----------------
*"Interested persons" (as defined in the 1940 Act) of the Adviser, whose
address is 500 Boylston Street, Boston, Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain
affiliates of MFS or with certain other funds of which MFS or a subsidiary
is the investment adviser or distributor. Messrs. Shames and Scott,
Directors of MFD, and Mr. Cavan, the Secretary of MFD, hold similar
positions with certain other MFS affiliates. Mr. Bailey is a Director of
Sun Life Assurance Company of Canada (U.S.), a subsidiary of Sun Life
Assurance Company of Canada.
<PAGE>
PART I - APPENDIX B
TRUSTEE COMPENSATION
The Fund pays the compensation of non-interested Trustees and of Trustees
who are not officers of the Trust, who currently receive a fee of $1,250 per
year plus $225 per meeting and $225 per committee meeting attended, together
with such Trustee's out-of-pocket expenses. In addition, the Trust has a
retirement plan for these Trustees as described under the caption
"Management of the Fund -- Trustee Retirement Plan" in Part II. The
Retirement Age under the plan is 75.
<TABLE>
<CAPTION>
TRUSTEE COMPENSATION TABLE
...............................................................................................................................
RETIREMENT BENEFIT TOTAL TRUSTEE
TRUSTEE FEES ACCRUED AS PART ESTIMATED CREDITED FEES FROM FUND
TRUSTEE FROM FUND(1) OF FUND EXPENSES(1) YEARS OF SERVICE(2) AND FUND COMPLEX(3)
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Bailey $3,500 $ 8 $
Marshall N. Cohan 4,175 8
Dr. Lawrence Cohn 3,788 22
Sir David Gibbons 3,500 8
Abby M. O'Neill 3,500 9
Walter E. Robb, III 4,688 8
Arnold D. Scott 0 N/A
James L. Shames 0 N/A
J. Dale Sherratt 4,769 24
Ward Smith 4,319 12
----------------
(1)For the fiscal year ending October 31, 1998.
(2)Based upon normal retirement age (75).
(3)Information provided is provided for calendar year 1998. All Trustees served as Trustees of funds within the MFS fund
complex (having aggregate net assets at December 31, 1998, of approximately $ billion) except Mr. Bailey, who served
as Trustee of funds within the MFS complex (having aggregate net assets at December 31, 1998 of approximately
$ billion).
</TABLE>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
..........................................................................
YEARS OF SERVICE
AVERAGE
TRUSTEE FEES 3 5 7 10 OR MORE
--------------------------------------------------------------------------
$3,150 $473 $ 788 $1,103 $1,575
3,569 535 892 1,249 1,785
3,988 598 997 1,396 1,994
4,408 661 1,102 1,543 2,204
4,827 724 1,207 1,689 2,413
5,246 787 1,311 1,836 2,623
----------------
(4)Other funds in the MFS Fund complex provide similar retirement benefits
to the Trustees.
<PAGE>
PART I - APPENDIX C
<TABLE>
<CAPTION>
AFFILIATED SERVICE PROVIDER COMPENSATION
...............................................................................................................................
The Fund paid compensation to its affiliated service providers over the specified periods as follows:
PAID TO MFS AMOUNT PAID TO MFS FOR PAID TO MFSC AMOUNT AGGREGATE
FOR ADVISORY WAIVED ADMINISTRATIVE FOR TRANSFER WAIVED AMOUNT PAID TO
FISCAL YEAR ENDED SERVICES BY MFS SERVICES AGENCY SERVICES BY MFSC MFS AND MFSC
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
October 31, 1998 $2,460,267 N/A $42,332 $343,831 N/A $2,846,430
October 31, 1997 $2,096,169 N/A $26,017* $338,210 N/A $2,460,396
October 31, 1996 $1,716,121 N/A N/A $340,345 N/A $2,056,466
--------------------
*From March 1, 1997, the commencement of the Master Administrative Service Agreement.
</TABLE>
<PAGE>
PART I - APPENDIX D
SALES CHARGES AND DISTIBUTION PLAN PAYMENTS
<TABLE>
<CAPTION>
SALES CHARGES
.......................................................................................................................
The following sales charges were paid during the specified periods:
CLASS A INITIAL SALES CHARGES: CDSC PAID TO MFD ON:
RETAINED REALLOWED CLASS A CLASS B CLASS C
FISCAL YEAR END TOTAL BY MFD TO DEALERS SHARES SHARES SHARES
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
October 31, 1998 $332,778 $55,441 $277,337 $591 $143,197 $4,390
October 31, 1997 406,824 56,871 349,953 895 111,555 3,270
October 31, 1996 388,523 53,235 335,288 2,201 88,243 566
</TABLE>
DEALER REALLOWANCES
..........................................................................
As shown above, MFD pays (or "reallows") a portion of the Class A initial
sales charge to dealers. The dealer reallowance as expressed as a
percentage of the Class A shares' offering price is:
DEALER REALLOWANCE AS A
AMOUNT OF PURCHASE PERCENT OF OFFERING PRICE
--------------------------------------------------------------------------
Less than $100,000 4.00%
$100,000 but less than $250,000 3.20%
$250,000 but less than $500,000 2.25%
$500,000 but less than $1,000,000 1.70%
$1,000,000 or more None*
----------------
*A CDSC will apply to such purchase.
<TABLE>
<CAPTION>
DISTRIBUTION PLAN PAYMENTS
..........................................................................................................
During the fiscal year ended October 31, 1998, the Fund made the following Distribution Plan payments:
AMOUNT OF DISTRIBUTION AND SERVICE FEES:
CLASS OF SHARES PAID BY FUND RETAINED BY MFD PAID TO DEALERS
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A Shares $ 576,416 $51,037 $ 525,379
Class B Shares $1,055,351 $27,755 $1,027,596
Class C Shares $ 265,404 $21,867 $ 243,537
Distribution plan payments retained by MFD are used to compensate MFD for commissions advanced by MFD to
dealers upon sale of fund shares.
</TABLE>
<PAGE>
PART I - APPENDIX E
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
BROKERAGE COMMISSIONS
.........................................................................
The following brokerage commissions were paid by the Fund during the
specified time periods:
BROKERAGE COMMISSIONS
FISCAL YEAR END PAID BY FUND
------------------------------------------------------------------------
October 31, 1998 $335,276
October 31, 1997 $257,335
October 31, 1996 $263,498
SECURITIES ISSUED BY REGULAR BROKER-DEALERS
........................................................................
During the fiscal year ended October 31, 1998, the Fund purchased
securities issued by the following regular broker-dealers of the Fund,
which had the following values as of October 31, 1998:
VALUE OF SECURITIES
BROKER-DEALER AS OF OCTOBER 31, 1998
------------------------------------------------------------------------
General Electric Capital Corp. $6,199,015
<PAGE>
PART I - APPENDIX F
SHARE OWNERSHIP
OWNERSHIP BY TRUSTEES AND OFFICERS
As of November 30, 1998, the Trustees and officers of the Trust as a group
owned less than 1% of any class of the Fund's shares.
25% OR GREATER OWNERSHIP
The following table identifies those investors who own 25% or more of the
Fund's shares (all share classes taken together) as of November 30, 1998,
and are therefore presumed to control the Fund:
<TABLE>
<CAPTION>
JURISDICTION OF ORGANIZATION
NAME AND ADDRESS OF INVESTOR (IF A COMPANY) PERCENTAGE OWNERSHIP
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
None
</TABLE>
5% OR GREATER OWNERSHIP OF SHARE CLASS
The following table identifies those investors who own 5% or more of any
class of the Fund's shares as of November 30, 1998:
NAME AND ADDRESS OF INVESTOR OWNERSHIP PERCENTAGE
..........................................................................
MLPF&S for the Sole Benefit of its Customers 10.32% of Class B shares
Attn: Fund Administration 97GT4
4800 Deer Lake Drive E 3rd FL
Jacksonville, FL 32246-6484
..........................................................................
MLPF&S for the Sole Benefit of its Customers 12.99% of Class C shares
Attn: Fund Administration 97N52
4800 Deer Lake Drive E 3rd FL
Jacksonville, FL 32246-6484
..........................................................................
TRS MFS DEF Contribution Plan 99.99% of Class I shares
c/o Mark Leary 19th FL
Mass Financial Services
500 Boylston Street
Boston, MA 02116-3740
..........................................................................
<PAGE>
PART I - APPENDIX G
<TABLE>
<CAPTION>
PERFORMANCE INFORMATION
...............................................................................................................................
All performance quotations are as of October 31, 1998.
AVERAGE ANNUAL
TOTAL RETURNS
30-DAY YIELD CURRENT
--------------------------------------------------- (WITHOUT ANY DISTRIBUTION
1 YEAR 5 YEARS LIFE OF FUND* WAIVERS) RATE+
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares, with initial sales
charge (SEC Performance) 8.86% 10.98% 12.39% 0.89% 2.72%
Class A Shares, at a net asset value 14.29% 12.07% 13.06% N/A N/A
Class B Shares, with CDSC (SEC
Performance) 9.57% 11.04% 12.58% N/A N/A
Class B Shares, at net asset value 13.57% 11.30% 12.58% 0.31% 2.26%
Class C Shares, with CDSC (SEC
Performance) 12.52% 11.37% 12.63% N/A N/A
Class C Shares, at net asset value 13.52% 11.37% 12.63% 0.34% 2.31%
Class I Shares, at net asset value 14.78% 12.21% 13.15% 1.27% 3.18%
----------------------
*From the class inception date of Class A shares on September 4, 1990.
+Annualized, based upon the last distribution.
</TABLE>
Class A share performance calculated according to Securities and Exchange
Commission (referred to as the SEC) rules (referred to as SEC performance)
takes into account the deduction of the 5.75% maximum sales charge. Class
B SEC performance takes into account the deduction of the applicable
contingent deferred sales charge (referred to as a CDSC), which declines
over six years from 4% to 0%. Class C SEC performance takes into account
the deduction of the 1% CDSC. The fund initially offered class A shares on
September 4, 1990, class B shares on September 7, 1993, class C shares on
January 3, 1994, and class I shares on January 2, 1997.
Class B and class C share performance include the performance of the
fund's class A shares for periods prior to the offering of class B and
class C shares. Class B and class C share performance generally would have
been lower than class A share performance had class B and class C shares
been offered for the entire period, because the operating expenses (e.g.,
distribution and service fees) attributable to class B and class C shares
are higher than those of class A shares. Class B and class C share SEC
performance has been adjusted to take into account the CDSC applicable to
class B and class C shares, rather than the initial sales charge
applicable to class A shares.
Class I share performance includes the performance of the fund's class A
shares for periods prior to the offering of class I shares. Class I share
performance generally would have been higher than class A share
performance had class I shares been offered for the entire period, because
operating expenses (e.g., distribution and service fees) attributable to
class I shares are lower than those of class A shares. Class I share
performance has been adjusted to take into account the fact that class I
shares have no initial sales charge.
Performance results include any applicable expense subsidies and waivers,
which may cause the results to be more favorable. Current subsidies and
waivers may be discontinued at any time.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
PART II
Part II of this SAI describes policies and practices that apply to each of the
Funds in the MFS Family of Funds. References in this Part II to a "Fund" means
each Fund in the MFS Family of Funds, unless noted otherwise. References in
this Part II to a "Trust" means the Massachusetts business trust of which the
Fund is a series, or, if the Fund is not a series of a Massachusetts business
trust, references to a "Trust" shall mean the Fund.
TABLE OF CONTENTS
Page
I Management of the Fund ................................... 1
Trustees/Officers ........................................ 1
Investment Adviser ....................................... 1
Administrator ............................................ 2
Custodian ................................................ 2
Shareholder Servicing Agent .............................. 2
Distributor .............................................. 2
II Principal Share Characteristics .......................... 2
Class A Shares ........................................... 2
Class B Shares, Class C Shares and Class I Shares ........ 2
Waiver of Sales Charges .................................. 3
Dealer Commissions and Concessions ....................... 3
General .................................................. 3
III Distribution Plan ........................................ 3
Features Common to Each Class of Shares .................. 3
Features Unique to Each Class of Shares .................. 4
IV Investment Techniques, Practices and Risks ............... 5
V Net Income and Distributions ............................. 5
Money Market Funds ....................................... 5
Other Funds .............................................. 5
VI Tax Considerations ....................................... 5
Taxation of the Fund ..................................... 5
Taxation of Shareholders ................................. 6
Special Rules for Municipal Fund Distributions ........... 7
VII Portfolio Transactions and Brokerage Commissions ......... 8
VIII Determination of Net Asset Value ......................... 9
Money Market Funds ....................................... 9
Other Funds .............................................. 10
IX Performance Information .................................. 10
Money Market Funds ....................................... 10
Other Funds .............................................. 11
General .................................................. l2
MFS Firsts ............................................... l2
X Shareholder Services ..................................... 13
Investment and Withdrawal Programs ....................... 13
Exchange Privilege ....................................... 15
Tax-Deferred Retirement Plans ............................ 16
XI Description of Shares, Voting Rights and Liabilities ..... 17
Appendix A -- Waivers of Sales Charges ................... A-1
Appendix B -- Dealer Commissions and Concessions ......... B-1
Appendix C -- Investment Techniques, Practices and Risks . C-1
Appendix D -- Description of Bond Ratings ................ D-1
<PAGE>
(I) MANAGEMENT OF THE FUND
TRUSTEES/OFFICERS
BOARD OVERSIGHT -- The Board of Trustees which oversees the Fund
provides broad supervision over the affairs of the Fund. The Adviser is
responsible for the investment management of the Fund's assets, and the
officers of the Trust are responsible for its operations.
TRUSTEE RETIREMENT PLAN -- The Trust has a retirement plan for
Trustees who are non-interested Trustees and Trustees who are not
officers of the Trust. Under this plan, a Trustee will retire upon
reaching a specified age (see Part I -- "Appendix B ") ("Retirement
Age") and if the Trustee has completed at least 5 years of service, he
would be entitled to annual payments during his lifetime of up to 50% of
such Trustee's average annual compensation (based on the three years
prior to his retirement) depending on his length of service. A Trustee
may also retire prior to his Retirement Age and receive reduced payments
if he has completed at least 5 years of service. Under the plan, a
Trustee (or his beneficiaries) will also receive benefits for a period
of time in the event the Trustee is disabled or dies. These benefits
will also be based on the Trustee's average annual compensation and
length of service. The Fund will accrue its allocable portion of
compensation expenses under the retirement plan each year to cover the
current year's service and amortize past service cost.
INDEMNIFICATION OF TRUSTEES AND OFFICERS -- The Declaration of Trust
of the Trust provides that the Trust will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with
litigation in which they may be involved because of their offices with
the Trust, unless, as to liabilities of the Trust or its shareholders,
it is determined that they engaged in willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in their
offices, or with respect to any matter, unless it is adjudicated that
they did not act in good faith in the reasonable belief that their
actions were in the best interest of the Trust. In the case of
settlement, such indemnification will not be provided unless it has been
determined pursuant to the Declaration of Trust, that they have not
engaged in willful misfeasance, bad faith, gross negligence or reckless
disregard of their duties.
INVESTMENT ADVISER
The Trust has retained Massachusetts Financial Services Company ("MFS"
or the "Adviser") as the Fund's investment adviser. MFS and its
predecessor organizations have a history of money management dating from
1924. MFS is a subsidiary of Sun Life of Canada (U.S.) Financial
Services Holdings, Inc., which in turn is an indirect wholly owned
subsidiary of Sun Life of Canada (an insurance company).
MFS has retained, on behalf of certain MFS Funds, sub-investment
advisers to assist MFS in the management of the Fund's assets. A
description of these sub-advisers, the services they provide and their
compensation is provided under the caption "Management of the Fund --
Sub- Adviser" in Part I of this SAI for Funds which use sub-advisers.
INVESTMENT ADVISORY AGREEMENT -- The Adviser manages the Fund pursuant
to an Investment Advisory Agreement (the "Advisory Agreement"). Under
the Advisory Agreement, the Adviser provides the Fund with overall
investment advisory services. Subject to such policies as the Trustees
may determine, the Adviser makes investment decisions for the Fund. For
these services and facilities, the Adviser receives an annual management
fee, computed and paid monthly, as disclosed in the Prospectus under the
heading "Management of the Fund[s]."
The Adviser pays the compensation of the Trust's officers and of any
Trustee who is an officer of the Adviser. The Adviser also furnishes at
its own expense all necessary administrative services, including office
space, equipment, clerical personnel, investment advisory facilities,
and all executive and supervisory personnel necessary for managing the
Fund's investments and effecting its portfolio transactions.
The Trust pays the compensation of the Trustees who are not officers
of MFS and all expenses of the Fund (other than those assumed by MFS)
including but not limited to: advisory and administrative services;
governmental fees; interest charges; taxes; membership dues in the
Investment Company Institute allocable to the Fund; fees and expenses of
independent auditors, of legal counsel, and of any transfer agent,
registrar or dividend disbursing agent of the Fund; expenses of
repurchasing and redeeming shares and servicing shareholder accounts;
expenses of preparing, printing and mailing prospectuses, periodic
reports, notices and proxy statements to shareholders and to
governmental officers and commissions; brokerage and other expenses
connected with the execution, recording and settlement of portfolio
security transactions; insurance premiums; fees and expenses of State
Street Bank and Trust Company, the Fund's custodian, for all services to
the Fund, including safekeeping of funds and securities and maintaining
required books and accounts; expenses of calculating the net asset value
of shares of the Fund; and expenses of shareholder meetings. Expenses
relating to the issuance, registration and qualification of shares of
the Fund and the preparation, printing and mailing of prospectuses are
borne by the Fund except that the Distribution Agreement with MFD
requires MFD to pay for prospectuses that are to be used for sales
purposes. Expenses of the Trust which are not attributable to a specific
series are allocated between the series in a manner believed by
management of the Trust to be fair and equitable.
The Advisory Agreement has an initial two year term and continues in
effect thereafter only if such continuance is specifically approved at
least annually by the Board of Trustees or by vote of a majority of the
Fund's shares (as defined in "Investment Restrictions" in Part I of this
SAI) and, in either case, by a majority of the Trustees who are not
parties to the Advisory Agreement or interested persons of any such
party. The Advisory Agreement terminates automatically if it is assigned
and may be terminated without penalty by vote of a majority of the
Fund's shares (as defined in "Investment Restrictions" in Part I of this
SAI), or by either party on not more than 60 days" nor less than 30
days" written notice. The Advisory Agreement provides that if MFS ceases
to serve as the Adviser to the Fund, the Fund will change its name so as
to delete the initials "MFS" and that MFS may render services to others
and may permit other fund clients to use the initials "MFS" in their
names. The Advisory Agreement also provides that neither the Adviser nor
its personnel shall be liable for any error of judgment or mistake of
law or for any loss arising out of any investment or for any act or
omission in the execution and management of the Fund, except for willful
misfeasance, bad faith or gross negligence in the performance of its or
their duties or by reason of reckless disregard of its or their
obligations and duties under the Advisory Agreement.
ADMINISTRATOR
MFS provides the Fund with certain financial, legal, compliance,
shareholder communications and other administrative services pursuant to
a Master Administrative Services Agreement. Under this Agreement, the
Fund pays MFS an administrative fee up to 0.015% per annum of the Fund's
average daily net assets. This fee reimburses MFS for a portion of the
costs it incurs to provide such services.
CUSTODIAN
State Street Bank and Trust Company (the "Custodian") is the custodian
of the Fund's assets. The Custodian's responsibilities include
safekeeping and controlling the Fund's cash and securities, handling the
receipt and delivery of securities, determining income and collecting
interest and dividends on the Fund's investments, maintaining books of
original entry for portfolio and fund accounting and other required
books and accounts, and calculating the daily net asset value of each
class of shares of the Fund. The Custodian does not determine the
investment policies of the Fund or decide which securities the Fund will
buy or sell. The Fund may, however, invest in securities of the
Custodian and may deal with the Custodian as principal in securities
transactions. The Custodian also acts as the dividend disbursing agent
of the Fund.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of MFS, is
the Fund's shareholder servicing agent, pursuant to an Amended and
Restated Shareholder Servicing Agreement (the "Agency Agreement"). The
Shareholder Servicing Agent's responsibilities under the Agency
Agreement include administering and performing transfer agent functions
and the keeping of records in connection with the issuance, transfer and
redemption of each class of shares of the Fund. For these services, MFSC
will receive a fee calculated as a percentage of the average daily net
assets of the Fund at an effective annual rate of up to 0.1125%. In
addition, MFSC will be reimbursed by the Fund for certain expenses
incurred by MFSC on behalf of the Fund. The Custodian has contracted
with MFSC to perform certain dividend disbursing agent functions for the
Fund.
DISTRIBUTOR
MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary of MFS,
serves as distributor for the continuous offering of shares of the Fund
pursuant to an Amended and Restated Distribution Agreement (the
"Distribution Agreement"). The Distribution Agreement has an initial two
year term and continues in effect thereafter only if such continuance is
specifically approved at least annually by the Board of Trustees or by
vote of a majority of the Fund's shares (as defined in "Investment
Restrictions" in Part I of this SAI) and in either case, by a majority
of the Trustees who are not parties to the Distribution Agreement or
interested persons of any such party. The Distribution Agreement
terminates automatically if it is assigned and may be terminated without
penalty by either party on not more than 60 days' nor less than 30 days'
notice.
(II) PRINCIPAL SHARE CHARACTERISTICS
Set forth below is a description of Class A, B, C and I shares offered
by the MFS Family of Funds. Some MFS Funds may not offer each class of
shares -- see the Prospectus of the Fund to determine which classes of
shares the Fund offers.
CLASS A SHARES
MFD acts as agent in selling Class A shares of the Fund to dealers. The
public offering price of Class A shares of the Fund is their net asset
value next computed after the sale plus a sales charge which varies
based upon the quantity purchased. The public offering price of a Class
A share of the Fund is calculated by dividing the net asset value of a
Class A share by the difference (expressed as a decimal) between 100%
and the sales charge percentage of offering price applicable to the
purchase (see "How to Purchase, Exchange and Redeem Shares" in the
Prospectus). The sales charge scale set forth in the Prospectus applies
to purchases of Class A shares of the Fund alone or in combination with
shares of all classes of certain other funds in the MFS Family of Funds
and other funds (as noted under Right of Accumulation) by any person,
including members of a family unit (e.g., husband, wife and minor
children) and bona fide trustees, and also applies to purchases made
under the Right of Accumulation or a Letter of Intent (see "Investment
and Withdrawal Programs" below). A group might qualify to obtain
quantity sales charge discounts (see "Investment and Withdrawal
Programs" below). Certain purchases of Class A shares may be subject to
a 1% CDSC instead of an initial sales charge, as described in the Fund's
Prospectus.
CLASS B SHARES, CLASS C SHARES AND CLASS I SHARES
MFD acts as agent in selling Class B, Class C and Class I shares of the
Fund. The public offering price of Class B, Class C and Class I shares
is their net asset value next computed after the sale. Class B and C
shares are generally subject to a CDSC, as described in the Fund's
Prospectus.
WAIVER OF SALES CHARGES
In certain circumstances, the initial sales charge imposed upon
purchases of Class A shares and the CDSC imposed upon redemptions of
Class A, B and C shares are waived. These circumstances are described in
Appendix A of this Part II. Such sales are made without a sales charge
to promote good will with employees and others with whom MFS, MFD and/or
the Fund have business relationships, because the sales effort, if any,
involved in making such sales is negligible, or in the case of certain
CDSC waivers, because the circumstances surrounding the redemption of
Fund shares were not foreseeable or voluntary.
DEALER COMMISSIONS AND CONCESSIONS
MFD pays commission and provides concessions to dealers that sell Fund
shares. These dealer commissions and concession are described in
Appendix B of this Part II.
GENERAL
Neither MFD nor dealers are permitted to delay placing orders to benefit
themselves by a price change. On occasion, MFD may obtain brokers loans
from various banks, including the custodian banks for the MFS Funds, to
facilitate the settlement of sales of shares of the Fund to dealers. MFD
may benefit from its temporary holding of funds paid to it by investment
dealers for the purchase of Fund shares.
(III) DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class A, Class B and
Class C shares (the "Distribution Plan") pursuant to Section 12(b) of
the 1940 Act and Rule 12b-1 thereunder (the "Rule") after having
concluded that there is a reasonable likelihood that the Distribution
Plan would benefit the Fund and each respective class of shareholders.
The provisions of the Distribution Plan are severable with respect to
each Class of shares offered by the Fund. The Distribution Plan is
designed to promote sales, thereby increasing the net assets of the
Fund. Such an increase may reduce the expense ratio to the extent the
Fund's fixed costs are spread over a larger net asset base. Also, an
increase in net assets may lessen the adverse effect that could result
were the Fund required to liquidate portfolio securities to meet
redemptions. There is, however, no assurance that the net assets of the
Fund will increase or that the other benefits referred to above will be
realized.
In certain circumstances, the fees described below may not be imposed,
are being waived or do not apply to certain MFS Funds. Current
distribution and service fees for each Fund are reflected under the
caption "Expense Summary" in the Prospectus.
FEATURES COMMON TO EACH CLASS OF SHARES
There are features of the Distribution Plan that are common to each
Class of shares, as described below.
SERVICE FEES -- The Distribution Plan provides that the Fund may pay MFD
a service fee of up to 0.25% of the average daily net assets
attributable to the class of shares to which the Distribution Plan
relates (i.e., Class A, Class B or Class C shares, as appropriate) (the
"Designated Class") annually in order that MFD may pay expenses on
behalf of the Fund relating to the servicing of shares of the Designated
Class. The service fee is used by MFD to compensate dealers which enter
into a sales agreement with MFD in consideration for all personal
services and/or account maintenance services rendered by the dealer with
respect to shares of the Designated Class owned by investors for whom
such dealer is the dealer or holder of record. MFD may from time to time
reduce the amount of the service fees paid for shares sold prior to a
certain date. Service fees may be reduced for a dealer that is the
holder or dealer of record for an investor who owns shares of the Fund
having an aggregate net asset value at or above a certain dollar level.
Dealers may from time to time be required to meet certain criteria in
order to receive service fees. MFD or its affiliates are entitled to
retain all service fees payable under the Distribution Plan for which
there is no dealer of record or for which qualification standards have
not been met as partial consideration for personal services and/or
account maintenance services performed by MFD or its affiliates to
shareholder accounts.
DISTRIBUTION FEES -- The Distribution Plan provides that the Fund may
pay MFD a distribution fee in addition to the service fee described
above based on the average daily net assets attributable to the
Designated Class as partial consideration for distribution services
performed and expenses incurred in the performance of MFD's obligations
under its distribution agreement with the Fund. MFD pays commissions to
dealers as well as expenses of printing prospectuses and reports used
for sales purposes, expenses with respect to the preparation and
printing of sales literature and other distribution related expenses,
including, without limitation, the cost necessary to provide
distribution-related services, or personnel, travel, office expense and
equipment. The amount of the distribution fee paid by the Fund with
respect to each class differs under the Distribution Plan, as does the
use by MFD of such distribution fees. Such amounts and uses are
described below in the discussion of the provisions of the Distribution
Plan relating to each Class of shares. While the amount of compensation
received by MFD in the form of distribution fees during any year may be
more or less than the expenses incurred by MFD under its distribution
agreement with the Fund, the Fund is not liable to MFD for any losses
MFD may incur in performing services under its distribution agreement
with the Fund.
OTHER COMMON FEATURES -- Fees payable under the Distribution Plan are
charged to, and therefore reduce, income allocated to shares of the
Designated Class. The provisions of the Distribution Plan relating to
operating policies as well as initial approval, renewal, amendment and
termination are substantially identical as they relate to each Class of
shares covered by the Distribution Plan.
The Distribution Plan remains in effect from year to year only if its
continuance is specifically approved at least annually by vote of both
the Trustees and a majority of the Trustees who are not "interested
persons" or financially interested parties of such Plan ("Distribution
Plan Qualified Trustees"). The Distribution Plan also requires that the
Fund and MFD each shall provide the Trustees, and the Trustees shall
review, at least quarterly, a written report of the amounts expended
(and purposes therefor) under such Plan. The Distribution Plan may be
terminated at any time by vote of a majority of the Distribution Plan
Qualified Trustees or by vote of the holders of a majority of the
respective class of the Fund's shares (as defined in "Investment
Restrictions" in Part I of this SAI). All agreements relating to the
Distribution Plan entered into between the Fund or MFD and other
organizations must be approved by the Board of Trustees, including a
majority of the Distribution Plan Qualified Trustees. Agreements under
the Distribution Plan must be in writing, will be terminated
automatically if assigned, and may be terminated at any time without
payment of any penalty, by vote of a majority of the Distribution Plan
Qualified Trustees or by vote of the holders of a majority of the
respective class of the Fund's shares. The Distribution Plan may not be
amended to increase materially the amount of permitted distribution
expenses without the approval of a majority of the respective class of
the Fund's shares (as defined in "Investment Restrictions" in Part I of
this SAI) or may not be materially amended in any case without a vote of
the Trustees and a majority of the Distribution Plan Qualified Trustees.
The selection and nomination of Distribution Plan Qualified Trustees
shall be committed to the discretion of the non-interested Trustees then
in office. No Trustee who is not an "interested person" has any
financial interest in the Distribution Plan or in any related agreement.
FEATURES UNIQUE TO EACH CLASS OF SHARES
There are certain features of the Distribution Plan that are unique to
each class of shares, as described below.
CLASS A SHARES -- Class A shares are generally offered pursuant to an
initial sales charge, a substantial portion of which is paid to or
retained by the dealer making the sale (the remainder of which is paid
to MFD). In addition to the initial sales charge, the dealer also
generally receives the ongoing 0.25% per annum service fee, as discussed
above.
No service fees will be paid: (i) to any dealer who is the holder or
dealer or record for investors who own Class A shares having an
aggregate net asset value less than $750,000, or such other amount as
may be determined from time to time by MFD (MFD, however, may waive this
minimum amount requirement from time to time); or (ii) to any insurance
company which has entered into an agreement with the Fund and MFD that
permits such insurance company to purchase Class A shares from the Fund
at their net asset value in connection with annuity agreements issued in
connection with the insurance company's separate accounts.
The distribution fee paid to MFD under the Distribution Plan is equal,
on an annual basis, to 0.10% of the Fund's average daily net assets
attributable to Class A shares (0.25% per annum for certain Funds). As
noted above, MFD may use the distribution fee to cover distribution-
related expenses incurred by it under its distribution agreement with
the Fund, including commissions to dealers and payments to wholesalers
employed by MFD (e.g., MFD pays commissions to dealers with respect to
purchases of $1 million or more and purchases by certain retirement
plans of Class A shares which are sold at net asset value but which are
subject to a 1% CDSC for one year after purchase). In addition, to the
extent that the aggregate service and distribution fees paid under the
Distribution Plan do not exceed 0.35% per annum of the average daily net
assets of the Fund attributable to Class A shares (0.50% per annum for
certain Funds), the Fund is permitted to pay such distribution-related
expenses or other distribution-related expenses.
CLASS B SHARES -- Class B shares are offered at net asset value
without an initial sales charge but subject to a CDSC. MFD will advance
to dealers the first year service fee described above at a rate equal to
0.25% of the purchase price of such shares and, as compensation
therefor, MFD may retain the service fee paid by the Fund with respect
to such shares for the first year after purchase. Dealers will become
eligible to receive the ongoing 0.25% per annum service fee with respect
to such shares commencing in the thirteenth month following purchase.
Except in the case of the first year service fee, no service fees will
be paid to any securities dealer who is the holder or dealer of record
for investors who own Class B shares having an aggregate net asset value
of less than $750,000 or such other amount as may be determined by MFD
from time to time. MFD, however, may waive this minimum amount
requirement from time to time.
Under the Distribution Plan, the Fund pays MFD a distribution fee
equal, on an annual basis, to 0.75% of the Fund's average daily net
assets attributable to Class B shares. As noted above, this distribution
fee may be used by MFD to cover its distribution-related expenses under
its distribution agreement with the Fund (including the 3.75% commission
it pays to dealers upon purchase of Class B shares).
CLASS C SHARES -- Class C shares are offered at net asset value
without an initial sales charge but subject to a CDSC of 1.00% upon
redemption during the first year. MFD will pay a commission to dealers
of 1.00% of the purchase price of Class C shares purchased through
dealers at the time of purchase. In compensation for this 1.00%
commission paid by MFD to dealers, MFD will retain the 1.00% per annum
Class C distribution and service fees paid by the Fund with respect to
such shares for the first year after purchase, and dealers will become
eligible to receive from MFD the ongoing 1.00% per annum distribution
and service fees paid by the Fund to MFD with respect to such shares
commencing in the thirteenth month following purchase.
This ongoing 1.00% fee is comprised of the 0.25% per annum service fee
paid to MFD under the Distribution Plan (which MFD in turn pays to
dealers), as discussed above, and a distribution fee paid to MFD (which
MFD also in turn pays to dealers) under the Distribution Plan, equal, on
an annual basis, to 0.75% of the Fund's average daily net assets
attributable to Class C shares.
(IV) INVESTMENT TECHNIQUES, PRACTICES AND RISKS
Set forth in Appendix C of this Part II is a description of investment
techniques and practices which the MFS Funds may generally use in
pursuing their investment objectives and principal investment policies,
and the risks associated with these investment techniques and practices.
The Fund will engage only in certain of these investment techniques and
practices, as identified in Part I. Investment practices and techniques
that are not identified in Part I do not apply to the Fund.
(V) NET INCOME AND DISTRIBUTIONS
MONEY MARKET FUNDS
The net income attributable to each MFS Fund that is a money market
fund is determined each day during which the New York Stock Exchange is
open for trading (see "Determination of Net Asset Value" below for a
list of days the Exchange is closed).
For this purpose, the net income attributable to shares of a money
market fund (from the time of the immediately preceding determination
thereof) shall consist of (i) all interest income accrued on the
portfolio assets of the money market fund, (ii) less all actual and
accrued expenses of the money market fund determined in accordance with
generally accepted accounting principles, and (iii) plus or minus net
realized gains and losses and net unrealized appreciation or
depreciation on the assets of the money market fund, if any. Interest
income shall include discount earned (including both original issue and
market discount) on discount paper accrued ratably to the date of
maturity.
Since the net income is declared as a dividend each time the net
income is determined, the net asset value per share (i.e., the value of
the net assets of the money market fund divided by the number of shares
outstanding) remains at $1.00 per share immediately after each such
determination and dividend declaration. Any increase in the value of a
shareholder's investment, representing the reinvestment of dividend
income, is reflected by an increase in the number of shares in the
shareholder's account.
It is expected that the shares of the money market fund will have a
positive net income at the time of each determination thereof. If for
any reason the net income determined at any time is a negative amount,
which could occur, for instance, upon default by an issuer of a
portfolio security, the money market fund would first offset the
negative amount with respect to each shareholder account from the
dividends declared during the month with respect to each such account.
If and to the extent that such negative amounts exceeds such declared
dividends at the end of the month (or during the month in the case of an
account liquidated in its entirety), the money market fund could reduce
the number of its outstanding shares by treating each shareholder of the
money market fund as having contributed to its capital that number of
full and fractional shares of the money market fund in the account of
such shareholder which represents its proportion of such excess. Each
shareholder of the money market fund will be deemed to have agreed to
such contribution in these circumstances by its investment in the money
market fund. This procedure would permit the net asset value per share
of the money market fund to be maintained at a constant $1.00 per share.
OTHER FUNDS
Each MFS Fund other than the MFS money market funds intends to
distribute to its shareholders dividends equal to all of its net
investment income with such frequency as is disclosed in the Fund's
prospectus. These Funds' net investment income consists of non-capital
gain income less expenses. In addition, these Funds intend to distribute
net realized short- and long-term capital gains, if any, at least
annually. Shareholders will be informed of the tax consequences of such
distributions, including whether any portion represents a return of
capital, after the end of each calendar year.
(VI) TAX CONSIDERATIONS
The following discussion is a brief summary of some of the important
federal (and, where noted, state) income tax consequences affecting the
Fund and its shareholders. The discussion is very general, and therefore
prospective investors are urged to consult their tax advisors about the
impact an investment in the Fund may have on their own federal, state
and local taxes.
TAXATION OF THE FUND
FEDERAL TAXES -- The Fund (even if it is a fund in a Trust with
multiple series) is treated as a separate entity for federal income tax
purposes under the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund has elected (or in the case of a new Fund, intends to
elect) to be, and intends to qualify to be treated each year as, a
"regulated investment company" under Subchapter M of the Code by meeting
all applicable requirements of Subchapter M, including requirements as
to the nature of the Fund's gross income, the amount of its
distributions (as a percentage of both its overall income and any
tax-exempt income), and the composition of its portfolio assets. As a
regulated investment company, the fund will not be subject to any
federal income or excise taxes on its net investment income and net
realized capital gains that it distributes to shareholders in accordance
with the timing requirements imposed by the Code. The Fund's
foreign-source income, if any, may be subject to foreign withholding
taxes. If the Fund failed to qualify as a "regulated investment company"
in any year, it would incur regular federal corporate income tax on all
of its taxable income, whether or not distributed, and Fund
distributions would generally be taxable as ordinary dividend income to
the shareholders.
MASSACHUSETTS TAXES -- As long as it qualifies as a regulated
investment company under the Code, the Fund will not be required to pay
Massachusetts income or excise taxes.
TAXATION OF SHAREHOLDERS
TAX TREATMENT OF DISTRIBUTIONS -- Subject to the special rules
discussed below for Municipal Funds, shareholders of the Fund normally
will have to pay federal income tax and any state or local income taxes
on the dividends and capital gain distributions they receive from the
Fund. Any distributions from ordinary income and from net short-term
capital gains are taxable to shareholders as ordinary income for federal
income tax purposes whether paid in cash or reinvested in additional
shares. Distributions of net capital gain (i.e., the excess of net
long-term capital gain over net short-term capital loss), whether paid
in cash or reinvested in additional shares, are taxable to shareholders
as long-term capital gains for federal income tax purposes without
regard to the length of time the shareholders have held their shares.
Any Fund dividend that is declared in October, November, or December of
any calendar year, payable to shareholders of record in such a month,
and paid during the following January will be treated as if received by
the shareholders on December 31 of the year in which the dividend is
declared. The Fund will notify shareholders regarding the federal tax
status of its distributions after the end of each calendar year.
Any Fund distribution, other than dividends that are declared by the
fund on a daily basis will have the effect of reducing the per share net
asset value of Fund shares by the amount of the distribution.
Shareholders purchasing shares shortly before the record date of any
distribution (other than an exempt-interest dividend) may thus pay the
full price for the shares and then effectively receive a portion of the
purchase price back as a taxable distribution.
DIVIDENDS-RECEIVED DEDUCTION -- If the Fund receives dividend income
from U.S. corporations, a portion of the Fund's ordinary income
dividends is normally eligible for the dividends-received deduction for
corporations if the recipient otherwise qualifies for that deduction
with respect to its holding of Fund shares. Availability of the
deduction for particular corporate shareholders is subject to certain
limitations, and deducted amounts may be subject to the alternative
minimum tax or result in certain basis adjustments.
DISPOSITION OF SHARES -- In general, any gain or loss realized upon a
disposition of Fund shares by a shareholder that holds such shares as a
capital asset will be treated as a long-term capital gain or loss if the
shares have been held for more than twelve months and otherwise as a
short-term capital gain or loss. However, any loss realized upon a
disposition of Fund shares held for six months or less will be treated
as a long-term capital loss to the extent of any distributions of net
capital gain made with respect to those shares. Any loss realized upon a
disposition of shares may also be disallowed under rules relating to
"wash sales." Gain may be increased (or loss reduced) upon a redemption
of Class A Fund shares held for 90 days or less followed by any purchase
(including purchases by exchange or by reinvestment) without payment of
an additional sales charge of Class A shares of the Fund or of any other
shares of an MFS Fund generally sold subject to a sales charge.
DISTRIBUTION/ACCOUNTING POLICIES -- The Fund's current distribution
and accounting policies will affect the amount, timing, and character of
distributions to shareholders and may, under certain circumstances, make
an economic return of capital taxable to shareholders.
FOREIGN INCOME TAXES -- Investment income received by the Fund and
gains with respect to foreign securities may be subject to foreign
income taxes withheld at the source. The United States has entered into
tax treaties with many foreign countries that may entitle the Fund to a
reduced rate of tax or an exemption from tax on such income; the Fund
intends to qualify for treaty reduced rates where available. It is not
possible, however, to determine the Fund's effective rate of foreign tax
in advance, since the amount of the Fund's assets to be invested within
various countries is not known.
If the Fund holds more than 50% of its assets in foreign stock and
securities at the close of its taxable year, it may elect to "pass
through" to its shareholders foreign income taxes paid by it. If the
Fund so elects, shareholders will be required to treat their pro rata
portions of the foreign income taxes paid by the Fund as part of the
amounts distributed to them by it and thus includable in their gross
income for federal income tax purposes. Shareholders who itemize
deductions would then be allowed to claim a deduction or credit (but not
both) on their federal income tax returns for such amounts, subject to
certain limitations. Shareholders who do not itemize deductions would
(subject to such limitations) be able to claim a credit but not a
deduction. No deduction will be permitted to individuals in computing
their alternative minimum tax liability. If the Fund is not eligible, or
does not elect, to "pass through" to its shareholders foreign income
taxes it has paid, shareholders will not be able to claim any deduction
or credit for any part of the foreign taxes paid by the Fund.
U.S. TAXATION OF NON-U.S. PERSONS -- Dividends and certain other
payments (but not including distributions of net capital gains) to
persons who are not citizens or residents of the United States or U.S.
entities ("Non-U.S. Persons") are generally subject to U.S. tax
withholding at the rate of 30%. The Fund intends to withhold at that
rate on taxable dividends and other payments to Non-U.S. Persons that
are subject to such withholding. The Fund may withhold at a lower rate
permitted by an applicable treaty if the shareholder provides the
documentation required by the Fund. Any amounts overwithheld may be
recovered by such persons by filing a claim for refund with the U.S.
Internal Revenue Service within the time period appropriate to such
claims.
BACKUP WITHHOLDING -- The Fund is also required in certain
circumstances to apply backup withholding at the rate of 31% on taxable
dividends and capital gain distributions (and redemption proceeds, if
applicable) paid to any non-corporate shareholder (including a Non-U.S.
Person) who does not furnish to the Fund certain information and
certifications or who is otherwise subject to backup withholding. Backup
withholding will not, however, be applied to payments that have been
subject to 30% withholding.
FOREIGN INCOME TAXATION OF NON-U.S. PERSONS -- Distributions received
from the Fund by Non-U.S. Persons may also be subject to tax under the
laws of their own jurisdictions.
STATE AND LOCAL INCOME TAXES: U.S. GOVERNMENT SECURITIES -- Dividends
paid by the Fund that are derived from interest on obligations of the
U.S. Government and certain of its agencies and instrumentalities (but
generally not distributions of capital gains realized upon the
disposition of such obligations) may be exempt from state and local
income taxes. The Fund generally intends to advise shareholders of the
extent to which its dividends consist of such interest. Shareholders are
urged to consult their tax advisors regarding the possible exclusion of
such portion of their dividends for state and local income tax purposes.
CERTAIN SPECIFIC INVESTMENTS -- Any investment in zero coupon bonds,
deferred interest bonds, payment-in-kind bonds, certain stripped
securities, and certain securities purchased at a market discount will
cause the Fund to recognize income prior to the receipt of cash payments
with respect to those securities. To distribute this income (as well as
non-cash income described in the next two paragraphs) and avoid a tax on
the Fund, the Fund may be required to liquidate portfolio securities
that it might otherwise have continued to hold, potentially resulting in
additional taxable gain or loss to the Fund. Any investment in residual
interests of a CMO that has elected to be treated as a real estate
mortgage investment conduit, or "REMIC," can create complex tax
problems, especially if the Fund has state or local governments or other
tax-exempt organizations as shareholders.
OPTIONS, FUTURES CONTRACTS, AND FORWARD CONTRACTS -- The Fund's
transactions in options, Futures Contracts, Forward Contracts, short
sales "against the box," and swaps and related transactions will be
subject to special tax rules that may affect the amount, timing, and
character of Fund income and distributions to shareholders. For example,
certain positions held by the Fund on the last business day of each
taxable year will be marked to market (i.e., treated as if closed out)
on that day, and any gain or loss associated with the positions will be
treated as 60% long-term and 40% short-term capital gain or loss.
Certain positions held by the Fund that substantially diminish its risk
of loss with respect to other positions in its portfolio may constitute
"straddles," and may be subject to special tax rules that would cause
deferral of Fund losses, adjustments in the holding periods of Fund
securities, and conversion of short-term into long-term capital losses.
Certain tax elections exist for straddles that may alter the effects of
these rules. The Fund will limit its activities in options, Futures
Contracts, Forward Contracts short sales "against the box" and swaps and
related transactions to the extent necessary to meet the requirements of
Subchapter M of the Code.
FOREIGN INVESTMENTS -- Special tax considerations apply with respect
to foreign investments by the Fund. Foreign exchange gains and losses
realized by the Fund may be treated as ordinary income and loss. Use of
foreign currencies for non-hedging purposes and investment by the Fund
in certain "passive foreign investment companies" may be limited in
order to avoid a tax on the Fund. The Fund may elect to mark to market
any investments in "passive foreign investment companies" on the last
day of each year. This election may cause the Fund to recognize income
prior to the receipt of cash payments with respect to those investments;
in order to distribute this income and avoid a tax on the Fund, the Fund
may be required to liquidate portfolio securities that it might
otherwise have continued to hold, potentially resulting in additional
taxable gain or loss to the fund.
SPECIAL RULES FOR MUNICIPAL FUND DISTRIBUTIONS
The following special rules apply to shareholders of funds whose
objective is to invest primarily in obligations that pay interest that
is exempt from federal income tax ("Municipal Funds").
TAX EXEMPT DISTRIBUTIONS -- The portion of a Municipal Fund's
distributions of net investment income that is attributable to interest
from tax-exempt securities will be designated by the Fund as an "exempt-
interest dividend" under the Code and will generally be exempt from
federal income tax in the hands of shareholders so long as at least 50%
of the total value of the Fund's assets consists of tax-exempt
securities at the close of each quarter of the Fund's taxable year.
Distributions of tax-exempt interest earned from certain securities may,
however, be treated as an item of tax preference for shareholders under
the federal alternative minimum tax, and all exempt-interest dividends
may increase a corporate shareholder's alternative minimum tax. Except
when the Fund provides actual monthly percentage breakdowns, the
percentage of income designated as tax-exempt will be applied uniformly
to all distributions by the Fund of net investment income made during
each fiscal year of the Fund and may differ from the percentage of
distributions consisting of tax- exempt interest in any particular
month. Shareholders are required to report exempt-interest dividends
received from the Fund on their federal income tax returns.
TAXABLE DISTRIBUTIONS -- A Municipal Fund may also earn some income
that is taxable (including interest from any obligations that lose their
federal tax exemption) and may recognize capital gains and losses as a
result of the disposition of securities and from certain options and
futures transactions. Shareholders normally will have to pay federal
income tax on the non-exempt-interest dividends and capital gain
distributions they receive from the Fund, whether paid in cash or
reinvested in additional shares. However, the Fund does not expect that
the non-tax-exempt portion of its net investment income, if any, will be
substantial. Because the Fund expects to earn primarily tax-exempt
interest income, it is expected that no Fund dividends will qualify for
the dividends-received deduction for corporations.
CONSEQUENCES OF DISTRIBUTIONS BY A MUNICIPAL FUND: EFFECT OF ACCRUED
TAX- EXEMPT INCOME -- Shareholders redeeming shares after tax-exempt
income has been accrued but not yet declared as a dividend should be
aware that a portion of the proceeds realized upon redemption of the
shares will reflect the existence of such accrued tax-exempt income and
that this portion will be subject to tax as a capital gain even though
it would have been tax-exempt had it been declared as a dividend prior
to the redemption. For this reason, if a shareholder wishes to redeem
shares of a Municipal Fund that does not declare dividends on a daily
basis, the shareholder may wish to consider whether he or she could
obtain a better tax result by redeeming immediately after the Fund
declares dividends representing substantially all the ordinary income
(including tax-exempt income) accrued for that month.
CERTAIN ADDITIONAL INFORMATION FOR MUNICIPAL FUND SHAREHOLDERS --
Interest on indebtedness incurred by shareholders to purchase or carry
Fund shares will not be deductible for federal income tax purposes.
Exempt-interest dividends are taken into account in calculating the
amount of social security and railroad retirement benefits that may be
subject to federal income tax. Entities or persons who are "substantial
users" (or persons related to "substantial users") of facilities
financed by private activity bonds should consult their tax advisors
before purchasing Fund shares.
CONSEQUENCES OF REDEMPTION OF SHARES -- Any loss realized on a
redemption of Municipal Fund shares held for six months or less will be
disallowed to the extent of any exempt-interest dividends received with
respect to those shares. If not disallowed, any such loss will be
treated as a long-term capital loss to the extent of any distributions
of net capital gain made with respect to those shares.
STATE AND LOCAL INCOME TAXES: MUNICIPAL OBLIGATIONS -- The exemption
of exempt-interest dividends for federal income tax purposes does not
necessarily result in exemption under the income tax laws of any state
or local taxing authority. Some states do exempt from tax that portion
of an exempt-interest dividend that represents interest received by a
regulated investment company on its holdings of securities issued by
that state and its political subdivisions and instrumentalities.
Therefore, the Fund will report annually to its shareholders the
percentage of interest income earned by it during the preceding year on
Municipal Bonds and will indicate, on a state-by-state basis only, the
source of such income.
(VII) PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are
made by persons affiliated with the Adviser. Any such person may serve
other clients of the Adviser, or any subsidiary of the Adviser in a
similar capacity. Changes in the Fund's investments are reviewed by the
Trust's Board of Trustees.
The primary consideration in placing portfolio security transactions
is execution at the most favorable prices. The Adviser has complete
freedom as to the markets in and broker-dealers through which it seeks
this result. In the U.S. and in some other countries debt securities are
traded principally in the over-the-counter market on a net basis through
dealers acting for their own account and not as brokers. In other
countries both debt and equity securities are traded on exchanges at
fixed commission rates. The cost of securities purchased from
underwriters includes an underwriter's commission or concession, and the
prices at which securities are purchased and sold from and to dealers
include a dealer's mark-up or mark-down. The Adviser normally seeks to
deal directly with the primary market makers or on major exchanges
unless, in its opinion, better prices are available elsewhere. Subject
to the requirement of seeking execution at the best available price,
securities may, as authorized by the Advisory Agreement, be bought from
or sold to dealers who have furnished statistical, research and other
information or services to the Adviser. At present no arrangements for
the recapture of commission payments are in effect.
Consistent with the foregoing primary consideration, the Conduct Rules
of the National Association of Securities Dealers, Inc. ("NASD") and
such other policies as the Trustees may determine, the Adviser may
consider sales of shares of the Fund and of the other investment company
clients of MFD as a factor in the selection of broker-dealers to execute
the Fund's portfolio transactions.
Under the Advisory Agreement and as permitted by Section 28(e) of the
Securities Exchange Act of 1934, the Adviser may cause the Fund to pay a
broker-dealer which provides brokerage and research services to the
Adviser, an amount of commission for effecting a securities transaction
for the Fund in excess of the amount other broker-dealers would have
charged for the transaction, if the Adviser determines in good faith
that the greater commission is reasonable in relation to the value of
the brokerage and research services provided by the executing
broker-dealer viewed in terms of either a particular transaction or
their respective overall responsibilities to the Fund or to their other
clients. Not all of such services are useful or of value in advising the
Fund.
The term "brokerage and research services" includes advice as to the
value of securities, the advisability of investing in, purchasing or
selling securities, and the availability of securities or of purchasers
or sellers of securities; furnishing analyses and reports concerning
issues, industries, securities, economic factors and trends, portfolio
strategy and the performance of accounts; and effecting securities
transactions and performing functions incidental thereto, such as
clearance and settlement.
Although commissions paid on every transaction will, in the judgment
of the Adviser, be reasonable in relation to the value of the brokerage
services provided, commissions exceeding those which another broker
might charge may be paid to broker-dealers who were selected to execute
transactions on behalf of the Fund and the Adviser's other clients in
part for providing advice as to the availability of securities or of
purchasers or sellers of securities and services in effecting securities
transactions and performing functions incidental thereto, such as
clearance and settlement.
Broker-dealers may be willing to furnish statistical, research and
other factual information or services ("Research") to the Adviser for no
consideration other than brokerage or underwriting commissions.
Securities may be bought or sold from time to time through such
broker-dealers, on behalf of the Fund. The Trustees (together with the
Trustees of the other MFS Family of Funds) have directed the Adviser to
allocate a total of $54,160 of commission business from the MFS Family
of Funds to the Pershing Division of Donaldson Lufkin & Jenrette as
consideration for the annual renewal of certain publications provided by
Lipper Analytical Securities Corporation (which provides information
useful to the Trustees in reviewing the relationship between the Fund
and the Adviser).
The Adviser's investment management personnel attempt to evaluate the
quality of Research provided by brokers. The Adviser sometimes uses
evaluations resulting from this effort as a consideration in the
selection of brokers to execute portfolio transactions.
The management fee of the Adviser will not be reduced as a consequence
of the Adviser's receipt of brokerage and research service. To the
extent the Fund's portfolio transactions are used to obtain brokerage
and research services, the brokerage commissions paid by the Fund will
exceed those that might otherwise be paid for such portfolio
transactions, or for such portfolio transactions and research, by an
amount which cannot be presently determined. Such services would be
useful and of value to the Adviser in serving both the Fund and other
clients and, conversely, such services obtained by the placement of
brokerage business of other clients would be useful to the Adviser in
carrying out its obligations to the Fund. While such services are not
expected to reduce the expenses of the Adviser, the Adviser would,
through use of the services, avoid the additional expenses which would
be incurred if it should attempt to develop comparable information
through its own staff.
In certain instances there may be securities which are suitable for
the Fund's portfolio as well as for that of one or more of the other
clients of the Adviser or any subsidiary of the Adviser. Investment
decisions for the Fund and for such other clients are made with a view
to achieving their respective investment objectives. It may develop that
a particular security is bought or sold for only one client even though
it might be held by, or bought or sold for, other clients. Likewise, a
particular security may be bought for one or more clients when one or
more other clients are selling that same security. Some simultaneous
transactions are inevitable when several clients receive investment
advice from the same investment adviser, particularly when the same
security is suitable for the investment objectives of more than one
client. When two or more clients are simultaneously engaged in the
purchase or sale of the same security, the securities are allocated
among clients in a manner believed by the adviser to be equitable to
each. It is recognized that in some cases this system could have a
detrimental effect on the price or volume of the security as far as the
Fund is concerned. In other cases, however, the Fund believes that its
ability to participate in volume transactions will produce better
executions for the Fund.
(VIII) DETERMINATION OF NET ASSET VALUE
The net asset value per share of each class of the Fund is determined
each day during which the New York Stock Exchange is open for trading.
(As of the date of this SAI, the Exchange is open for trading every
weekday except for the following holidays (or the days on which they are
observed): New Year's Day; Martin Luther King Day; Presidents' Day; Good
Friday; Memorial Day; Independence Day; Labor Day; Thanksgiving Day and
Christmas Day.) This determination is made once each day as of the close
of regular trading on the Exchange by deducting the amount of the
liabilities attributable to the class from the value of the assets
attributable to the class and dividing the difference by the number of
shares of the class outstanding.
MONEY MARKET FUNDS
Portfolio securities of each MFS Fund that is a money market fund are
valued at amortized cost, which the Board of Trustees which oversees the
money market fund has determined in good faith constitutes fair value
for the purposes of complying with the 1940 Act. This valuation method
will continue to be used until such time as the Board of Trustees
determines that it does not constitute fair value for such purposes.
Each money market fund will limit its portfolio to those investments in
U.S. dollar- denominated instruments which its Board of Trustees
determines present minimal credit risks, and which are of high quality
as determined by any major rating service or, in the case of any
instrument that is not so rated, of comparable quality as determined by
the Board of Trustees. Each money market fund has also agreed to
maintain a dollar-weighted average maturity of 90 days or less and to
invest only in securities maturing in 13 months or less. The Board of
Trustees which oversee each money market fund has established procedures
designed to stabilize its net asset value per share, as computed for the
purposes of sales and redemptions, at $1.00 per share. If the Board
determines that a deviation from the $1.00 per share price may exist
which may result in a material dilution or other unfair result to
investors or existing shareholders, it will take corrective action it
regards as necessary and appropriate, which action could include the
sale of instruments prior to maturity (to realize capital gains or
losses); shortening average portfolio maturity; withholding dividends;
or using market quotations for valuation purposes.
OTHER FUNDS
The following valuation techniques apply to each MFS Fund that is not
a money market fund.
Equity securities in the Fund's portfolio are valued at the last sale
price on the exchange on which they are primarily traded or on the
Nasdaq stock market system for unlisted national market issues, or at
the last quoted bid price for listed securities in which there were no
sales during the day or for unlisted securities not reported on the
Nasdaq stock market system. Bonds and other fixed income securities
(other than short-term obligations) of U.S. issuers in the Fund's
portfolio are valued on the basis of valuations furnished by a pricing
service which utilizes both dealer-supplied valuations and electronic
data processing techniques which take into account appropriate factors
such as institutional-size trading in similar groups of securities,
yield, quality, coupon rate, maturity, type of issue, trading
characteristics and other market data without exclusive reliance upon
quoted prices or exchange or over-the-counter prices, since such
valuations are believed to reflect more accurately the fair value of
such securities. Forward Contracts will be valued using a pricing model
taking into consideration market data from an external pricing source.
Use of the pricing services has been approved by the Board of Trustees.
All other securities, futures contracts and options in the Fund's
portfolio (other than short-term obligations) for which the principal
market is one or more securities or commodities exchanges (whether
domestic or foreign) will be valued at the last reported sale price or
at the settlement price prior to the determination (or if there has been
no current sale, at the closing bid price) on the primary exchange on
which such securities, futures contracts or options are traded; but if a
securities exchange is not the principal market for securities, such
securities will, if market quotations are readily available, be valued
at current bid prices, unless such securities are reported on the Nasdaq
stock market system, in which case they are valued at the last sale
price or, if no sales occurred during the day, at the last quoted bid
price. Short-term obligations in the Fund's portfolio are valued at
amortized cost, which constitutes fair value as determined by the Board
of Trustees. Short-term obligations with a remaining maturity in excess
of 60 days will be valued upon dealer supplied valuations. Portfolio
investments for which there are no such quotations or valuations are
valued at fair value as determined in good faith by or at the direction
of the Board of Trustees.
Generally, trading in foreign securities is substantially completed
each day at various times prior to the close of regular trading on the
Exchange. Occasionally, events affecting the values of such securities
may occur between the times at which they are determined and the close
of regular trading on the Exchange which will not be reflected in the
computation of the Fund's net asset value unless the Trustees deem that
such event would materially affect the net asset value in which case an
adjustment would be made.
All investments and assets are expressed in U.S. dollars based upon
current currency exchange rates. A share's net asset value is effective
for orders received by the dealer prior to its calculation and received
by MFD prior to the close of that business day.
(IX) PERFORMANCE INFORMATION
MONEY MARKET FUNDS
Each MFS Fund that is a money market fund will provide current
annualized and effective annualized yield quotations based on the daily
dividends of shares of the money market fund. These quotations may from
time to time be used in advertisements, shareholder reports or other
communications to shareholders.
Any current yield quotation of a money market fund which is used in
such a manner as to be subject to the provisions of Rule 482(d) under
the 1933 Act shall consist of an annualized historical yield, carried at
least to the nearest hundredth of one percent based on a specific seven
calendar day period and shall be calculated by dividing the net change
in the value of an account having a balance of one share of that class
at the beginning of the period by the value of the account at the
beginning of the period and multiplying the quotient by 365/7. For this
purpose the net change in account value would reflect the value of
additional shares purchased with dividends declared on the original
share and dividends declared on both the original share and any such
additional shares, but would not reflect any realized gains or losses
from the sale of securities or any unrealized appreciation or
depreciation on portfolio securities. In addition, any effective yield
quotation of a money market fund so used shall be calculated by
compounding the current yield quotation for such period by multiplying
such quotation by 7/365, adding 1 to the product, raising the sum to a
power equal to 365/7, and subtracting 1 from the result. These yield
quotations should not be considered as representative of the yield of a
money market fund in the future since the yield will vary based on the
type, quality and maturities of the securities held in its portfolio,
fluctuations in short-term interest rates and changes in the money
market fund's expenses.
OTHER FUNDS
Each MFS Fund that is not a money market fund may quote the following
performance results.
TOTAL RATE OF RETURN -- The Fund will calculate its total rate of
return for each class of shares for certain periods by determining the
average annual compounded rates of return over those periods that would
cause an investment of $1,000 (made with all distributions reinvested
and reflecting the CDSC or the maximum public offering price) to reach
the value of that investment at the end of the periods. The Fund may
also calculate (i) a total rate of return, which is not reduced by any
applicable CDSC and therefore may result in a higher rate of return,
(ii) a total rate of return assuming an initial account value of $1,000,
which will result in a higher rate of return since the value of the
initial account will not be reduced by any applicable sales charge
and/or (iii) total rates of return which represent aggregate performance
over a period or year- by-year performance, and which may or may not
reflect the effect of the maximum or other sales charge or CDSC.
The Fund offers multiple classes of shares which were initially
offered for sale to, and purchased by, the public on different dates
(the class "inception date"). The calculation of total rate of return
for a class of shares which has a later class inception date than
another class of shares of the Fund is based both on (i) the performance
of the Fund's newer class from its inception date and (ii) the
performance of the Fund's oldest class from its inception date up to the
class inception date of the newer class.
As discussed in the Prospectus, the sales charges, expenses and
expense ratios, and therefore the performance, of the Fund's classes of
shares differ. In calculating total rate of return for a newer class of
shares in accordance with certain formulas required by the SEC, the
performance will be adjusted to take into account the fact that the
newer class is subject to a different sales charge than the oldest class
(e.g., if the newer class is Class A shares, the total rate of return
quoted will reflect the deduction of the initial sales charge applicable
to Class A shares; if the newer class is Class B shares, the total rate
of return quoted will reflect the deduction of the CDSC applicable to
Class B shares). However, the performance will not be adjusted to take
into account the fact that the newer class of shares bears different
class specific expenses than the oldest class of shares (e.g., Rule
12b-1 fees). Therefore, the total rate of return quoted for a newer
class of shares will differ from the return that would be quoted had the
newer class of shares been outstanding for the entire period over which
the calculation is based (i.e., the total rate of return quoted for the
newer class will be higher than the return that would have been quoted
had the newer class of shares been outstanding for the entire period
over which the calculation is based if the class specific expenses for
the newer class are higher than the class specific expenses of the
oldest class, and the total rate of return quoted for the newer class
will be lower than the return that would be quoted had the newer class
of shares been outstanding for this entire period if the class specific
expenses for the newer class are lower than the class specific expenses
of the oldest class).
Any total rate of return quotation provided by the Fund should not be
considered as representative of the performance of the Fund in the
future since the net asset value of shares of the Fund will vary based
not only on the type, quality and maturities of the securities held in
the Fund's portfolio, but also on changes in the current value of such
securities and on changes in the expenses of the Fund. These factors and
possible differences in the methods used to calculate total rates of
return should be considered when comparing the total rate of return of
the Fund to total rates of return published for other investment
companies or other investment vehicles. Total rate of return reflects
the performance of both principal and income. Current net asset value
and account balance information may be obtained by calling
1-800-MFS-TALK (637-8255).
YIELD -- Any yield quotation for a class of shares of the Fund is
based on the annualized net investment income per share of that class
for the 30- day period. The yield for each class of the Fund is
calculated by dividing the net investment income allocated to that class
earned during the period by the maximum offering price per share of that
class of the Fund on the last day of the period. The resulting figure is
then annualized. Net investment income per share of a class is
determined by dividing (i) the dividends and interest allocated to that
class during the period, minus accrued expense of that class for the
period by (ii) the average number of shares of the class entitled to
receive dividends during the period multiplied by the maximum offering
price per share on the last day of the period. The Fund's yield
calculations assume a maximum sales charge of 5.75% in the case of Class
A shares and no payment of any CDSC in the case of Class B and Class C
shares.
TAX-EQUIVALENT YIELD -- The tax-equivalent yield for a class of shares
of a Fund is calculated by determining the rate of return that would
have to be achieved on a fully taxable investment in such shares to
produce the after-tax equivalent of the yield of that class. In
calculating tax- equivalent yield, a Fund assumes certain federal tax
brackets for shareholders and does not take into account state taxes.
CURRENT DISTRIBUTION RATE -- Yield, which is calculated according to a
formula prescribed by the Securities and Exchange Commission, is not
indicative of the amounts which were or will be paid to the Fund's
shareholders. Amounts paid to shareholders of each class are reflected
in the quoted "current distribution rate" for that class. The current
distribution rate for a class is computed by (i) annualizing the
distributions (excluding short-term capital gains) of the class for a
stated period; (ii) adding any short-term capital gains paid within the
immediately preceding twelve-month period; and (iii) dividing the result
by the maximum offering price or net asset value per share on the last
day of the period. The current distribution rate differs from the yield
computation because it may include distributions to shareholders from
sources other than dividends and interest, such as premium income for
option writing, short-term capital gains and return of invested capital,
and may be calculated over a different period of time. The Fund's
current distribution rate calculation for Class B shares and Class C
shares assumes no CDSC is paid.
GENERAL
From time to time the Fund may, as appropriate, quote Fund rankings or
reprint all or a portion of evaluations of fund performance and
operations appearing in various independent publications, including but
not limited to the following: Money, Fortune, U.S. News and World
Report, Kiplinger's Personal Finance, The Wall Street Journal, Barron's,
Investors Business Daily, Newsweek, Financial World, Financial Planning,
Investment Advisor, USA Today, Pensions and Investments, SmartMoney,
Forbes, Global Finance, Registered Representative, Institutional
Investor, the Investment Company Institute, Johnson's Charts,
Morningstar, Lipper Analytical Securities Corporation, CDA Wiesenberger,
Shearson Lehman and Salomon Bros. Indices, Ibbotson, Business Week,
Lowry Associates, Media General, Investment Company Data, The New York
Times, Your Money, Strangers Investment Advisor, Financial Planning on
Wall Street, Standard and Poor's, Individual Investor, The 100 Best
Mutual Funds You Can Buy, by Gordon K. Williamson, Consumer Price Index,
and Sanford C. Bernstein & Co. Fund performance may also be compared to
the performance of other mutual funds tracked by financial or business
publications or periodicals. The Fund may also quote evaluations
mentioned in independent radio or television broadcasts and use charts
and graphs to illustrate the past performance of various indices such as
those mentioned above and illustrations using hypothetical rates of
return to illustrate the effects of compounding and tax-deferral. The
Fund may advertise examples of the effects of periodic investment plans,
including the principle of dollar cost averaging. In such a program, an
investor invests a fixed dollar amount in a fund at periodic intervals,
thereby purchasing fewer shares when prices are high and more shares
when prices are low. While such a strategy does not assure a profit or
guard against a loss in a declining market, the investor's average cost
per share can be lower than if fixed numbers of shares are purchased at
the same intervals.
From time to time, the Fund may discuss or quote its current portfolio
manager as well as other investment personnel, including such persons'
views on: the economy; securities markets; portfolio securities and
their issuers; investment philosophies, strategies, techniques and
criteria used in the selection of securities to be purchased or sold for
the Fund; the Fund's portfolio holdings; the investment research and
analysis process; the formulation and evaluation of investment
recommendations; and the assessment and evaluation of credit, interest
rate, market and economic risks, and similar or related matters.
The Fund may also use charts, graphs or other presentation formats to
illustrate the historical correlation of its performance to fund
categories established by Morningstar (or other nationally recognized
statistical ratings organizations) and to other MFS Funds.
From time to time the Fund may also discuss or quote the views of its
distributor, its investment adviser and other financial planning, legal,
tax, accounting, insurance, estate planning and other professionals, or
from surveys, regarding individual and family financial planning. Such
views may include information regarding: retirement planning; tax
management strategies; estate planning; general investment techniques
(e.g., asset allocation and disciplined saving and investing); business
succession; ideas and information provided through the MFS Heritage
Planning(SM) program, an intergenerational financial planning assistance
program; issues with respect to insurance (e.g., disability and life
insurance and Medicare supplemental insurance); issues regarding
financial and health care management for elderly family members; and
other similar or related matters.
From time to time, the Fund may also advertise annual returns showing
the cumulative value of an initial investment in the Fund in various
amounts over specified periods, with capital gain and dividend
distributions invested in additional shares or taken in cash, and with
no adjustment for any income taxes (if applicable) payable by
shareholders.
MFS FIRSTS
MFS has a long history of innovations.
o 1924 -- Massachusetts Investors Trust is established as the first
open-end mutual fund in America.
o 1924 -- Massachusetts Investors Trust is the first mutual fund to
make full public disclosure of its operations in shareholder reports.
o 1932 -- One of the first internal research departments is established
to provide in- house analytical capability for an investment
management firm.
o 1933 -- Massachusetts Investors Trust is the first mutual fund to
register under the Securities Act of 1933 ("Truth in Securities Act"
or "Full Disclosure Act").
o 1936 -- Massachusetts Investors Trust is the first mutual fund to
allow shareholders to take capital gain distributions either in
additional shares or in cash.
o 1976 -- MFS(R) Municipal Bond Fund is among the first municipal bond
funds established.
o 1979 -- Spectrum becomes the first combination fixed/ variable
annuity with no initial sales charge.
o 1981 -- MFS(R) Global Governments Fund is established as America's
first globally diversified fixed-income mutual fund.
o 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.
o 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual fund to
target and shift investments among industry sectors for shareholders.
o 1986 -- MFS(R) Municipal Income Trust is the first closed-end,
high-yield municipal bond fund traded on the New York Stock Exchange.
o 1987 -- MFS(R) Multimarket Income Trust is the first closed-end,
multimarket high income fund listed on the New York Stock Exchange.
o 1989 -- MFS(R) Regatta becomes America's first non-qualified market
value adjusted fixed/variable annuity.
o 1990 -- MFS(R) Global Total Return Fund is the first global balanced
fund.
o 1993 -- MFS(R) Global Growth Fund is the first global emerging
markets fund to offer the expertise of two sub-advisers.
o 1993 -- MFS(R) becomes money manager of MFS(R) Union Standard(R)
Equity Fund, the first fund to invest principally in companies deemed
to be union-friendly by an advisory board of senior labor officials,
senior managers of companies with significant labor contracts,
academics and other national labor leaders or experts.
(X) SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS
The Fund makes available the following programs designed to enable
shareholders to add to their investment or withdraw from it with a
minimum of paper work. These programs are described below and, in
certain cases, in the Prospectus. The programs involve no extra charge
to shareholders (other than a sales charge in the case of certain Class
A share purchases) and may be changed or discontinued at any time by a
shareholder or the Fund.
LETTER OF INTENT -- If a shareholder (other than a group purchaser
described below) anticipates purchasing $50,000 or more of Class A
shares of the Fund alone or in combination with shares of any class of
MFS Funds or MFS Fixed Fund (a bank collective investment fund) within a
13-month period (or 36-month period, in the case of purchases of $1
million or more), the shareholder may obtain Class A shares of the Fund
at the same reduced sales charge as though the total quantity were
invested in one lump sum by completing the Letter of Intent section of
the Account Application or filing a separate Letter of Intent
application (available from MFSC) within 90 days of the commencement of
purchases. Subject to acceptance by MFD and the conditions mentioned
below, each purchase will be made at a public offering price applicable
to a single transaction of the dollar amount specified in the Letter of
Intent application. The shareholder or his dealer must inform MFD that
the Letter of Intent is in effect each time shares are purchased. The
shareholder makes no commitment to purchase additional shares, but if
his purchases within 13 months (or 36 months in the case of purchases of
$1 million or more) plus the value of shares credited toward completion
of the Letter of Intent do not total the sum specified, he will pay the
increased amount of the sales charge as described below. Instructions
for issuance of shares in the name of a person other than the person
signing the Letter of Intent application must be accompanied by a
written statement from the dealer stating that the shares were paid for
by the person signing such Letter. Neither income dividends nor capital
gain distributions taken in additional shares will apply toward the
completion of the Letter of Intent. Dividends and distributions of other
MFS Funds automatically reinvested in shares of the Fund pursuant to the
Distribution Investment Program will also not apply toward completion of
the Letter of Intent.
Out of the shareholder's initial purchase (or subsequent purchases if
necessary), 5% of the dollar amount specified in the Letter of Intent
application shall be held in escrow by MFSC in the form of shares
registered in the shareholder's name. All income dividends and capital
gain distributions on escrowed shares will be paid to the shareholder or
to his order. When the minimum investment so specified is completed
(either prior to or by the end of the 13-month period or 36-month
period, as applicable), the shareholder will be notified and the
escrowed shares will be released.
If the intended investment is not completed, MFSC will redeem an
appropriate number of the escrowed shares in order to realize such
difference. Shares remaining after any such redemption will be released
by MFSC. By completing and signing the Account Application or separate
Letter of Intent application, the shareholder irrevocably appoints MFSC
his attorney to surrender for redemption any or all escrowed shares with
full power of substitution in the premises.
RIGHT OF ACCUMULATION -- A shareholder qualifies for cumulative quantity
discounts on the purchase of Class A shares when his new investment,
together with the current offering price value of all holdings of Class
A, Class B and Class C shares of that shareholder in the MFS Funds or
MFS Fixed Fund reaches a discount level. See "Purchases" in the
Prospectus for the sales charges on quantity discounts. A shareholder
must provide MFSC (or his investment dealer must provide MFD) with
information to verify that the quantity sales charge discount is
applicable at the time the investment is made.
SUBSEQUENT INVESTMENT BY TELEPHONE -- Each shareholder may purchase
additional shares of any MFS Fund by telephoning MFSC toll-free at (800)
225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this
telephone purchase privilege must so elect on their Account Application
and designate thereon a bank and account number from which purchases
will be made. If a telephone purchase request is received by MFSC on any
business day prior to the close of regular trading on the Exchange
(generally, 4:00 p.m., Eastern time), the purchase will occur at the
closing net asset value of the shares purchased on that day. MFSC may be
liable for any losses resulting from unauthorized telephone transactions
if it does not follow reasonable procedures designed to verify the
identity of the caller. MFSC will request personal or other information
from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after
their receipt.
DISTRIBUTION INVESTMENT PROGRAM -- Distributions of dividends and
capital gains made by the Fund with respect to a particular class of
shares may be automatically invested in shares of the same class of one
of the other MFS Funds, if shares of that fund are available for sale.
Such investments will be subject to additional purchase minimums.
Distributions will be invested at net asset value (exclusive of any
sales charge) and will not be subject to any CDSC. Distributions will be
invested at the close of business on the payable date for the
distribution. A shareholder considering the Distribution Investment
Program should obtain and read the prospectus of the other fund and
consider the differences in objectives and policies before making any
investment.
SYSTEMATIC WITHDRAWAL PLAN -- A shareholder may direct MFSC to send him
(or anyone he designates) regular periodic payments based upon the value
of his account. Each payment under a Systematic Withdrawal Plan ("SWP")
must be at least $100, except in certain limited circumstances. The
aggregate withdrawals of Class B and Class C shares in any year pursuant
to a SWP generally are limited to 10% of the value of the account at the
time of establishment of the SWP. SWP payments are drawn from the
proceeds of share redemptions (which would be a return of principal and,
if reflecting a gain, would be taxable). Redemptions of Class B and
Class C shares will be made in the following order: (i) shares
representing reinvested distributions; (ii) shares representing
undistributed capital gains and income; and (iii) to the extent
necessary, shares representing direct investments subject to the lowest
CDSC. The CDSC will be waived in the case of redemptions of Class B and
Class C shares pursuant to a SWP, but will not be waived in the case of
SWP redemptions of Class A shares which are subject to a CDSC. To the
extent that redemptions for such periodic withdrawals exceed dividend
income reinvested in the account, such redemptions will reduce and may
eventually exhaust the number of shares in the shareholder's account.
All dividend and capital gain distributions for an account with a SWP
will be received in full and fractional shares of the Fund at the net
asset value in effect at the close of business on the record date for
such distributions. To initiate this service, shares having an aggregate
value of at least $5,000 either must be held on deposit by, or
certificates for such shares must be deposited with, MFSC. With respect
to Class A shares, maintaining a withdrawal plan concurrently with an
investment program would be disadvantageous because of the sales charges
included in share purchases and the imposition of a CDSC on certain
redemptions. The shareholder may deposit into the account additional
shares of the Fund, change the payee or change the dollar amount of each
payment. MFSC may charge the account for services rendered and expenses
incurred beyond those normally assumed by the Fund with respect to the
liquidation of shares. No charge is currently assessed against the
account, but one could be instituted by MFSC on 60 days' notice in
writing to the shareholder in the event that the Fund ceases to assume
the cost of these services. The Fund may terminate any SWP for an
account if the value of the account falls below $5,000 as a result of
share redemptions (other than as a result of a SWP) or an exchange of
shares of the Fund for shares of another MFS Fund. Any SWP may be
terminated at any time by either the shareholder or the Fund.
INVEST BY MAIL -- Additional investments of $50 or more may be made at
any time by mailing a check payable to the Fund directly to MFSC. The
shareholder's account number and the name of his investment dealer must
be included with each investment.
GROUP PURCHASES -- A bona fide group and all its members may be treated
as a single purchaser and, under the Right of Accumulation (but not the
Letter of Intent) obtain quantity sales charge discounts on the purchase
of Class A shares if the group (1) gives its endorsement or
authorization to the investment program so it may be used by the
investment dealer to facilitate solicitation of the membership, thus
effecting economies of sales effort; (2) has been in existence for at
least six months and has a legitimate purpose other than to purchase
mutual fund shares at a discount; (3) is not a group of individuals
whose sole organizational nexus is as credit cardholders of a company,
policyholders of an insurance company, customers of a bank or
broker-dealer, clients of an investment Adviser or other similar groups;
and (4) agrees to provide certification of membership of those members
investing money in the MFS Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN -- Shareholders having account balances of at
least $5,000 in any MFS Fund may participate in the Automatic Exchange
Plan. The Automatic Exchange Plan provides for automatic exchanges of
funds from the shareholder's account in an MFS Fund for investment in
the same class of shares of other MFS Funds selected by the shareholder
(if available for sale). Under the Automatic Exchange Plan, exchanges of
at least $50 each may be made to up to six different funds effective on
the seventh day of each month or of every third month, depending whether
monthly or quarterly exchanges are elected by the shareholder. If the
seventh day of the month is not a business day, the transaction will be
processed on the next business day. Generally, the initial transfer will
occur after receipt and processing by MFSC of an application in good
order. Exchanges will continue to be made from a shareholder's account
in any MFS Fund, as long as the balance of the account is sufficient to
complete the exchanges. Additional payments made to a shareholder's
account will extend the period that exchanges will continue to be made
under the Automatic Exchange Plan. However, if additional payments are
added to an account subject to the Automatic Exchange Plan shortly
before an exchange is scheduled, such funds may not be available for
exchanges until the following month; therefore, care should be used to
avoid inadvertently terminating the Automatic Exchange Plan through
exhaustion of the account balance.
No transaction fee for exchanges will be charged in connection with
the Automatic Exchange Plan. However, exchanges of shares of MFS Money
Market Fund, MFS Government Money Market Fund and Class A shares of MFS
Cash Reserve Fund will be subject to any applicable sales charge.
Changes in amounts to be exchanged to the Fund, the funds to which
exchanges are to be made and the timing of exchanges (monthly or
quarterly), or termination of a shareholder's participation in the
Automatic Exchange Plan will be made after instructions in writing or by
telephone (an "Exchange Change Request") are received by MFSC in proper
form (i.e., if in writing -- signed by the record owner(s) exactly as
shares are registered; if by telephone -- proper account identification
is given by the dealer or shareholder of record). Each Exchange Change
Request (other than termination of participation in the program) must
involve at least $50. Generally, if an Exchange Change Request is
received by telephone or in writing before the close of business on the
last business day of a month, the Exchange Change Request will be
effective for the following month's exchange.
A shareholder's right to make additional investments in any of the MFS
Funds, to make exchanges of shares from one MFS Fund to another and to
withdraw from an MFS Fund, as well as a shareholder's other rights and
privileges are not affected by a shareholder's participation in the
Automatic Exchange Plan. The Automatic Exchange Plan is part of the
Exchange Privilege. For additional information regarding the Automatic
Exchange Plan, including the treatment of any CDSC, see "Exchange
Privilege" below.
REINSTATEMENT PRIVILEGE -- Shareholders of the Fund and shareholders of
the other MFS Funds (except MFS Money Market Fund, MFS Government Money
Market Fund and holders of Class A shares of MFS Cash Reserve Fund in
the case where shares of such funds are acquired through direct purchase
or reinvested dividends) who have redeemed their shares have a one-time
right to reinvest the redemption proceeds in the same class of shares of
any of the MFS Funds (if shares of the fund are available for sale) at
net asset value (without a sales charge) and, if applicable, with credit
for any CDSC paid. In the case of proceeds reinvested in MFS Money
Market Fund, MFS Government Money Market Fund and Class A shares of MFS
Cash Reserve Fund, the shareholder has the right to exchange the
acquired shares for shares of another MFS Fund at net asset value
pursuant to the exchange privilege described below. Such a reinvestment
must be made within 90 days of the redemption and is limited to the
amount of the redemption proceeds. If the shares credited for any CDSC
paid are then redeemed within six years of the initial purchase in the
case of Class B shares or 12 months of the initial purchase in the case
of Class C shares and certain Class A shares, a CDSC will be imposed
upon redemption. Although redemptions and repurchases of shares are
taxable events, a reinvestment within a certain period of time in the
same fund may be considered a "wash sale" and may result in the
inability to recognize currently all or a portion of a loss realized on
the original redemption for federal income tax purposes. Please see your
tax adviser for further information.
EXCHANGE PRIVILEGE
Subject to the requirements set forth below, some or all of the shares
of the same class in an account with the Fund for which payment has been
received by the Fund (i.e., an established account) may be exchanged for
shares of the same class of any of the other MFS Funds (if available for
sale and if the purchaser is eligible to purchase the Class of shares)
at net asset value. Exchanges will be made only after instructions in
writing or by telephone (an "Exchange Request") are received for an
established account by MFSC.
EXCHANGES AMONG MFS FUNDS (excluding exchanges from MFS money market
funds) -- No initial sales charge or CDSC will be imposed in connection
with an exchange from shares of an MFS Fund to shares of any other MFS
Fund, except with respect to exchanges from an MFS money market fund to
another MFS Fund which is not an MFS money market fund (discussed
below). With respect to an exchange involving shares subject to a CDSC,
the CDSC will be unaffected by the exchange and the holding period for
purposes of calculating the CDSC will carry over to the acquired shares.
EXCHANGES FROM AN MFS MONEY MARKET FUND -- Special rules apply with
respect to the imposition of an initial sales charge or a CDSC for
exchanges from an MFS money market fund to another MFS Fund which is not
an MFS money market fund. These rules are described under the caption
"How to Purchase, Exchange and Redeem Shares" in the Prospectuses of
those MFS money market funds.
EXCHANGES INVOLVING THE MFS FIXED FUND -- Class A shares of any MFS Fund
held by certain qualified retirement plans may be exchanged for units of
participation of the MFS Fixed Fund (a bank collective investment fund)
(the "Units"), and Units may be exchanged for Class A shares of any MFS
Fund. With respect to exchanges between Class A shares subject to a CDSC
and Units, the CDSC will carry over to the acquired shares or Units and
will be deducted from the redemption proceeds when such shares or Units
are subsequently redeemed, assuming the CDSC is then payable (the period
during which the Class A shares and the Units were held will be
aggregated for purposes of calculating the applicable CDSC). In the
event that a shareholder initially purchases Units and then exchanges
into Class A shares subject to an initial sales charge of an MFS Fund,
the initial sales charge shall be due upon such exchange, but will not
be imposed with respect to any subsequent exchanges between such Class A
shares and Units with respect to shares on which the initial sales
charge has already been paid. In the event that a shareholder initially
purchases Units and then exchanges into Class A shares subject to a CDSC
of an MFS Fund, the CDSC period will commence upon such exchange, and
the applicability of the CDSC with respect to subsequent exchanges shall
be governed by the rules set forth above in this paragraph.
GENERAL -- Each Exchange Request must be in proper form (i.e., if in
writing -- signed by the record owner(s) exactly as the shares are
registered; if by telephone -- proper account identification is given by
the dealer or shareholder of record), and each exchange must involve
either shares having an aggregate value of at least $1,000 ($50 in the
case of retirement plan participants whose sponsoring organizations
subscribe to MFS FUNDamental 401(k) Plan or another similar 401(k)
recordkeeping system made available by MFSC) or all the shares in the
account. Each exchange involves the redemption of the shares of the Fund
to be exchanged and the purchase of shares of the same class of the
other MFS Fund. Any gain or loss on the redemption of the shares
exchanged is reportable on the shareholder's federal income tax return,
unless both the shares received and the shares surrendered in the
exchange are held in a tax-deferred retirement plan or other tax-exempt
account. No more than five exchanges may be made in any one Exchange
Request by telephone. If the Exchange Request is received by MFSC prior
to the close of regular trading on the Exchange the exchange usually
will occur on that day if all the requirements set forth above have been
complied with at that time. However, payment of the redemption proceeds
by the Fund, and thus the purchase of shares of the other MFS Fund, may
be delayed for up to seven days if the Fund determines that such a delay
would be in the best interest of all its shareholders. Investment
dealers which have satisfied criteria established by MFD may also
communicate a shareholder's Exchange Request to MFD by facsimile subject
to the requirements set forth above.
Additional information with respect to any of the MFS Funds, including
a a copy of its current prospectus, may be obtained from investment
dealers or MFSC. A shareholder considering an exchange should obtain and
read the prospectus of the other fund and consider the differences in
objectives and policies before making any exchange.
Any state income tax advantages for investment in shares of each
state- specific series of MFS Municipal Series Trust may only benefit
residents of such states. Investors should consult with their own tax
advisers to be sure this is an appropriate investment, based on their
residency and each state's income tax laws. The exchange privilege (or
any aspect of it) may be changed or discontinued and is subject to
certain limitations imposed from time to time at the discretion of the
Funds in order to protect the Funds.
TAX-DEFERRED RETIREMENT PLANS
Shares of the Fund may be purchased by all types of tax-deferred
retirement plans. MFD makes available, through investment dealers, plans
and/or custody agreements, the following:
o Traditional Individual Retirement Accounts (IRAs) (for individuals
who desire to make limited contributions to a Tax-deferred retirement
program and, if eligible, to receive a federal Income tax deduction
for amounts contributed);
o Roth Individual Retirement Accounts (Roth IRAs) (for individuals who
desire to make limited contributions to a tax-favored retirement
program);
o Simplified Employee Pension (SEP-IRA) Plans;
o Retirement Plans Qualified under Section 401(k) of the Internal
Revenue Code of 1986, as amended (the "Code");
o 403(b) Plans (deferred compensation arrangements for employees of
public School systems and certain non-profit organizations); and
o Certain other qualified pension and profit-sharing plans.
The plan documents provided by MFD designate a trustee or custodian
(unless another trustee or custodian is designated by the individual or
group establishing the plan) and contain specific information about the
plans. Each plan provides that dividends and distributions will be
reinvested automatically. For further details with respect to any plan,
including fees charged by the trustee, custodian or MFD, tax
consequences and redemption information, see the specific documents for
that plan. Plan documents other than those provided by MFD may be used
to establish any of the plans described above. Third party
administrative services, available for some corporate plans, may limit
or delay the processing of transactions.
An investor should consult with his tax adviser before establishing
any of the tax-deferred retirement plans described above.
Class C shares are not currently available for purchase by any
retirement plan qualified under Internal Revenue Code Section 401(a) or
403(b) if the retirement plan and/or the sponsoring organization
subscribe to the MFS FUNDamental 401(k) Plan or another similar Section
401(a) or 403(b) recordkeeping program made available by MFSC.
(XI) DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional Shares of Beneficial Interest (without par
value) of one or more separate series and to divide or combine the
shares of any series into a greater or lesser number of shares without
thereby changing the proportionate beneficial interests in that series.
The Declaration of Trust further authorizes the Trustees to classify or
reclassify any series of shares into one or more classes. Each share of
a class of the Fund represents an equal proportionate interest in the
assets of the Fund allocable to that class. Upon liquidation of the
Fund, shareholders of each class of the Fund are entitled to share pro
rata in the Fund's net assets allocable to such class available for
distribution to shareholders. The Trust reserves the right to create and
issue a number of series and additional classes of shares, in which case
the shares of each class of a series would participate equally in the
earnings, dividends and assets allocable to that class of the particular
series.
Shareholders are entitled to one vote for each share held and may vote
in the election of Trustees and on other matters submitted to meetings
of shareholders. To the extent a shareholder of the Fund owns a
controlling percentage of the Fund's shares, such shareholder may affect
the outcome of such matters to a greater extent than other Fund
shareholders. Although Trustees are not elected annually by the
shareholders, the Declaration of Trust provides that a Trustee may be
removed from office at a meeting of shareholders by a vote of two-thirds
of the outstanding shares of the Trust. A meeting of shareholders will
be called upon the request of shareholders of record holding in the
aggregate not less than 10% of the outstanding voting securities of the
Trust. No material amendment may be made to the Declaration of Trust
without the affirmative vote of a majority of the Trust's outstanding
shares (as defined in "Investment Restrictions" in Part I of this SAI).
The Trust or any series of the Trust may be terminated (i) upon the
merger or consolidation of the Trust or any series of the Trust with
another organization or upon the sale of all or substantially all of its
assets (or all or substantially all of the assets belonging to any
series of the Trust), if approved by the vote of the holders of
two-thirds of the Trust's or the affected series' outstanding shares
voting as a single class, or of the affected series of the Trust, except
that if the Trustees recommend such merger, consolidation or sale, the
approval by vote of the holders of a majority of the Trust's or the
affected series' outstanding shares will be sufficient, or (ii) upon
liquidation and distribution of the assets of a Fund, if approved by the
vote of the holders of two-thirds of its outstanding shares of the
Trust, or (iii) by the Trustees by written notice to its shareholders.
If not so terminated, the Trust will continue indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a trust
may, under certain circumstances, be held personally liable as partners
for its obligations. However, the Declaration of Trust contains an
express disclaimer of shareholder liability for acts or obligations of
the Trust and provides for indemnification and reimbursement of expenses
out of Trust property for any shareholder held personally liable for the
obligations of the Trust. The Declaration of Trust also provides that
the Trust shall maintain appropriate insurance (for example, fidelity
bonding and errors and omissions insurance) for the protection of the
Trust and its shareholders and the Trustees, officers, employees and
agents of the Trust covering possible tort and other liabilities. Thus,
the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which both
inadequate insurance existed and the Trust itself was unable to meet its
obligations.
The Declaration of Trust further provides that obligations of the
Trust are not binding upon the Trustees individually but only upon the
property of the Trust and that the Trustees will not be liable for any
action or failure to act, but nothing in the Declaration of Trust
protects a Trustee against any liability to which he would otherwise be
subject by reason of his willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct
of his office.
<PAGE>
PART II - APPENDIX A
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all
applicable sales charges are waived (Section I), the initial sales
charge and the CDSC for Class A shares are waived (Section II), and the
CDSC for Class B and Class C shares is waived (Section III). Some of the
following information will not apply to certain funds in the MFS Family
of Funds, depending on which classes of shares are offered by such fund.
As used in this Appendix, the term "dealer" includes any broker, dealer,
bank (including bank trust departments), registered investment adviser,
financial planner and any other financial institutions having a selling
agreement or other similar agreement with MFD.
(I) WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on
purchases of Class A shares and the CDSC imposed on certain redemptions
of Class A shares and on redemptions of Class B and Class C shares, as
applicable, are waived:
DIVIDEND REINVESTMENT
o Shares acquired through dividend or capital gain reinvestment; and
o Shares acquired by automatic reinvestment of distributions of
dividends and capital gains of any fund in the MFS Funds pursuant
to the Distribution Investment Program.
CERTAIN ACQUISITIONS/LIQUIDATIONS
o Shares acquired on account of the acquisition or liquidation of
assets of other investment companies or personal holding companies.
AFFILIATES OF AN MFS FUND/CERTAIN DEALERS.
Shares acquired by:
o Officers, eligible directors, employees (including retired
employees) and agents of MFS, Sun Life or any of their subsidiary
companies;
o Trustees and retired trustees of any investment company for which
MFD serves as distributor;
o Employees, directors, partners, officers and trustees of any
sub-adviser to any MFS Fund;
o Employees or registered representatives of dealers;
o Certain family members of any such individual and their spouses
identified above and certain trusts, pension, profit- sharing or
other retirement plans for the sole benefit of such persons,
provided the shares are not resold except to the MFS Fund which
issued the shares; and
o Institutional Clients of MFS or MFS Institutional Advisors, Inc.
INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
o Shares redeemed at an MFS Fund's direction due to the small size of
a shareholder's account. See "Redemptions and Repurchases --
General -- Involuntary Redemptions/Small Accounts" in the
Prospectus.
RETIREMENT PLANS (CDSC WAIVER ONLY).
Shares redeemed on account of distributions made under the following
circumstances:
o Individual Retirement Accounts ("IRAs")
> Death or disability of the IRA owner.
o Section 401(a) Plans ("401(a) Plans") and Section 403(b) Employer
Sponsored Plans ("ESP Plans")
> Death, disability or retirement of 401(a) or ESP Plan
participant;
> Loan from 401(a) or ESP Plan;
> Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
> Termination of employment of 401(a) or ESP Plan participant
(excluding, however, a partial or other termination of the
Plan);
> Tax-free return of excess 401(a) or ESP Plan contributions;
> To the extent that redemption proceeds are used to pay expenses
(or certain participant expenses) of the 401(a) or ESP Plan
(e.g., participant account fees), provided that the Plan sponsor
subscribes to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping system made available by MFSC (the "MFS
Participant Recordkeeping System"); and
> Distributions from a 401(a) or ESP Plan that has invested its
assets in one or more of the MFS Funds for more than 10 years
from the later to occur of: (i) January 1, 1993 or (ii) the date
such 401(a) or ESP Plan first invests its assets in one or more
of the MFS Funds. The sales charges will be waived in the case
of a redemption of all of the 401(a) or ESP Plan's shares in all
MFS Funds (i.e., all the assets of the 401(a) or ESP Plan
invested in the MFS Funds are withdrawn), unless immediately
prior to the redemption, the aggregate amount invested by the
401(a) or ESP Plan in shares of the MFS Funds (excluding the
reinvestment of distributions) during the prior four years
equals 50% or more of the total value of the 401(a) or ESP
Plan's assets in the MFS Funds, in which case the sales charges
will not be waived.
> Shares purchased by certain retirement plans or trust accounts
if: (i) the plan is currently a party to a retirement plan
recordkeeping or administration services agreement with MFD or
one of its affiliates and (ii) the shares purchased or redeemed
represent transfers from or transfers to plan investments other
than the MFS Funds for which retirement plan recordkeeping
services are provided under the terms of such agreement.
o Section 403(b) Salary Reduction Only Plans ("SRO Plans")
> Death or disability of SRO Plan participant.
CERTAIN TRANSFERS OF REGISTRATION
(CDSC WAIVER ONLY).
Shares transferred:
o To an IRA rollover account where any sales charges with respect to
the shares being reregistered would have been waived had they been
redeemed; and
o From a single account maintained for a 401(a) Plan to multiple
accounts maintained by MFSC on behalf of individual participants of
such Plan, provided that the Plan sponsor subscribes to the MFS
FUNDamental 401(k) Plan or another similar recordkeeping system
made available by MFSC.
LOAN REPAYMENTS
o Shares acquired pursuant to repayments by retirement plan
participants of loans from 401(a) or ESP Plans with respect to
which such Plan or its sponsoring organization subscribes to the
MFS FUNDamental 401(k) Program or the MFS Recordkeeper Plus Program
(but not the MFS Recordkeeper Program).
(II) WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the
following circumstances the initial sales charge imposed on purchases of
Class A shares and the CDSC imposed on certain redemptions of Class A
shares are waived:
WRAP ACCOUNT AND FUND "SUPERMARKET"
INVESTMENTS
o Shares acquired by investments through certain dealers (including
registered investment advisers and financial planners) which have
established certain operational arrangements with MFD which include
a requirement that such shares be sold for the sole benefit of
clients participating in a "wrap" account, mutual fund
"supermarket" account or a similar program under which such clients
pay a fee to such dealer.
INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
o Shares acquired by insurance company separate accounts.
RETIREMENT PLANS
o Administrative Services Arrangements
> Shares acquired by retirement plans or trust accounts whose
third party administrators or dealers have entered into an
administrative services agreement with MFD or one of its
affiliates to perform certain administrative services, subject
to certain operational and minimum size requirements specified
from time to time by MFD or one or more of its affiliates.
o Reinvestment of Distributions from Qualified Retirement Plans
> Shares acquired through the automatic reinvestment in Class A
shares of Class A or Class B distributions which constitute
required withdrawals from qualified retirement plans.
SHARES REDEEMED ON ACCOUNT OF DISTRIBUTIONS MADE UNDER THE FOLLOWING
CIRCUMSTANCES:
o IRAs
> Distributions made on or after the IRA owner has attained the
age of 59 1/2 years old; and
> Tax-free returns of excess IRA contributions.
o 401(a) Plans
> Distributions made on or after the 401(a) Plan participant has
attained the age of 59 1/2 years old; and
> Certain involuntary redemptions and redemptions in connection
with certain automatic withdrawals from a 401(a) Plan.
o ESP Plans and SRO Plans
> Distributions made on or after the ESP or SRO Plan participant
has attained the age of 59 1/2 years old.
o 401(a) Plans and ESP Plans
> where the retirement plan and/or sponsoring organization does
not subscribe to the MFS Participant Recordkeeping System; and
> where the retirement plan and/or sponsoring organization
demonstrates to the satisfaction of, and certifies to, MFSC that
the retirement plan has, at the time of certification or will
have pursuant to a purchase order placed with the certification,
a market value of $500,000 or more invested in shares of any
class or classes of the MFS Family of Funds and aggregate assets
of at least $10 million;
provided, however, that the CDSC will not be waived (i.e., it will be
imposed) (a) with respect to plans which establish an account with MFSC
on or after November 1, 1997, in the event that the plan makes a
complete redemption of all of its shares in the MFS Family of Funds, or
(b) with respect to plans which establish an account with MFSC prior to
November 1, 1997, in the event that there is a change in law or
regulations which result in a material adverse change to the tax
advantaged nature of the plan, or in the event that the plan and/or
sponsoring organization: (i) becomes insolvent or bankrupt; (ii) is
terminated under ERISA or is liquidated or dissolved; or (iii) is
acquired by, merged into, or consolidated with any other entity.
PURCHASES OF AT LEAST $5 MILLION
(CDSC WAIVER ONLY)
o Shares acquired of Eligible Funds (as defined below) if the
shareholder's investment equals or exceeds $5 million in one or
more Eligible Funds (the "Initial Purchase") (this waiver applies
to the shares acquired from the Initial Purchase and all shares of
Eligible Funds subsequently acquired by the shareholder); provided
that the dealer through which the Initial Purchase is made enters
into an agreement with MFD to accept delayed payment of commissions
with respect to the Initial Purchase and all subsequent investments
by the shareholder in the Eligible Funds subject to such
requirements as may be established from time to time by MFD (for a
schedule of the amount of commissions paid by MFD to the dealer on
such investments, see "Purchases -- Class A Shares -- Purchases
subject to a CDSC" in the Prospectus). The Eligible Funds are all
funds included in the MFS Family of Funds, except for Massachusetts
Investors Trust, Massachusetts Investors Growth Stock Fund, MFS
Municipal Bond Fund, MFS Municipal Limited Maturity Fund, MFS Money
Market Fund, MFS Government Money Market Fund and MFS Cash Reserve
Fund.
BANK TRUST DEPARTMENTS AND LAW FIRMS
o Shares acquired by certain bank trust departments or law firms
acting as trustee or manager for trust accounts which have entered
into an administrative services agreement with MFD and are
acquiring such shares for the benefit of their trust account
clients.
INVESTMENT OF PROCEEDS FROM CERTAIN REDEMPTIONS OF CLASS I SHARES.
o The initial sales charge imposed on purchases of Class A shares,
and the contingent deferred sales charge imposed on certain
redemptions of Class A shares, are waived with respect to Class A
shares acquired of any of the MFS Funds through the immediate
reinvestment of the proceeds of a redemption of Class I shares of
any of the MFS Funds.
(III) WAIVERS OF CLASS B AND CLASS C SALES CHARGES
In addition to the waivers set forth in Section I above, in the
following circumstances the CDSC imposed on redemptions of Class B
and Class C shares is waived:
SYSTEMATIC WITHDRAWAL PLAN
o Systematic Withdrawal Plan redemptions with respect to up to 10%
per year (or 15% per year, in the case of accounts registered as
IRAs where the redemption is made pursuant to Section 72(t) of the
Internal Revenue Code of 1986, as amended) of the account value at
the time of establishment.
DEATH OF OWNER
o Shares redeemed on account of the death of the account owner if the
shares are held solely in the deceased individual's name or in a
living trust for the benefit of the deceased individual.
DISABILITY OF OWNER
o Shares redeemed on account of the disability of the account owner
if shares are held either solely or jointly in the disabled
individual's name or in a living trust for the benefit of the
disabled individual (in which case a disability certification form
is required to be submitted to MFSC.).
RETIREMENT PLANS.
Shares redeemed on account of distributions made under the following
circumstances:
o IRAs, 401(a) Plans, ESP Plans and SRO Plans
> Distributions made on or after the IRA owner or the 401(a), ESP
or SRO Plan participant, as applicable, has attained the age of
70 1/2 years old, but only with respect to the minimum
distribution under Code rules.
> Salary Reduction Simplified Employee Pension Plans ("SAR-SEP
Plans")
> Distributions made on or after the SAR- SEP Plan participant has
attained the age of 70 1/2 years old, but only with respect to
the minimum distribution under applicable Code rules; and
> Death or disability of a SAR-SEP Plan participant.
o 401(a) and ESP Plans Only (Class B CDSC Waiver Only)
> By a retirement plan whose sponsoring organization subscribes to
the MFS Participant Recordkeeping System and which established
an account with MFSC between July 1, 1996 and December 31, 1998;
provided, however, that the CDSC will not be waived (i.e., it
will be imposed) in the event that there is a change in law or
regulations which results in a material adverse change to the
tax advantaged nature of the plan, or in the event that the plan
and/or sponsoring organization: (i) becomes insolvent or
bankrupt; (ii) is terminated under ERISA or is liquidated or
dissolved; or (iii) is acquired by, merged into, or consolidated
with any other entity.
> By a retirement plan whose sponsoring organization subscribes to
the MFS Recordkeeper Plus product and which established its
account with MFSC on or after January 1, 1999 (provided that the
plan establishment paperwork is received by MFSC in good order
on or after November 15, 1998). A plan with a pre-existing
account(s) with any MFS Fund which switches to the MFS
Recordkeeper Plus product will not become eligible for this
waiver category.
<PAGE>
PART II - APPENDIX B
DEALER COMMISSIONS AND CONCESSIONS
This Appendix describes the various commissions paid and concessions
made to dealers by MFD in connection with the sale of Fund shares. As
used in this Appendix, the term "dealer" includes any broker, dealer,
bank (including bank trust departments), registered investment adviser,
financial planner and any other financial institutions having a selling
agreement or other similar agreement with MFD.
CLASS A SHARES
Purchases Subject to an Initial Sales Charge. For purchases of Class A
shares subject to an initial sales charge, MFD reallows a portion of the
initial sales charge to dealers (which are alike for all dealers), as
shown in Appendix D to Part I of this SAI. The difference between the
total amount invested and the sum of (a) the net proceeds to the Fund
and (b) the dealer reallowance, is the amount of the initial sales
charge retained by MFD (as shown in Appendix D to Part I of this SAI).
Because of rounding in the computation of offering price, the portion of
the sales charge retained by MFD may vary and the total sales charge may
be more or less than the sales charge calculated using the sales charge
expressed as a percentage of the offering price or as a percentage of
the net amount invested as listed in the Prospectus.
Purchases Subject to a CDSC (but not an Initial Sales Charge). For
purchases of Class A shares subject to a CDSC, MFD pays commissions to
dealers on new investments made through such dealers as follows:
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
purchases for each shareholder account (and certain other accounts for
which the shareholder is a record or beneficial holder) will be
aggregated over a 12-month period (commencing from the date of the first
such purchase).
CLASS B SHARES
For purchases of Class B shares, MFD will pay commissions to dealers of
3.75% of the purchase price of Class B shares purchased through dealers.
MFD will also advance to dealers the first year service fee payable
under the Fund's Distribution Plan at a rate equal to 0.25% of the
purchase price of such shares. Therefore, the total amount paid to a
dealer upon the sale of Class B shares is 4% of the purchase price of
the shares (commission rate of 3.75% plus a service fee equal to 0.25%
of the purchase price).
For purchases of Class B shares by a retirement plan whose sponsoring
organization subscribes to the MFS Participant Recordkeeping System and
which established its account with MFSC between July 1, 1996 and
December 31, 1998, MFD pays an amount to dealers equal to 3.00% of the
amount purchased through such dealers (rather than the 4.00% payment
described above), which is comprised of a commission of 2.75% plus the
advancement of the first year service fee equal to 0.25% of the purchase
price payable under the Fund's Distribution Plan.
For purchases of Class B shares by a retirement plan whose sponsoring
organization subscribes to the MFS Recordkeeper Plus product and which
has established its account with MFSC on or after January 1, 1999
(provided that the plan establishment paperwork is received by MFSC in
good order on or after November 15, 1998), MFD pays no up front
commissions to dealers, but instead pays an amount to dealers equal to
1% per annum of the average daily net assets of the Fund attributable to
plan assets, payable at the rate of 0.25% at the end of each calendar
quarter, in arrears. This commission structure is not available with
respect to a plan with a pre- existing account(s) with any MFS Fund
which seeks to switch to the MFS Recordkeeper Plus product.
CLASS C SHARES
For purchases of Class C shares, MFD will pay dealers 1.00% of the
purchase price of Class C shares purchased through dealers and, as
compensation therefor, MFD will retain the 1.00% per annum distribution
and service fee paid under the Fund's Distribution Plan to MFD for the
first year after purchase.
ADDITIONAL DEALER COMMISSIONS/CONCESSIONS
Dealers may receive different compensation with respect to sales of
Class A, Class B and Class C shares. In addition, from time to time, MFD
may pay dealers 100% of the applicable sales charge on sales of Class A
shares of certain specified Funds sold by such dealer during a specified
sales period. In addition, MFD or its affiliates may, from time to time,
pay dealers an additional commission equal to 0.50% of the net asset
value of all of the Class B and/or Class C shares of certain specified
Funds sold by such dealer during a specified sales period. In addition,
from time to time, MFD, at its expense, may provide additional
commissions, compensation or promotional incentives ("concessions") to
dealers which sell or arrange for the sale of shares of the Fund. Such
concessions provided by MFD may include financial assistance to dealers
in connection with preapproved conferences or seminars, sales or
training programs for invited registered representatives and other
employees, payment for travel expenses, including lodging, incurred by
registered representatives and other employees for such seminars or
training programs, seminars for the public, advertising and sales
campaigns regarding one or more Funds, and/ or other dealer-sponsored
events. From time to time, MFD may make expense reimbursements for
special training of a dealer's registered representatives and other
employees in group meetings or to help pay the expenses of sales
contests. Other concessions may be offered to the extent not prohibited
by state laws or any self-regulatory agency, such as the NASD.
<PAGE>
PART II - APPENDIX C
INVESTMENT TECHNIQUES, PRACTICES AND RISKS
Set forth below is a description of investment techniques and practices
which the MFS Funds may generally use in pursuing their investment
objectives and principal investment policies, and the associated risks
associated with these investment techniques and practices. The Fund will
engage only in certain of these investment techniques and practices, as
identified in Appendix A of the Fund's Prospectus. Investment practices
and techniques that are not identified in Appendix A of the Fund's
Prospectus do not apply to the Fund.
INVESTMENT TECHNIQUES AND PRACTICES
DEBT SECURITIES
To the extent the Fund invests in the following types of debt
securities, its net asset value may change as the general levels of
interest rates fluctuate. When interest rates decline, the value of debt
securities can be expected to rise. Conversely, when interest rates
rise, the value of debt securities can be expected to decline. The
Fund's investment in debt securities with longer terms to maturity are
subject to greater volatility than the Fund's shorter-term obligations.
Debt securities may have all types of interest rate payment and reset
terms, including fixed rate, adjustable rate, zero coupon, contingent,
deferred, payment in kind and auction rate features.
ASSET-BACKED SECURITIES: The Fund may purchase the following types of
asset-backed securities:
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH
SECURITIES: The Fund may invest a portion of its assets in
collateralized mortgage obligations or "CMOs," which are debt
obligations collateralized by mortgage loans or mortgage pass-through
securities (such collateral referred to collectively as "Mortgage
Assets"). Unless the context indicates otherwise, all references herein
to CMOs include multiclass pass-through securities.
Interest is paid or accrues on all classes of the CMOs on a monthly,
quarterly or semi-annual basis. The principal of and interest on the
Mortgage Assets may be allocated among the several classes of a CMO in
innumerable ways. In a common structure, payments of principal,
including any principal prepayments, on the Mortgage Assets are applied
to the classes of a CMO in the order of their respective stated
maturities or final distribution dates, so that no payment of principal
will be made on any class of CMOs until all other classes having an
earlier stated maturity or final distribution date have been paid in
full. Certain CMOs may be stripped (securities which provide only the
principal or interest factor of the underlying security). See "Stripped
Mortgage-Backed Securities" below for a discussion of the risks of
investing in these stripped securities and of investing in classes
consisting of interest payments or principal payments.
The Fund may also invest in parallel pay CMOs and Planned Amortization
Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to provide
payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated
maturity date or final distribution date of each class, which, as with
other CMO structures, must be retired by its stated maturity date or
final distribution date but may be retired earlier.
CORPORATE ASSET-BACKED SECURITIES: The Fund may invest in corporate
asset-backed securities. These securities, issued by trusts and special
purpose corporations, are backed by a pool of assets, such as credit
card and automobile loan receivables, representing the obligations of a
number of different parties. These securities present certain risks. For
instance, in the case of credit card receivables, these securities may
not have the benefit of any security interest in the related collateral.
Credit card receivables are generally unsecured and the debtors are
entitled to the protection of a number of state and federal consumer
credit laws, many of which give such debtors the right to set off
certain amounts owed on the credit cards, thereby reducing the balance
due. Most issuers of automobile receivables permit the servicers to
retain possession of the underlying obligations. If the servicer were to
sell these obligations to another party, there is a risk that the
purchaser would acquire an interest superior to that of the holders of
the related automobile receivables. In addition, because of the large
number of vehicles involved in a typical issuance and technical
requirements under state laws, the trustee for the holders of the
automobile receivables may not have a proper security interest in all of
the obligations backing such receivables. Therefore, there is the
possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities. The
underlying assets (e.g., loans) are also subject to prepayments which
shorten the securities weighted average life and may lower their return.
Corporate asset-backed securities are backed by a pool of assets
representing the obligations of a number of different parties. To lessen
the effect of failures by obligors on underlying assets to make
payments, the securities may contain elements of credit support which
fall into two categories: (i) liquidity protection and (ii) protection
against losses resulting from ultimate default by an obligor on the
underlying assets. Liquidity protection refers to the provision of
advances, generally by the entity administering the pool of assets, to
ensure that the receipt of payments on the underlying pool occurs in a
timely fashion. Protection against losses resulting from ultimate
default ensures payment through insurance policies or letters of credit
obtained by the issuer or sponsor from third parties. The Fund will not
pay any additional or separate fees for credit support. The degree of
credit support provided for each issue is generally based on historical
information respecting the level of credit risk associated with the
underlying assets. Delinquency or loss in excess of that anticipated or
failure of the credit support could adversely affect the return on an
investment in such a security.
MORTGAGE PASS-THROUGH SECURITIES: The Fund may invest in mortgage
pass- through securities. Mortgage pass-through securities are
securities representing interests in "pools" of mortgage loans. Monthly
payments of interest and principal by the individual borrowers on
mortgages are passed through to the holders of the securities (net of
fees paid to the issuer or guarantor of the securities) as the mortgages
in the underlying mortgage pools are paid off. The average lives of
mortgage pass-throughs are variable when issued because their average
lives depend on prepayment rates. The average life of these securities
is likely to be substantially shorter than their stated final maturity
as a result of unscheduled principal prepayment. Prepayments on
underlying mortgages result in a loss of anticipated interest, and all
or part of a premium if any has been paid, and the actual yield (or
total return) to the Fund may be different than the quoted yield on the
securities. Mortgage premiums generally increase with falling interest
rates and decrease with rising interest rates. Like other fixed income
securities, when interest rates rise the value of mortgage pass-through
security generally will decline; however, when interest rates are
declining, the value of mortgage pass-through securities with prepayment
features may not increase as much as that of other fixed-income
securities. In the event of an increase in interest rates which results
in a decline in mortgage prepayments, the anticipated maturity of
mortgage pass-through securities held by the Fund may increase,
effectively changing a security which was considered short or
intermediate-term at the time of purchase into a long-term security.
Long- term securities generally fluctuate more widely in response to
changes in interest rates than short or intermediate-term securities.
Payment of principal and interest on some mortgage pass-through
securities (but not the market value of the securities themselves) may
be guaranteed by the full faith and credit of the U.S. Government (in
the case of securities guaranteed by the Government National Mortgage
Association ("GNMA")); or guaranteed by agencies or instrumentalities of
the U.S. Government (such as the Federal National Mortgage Association
"FNMA") or the Federal Home Loan Mortgage Corporation, ("FHLMC") which
are supported only by the discretionary authority of the U.S. Government
to purchase the agency's obligations). Mortgage pass-through securities
may also be issued by non-governmental issuers (such as commercial
banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers). Some of
these mortgage pass-through securities may be supported by various forms
of insurance or guarantees.
Interests in pools of mortgage-related securities differ from other
forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or
specified call dates. Instead, these securities provide a monthly
payment which consists of both interest and principal payments. In
effect, these payments are a "pass-through" of the monthly payments made
by the individual borrowers on their mortgage loans, net of any fees
paid to the issuer or guarantor of such securities. Additional payments
are caused by prepayments of principal resulting from the sale,
refinancing or foreclosure of the underlying property, net of fees or
costs which may be incurred. Some mortgage pass-through securities (such
as securities issued by the GNMA) are described as "modified
pass-through." These securities entitle the holder to receive all
interests and principal payments owed on the mortgages in the mortgage
pool, net of certain fees, at the scheduled payment dates regardless of
whether the mortgagor actually makes the payment.
The principal governmental guarantor of mortgage pass-through
securities is GNMA. GNMA is a wholly owned U.S. Government corporation
within the Department of Housing and Urban Development. GNMA is
authorized to guarantee, with the full faith and credit of the U.S.
Government, the timely payment of principal and interest on securities
issued by institutions approved by GNMA (such as savings and loan
institutions, commercial banks and mortgage bankers) and backed by pools
of Federal Housing Administration ("FHA")-insured or Veterans
Administration ("VA")- guaranteed mortgages. These guarantees, however,
do not apply to the market value or yield of mortgage pass-through
securities. GNMA securities are often purchased at a premium over the
maturity value of the underlying mortgages. This premium is not
guaranteed and will be lost if prepayment occurs.
Government-related guarantors (i.e., whose guarantees are not backed
by the full faith and credit of the U.S. Government) include FNMA and
FHLMC. FNMA is a government-sponsored corporation owned entirely by
private stockholders. It is subject to general regulation by the
Secretary of Housing and Urban Development. FNMA purchases conventional
residential mortgages (i.e., mortgages not insured or guaranteed by any
governmental agency) from a list of approved seller/servicers which
include state and federally chartered savings and loan associations,
mutual savings banks, commercial banks, credit unions and mortgage
bankers. Pass-through securities issued by FNMA are guaranteed as to
timely payment by FNMA of principal and interest.
FHLMC is also a government-sponsored corporation owned by private
stockholders. FHLMC issues Participation Certificates ("PCs") which
represent interests in conventional mortgages (i.e., not federally
insured or guaranteed) for FHLMC's national portfolio. FHLMC guarantees
timely payment of interest and ultimate collection of principal
regardless of the status of the underlying mortgage loans.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers
also create pass through pools of mortgage loans. Such issuers may also
be the originators and/or servicers of the underlying mortgage-related
securities. Pools created by such non-governmental issuers generally
offer a higher rate of interest than government and government-related
pools because there are no direct or indirect government or agency
guarantees of payments in the former pools. However, timely payment of
interest and principal of mortgage loans in these pools may be supported
by various forms of insurance or guarantees, including individual loan,
title, pool and hazard insurance and letters of credit. The insurance
and guarantees are issued by governmental entities, private insurers and
the mortgage poolers. There can be no assurance that the private
insurers or guarantors can meet their obligations under the insurance
policies or guarantee arrangements. The Fund may also buy
mortgage-related securities without insurance or guarantees.
STRIPPED MORTGAGE-BACKED SECURITIES: The Fund may invest a portion of
its assets in stripped mortgage-backed securities ("SMBS") which are
derivative multiclass mortgage securities issued by agencies or
instrumentalities of the U.S. Government, or by private originators of,
or investors in, mortgage loans, including savings and loan
institutions, mortgage banks, commercial banks and investment banks.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions from a pool of
mortgage assets. A common type of SMBS will have one class receiving
some of the interest and most of the principal from the Mortgage Assets,
while the other class will receive most of the interest and the
remainder of the principal. In the most extreme case, one class will
receive all of the interest (the interest-only or "I0" class) while the
other class will receive all of the principal (the principal-only or
"P0" class). The yield to maturity on an I0 is extremely sensitive to
the rate of principal payments, including prepayments on the related
underlying Mortgage Assets, and a rapid rate of principal payments may
have a material adverse effect on such security's yield to maturity. If
the underlying Mortgage Assets experience greater than anticipated
prepayments of principal, the Fund may fail to fully recoup its initial
investment in these securities. The market value of the class consisting
primarily or entirely of principal payments generally is unusually
volatile in response to changes in interest rates. Because SMBS were
only recently introduced, established trading markets for these
securities have not yet developed, although the securities are traded
among institutional investors and investment banking firms.
CORPORATE SECURITIES: The Fund may invest in debt securities, such as
convertible and non-convertible bonds, notes and debentures, issued by
corporations, limited partnerships and other similar entities.
LOANS AND OTHER DIRECT INDEBTEDNESS: The Fund may purchase loans and
other direct indebtedness. In purchasing a loan, the Fund acquires some
or all of the interest of a bank or other lending institution in a loan
to a corporate, governmental or other borrower. Many such loans are
secured, although some may be unsecured. Such loans may be in default at
the time of purchase. Loans that are fully secured offer the Fund more
protection than an unsecured loan in the event of non-payment of
scheduled interest or principal. However, there is no assurance that the
liquidation of collateral from a secured loan would satisfy the
corporate borrowers obligation, or that the collateral can be
liquidated.
These loans are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans are typically made by a syndicate of lending
institutions, represented by an agent lending institution which has
negotiated and structured the loan and is responsible for collecting
interest, principal and other amounts due on its own behalf and on
behalf of the others in the syndicate, and for enforcing its and their
other rights against the borrower. Alternatively, such loans may be
structured as a novation, pursuant to which the Fund would assume all of
the rights of the lending institution in a loan or as an assignment,
pursuant to which the Fund would purchase an assignment of a portion of
a lenders interest in a loan either directly from the lender or through
an intermediary. The Fund may also purchase trade or other claims
against companies, which generally represent money owned by the company
to a supplier of goods or services. These claims may also be purchased
at a time when the company is in default.
Certain of the loans and the other direct indebtedness acquired by the
Fund may involve revolving credit facilities or other standby financing
commitments which obligate the Fund to pay additional cash on a certain
date or on demand. These commitments may have the effect of requiring
the Fund to increase its investment in a company at a time when the Fund
might not otherwise decide to do so (including at a time when the
company's financial condition makes it unlikely that such amounts will
be repaid). To the extent that the Fund is committed to advance
additional funds, it will at all times hold and maintain in a segregated
account cash or other high grade debt obligations in an amount
sufficient to meet such commitments.
The Fund's ability to receive payment of principal, interest and other
amounts due in connection with these investments will depend primarily
on the financial condition of the borrower. In selecting the loans and
other direct indebtedness which the Fund will purchase, the Adviser will
rely upon its own (and not the original lending institution's) credit
analysis of the borrower. As the Fund may be required to rely upon
another lending institution to collect and pass onto the Fund amounts
payable with respect to the loan and to enforce the Fund's rights under
the loan and other direct indebtedness, an insolvency, bankruptcy or
reorganization of the lending institution may delay or prevent the Fund
from receiving such amounts. In such cases, the Fund will evaluate as
well the creditworthiness of the lending institution and will treat both
the borrower and the lending institution as an "issuer" of the loan for
purposes of certain investment restrictions pertaining to the
diversification of the Fund's portfolio investments. The highly
leveraged nature of many such loans and other direct indebtedness may
make such loans and other direct indebtedness especially vulnerable to
adverse changes in economic or market conditions. Investments in such
loans and other direct indebtedness may involve additional risk to the
Fund.
LOWER RATED BONDS: The Fund may invest in fixed income securities
rated Ba or lower by Moody's or BB or lower by S&P, Fitch or Duff &
Phelps and comparable unrated securities (commonly known as "junk
bonds"). See Appendix D for a description of bond ratings. No minimum
rating standard is required by the Fund. These securities are considered
speculative and, while generally providing greater income than
investments in higher rated securities, will involve greater risk of
principal and income (including the possibility of default or bankruptcy
of the issuers of such securities) and may involve greater volatility of
price (especially during periods of economic uncertainty or change) than
securities in the higher rating categories and because yields vary over
time, no specific level of income can ever be assured. These lower rated
high yielding fixed income securities generally tend to reflect economic
changes (and the outlook for economic growth), short-term corporate and
industry developments and the market's perception of their credit
quality (especially during times of adverse publicity) to a greater
extent than higher rated securities which react primarily to
fluctuations in the general level of interest rates (although these
lower rated fixed income securities are also affected by changes in
interest rates). In the past, economic downturns or an increase in
interest rates have, under certain circumstances, caused a higher
incidence of default by the issuers of these securities and may do so in
the future, especially in the case of highly leveraged issuers. The
prices for these securities may be affected by legislative and
regulatory developments. The market for these lower rated fixed income
securities may be less liquid than the market for investment grade fixed
income securities. Furthermore, the liquidity of these lower rated
securities may be affected by the market's perception of their credit
quality. Therefore, the Adviser's judgment may at times play a greater
role in valuing these securities than in the case of investment grade
fixed income securities, and it also may be more difficult during times
of certain adverse market conditions to sell these lower rated
securities to meet redemption requests or to respond to changes in the
market.
While the Adviser may refer to ratings issued by established credit
rating agencies, it is not the Fund's policy to rely exclusively on
ratings issued by these rating agencies, but rather to supplement such
ratings with the Adviser's own independent and ongoing review of credit
quality. To the extent a Fund invests in these lower rated securities,
the achievement of its investment objectives may be a more dependent on
the Adviser's own credit analysis than in the case of a fund investing
in higher quality fixed income securities. These lower rated securities
may also include zero coupon bonds, deferred interest bonds and PIK
bonds.
MUNICIPAL BONDS: The Fund may invest in debt securities issued by or
on behalf of states, territories and possessions of the United States
and the District of Columbia and their political subdivisions, agencies
or instrumentalities, the interest on which is exempt from federal
income tax ("Municipal Bonds"). Municipal Bonds include debt securities
which pay interest income that is subject to the alternative minimum
tax. The Fund may invest in Municipal Bonds whose issuers pay interest
on the Bonds from revenues from projects such as multifamily housing,
nursing homes, electric utility systems, hospitals or life care
facilities.
If a revenue bond is secured by payments generated from a project, and
the revenue bond is also secured by a lien on the real estate comprising
the project, foreclosure by the indenture trustee on the lien for the
benefit of the bondholders creates additional risks associated with
owning real estate, including environmental risks.
Housing revenue bonds typically are issued by a state, county or local
housing authority and are secured only by the revenues of mortgages
originated by the authority using the proceeds of the bond issue.
Because of the impossibility of precisely predicting demand for
mortgages from the proceeds of such an issue, there is a risk that the
proceeds of the issue will be in excess of demand, which would result in
early retirement of the bonds by the issuer. Moreover, such housing
revenue bonds depend for their repayment upon the cash flow from the
underlying mortgages, which cannot be precisely predicted when the bonds
are issued. Any difference in the actual cash flow from such mortgages
from the assumed cash flow could have an adverse impact upon the ability
of the issuer to make scheduled payments of principal and interest on
the bonds, or could result in early retirement of the bonds.
Additionally, such bonds depend in part for scheduled payments of
principal and interest upon reserve funds established from the proceeds
of the bonds, assuming certain rates of return on investment of such
reserve funds. If the assumed rates of return are not realized because
of changes in interest rate levels or for other reasons, the actual cash
flow for scheduled payments of principal and interest on the bonds may
be inadequate. The financing of multi-family housing projects is
affected by a variety of factors, including satisfactory completion of
construction within cost constraints, the achievement and maintenance of
a sufficient level of occupancy, sound management of the developments,
timely and adequate increases in rents to cover increases in operating
expenses, including taxes, utility rates and maintenance costs, changes
in applicable laws and governmental regulations and social and economic
trends.
Electric utilities face problems in financing large construction
programs in inflationary periods, cost increases and delay occasioned by
environmental considerations (particularly with respect to nuclear
facilities), difficulty in obtaining fuel at reasonable prices, the cost
of competing fuel sources, difficulty in obtaining sufficient rate
increases and other regulatory problems, the effect of energy
conservation and difficulty of the capital market to absorb utility
debt.
Health care facilities include life care facilities, nursing homes and
hospitals. Life care facilities are alternative forms of long-term
housing for the elderly which offer residents the independence of
condominium life style and, if needed, the comprehensive care of nursing
home services. Bonds to finance these facilities have been issued by
various state industrial development authorities. Since the bonds are
secured only by the revenues of each facility and not by state or local
government tax payments, they are subject to a wide variety of risks.
Primarily, the projects must maintain adequate occupancy levels to be
able to provide revenues adequate to maintain debt service payments.
Moreover, in the case of life care facilities, since a portion of
housing, medical care and other services may be financed by an initial
deposit, there may be risk if the facility does not maintain adequate
financial reserves to secure estimated actuarial liabilities. The
ability of management to accurately forecast inflationary cost pressures
weighs importantly in this process. The facilities may also be affected
by regulatory cost restrictions applied to health care delivery in
general, particularly state regulations or changes in Medicare and
Medicaid payments or qualifications, or restrictions imposed by medical
insurance companies. They may also face competition from alternative
health care or conventional housing facilities in the private or public
sector. Hospital bond ratings are often based on feasibility studies
which contain projections of expenses, revenues and occupancy levels. A
hospital's gross receipts and net income available to service its debt
are influenced by demand for hospital services, the ability of the
hospital to provide the services required, management capabilities,
economic developments in the service area, efforts by insurers and
government agencies to limit rates and expenses, confidence in the
hospital, service area economic developments, competition, availability
and expense of malpractice insurance, Medicaid and Medicare funding, and
possible federal legislation limiting the rates of increase of hospital
charges.
The Fund may invest in municipal lease securities. These are undivided
interests in a portion of an obligation in the from of a lease or
installment purchase which is issued by state and local governments to
acquire equipment and facilities. Municipal leases frequently have
special risks not normally associated with general obligation or revenue
bonds. Leases and installment purchase or conditional sale contracts
(which normally provide for title to the leased asset to pass eventually
to the governmental issuer) have evolved as a means for governmental
issuers to acquire property and equipment without meeting the
constitutional and statutory requirements for the issuance of debt. The
debt-issuance limitations are deemed to be inapplicable because of the
inclusion in many leases or contracts of "non-appropriation" clauses
that provide that the governmental issuer has no obligation to make
future payments under the lease or contract unless money is appropriated
for such purpose by the appropriate legislative body on a yearly or
other periodic basis. Although the obligations will be secured by the
leased equipment or facilities, the disposition of the property in the
event of non-appropriation or foreclosure might, in some cases, prove
difficult. There are, of course, variations in the security of municipal
lease securities, both within a particular classification and between
classifications, depending on numerous factors.
The Fund may also invest in bonds for industrial and other projects,
such as sewage or solid waste disposal or hazardous waste treatment
facilities. Financing for such projects will be subject to inflation and
other general economic factors as well as construction risks including
labor problems, difficulties with construction sites and the ability of
contractors to meet specifications in a timely manner. Because some of
the materials, processes and wastes involved in these projects may
include hazardous components, there are risks associated with their
production, handling and disposal.
SPECULATIVE BONDS: The Fund may invest in fixed income and convertible
securities rated Baa by Moody's or BBB by S&P, Fitch or Duff & Phelps
and comparable unrated securities. See Appendix D for a description of
bond ratings. These securities, while normally exhibiting adequate
protection parameters, have speculative characteristics and changes in
economic conditions or other circumstances are more likely to lead to a
weakened capacity to make principal and interest payments than in the
case of higher grade securities.
U.S. GOVERNMENT SECURITIES: The Fund may invest in U.S. Government
Securities including (i) U.S. Treasury obligations, all of which are
backed by the full faith and credit of the U.S. Government and (ii) U.S.
Government Securities, some of which are backed by the full faith and
credit of the U.S. Treasury, e.g., direct pass-through certificates of
the Government National Mortgage Association ("GNMA"); some of which are
backed only by the credit of the issuer itself, e.g., obligations of the
Student Loan Marketing Association; and some of which are supported by
the discretionary authority of the U.S. Government to purchase the
agency's obligations, e.g., obligations of the Federal National Mortgage
Association ("FNMA").
U.S. Government Securities also include interest in trust or other
entities representing interests in obligations that are issued or
guaranteed by the U.S. Government, its agencies, authorities or
instrumentalities.
VARIABLE AND FLOATING RATE OBLIGATIONS: The Fund may invest in
floating or variable rate securities. Investments in floating or
variable rate securities normally will involve industrial development or
revenue bonds which provide that the rate of interest is set as a
specific percentage of a designated base rate, such as rates on Treasury
Bonds or Bills or the prime rate at a major commercial bank, and that a
bondholder can demand payment of the obligations on behalf of the Fund
on short notice at par plus accrued interest, which amount may be more
or less than the amount the bondholder paid for them. The maturity of
floating or variable rate obligations (including participation interests
therein) is deemed to be the longer of (i) the notice period required
before the Fund is entitled to receive payment of the obligation upon
demand or (ii) the period remaining until the obligation's next interest
rate adjustment. If not redeemed by the Fund through the demand feature,
the obligations mature on a specified date which may range up to thirty
years from the date of issuance.
ZERO COUPON BONDS, DEFERRED INTEREST BONDS AND PIK BONDS: The Fund may
invest in zero coupon bonds, deferred interest bonds and bonds on which
the interest is payable in kind ("PIK bonds"). Zero coupon and deferred
interest bonds are debt obligations which are issued at a significant
discount from face value. The discount approximates the total amount of
interest the bonds will accrue and compound over the period until
maturity or the first interest payment date at a rate of interest
reflecting the market rate of the security at the time of issuance.
While zero coupon bonds do not require the periodic payment of interest,
deferred interest bonds provide for a period of delay before the regular
payment of interest begins. PIK bonds are debt obligations which provide
that the issuer may, at its option, pay interest on such bonds in cash
or in the form of additional debt obligations. Such investments benefit
the issuer by mitigating its need for cash to meet debt service, but
also require a higher rate of return to attract investors who are
willing to defer receipt of such cash. Such investments may experience
greater volatility in market value than debt obligations which make
regular payments of interest. The Fund will accrue income on such
investments for tax and accounting purposes, which is distributable to
shareholders and which, because no cash is received at the time of
accrual, may require the liquidation of other portfolio securities to
satisfy the Fund's distribution obligations.
EQUITY SECURITIES
The Fund may invest in all types of equity securities, including the
following: common stocks, preferred stocks and preference stocks;
securities such as bonds, warrants or rights that are convertible into
stocks; and depositary receipts for those securities. These securities
may be listed on securities exchanges, traded in various
over-the-counter markets or have no organized market.
FOREIGN SECURITIES EXPOSURE
The Fund may invest in various types of foreign securities, or
securities which provide the Fund with exposure to foreign securities or
foreign currencies, as discussed below:
BRADY BONDS: The Fund may invest in Brady Bonds, which are securities
created through the exchange of existing commercial bank loans to public
and private entities in certain emerging markets for new bonds in
connection with debt restructurings under a debt restructuring plan
introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady
(the "Brady Plan"). Brady Plan debt restructurings have been implemented
to date in Argentina, Brazil, Bulgaria, Costa Rica, Croatia, Dominican
Republic, Ecuador, Jordan, Mexico, Morocco, Nigeria, Panama, Peru, the
Philippines, Poland, Slovenia, Uruguay and Venezuela. Brady Bonds have
been issued only recently, and for that reason do not have a long
payment history. Brady Bonds may be collateralized or uncollateralized,
are issued in various currencies (but primarily the U.S. dollar) and are
actively traded in over-the-counter secondary markets. U.S.
dollar-denominated, collateralized Brady Bonds, which may be fixed rate
bonds or floating-rate bonds, are generally collateralized in full as to
principal by U.S. Treasury zero coupon bonds having the same maturity as
the bonds. Brady Bonds are often viewed as having three or four
valuation components: the collateralized repayment of principal at final
maturity; the collateralized interest payments; the uncollateralized
interest payments; and any uncollateralized repayment of principal at
maturity (these uncollateralized amounts constituting the "residual
risk"). In light of the residual risk of Brady Bonds and the history of
defaults of countries issuing Brady Bonds with respect to commercial
bank loans by public and private entities, investments in Brady Bonds
may be viewed as speculative.
DEPOSITARY RECEIPTS: The Fund may invest in American Depositary Receipts
("ADRs"), Global Depositary Receipts ("GDRs") and other types of
depositary receipts. ADRs are certificates by a U.S. depositary (usually
a bank) and represent a specified quantity of shares of an underlying
non- U.S. stock on deposit with a custodian bank as collateral. GDRs and
other types of depositary receipts are typically issued by foreign banks
or trust companies and evidence ownership of underlying securities
issued by either a foreign or a U.S. company. Generally, ADRs are in
registered form and are designed for use in U.S. securities markets and
GDRs are in bearer form and are designed for use in foreign securities
markets. For the purposes of the Fund's policy to invest a certain
percentage of its assets in foreign securities, the investments of the
Fund in ADRs, GDRs and other types of depositary receipts are deemed to
be investments in the underlying securities.
ADRs may be sponsored or unsponsored. A sponsored ADR is issued by a
depositary which has an exclusive relationship with the issuer of the
underlying security. An unsponsored ADR may be issued by any number of
U.S. depositories. Under the terms of most sponsored arrangements,
depositories agree to distribute notices of shareholder meetings and
voting instructions, and to provide shareholder communications and other
information to the ADR holders at the request of the issuer of the
deposited securities. The depository of an unsponsored ADR, on the other
hand, is under no obligation to distribute shareholder communications
received from the issuer of the deposited securities or to pass through
voting rights to ADR holders in respect of the deposited securities. The
Fund may invest in either type of ADR. Although the U.S. investor holds
a substitute receipt of ownership rather than direct stock certificates,
the use of the depositary receipts in the United States can reduce costs
and delays as well as potential currency exchange and other
difficulties. The Fund may purchase securities in local markets and
direct delivery of these ordinary shares to the local depositary of an
ADR agent bank in foreign country. Simultaneously, the ADR agents create
a certificate which settles at the Fund's custodian in five days. The
Fund may also execute trades on the U.S. markets using existing ADRs. A
foreign issuer of the security underlying an ADR is generally not
subject to the same reporting requirements in the United States as a
domestic issuer. Accordingly, information available to a U.S. investor
will be limited to the information the foreign issuer is required to
disclose in its country and the market value of an ADR may not reflect
undisclosed material information concerning the issuer of the underlying
security. ADRs may also be subject to exchange rate risks if the
underlying foreign securities are denominated in a foreign currency.
DOLLAR-DENOMINATED FOREIGN DEBT SECURITIES: The Fund may invest in
dollar- denominated foreign debt securities. Investing in
dollar-denominated foreign debt represents a greater degree of risk than
investing in domestic securities, due to less publicly available
information, less securities regulation, war or expropriation. Special
considerations may include higher brokerage costs and thinner trading
markets. Investments in foreign countries could be affected by other
factors including extended settlement periods.
EMERGING MARKETS: The Fund may invest in securities of government,
government-related, supranational and corporate issuers located in
emerging markets. Such investments entail significant risks as described
below.
o Company Debt -- Governments of many emerging market countries have
exercised and continue to exercise substantial influence over many
aspects of the private sector through the ownership or control of
many companies, including some of the largest in any given country.
As a result, government actions in the future could have a
significant effect on economic conditions in emerging markets,
which in turn, may adversely affect companies in the private
sector, general market conditions and prices and yields of certain
of the securities in the Fund's portfolio. Expropriation,
confiscatory taxation, nationalization, political, economic or
social instability or other similar developments have occurred
frequently over the history of certain emerging markets and could
adversely affect the Fund's assets should these conditions recur.
o Default; Legal Recourse -- The Fund may have limited legal recourse
in the event of a default with respect to certain debt obligations
it may hold. If the issuer of a fixed income security owned by the
Fund defaults, the Fund may incur additional expenses to seek
recovery. Debt obligations issued by emerging market governments
differ from debt obligations of private entities; remedies from
defaults on debt obligations issued by emerging market governments,
unlike those on private debt, must be pursued in the courts of the
defaulting party itself. The Fund's ability to enforce its rights
against private issuers may be limited. The ability to attach
assets to enforce a judgment may be limited. Legal recourse is
therefore somewhat diminished. Bankruptcy, moratorium and other
similar laws applicable to private issuers of debt obligations may
be substantially different from those of other countries. The
political context, expressed as an emerging market governmental
issuer's willingness to meet the terms of the debt obligation, for
example, is of considerable importance. In addition, no assurance
can be given that the holders of commercial bank debt may not
contest payments to the holders of debt obligations in the event of
default under commercial bank loan agreements.
o Foreign Currencies -- The securities in which the Fund invests may
be denominated in foreign currencies and international currency
units and the Fund may invest a portion of its assets directly in
foreign currencies. Accordingly, the weakening of these currencies
and units against the U.S. dollar may result in a decline in the
Fund's asset value.
Some emerging market countries also may have managed currencies,
which are not free floating against the U.S. dollar. In addition,
there is risk that certain emerging market countries may restrict
the free conversion of their currencies into other currencies.
Further, certain emerging market currencies may not be
internationally traded. Certain of these currencies have
experienced a steep devaluation relative to the U.S. dollar. Any
devaluations in the currencies in which a Fund's portfolio
securities are denominated may have a detrimental impact on the
Fund's net asset value.
o Inflation -- Many emerging markets have experienced substantial,
and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had
and may continue to have adverse effects on the economies and
securities markets of certain emerging market countries. In an
attempt to control inflation, wage and price controls have been
imposed in certain countries. Of these countries, some, in recent
years, have begun to control inflation through prudent economic
policies.
o Liquidity; Trading Volume; Regulatory Oversight -- The securities
markets of emerging market countries are substantially smaller,
less developed, less liquid and more volatile than the major
securities markets in the U.S. Disclosure and regulatory standards
are in many respects less stringent than U.S. standards.
Furthermore, there is a lower level of monitoring and regulation of
the markets and the activities of investors in such markets.
The limited size of many emerging market securities markets and
limited trading volume in the securities of emerging market issuers
compared to volume of trading in the securities of U.S. issuers
could cause prices to be erratic for reasons apart from factors
that affect the soundness and competitiveness of the securities
issuers. For example, limited market size may cause prices to be
unduly influenced by traders who control large positions. Adverse
publicity and investors' perceptions, whether or not based on
in-depth fundamental analysis, may decrease the value and liquidity
of portfolio securities.
The risk also exists that an emergency situation may arise in one
or more emerging markets, as a result of which trading of
securities may cease or may be substantially curtailed and prices
for the Fund's securities in such markets may not be readily
available. The Fund may suspend redemption of its shares for any
period during which an emergency exists, as determined by the
Securities and Exchange Commission (the "SEC"). Accordingly, if the
Fund believes that appropriate circumstances exist, it will
promptly apply to the SEC for a determination that an emergency is
present. During the period commencing from the Fund's
identification of such condition until the date of the SEC action,
the Fund's securities in the affected markets will be valued at
fair value determined in good faith by or under the direction of
the Board of Trustees.
o Sovereign Debt -- Investment in sovereign debt can involve a high
degree of risk. The governmental entity that controls the repayment
of sovereign debt may not be able or willing to repay the principal
and/or interest when due in accordance with the terms of such debt.
A governmental entity's willingness or ability to repay principal
and interest due in a timely manner may be affected by, among other
factors, its cash flow situation, the extent of its foreign
reserves, the availability of sufficient foreign exchange on the
date a payment is due, the relative size of the debt service burden
to the economy as a whole, the governmental entity's policy towards
the International Monetary Fund and the political constraints to
which a governmental entity may be subject. Governmental entities
may also be dependent on expected disbursements from foreign
governments, multilateral agencies and others abroad to reduce
principal and interest on their debt. The commitment on the part of
these governments, agencies and others to make such disbursements
may be conditioned on a governmental entity's implementation of
economic reforms and/or economic performance and the timely service
of such debtor's obligations. Failure to implement such reforms,
achieve such levels of economic performance or repay principal or
interest when due may result in the cancellation of such third
parties' commitments to lend funds to the governmental entity,
which may further impair such debtor's ability or willingness to
service its debts in a timely manner. Consequently, governmental
entities may default on their sovereign debt. Holders of sovereign
debt (including the Fund) may be requested to participate in the
rescheduling of such debt and to extend further loans to
governmental entities. There is no bankruptcy proceedings by which
sovereign debt on which governmental entities have defaulted may be
collected in whole or in part.
Emerging market governmental issuers are among the largest debtors
to commercial banks, foreign governments, international financial
organizations and other financial institutions. Certain emerging
market governmental issuers have not been able to make payments of
interest on or principal of debt obligations as those payments have
come due. Obligations arising from past restructuring agreements
may affect the economic performance and political and social
stability of those issuers.
The ability of emerging market governmental issuers to make timely
payments on their obligations is likely to be influenced strongly
by the issuer's balance of payments, including export performance,
and its access to international credits and investments. An
emerging market whose exports are concentrated in a few commodities
could be vulnerable to a decline in the international prices of one
or more of those commodities. Increased protectionism on the part
of an emerging market's trading partners could also adversely
affect the country's exports and tarnish its trade account surplus,
if any. To the extent that emerging markets receive payment for
their exports in currencies other than dollars or non-emerging
market currencies, its ability to make debt payments denominated in
dollars or non-emerging market currencies could be affected.
To the extent that an emerging market country cannot generate a
trade surplus, it must depend on continuing loans from foreign
governments, multilateral organizations or private commercial
banks, aid payments from foreign governments and on inflows of
foreign investment. The access of emerging markets to these forms
of external funding may not be certain, and a withdrawal of
external funding could adversely affect the capacity of emerging
market country governmental issuers to make payments on their
obligations. In addition, the cost of servicing emerging market
debt obligations can be affected by a change in international
interest rates since the majority of these obligations carry
interest rates that are adjusted periodically based upon
international rates.
Another factor bearing on the ability of emerging market countries
to repay debt obligations is the level of international reserves of
the country. Fluctuations in the level of these reserves affect the
amount of foreign exchange readily available for external debt
payments and thus could have a bearing on the capacity of emerging
market countries to make payments on these debt obligations.
o Withholding -- Income from securities held by the Fund could be
reduced by a withholding tax on the source or other taxes imposed
by the emerging market countries in which the Fund makes its
investments. The Fund's net asset value may also be affected by
changes in the rates or methods of taxation applicable to the Fund
or to entities in which the Fund has invested. The Adviser will
consider the cost of any taxes in determining whether to acquire
any particular investments, but can provide no assurance that the
taxes will not be subject to change.
FOREIGN SECURITIES: The Fund may invest in dollar-denominated and non
dollar-denominated foreign securities. Investing in securities of
foreign issuers generally involves risks not ordinarily associated with
investing in securities of domestic issuers. These include changes in
currency rates, exchange control regulations, securities settlement
practices, governmental administration or economic or monetary policy
(in the United States or abroad) or circumstances in dealings between
nations. Costs may be incurred in connection with conversions between
various currencies. Special considerations may also include more limited
information about foreign issuers, higher brokerage costs, different
accounting standards and thinner trading markets. Foreign securities
markets may also be less liquid, more volatile and less subject to
government supervision than in the United States. Investments in foreign
countries could be affected by other factors including expropriation,
confiscatory taxation and potential difficulties in enforcing
contractual obligations and could be subject to extended settlement
periods. As a result of its investments in foreign securities, the Fund
may receive interest or dividend payments, or the proceeds of the sale
or redemption of such securities, in the foreign currencies in which
such securities are denominated. Under certain circumstances, such as
where the Adviser believes that the applicable exchange rate is
unfavorable at the time the currencies are received or the Adviser
anticipates, for any other reason, that the exchange rate will improve,
the Fund may hold such currencies for an indefinite period of time.
While the holding of currencies will permit the Fund to take advantage
of favorable movements in the applicable exchange rate, such strategy
also exposes the Fund to risk of loss if exchange rates move in a
direction adverse to the Fund's position. Such losses could reduce any
profits or increase any losses sustained by the Fund from the sale or
redemption of securities and could reduce the dollar value of interest
or dividend payments received.
FORWARD CONTRACTS
The Fund may enter into contracts for the purchase or sale of a specific
currency at a future date at a price set at the time the contract is
entered into (a "Forward Contract"), for hedging purposes (e.g., to
protect its current or intended investments from fluctuations in
currency exchange rates) as well as for non-hedging purposes.
A Forward Contract to sell a currency may be entered into where the
Fund seeks to protect against an anticipated increase in the exchange
rate for a specific currency which could reduce the dollar value of
portfolio securities denominated in such currency. Conversely, the Fund
may enter into a Forward Contract to purchase a given currency to
protect against a projected increase in the dollar value of securities
denominated in such currency which the Fund intends to acquire.
If a hedging transaction in Forward Contracts is successful, the
decline in the dollar value of portfolio securities or the increase in
the dollar cost of securities to be acquired may be offset, at least in
part, by profits on the Forward Contract. Nevertheless, by entering into
such Forward Contracts, the Fund may be required to forego all or a
portion of the benefits which otherwise could have been obtained from
favorable movements in exchange rates. The Fund does not presently
intend to hold Forward Contracts entered into until maturity, at which
time it would be required to deliver or accept delivery of the
underlying currency, but will seek in most instances to close out
positions in such Contracts by entering into offsetting transactions,
which will serve to fix the Fund's profit or loss based upon the value
of the Contracts at the time the offsetting transaction is executed.
The Fund will also enter into transactions in Forward Contracts for
other than hedging purposes, which presents greater profit potential but
also involves increased risk. For example, the Fund may purchase a given
foreign currency through a Forward Contract if, in the judgment of the
Adviser, the value of such currency is expected to rise relative to the
U.S. dollar. Conversely, the Fund may sell the currency through a
Forward Contract if the Adviser believes that its value will decline
relative to the dollar.
The Fund will profit if the anticipated movements in foreign currency
exchange rates occur, which will increase its gross income. Where
exchange rates do not move in the direction or to the extent
anticipated, however, the Fund may sustain losses which will reduce its
gross income. Such transactions, therefore, could be considered
speculative and could involve significant risk of loss.
The use by the Fund of Forward Contracts also involves the risks
described under the caption "Special Risk Factors -- Options, Futures,
Forwards, Swaps and Other Derivative Transactions" in this Appendix.
FUTURES CONTRACTS
The Fund may purchase and sell futures contracts ("Futures Contracts")
on stock indices, foreign currencies, interest rates or interest-rate
related instruments, indices of foreign currencies or commodities. The
Fund may also purchase and sell Futures Contracts on foreign or domestic
fixed income securities or indices of such securities including
municipal bond indices and any other indices of foreign or domestic
fixed income securities that may become available for trading. Such
investment strategies will be used for hedging purposes and for
non-hedging purposes, subject to applicable law.
A Futures Contract is a bilateral agreement providing for the purchase
and sale of a specified type and amount of a financial instrument,
foreign currency or commodity, or for the making and acceptance of a
cash settlement, at a stated time in the future for a fixed price. By
its terms, a Futures Contract provides for a specified settlement month
in which, in the case of the majority of commodities, interest rate and
foreign currency futures contracts, the underlying commodities, fixed
income securities or currency are delivered by the seller and paid for
by the purchaser, or on which, in the case of index futures contracts
and certain interest rate and foreign currency futures contracts, the
difference between the price at which the contract was entered into and
the contract's closing value is settled between the purchaser and seller
in cash. Futures Contracts differ from options in that they are
bilateral agreements, with both the purchaser and the seller equally
obligated to complete the transaction. Futures Contracts call for
settlement only on the expiration date and cannot be "exercised" at any
other time during their term.
The purchase or sale of a Futures Contract differs from the purchase
or sale of a security or the purchase of an option in that no purchase
price is paid or received. Instead, an amount of cash or cash
equivalents, which varies but may be as low as 5% or less of the value
of the contract, must be deposited with the broker as "initial margin."
Subsequent payments to and from the broker, referred to as "variation
margin," are made on a daily basis as the value of the index or
instrument underlying the Futures Contract fluctuates, making positions
in the Futures Contract more or less valuable -- a process known as
"mark-to-market."
Purchases or sales of stock index futures contracts are used to
attempt to protect the Fund's current or intended stock investments from
broad fluctuations in stock prices. For example, the Fund may sell stock
index futures contracts in anticipation of or during a market decline to
attempt to offset the decrease in market value of the Fund's securities
portfolio that might otherwise result. If such decline occurs, the loss
in value of portfolio securities may be offset, in whole or part, by
gains on the futures position. When the Fund is not fully invested in
the securities market and anticipates a significant market advance, it
may purchase stock index futures contracts in order to gain rapid market
exposure that may, in part or entirely, offset increases in the cost of
securities that the Fund intends to purchase. As such purchases are
made, the corresponding positions in stock index futures contracts will
be closed out. In a substantial majority of these transactions, the Fund
will purchase such securities upon termination of the futures position,
but under unusual market conditions, a long futures position may be
terminated without a related purchase of securities.
Interest rate Futures Contracts may be purchased or sold to attempt to
protect against the effects of interest rate changes on the Fund's
current or intended investments in fixed income securities. For example,
if the Fund owned long-term bonds and interest rates were expected to
increase, the Fund might enter into interest rate futures contracts for
the sale of debt securities. Such a sale would have much the same effect
as selling some of the long-term bonds in the Fund's portfolio. If
interest rates did increase, the value of the debt securities in the
portfolio would decline, but the value of the Fund's interest rate
futures contracts would increase at approximately the same rate, subject
to the correlation risks described below, thereby keeping the net asset
value of the Fund from declining as much as it otherwise would have.
Similarly, if interest rates were expected to decline, interest rate
futures contracts may be purchased to hedge in anticipation of
subsequent purchases of long-term bonds at higher prices. Since the
fluctuations in the value of the interest rate futures contracts should
be similar to that of long-term bonds, the Fund could protect itself
against the effects of the anticipated rise in the value of long-term
bonds without actually buying them until the necessary cash became
available or the market had stabilized. At that time, the interest rate
futures contracts could be liquidated and the Fund's cash reserves could
then be used to buy long- term bonds on the cash market. The Fund could
accomplish similar results by selling bonds with long maturities and
investing in bonds with short maturities when interest rates are
expected to increase. However, since the futures market may be more
liquid than the cash market in certain cases or at certain times, the
use of interest rate futures contracts as a hedging technique may allow
the Fund to hedge its interest rate risk without having to sell its
portfolio securities.
The Fund may purchase and sell foreign currency futures contracts for
hedging purposes, to attempt to protect its current or intended
investments from fluctuations in currency exchange rates. Such
fluctuations could reduce the dollar value of portfolio securities
denominated in foreign currencies, or increase the dollar cost of
foreign- denominated securities to be acquired, even if the value of
such securities in the currencies in which they are denominated remains
constant. The Fund may sell futures contracts on a foreign currency, for
example, where it holds securities denominated in such currency and it
anticipates a decline in the value of such currency relative to the
dollar. In the event such decline occurs, the resulting adverse effect
on the value of foreign-denominated securities may be offset, in whole
or in part, by gains on the futures contracts.
Conversely, the Fund could protect against a rise in the dollar cost
of foreign-denominated securities to be acquired by purchasing futures
contracts on the relevant currency, which could offset, in whole or in
part, the increased cost of such securities resulting from a rise in the
dollar value of the underlying currencies. Where the Fund purchases
futures contracts under such circumstances, however, and the prices of
securities to be acquired instead decline, the Fund will sustain losses
on its futures position which could reduce or eliminate the benefits of
the reduced cost of portfolio securities to be acquired.
The use by the Fund of Futures Contracts also involves the risks
described under the caption "Special Risk Factors -- Options, Futures,
Forwards, Swaps and Other Derivative Transactions" in this Appendix.
INDEXED SECURITIES
The Fund may purchase securities with principal and/or interest
payments whose prices are indexed to the prices of other securities,
securities indices, currencies, precious metals or other commodities, or
other financial indicators. Indexed securities typically, but not
always, are debt securities or deposits whose value at maturity or
coupon rate is determined by reference to a specific instrument or
statistic. The Fund may also purchase indexed deposits with similar
characteristics. Gold- indexed securities, for example, typically
provide for a maturity value that depends on the price of gold,
resulting in a security whose price tends to rise and fall together with
gold prices. Currency-indexed securities typically are short-term to
intermediate-term debt securities whose maturity values or interest
rates are determined by reference to the values of one or more specified
foreign currencies, and may offer higher yields than U.S. dollar
denominated securities of equivalent issuers. Currency-indexed
securities may be positively or negatively indexed; that is, their
maturity value may increase when the specified currency value increases,
resulting in a security that performs similarly to a foreign-
denominated instrument, or their maturity value may decline when foreign
currencies increase, resulting in a security whose price characteristics
are similar to a put on the underlying currency. Currency-indexed
securities may also have prices that depend on the values of a number of
different foreign currencies relative to each other. Certain indexed
securities may expose the Fund to the risk of loss of all or a portion
of the principal amount of its investment and/or the interest that might
otherwise have been earned on the amount invested.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they
are indexed, and may also be influenced by interest rate changes in the
U.S. and abroad. At the same time, indexed securities are subject to the
credit risks associated with the issuer of the security, and their
values may decline substantially if the issuer's creditworthiness
deteriorates. Recent issuers of indexed securities have included banks,
corporations, and certain U.S. Government-sponsored entities.
INVERSE FLOATING RATE OBLIGATIONS
The Fund may invest in so-called "inverse floating rate obligations"
or "residual interest bonds" or other obligations or certificates
relating thereto structured to have similar features. In creating such
an obligation, a municipality issues a certain amount of debt and pays a
fixed interest rate. Half of the debt is issued as variable rate short
term obligations, the interest rate of which is reset at short
intervals, typically 35 days. The other half of the debt is issued as
inverse floating rate obligations, the interest rate of which is
calculated based on the difference between a multiple of (approximately
two times) the interest paid by the issuer and the interest paid on the
short-term obligation. Under usual circumstances, the holder of the
inverse floating rate obligation can generally purchase an equal
principal amount of the short term obligation and link the two
obligations in order to create long-term fixed rate bonds. Because the
interest rate on the inverse floating rate obligation is determined by
subtracting the short-term rate from a fixed amount, the interest rate
will decrease as the short-term rate increases and will increase as the
short-term rate decreases. The magnitude of increases and decreases in
the market value of inverse floating rate obligations may be
approximately twice as large as the comparable change in the market
value of an equal principal amount of long-term bonds which bear
interest at the rate paid by the issuer and have similar credit quality,
redemption and maturity provisions.
INVESTMENT IN OTHER INVESTMENT COMPANIES
The Fund may invest in other investment companies. Such investment may
involve the payment of substantial premiums above the value of such
investment companies' portfolio securities, and the total return on such
investment will be reduced by the operating expenses and fees of such
other investment companies, including advisory fees.
LADDERING
As one way of managing the Fund's exposure to interest rate
fluctuations, the Adviser may engage in a portfolio management strategy
known as "laddering." Under this strategy, the Fund will allocate a
portion of its assets in securities with remaining maturities of less
than 1 year, a portion of its assets in securities with remaining
maturities of 1 to 2 years, a portion of its assets in securities with
remaining maturities of 2 to 3 years, a portion of its assets in
securities with remaining maturities of 3 to 4 years and a portion of
its assets in securities with remaining maturities of 4 to 5 years.
Under normal market conditions, approximately 50% or more of the assets
of the Fund will be devoted to this strategy. The Adviser will actively
manage securities within each rung of the "ladder." "Laddering" does not
require that individual bonds are held to maturity.
The Adviser believes that "laddering" provides additional stability to
the Fund's portfolio by allocating the Fund's assets across a range of
securities with shorter-term maturities. For example, in periods of
rising interest rates and falling bond prices, the bonds with one- and
two-year remaining maturities generally lose less of their value than
bonds with four- and five-year remaining maturities; conversely, in
periods of falling interest rates and corresponding rising bond prices,
the principal value of the bonds with four- and five-year remaining
maturities generally increase more than the bonds with one-and two-year
remaining maturities. Furthermore, with the passage of time, individual
bonds held in the Fund's portfolio tend to become less volatile as the
time of their remaining maturity decreases. In addition, bonds with
four- and five-year remaining maturities generally provide higher income
than bonds with one- and two- year remaining maturities.
"Laddering" does not assure profit and does not protect against loss
in a declining market.
LENDING OF PORTFOLIO SECURITIES
The Fund may seek to increase its income by lending portfolio
securities. Such loans will usually be made only to member firms of the
New York Stock Exchange (the "Exchange") (and subsidiaries thereof) and
member banks of the Federal Reserve System, and would be required to be
secured continuously by collateral in cash, an irrevocable letter of
credit or United States ("U.S.") Treasury securities maintained on a
current basis at an amount at least equal to the market value of the
securities loaned. The Fund would have the right to call a loan and
obtain the securities loaned at any time on customary industry
settlement notice (which will not usually exceed five business days).
For the duration of a loan, the Fund would continue to receive the
equivalent of the interest or dividends paid by the issuer on the
securities loaned. The Fund would also receive a fee from the borrower
or compensation from the investment of the collateral, less a fee paid
to the borrower (if the collateral is in the form of cash). The Fund
would not, however, have the right to vote any securities having voting
rights during the existence of the loan, but the Fund would call the
loan in anticipation of an important vote to be taken among holders of
the securities or of the giving or withholding of their consent on a
material matter affecting the investment. As with other extensions of
credit there are risks of delay in recovery or even loss of rights in
the collateral should the borrower of the securities fail financially.
However, the loans would be made only to firms deemed by the Adviser to
be of good standing, and when, in the judgment of the Adviser, the
consideration which can be earned currently from securities loans of
this type justifies the attendant risk.
LEVERAGING TRANSACTIONS
The Fund may engage in the types of transactions described below, which
involve "leverage" because in each case the Fund receives cash which it
can invest in portfolio securities and has a future obligation to make a
payment. The use of these transactions by the Fund will generally cause
its net asset value to increase or decrease at a greater rate than would
otherwise be the case. Any investment income or gains earned from the
portfolio securities purchased with the proceeds from these transactions
which is in excess of the expenses associated from these transactions
can be expected to cause the value of the Fund's shares and
distributions on the Fund's shares to rise more quickly than would
otherwise be the case. Conversely, if the investment income or gains
earned from the portfolio securities purchased with proceeds from these
transactions fail to cover the expenses associated with these
transactions, the value of the Fund's shares is likely to decrease more
quickly than otherwise would be the case and distributions thereon will
be reduced or eliminated. Hence, these transactions are speculative,
involve leverage and increase the risk of owning or investing in the
shares of the Fund. These transactions also increase the Fund's expenses
because of interest and similar payments and administrative expenses
associated with them. Unless the appreciation and income on assets
purchased with proceeds from these transactions exceed the costs
associated with them, the use of these transactions by a Fund would
diminish the investment performance of the Fund compared with what it
would have been without using these transactions.
BANK BORROWINGS: The Fund may borrow money for investment purposes from
banks and invest the proceeds in accordance with its investment
objectives and policies.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: The Fund may enter into mortgage
"dollar roll" transactions pursuant to which it sells mortgage-backed
securities for delivery in the future and simultaneously contracts to
repurchase substantially similar securities on a specified future date.
During the roll period, the Fund foregoes principal and interest paid on
the mortgage-backed securities. The Fund is compensated for the lost
interest by the difference between the current sales price and the lower
price for the future purchase (often referred to as the "drop") as well
as by the interest earned on, and gains from, the investment of the cash
proceeds of the initial sale. The Fund may also be compensated by
receipt of a commitment fee.
If the income and capital gains from the Fund's investment of the cash
from the initial sale do not exceed the income, capital appreciation and
gain or loss that would have been realized on the securities sold as
part of the dollar roll, the use of this technique will diminish the
investment performance of the Fund compared with what the performance
would have been without the use of the dollar rolls. Dollar roll
transactions involve the risk that the market value of the securities
the Fund is required to purchase may decline below the agreed upon
repurchase price of those securities. If the broker/dealer to whom the
Fund sells securities becomes insolvent, the Fund's right to purchase or
repurchase securities may be restricted. Successful use of mortgage
dollar rolls may depend upon the Adviser's ability to correctly predict
interest rates and prepayments. There is no assurance that dollar rolls
can be successfully employed.
REVERSE REPURCHASE AGREEMENTS: The Fund may enter into reverse
repurchase agreements. In a reverse repurchase agreement, the Fund will
sell securities and receive cash proceeds, subject to its agreement to
repurchase the securities at a later date for a fixed price reflecting a
market rate of interest. There is a risk that the counter party to a
reverse repurchase agreement will be unable or unwilling to complete the
transaction as scheduled, which may result in losses to the Fund. The
Fund will invest the proceeds received under a reverse repurchase
agreement in accordance with its investment objective and policies.
OPTIONS
The Fund may invest in the following types of options, which involves
the risks described under the caption "Special Risk Factors -- Option,
Futures, Forwards, Swaps and Other Derivative Transactions" in this
Appendix:
OPTIONS ON FOREIGN CURRENCIES: The Fund may purchase and write options
on foreign currencies for hedging and non-hedging purposes in a manner
similar to that in which Futures Contracts on foreign currencies, or
Forward Contracts, will be utilized. For example, a decline in the
dollar value of a foreign currency in which portfolio securities are
denominated will reduce the dollar value of such securities, even if
their value in the foreign currency remains constant. In order to
protect against such diminutions in the value of portfolio securities,
the Fund may purchase put options on the foreign currency. If the value
of the currency does decline, the Fund will have the right to sell such
currency for a fixed amount in dollars and will thereby offset, in whole
in part, the adverse effect on its portfolio which otherwise would have
resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby
increasing the cost of such securities, the Fund may purchase call
options thereon. The purchase of such options could offset, at least
partially, the effect of the adverse movements in exchange rates. As in
the case of other types of options, however, the benefit to the Fund
deriving from purchases of foreign currency options will be reduced by
the amount of the premium and related transaction costs. In addition,
where currency exchange rates do not move in the direction or to the
extent anticipated, the Fund could sustain losses on transactions in
foreign currency options which would require it to forego a portion or
all of the benefits of advantageous changes in such rates. The Fund may
write options on foreign currencies for the same types of hedging
purposes. For example, where the Fund anticipates a decline in the
dollar value of foreign-denominated securities due to adverse
fluctuations in exchange rates it could, instead of purchasing a put
option, write a call option on the relevant currency. If the expected
decline occurs, the option will most likely not be exercised, and the
diminution in value of portfolio securities will be offset by the amount
of the premium received less related transaction costs. As in the case
of other types of options, therefore, the writing of Options on Foreign
Currencies will constitute only a partial hedge.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired,
the Fund could write a put option on the relevant currency which, if
rates move in the manner projected, will expire unexercised and allow
the Fund to hedge such increased cost up to the amount of the premium.
Foreign currency options written by the Fund will generally be covered
in a manner similar to the covering of other types of options. As in the
case of other types of options, however, the writing of a foreign
currency option will constitute only a partial hedge up to the amount of
the premium, and only if rates move in the expected direction. If this
does not occur, the option may be exercised and the Fund would be
required to purchase or sell the underlying currency at a loss which may
not be offset by the amount of the premium. Through the writing of
options on foreign currencies, the Fund also may be required to forego
all or a portion of the benefits which might otherwise have been
obtained from favorable movements in exchange rates. The use of foreign
currency options for non-hedging purposes, like the use of other types
of derivatives for such purposes, presents greater profit potential but
also significant risk of loss and could be considered speculative.
OPTIONS ON FUTURES CONTRACTS: The Fund also may purchase and write
options to buy or sell those Futures Contracts in which it may invest
("Options on Futures Contracts") as described above under "Futures
Contracts." Such investment strategies will be used for hedging purposes
and for non- hedging purposes, subject to applicable law.
An Option on a Futures Contract provides the holder with the right to
enter into a "long" position in the underlying Futures Contract, in the
case of a call option, or a "short" position in the underlying Futures
Contract, in the case of a put option, at a fixed exercise price up to a
stated expiration date or, in the case of certain options, on such date.
Upon exercise of the option by the holder, the contract market
clearinghouse establishes a corresponding short position for the writer
of the option, in the case of a call option, or a corresponding long
position in the case of a put option. In the event that an option is
exercised, the parties will be subject to all the risks associated with
the trading of Futures Contracts, such as payment of initial and
variation margin deposits. In addition, the writer of an Option on a
Futures Contract, unlike the holder, is subject to initial and variation
margin requirements on the option position.
A position in an Option on a Futures Contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase
or sale transaction, subject to the availability of a liquid secondary
market, which is the purchase or sale of an option of the same type
(i.e., the same exercise price and expiration date) as the option
previously purchased or sold. The difference between the premiums paid
and received represents the trader's profit or loss on the transaction.
Options on Futures Contracts that are written or purchased by the Fund
on U.S. exchanges are traded on the same contract market as the
underlying Futures Contract, and, like Futures Contracts, are subject to
regulation by the Commodity Futures Trading Commission (the "CFTC") and
the performance guarantee of the exchange clearinghouse. In addition,
Options on Futures Contracts may be traded on foreign exchanges. The
Fund may cover the writing of call Options on Futures Contracts (a)
through purchases of the underlying Futures Contract, (b) through
ownership of the instrument, or instruments included in the index,
underlying the Futures Contract, or (c) through the holding of a call on
the same Futures Contract and in the same principal amount as the call
written where the exercise price of the call held (i) is equal to or
less than the exercise price of the call written or (ii) is greater than
the exercise price of the call written if the Fund owns liquid and
unencumbered assets equal to the difference. The Fund may cover the
writing of put Options on Futures Contracts (a) through sales of the
underlying Futures Contract, (b) through the ownership of liquid and
unencumbered assets equal to the value of the security or index
underlying the Futures Contract, or (c) through the holding of a put on
the same Futures Contract and in the same principal amount as the put
written where the exercise price of the put held (i) is equal to or
greater than the exercise price of the put written or where the exercise
price of the put held (ii) is less than the exercise price of the put
written if the Fund owns liquid and unencumbered assets equal to the
difference. Put and call Options on Futures Contracts may also be
covered in such other manner as may be in accordance with the rules of
the exchange on which the option is traded and applicable laws and
regulations. Upon the exercise of a call Option on a Futures Contract
written by the Fund, the Fund will be required to sell the underlying
Futures Contract which, if the Fund has covered its obligation through
the purchase of such Contract, will serve to liquidate its futures
position. Similarly, where a put Option on a Futures Contract written by
the Fund is exercised, the Fund will be required to purchase the
underlying Futures Contract which, if the Fund has covered its
obligation through the sale of such Contract, will close out its futures
position.
The writing of a call option on a Futures Contract for hedging
purposes constitutes a partial hedge against declining prices of the
securities or other instruments required to be delivered under the terms
of the Futures Contract. If the futures price at expiration of the
option is below the exercise price, the Fund will retain the full amount
of the option premium, less related transaction costs, which provides a
partial hedge against any decline that may have occurred in the Fund's
portfolio holdings. The writing of a put option on a Futures Contract
constitutes a partial hedge against increasing prices of the securities
or other instruments required to be delivered under the terms of the
Futures Contract. If the futures price at expiration of the option is
higher than the exercise price, the Fund will retain the full amount of
the option premium which provides a partial hedge against any increase
in the price of securities which the Fund intends to purchase. If a put
or call option the Fund has written is exercised, the Fund will incur a
loss which will be reduced by the amount of the premium it receives.
Depending on the degree of correlation between changes in the value of
its portfolio securities and the changes in the value of its futures
positions, the Fund's losses from existing Options on Futures Contracts
may to some extent be reduced or increased by changes in the value of
portfolio securities.
The Fund may purchase Options on Futures Contracts for hedging
purposes instead of purchasing or selling the underlying Futures
Contracts. For example, where a decrease in the value of portfolio
securities is anticipated as a result of a projected market-wide decline
or changes in interest or exchange rates, the Fund could, in lieu of
selling Futures Contracts, purchase put options thereon. In the event
that such decrease occurs, it may be offset, in whole or in part, by a
profit on the option. Conversely, where it is projected that the value
of securities to be acquired by the Fund will increase prior to
acquisition, due to a market advance or changes in interest or exchange
rates, the Fund could purchase call Options on Futures Contracts than
purchasing the underlying Futures Contracts.
OPTIONS ON SECURITIES: The Fund may write (sell) covered put and call
options, and purchase put and call options, on securities. Call and put
options written by the Fund may be covered in the manner set forth
below.
A call option written by the Fund is "covered" if the Fund owns the
security underlying the call or has an absolute and immediate right to
acquire that security without additional cash consideration (or for
additional cash consideration if the Fund owns liquid and unencumbered
assets equal to the amount of cash consideration) upon conversion or
exchange of other securities held in its portfolio. A call option is
also covered if the Fund holds a call on the same security and in the
same principal amount as the call written where the exercise price of
the call held (a) is equal to or less than the exercise price of the
call written or (b) is greater than the exercise price of the call
written if the Fund owns liquid and unencumbered assets equal to the
difference. A put option written by the Fund is "covered" if the Fund
owns liquid and unencumbered assets with a value equal to the exercise
price, or else holds a put on the same security and in the same
principal amount as the put written where the exercise price of the put
held is equal to or greater than the exercise price of the put written
or where the exercise price of the put held is less than the exercise
price of the put written if the Fund owns liquid and unencumbered assets
equal to the difference. Put and call options written by the Fund may
also be covered in such other manner as may be in accordance with the
requirements of the exchange on which, or the counterparty with which,
the option is traded, and applicable laws and regulations. If the
writer's obligation is not so covered, it is subject to the risk of the
full change in value of the underlying security from the time the option
is written until exercise.
Effecting a closing transaction in the case of a written call option
will permit the Fund to write another call option on the underlying
security with either a different exercise price or expiration date or
both, or in the case of a written put option will permit the Fund to
write another put option to the extent that the Fund owns liquid and
unencumbered assets. Such transactions permit the Fund to generate
additional premium income, which will partially offset declines in the
value of portfolio securities or increases in the cost of securities to
be acquired. Also, effecting a closing transaction will permit the cash
or proceeds from the concurrent sale of any securities subject to the
option to be used for other investments of the Fund, provided that
another option on such security is not written. If the Fund desires to
sell a particular security from its portfolio on which it has written a
call option, it will effect a closing transaction in connection with the
option prior to or concurrent with the sale of the security.
The Fund will realize a profit from a closing transaction if the
premium paid in connection with the closing of an option written by the
Fund is less than the premium received from writing the option, or if
the premium received in connection with the closing of an option
purchased by the Fund is more than the premium paid for the original
purchase. Conversely, the Fund will suffer a loss if the premium paid or
received in connection with a closing transaction is more or less,
respectively, than the premium received or paid in establishing the
option position. Because increases in the market price of a call option
will generally reflect increases in the market price of the underlying
security, any loss resulting from the repurchase of a call option
previously written by the Fund is likely to be offset in whole or in
part by appreciation of the underlying security owned by the Fund.
The Fund may write options in connection with buy-and-write
transactions; that is, the Fund may purchase a security and then write a
call option against that security. The exercise price of the call option
the Fund determines to write will depend upon the expected price
movement of the underlying security. The exercise price of a call option
may be below ("in-the-money"), equal to ("at-the-money") or above
("out-of-the- money") the current value of the underlying security at
the time the option is written. Buy-and-write transactions using
in-the-money call options may be used when it is expected that the price
of the underlying security will decline moderately during the option
period. Buy-and-write transactions using out-of-the-money call options
may be used when it is expected that the premiums received from writing
the call option plus the appreciation in the market price of the
underlying security up to the exercise price will be greater than the
appreciation in the price of the underlying security alone. If the call
options are exercised in such transactions, the Fund's maximum gain will
be the premium received by it for writing the option, adjusted upwards
or downwards by the difference between the Fund's purchase price of the
security and the exercise price, less related transaction costs. If the
options are not exercised and the price of the underlying security
declines, the amount of such decline will be offset in part, or
entirely, by the premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of
the underlying security rises or otherwise is above the exercise price,
the put option will expire worthless and the Fund's gain will be limited
to the premium received, less related transaction costs. If the market
price of the underlying security declines or otherwise is below the
exercise price, the Fund may elect to close the position or retain the
option until it is exercised, at which time the Fund will be required to
take delivery of the security at the exercise price; the Fund's return
will be the premium received from the put option minus the amount by
which the market price of the security is below the exercise price,
which could result in a loss. Out-of-the-money, at-the-money and
in-the-money put options may be used by the Fund in the same market
environments that call options are used in equivalent buy-and-write
transactions.
The Fund may also write combinations of put and call options on the
same security, known as "straddles" with the same exercise price and
expiration date. By writing a straddle, the Fund undertakes a
simultaneous obligation to sell and purchase the same security in the
event that one of the options is exercised. If the price of the security
subsequently rises sufficiently above the exercise price to cover the
amount of the premium and transaction costs, the call will likely be
exercised and the Fund will be required to sell the underlying security
at a below market price. This loss may be offset, however, in whole or
part, by the premiums received on the writing of the two options.
Conversely, if the price of the security declines by a sufficient
amount, the put will likely be exercised. The writing of straddles will
likely be effective, therefore, only where the price of the security
remains stable and neither the call nor the put is exercised. In those
instances where one of the options is exercised, the loss on the
purchase or sale of the underlying security may exceed the amount of the
premiums received.
By writing a call option, the Fund limits its opportunity to profit
from any increase in the market value of the underlying security above
the exercise price of the option. By writing a put option, the Fund
assumes the risk that it may be required to purchase the underlying
security for an exercise price above its then-current market value,
resulting in a capital loss unless the security subsequently appreciates
in value. The writing of options on securities will not be undertaken by
the Fund solely for hedging purposes, and could involve certain risks
which are not present in the case of hedging transactions. Moreover,
even where options are written for hedging purposes, such transactions
constitute only a partial hedge against declines in the value of
portfolio securities or against increases in the value of securities to
be acquired, up to the amount of the premium.
The Fund may also purchase options for hedging purposes or to increase
its return. Put options may be purchased to hedge against a decline in
the value of portfolio securities. If such decline occurs, the put
options will permit the Fund to sell the securities at the exercise
price, or to close out the options at a profit. By using put options in
this way, the Fund will reduce any profit it might otherwise have
realized in the underlying security by the amount of the premium paid
for the put option and by transaction costs.
The Fund may also purchase call options to hedge against an increase
in the price of securities that the Fund anticipates purchasing in the
future. If such increase occurs, the call option will permit the Fund to
purchase the securities at the exercise price, or to close out the
options at a profit. The premium paid for the call option plus any
transaction costs will reduce the benefit, if any, realized by the Fund
upon exercise of the option, and, unless the price of the underlying
security rises sufficiently, the option may expire worthless to the
Fund.
OPTIONS ON STOCK INDICES: The Fund may write (sell) covered call and
put options and purchase call and put options on stock indices. In
contrast to an option on a security, an option on a stock index provides
the holder with the right but not the obligation to make or receive a
cash settlement upon exercise of the option, rather than the right to
purchase or sell a security. The amount of this settlement is generally
equal to (i) the amount, if any, by which the fixed exercise price of
the option exceeds (in the case of a call) or is below (in the case of a
put) the closing value of the underlying index on the date of exercise,
multiplied by (ii) a fixed "index multiplier." The Fund may cover
written call options on stock indices by owning securities whose price
changes, in the opinion of the Adviser, are expected to be similar to
those of the underlying index, or by having an absolute and immediate
right to acquire such securities without additional cash consideration
(or for additional cash consideration if the Fund owns liquid and
unencumbered assets equal to the amount of cash consideration) upon
conversion or exchange of other securities in its portfolio. Where the
Fund covers a call option on a stock index through ownership of
securities, such securities may not match the composition of the index
and, in that event, the Fund will not be fully covered and could be
subject to risk of loss in the event of adverse changes in the value of
the index. The Fund may also cover call options on stock indices by
holding a call on the same index and in the same principal amount as the
call written where the exercise price of the call held (a) is equal to
or less than the exercise price of the call written or (b) is greater
than the exercise price of the call written if the Fund owns liquid and
unencumbered assets equal to the difference. The Fund may cover put
options on stock indices by owning liquid and unencumbered assets with a
value equal to the exercise price, or by holding a put on the same stock
index and in the same principal amount as the put written where the
exercise price of the put held (a) is equal to or greater than the
exercise price of the put written or (b) is less than the exercise price
of the put written if the Fund owns liquid and unencumbered assets equal
to the difference. Put and call options on stock indices may also be
covered in such other manner as may be in accordance with the rules of
the exchange on which, or the counterparty with which, the option is
traded and applicable laws and regulations.
The Fund will receive a premium from writing a put or call option,
which increases the Fund's gross income in the event the option expires
unexercised or is closed out at a profit. If the value of an index on
which the Fund has written a call option falls or remains the same, the
Fund will realize a profit in the form of the premium received (less
transaction costs) that could offset all or a portion of any decline in
the value of the securities it owns. If the value of the index rises,
however, the Fund will realize a loss in its call option position, which
will reduce the benefit of any unrealized appreciation in the Fund's
stock investments. By writing a put option, the Fund assumes the risk of
a decline in the index. To the extent that the price changes of
securities owned by the Fund correlate with changes in the value of the
index, writing covered put options on indices will increase the Fund's
losses in the event of a market decline, although such losses will be
offset in part by the premium received for writing the option.
The Fund may also purchase put options on stock indices to hedge its
investments against a decline in value. By purchasing a put option on a
stock index, the Fund will seek to offset a decline in the value of
securities it owns through appreciation of the put option. If the value
of the Fund's investments does not decline as anticipated, or if the
value of the option does not increase, the Fund's loss will be limited
to the premium paid for the option plus related transaction costs. The
success of this strategy will largely depend on the accuracy of the
correlation between the changes in value of the index and the changes in
value of the Fund's security holdings.
The purchase of call options on stock indices may be used by the Fund
to attempt to reduce the risk of missing a broad market advance, or an
advance in an industry or market segment, at a time when the Fund holds
uninvested cash or short-term debt securities awaiting investment. When
purchasing call options for this purpose, the Fund will also bear the
risk of losing all or a portion of the premium paid it the value of the
index does not rise. The purchase of call options on stock indices when
the Fund is substantially fully invested is a form of leverage, up to
the amount of the premium and related transaction costs, and involves
risks of loss and of increased volatility similar to those involved in
purchasing calls on securities the Fund owns.
The index underlying a stock index option may be a "broad-based"
index, such as the Standard & Poor's 500 Index or the New York Stock
Exchange Composite Index, the changes in value of which ordinarily will
reflect movements in the stock market in general. In contrast, certain
options may be based on narrower market indices, such as the Standard &
Poor's 100 Index, or on indices of securities of particular industry
groups, such as those of oil and gas or technology companies. A stock
index assigns relative values to the stocks included in the index and
the index fluctuates with changes in the market values of the stocks so
included. The composition of the index is changed periodically.
RESET OPTIONS:
In certain instances, the Fund may purchase or write options on U.S.
Treasury securities which provide for periodic adjustment of the strike
price and may also provide for the periodic adjustment of the premium
during the term of each such option. Like other types of options, these
transactions, which may be referred to as "reset" options or "adjustable
strike" options grant the purchaser the right to purchase (in the case
of a call) or sell (in the case of a put), a specified type of U.S.
Treasury security at any time up to a stated expiration date (or, in
certain instances, on such date). In contrast to other types of options,
however, the price at which the underlying security may be purchased or
sold under a "reset" option is determined at various intervals during
the term of the option, and such price fluctuates from interval to
interval based on changes in the market value of the underlying
security. As a result, the strike price of a "reset" option, at the time
of exercise, may be less advantageous than if the strike price had been
fixed at the initiation of the option. In addition, the premium paid for
the purchase of the option may be determined at the termination, rather
than the initiation, of the option. If the premium for a reset option
written by the Fund is paid at termination, the Fund assumes the risk
that (i) the premium may be less than the premium which would otherwise
have been received at the initiation of the option because of such
factors as the volatility in yield of the underlying Treasury security
over the term of the option and adjustments made to the strike price of
the option, and (ii) the option purchaser may default on its obligation
to pay the premium at the termination of the option. Conversely, where
the Fund purchases a reset option, it could be required to pay a higher
premium than would have been the case at the initiation of the option.
"YIELD CURVE" OPTIONS: The Fund may also enter into options on the
"spread," or yield differential, between two fixed income securities, in
transactions referred to as "yield curve" options. In contrast to other
types of options, a yield curve option is based on the difference
between the yields of designated securities, rather than the prices of
the individual securities, and is settled through cash payments.
Accordingly, a yield curve option is profitable to the holder if this
differential widens (in the case of a call) or narrows (in the case of a
put), regardless of whether the yields of the underlying securities
increase or decrease.
Yield curve options may be used for the same purposes as other options
on securities. Specifically, the Fund may purchase or write such options
for hedging purposes. For example, the Fund may purchase a call option
on the yield spread between two securities, if it owns one of the
securities and anticipates purchasing the other security and wants to
hedge against an adverse change in the yield spread between the two
securities. The Fund may also purchase or write yield curve options for
other than hedging purposes (i.e., in an effort to increase its current
income) if, in the judgment of the Adviser, the Fund will be able to
profit from movements in the spread between the yields of the underlying
securities. The trading of yield curve options is subject to all of the
risks associated with the trading of other types of options. In
addition, however, such options present risk of loss even if the yield
of one of the underlying securities remains constant, if the spread
moves in a direction or to an extent which was not anticipated. Yield
curve options written by the Fund will be "covered". A call (or put)
option is covered if the Fund holds another call (or put) option on the
spread between the same two securities and owns liquid and unencumbered
assets sufficient to cover the Fund's net liability under the two
options. Therefore, the Fund's liability for such a covered option is
generally limited to the difference between the amount of the Fund's
liability under the option written by the Fund less the value of the
option held by the Fund. Yield curve options may also be covered in such
other manner as may be in accordance with the requirements of the
counterparty with which the option is traded and applicable laws and
regulations. Yield curve options are traded over-the-counter and because
they have been only recently introduced, established trading markets for
these securities have not yet developed.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with sellers who are
member firms (or a subsidiary thereof) of the New York Stock Exchange or
members of the Federal Reserve System, recognized primary U.S.
Government securities dealers or institutions which the Adviser has
determined to be of comparable creditworthiness. The securities that the
Fund purchases and holds through its agent are U.S. Government
securities, the values of which are equal to or greater than the
repurchase price agreed to be paid by the seller. The repurchase price
may be higher than the purchase price, the difference being income to
the Fund, or the purchase and repurchase prices may be the same, with
interest at a standard rate due to the Fund together with the repurchase
price on repurchase. In either case, the income to the Fund is unrelated
to the interest rate on the Government securities.
The repurchase agreement provides that in the event the seller fails
to pay the amount agreed upon on the agreed upon delivery date or upon
demand, as the case may be, the Fund will have the right to liquidate
the securities. If at the time the Fund is contractually entitled to
exercise its right to liquidate the securities, the seller is subject to
a proceeding under the bankruptcy laws or its assets are otherwise
subject to a stay order, the Fund's exercise of its right to liquidate
the securities may be delayed and result in certain losses and costs to
the Fund. The Fund has adopted and follows procedures which are intended
to minimize the risks of repurchase agreements. For example, the Fund
only enters into repurchase agreements after the Adviser has determined
that the seller is creditworthy, and the Adviser monitors that seller's
creditworthiness on an ongoing basis. Moreover, under such agreements,
the value of the securities (which are marked to market every business
day) is required to be greater than the repurchase price, and the Fund
has the right to make margin calls at any time if the value of the
securities falls below the agreed upon collateral.
RESTRICTED SECURITIES
The Fund may purchase securities that are not registered under the
Securities Act of 1933, as amended ("1933 Act") ("restricted
securities"), including those that can be offered and sold to "qualified
institutional buyers" under Rule 144A under the 1933 Act ("Rule 144A
securities") and commercial paper issued under Section 4(2) of the 1933
Act ("4(2) Paper"). A determination is made, based upon a continuing
review of the trading markets for the Rule 144A security or 4(2) Paper,
whether such security is liquid and thus not subject to the Fund's
limitation on investing in illiquid investments. The Board of Trustees
has adopted guidelines and delegated to MFS the daily function of
determining and monitoring the liquidity of Rule 144A securities and
4(2) Paper. The Board, however, retains oversight of the liquidity
determinations focusing on factors such as valuation, liquidity and
availability of information. Investing in Rule 144A securities could
have the effect of decreasing the level of liquidity in the Fund to the
extent that qualified institutional buyers become for a time
uninterested in purchasing these Rule 144A securities held in the Fund's
portfolio. Subject to the Fund's limitation on investments in illiquid
investments, the Fund may also invest in restricted securities that may
not be sold under Rule 144A, which presents certain risks. As a result,
the Fund might not be able to sell these securities when the Adviser
wishes to do so, or might have to sell them at less than fair value. In
addition, market quotations are less readily available. Therefore,
judgment may at times play a greater role in valuing these securities
than in the case of unrestricted securities.
SHORT SALES
The Fund may seek to hedge investments or realize additional gains
through short sales. The Fund may make short sales, which are
transactions in which the Fund sells a security it does not own, in
anticipation of a decline in the market value of that security. To
complete such a transaction, the Fund must borrow the security to make
delivery to the buyer. The Fund then is obligated to replace the
security borrowed by purchasing it at the market price at the time of
replacement. The price at such time may be more or less than the price
at which the security was sold by the Fund. Until the security is
replaced, the Fund is required to repay the lender any dividends or
interest which accrue during the period of the loan. To borrow the
security, the Fund also may be required to pay a premium, which would
increase the cost of the security sold. The net proceeds of the short
sale will be retained by the broker, to the extent necessary to meet
margin requirements, until the short position is closed out. The Fund
also will incur transaction costs in effecting short sales.
The Fund will incur a loss as a result of the short sale if the price
of the security increases between the date of the short sale and the
date on which the Fund replaces the borrowed security. The Fund will
realize a gain if the price of the security declines between those
dates. The amount of any gain will be decreased, and the amount of any
loss increased, by the amount of the premium, dividends or interest the
Fund may be required to pay in connection with a short sale.
Whenever the Fund engages in short sales, it identifies liquid and
unencumbered assets in an amount that, when combined with the amount of
collateral deposited with the broker connection with the short sale,
equals the current market value of the security sold short.
SHORT SALES AGAINST THE BOX
The Fund may make short sales "against the box," i.e., when a security
identical to one owned by the Fund is borrowed and sold short. If the
Fund enters into a short sale against the box, it is required to
segregate securities equivalent in kind and amount to the securities
sold short (or securities convertible or exchangeable into such
securities) and is required to hold such securities while the short sale
is outstanding. The Fund will incur transaction costs, including
interest, in connection with opening, maintaining, and closing short
sales against the box.
SHORT TERM INSTRUMENTS
The Fund may hold cash and invest in cash equivalents, such as
short-term U.S. Government Securities, commercial paper and bank
instruments.
SWAPS AND RELATED DERIVATIVE INSTRUMENTS
The Fund may enter into interest rate swaps, currency swaps and other
types of available swap agreements, including swaps on securities,
commodities and indices, and related types of derivatives, such as caps,
collars and floors. A swap is an agreement between two parties pursuant
to which each party agrees to make one or more payments to the other on
regularly scheduled dates over a stated term, based on different
interest rates, currency exchange rates, security or commodity prices,
the prices or rates of other types of financial instruments or assets or
the levels of specified indices. Under a typical swap, one party may
agree to pay a fixed rate or a floating rate determined by reference to
a specified instrument, rate or index, multiplied in each case by a
specified amount (the "notional amount"), while the other party agrees
to pay an amount equal to a different floating rate multiplied by the
same notional amount. On each payment date, the obligations of parties
are netted, with only the net amount paid by one party to the other. All
swap agreements entered into by the Fund with the same counterparty are
generally governed by a single master agreement, which provides for the
netting of all amounts owed by the parties under the agreement upon the
occurrence of an event of default, thereby reducing the credit risk to
which such party is exposed.
Swap agreements are typically individually negotiated and structured
to provide exposure to a variety of different types of investments or
market factors. Swap agreements may be entered into for hedging or
non-hedging purposes and therefore may increase or decrease the Fund's
exposure to the underlying instrument, rate, asset or index. Swap
agreements can take many different forms and are known by a variety of
names. The Fund is not limited to any particular form or variety of swap
agreement if the Adviser determines it is consistent with the Fund's
investment objective and policies.
For example, the Fund may enter into an interest rate swap in order to
protect against declines in the value of fixed income securities held by
the Fund. In such an instance, the Fund would agree with a counterparty
to pay a fixed rate (multiplied by a notional amount) and the
counterparty would agree to pay a floating rate multiplied by the same
notional amount. If interest rates rise, resulting in a diminution in
the value of the Fund's portfolio, the Fund would receive payments under
the swap that would offset, in whole or part, such diminution in value.
The Fund may also enter into swaps to modify its exposure to particular
markets or instruments, such as a currency swap between the dollar and
another currency which would have the effect of increasing or decreasing
the Fund's exposure to each such currency. The Fund might also enter
into a swap on a particular security, or a basket or index of
securities, in order to gain exposure to the underlying security or
securities, as an alternative to purchasing such securities. Such
transactions could be more efficient or less costly in certain instances
than an actual purchase or sale of the securities.
The Fund may enter into other related types of over-the-counter
derivatives, such as "caps", "floors", "collars" and options on swaps,
or "swaptions", for the same types of hedging or non-hedging purposes.
Caps and floors are similar to swaps, except that one party pays a fee
at the time the transaction is entered into and has no further payment
obligations, while the other party is obligated to pay an amount equal
to the amount by which a specified fixed or floating rate exceeds or is
below another rate (multiplied by a notional amount). Caps and floors,
therefore, are also similar to options. A collar is in effect a
combination of a cap and a floor, with payments made only within or
outside a specified range of prices or rates. A swaption is an option to
enter into a swap agreement. Like other types of options, the buyer of a
swaption pays a non-refundable premium for the option and obtains the
right, but not the obligation, to enter into the underlying swap on the
agreed-upon terms.
The Fund will maintain liquid and unencumbered assets to cover its
current obligations under swap and other over-the-counter derivative
transactions. If the Fund enters into a swap agreement on a net basis
(i.e., the two payment streams are netted out, with the Fund receiving
or paying, as the case may be, only the net amount of the two payments),
the Fund will maintain liquid and unencumbered assets with a daily value
at least equal to the excess, if any, of the Fund's accrued obligations
under the swap agreement over the accrued amount the Fund is entitled to
receive under the agreement. If the Fund enters into a swap agreement on
other than a net basis, it will maintain liquid and unencumbered assets
with a value equal to the full amount of the Fund's accrued obligations
under the agreement.
The most significant factor in the performance of swaps, caps, floors
and collars is the change in the underlying price, rate or index level
that determines the amount of payments to be made under the arrangement.
If the Adviser is incorrect in its forecasts of such factors, the
investment performance of the Fund would be less than what it would have
been if these investment techniques had not been used. If a swap
agreement calls for payments by the Fund, the Fund must be prepared to
make such payments when due. In addition, if the counterparty's
creditworthiness would decline, the value of the swap agreement would be
likely to decline, potentially resulting in losses.
If the counterparty defaults, the Fund's risk of loss consists of the
net amount of payments that the Fund is contractually entitled to
receive. The Fund anticipates that it will be able to eliminate or
reduce its exposure under these arrangements by assignment or other
disposition or by entering into an offsetting agreement with the same or
another counterparty, but there can be no assurance that it will be able
to do so.
The uses by the Fund of Swaps and related derivative instruments also
involves the risks described under the caption "Special Risk Factors --
Options, Futures, Forwards, Swaps and Other Derivative Transactions" in
this Appendix.
TEMPORARY BORROWINGS
The Fund may borrow money for temporary purposes (e.g., to meet
redemption requests or settle outstanding purchases of portfolio
securities).
TEMPORARY DEFENSIVE POSITIONS
During periods of unusual market conditions when the Adviser believes
that investing for temporary defensive purposes is appropriate, or in
order to meet anticipated redemption requests, a large portion or all of
the assets of the Fund may be invested in cash (including foreign
currency) or cash equivalents, including, but not limited to,
obligations of banks (including certificates of deposit, bankers'
acceptances, time deposits and repurchase agreements), commercial paper,
short-term notes, U.S. Government Securities and related repurchase
agreements.
WARRANTS
The Fund may invest in warrants. Warrants are securities that give the
Fund the right to purchase equity securities from the issuer at a
specific price (the "strike price") for a limited period of time. The
strike price of warrants typically is much lower than the current market
price of the underlying securities, yet they are subject to similar
price fluctuations. As a result, warrants may be more volatile
investments than the underlying securities and may offer greater
potential for capital appreciation as well as capital loss. Warrants do
not entitle a holder to dividends or voting rights with respect to the
underlying securities and do not represent any rights in the assets of
the issuing company. Also, the value of the warrant does not necessarily
change with the value of the underlying securities and a warrant ceases
to have value if it is not exercised prior to the expiration date. These
factors can make warrants more speculative than other types of
investments.
"WHEN-ISSUED" SECURITIES
The Fund may purchase securities on a "when-issued" or on a "forward
delivery" basis which means that the securities will be delivered to the
Fund at a future date usually beyond customary settlement time. The
commitment to purchase a security for which payment will be made on a
future date may be deemed a separate security. In general, the Fund does
not pay for such securities until received, and does not start earning
interest on the securities until the contractual settlement date. While
awaiting delivery of securities purchased on such bases, a Fund will
identify liquid and unencumbered assets equal to its forward delivery
commitment.
SPECIAL RISK FACTORS -- OPTIONS, FUTURES, FORWARDS, SWAPS AND OTHER
DERIVATIVE TRANSACTIONS
RISK OF IMPERFECT CORRELATION OF HEDGING INSTRUMENTS WITH THE FUND'S
PORTFOLIO: The Fund's ability effectively to hedge all or a portion of
its portfolio through transactions in derivatives, including options,
Futures Contracts, Options on Futures Contracts, Forward Contracts,
swaps and other types of derivatives depends on the degree to which
price movements in the underlying index or instrument correlate with
price movements in the relevant portion of the Fund's portfolio. In the
case of derivative instruments based on an index, the portfolio will not
duplicate the components of the index, and in the case of derivative
instruments on fixed income securities, the portfolio securities which
are being hedged may not be the same type of obligation underlying such
derivatives. The use of derivatives for "cross hedging" purposes (such
as a transaction in a Forward Contract on one currency to hedge exposure
to a different currency) may involve greater correlation risks.
Consequently, the Fund bears the risk that the price of the portfolio
securities being hedged will not move in the same amount or direction as
the underlying index or obligation.
If the Fund purchases a put option on an index and the index decreases
less than the value of the hedged securities, the Fund would experience
a loss which is not completely offset by the put option. It is also
possible that there may be a negative correlation between the index or
obligation underlying an option or Futures Contract in which the Fund
has a position and the portfolio securities the Fund is attempting to
hedge, which could result in a loss on both the portfolio and the
hedging instrument. It should be noted that stock index futures
contracts or options based upon a narrower index of securities, such as
those of a particular industry group, may present greater risk than
options or futures based on a broad market index. This is due to the
fact that a narrower index is more susceptible to rapid and extreme
fluctuations as a result of changes in the value of a small number of
securities. Nevertheless, where the Fund enters into transactions in
options or futures on narrowly-based indices for hedging purposes,
movements in the value of the index should, if the hedge is successful,
correlate closely with the portion of the Fund's portfolio or the
intended acquisitions being hedged.
The trading of derivatives for hedging purposes entails the additional
risk of imperfect correlation between movements in the price of the
derivative and the price of the underlying index or obligation. The
anticipated spread between the prices may be distorted due to the
differences in the nature of the markets such as differences in margin
requirements, the liquidity of such markets and the participation of
speculators in the derivatives markets. In this regard, trading by
speculators in derivatives has in the past occasionally resulted in
market distortions, which may be difficult or impossible to predict,
particularly near the expiration of such instruments.
The trading of Options on Futures Contracts also entails the risk that
changes in the value of the underlying Futures Contracts will not be
fully reflected in the value of the option. The risk of imperfect
correlation, however, generally tends to diminish as the maturity date
of the Futures Contract or expiration date of the option approaches.
Further, with respect to options on securities, options on stock
indices, options on currencies and Options on Futures Contracts, the
Fund is subject to the risk of market movements between the time that
the option is exercised and the time of performance thereunder. This
could increase the extent of any loss suffered by the Fund in connection
with such transactions.
In writing a covered call option on a security, index or futures
contract, the Fund also incurs the risk that changes in the value of the
instruments used to cover the position will not correlate closely with
changes in the value of the option or underlying index or instrument.
For example, where the Fund covers a call option written on a stock
index through segregation of securities, such securities may not match
the composition of the index, and the Fund may not be fully covered. As
a result, the Fund could be subject to risk of loss in the event of
adverse market movements.
The writing of options on securities, options on stock indices or
Options on Futures Contracts constitutes only a partial hedge against
fluctuations in the value of the Fund's portfolio. When the Fund writes
an option, it will receive premium income in return for the holder's
purchase of the right to acquire or dispose of the underlying
obligation. In the event that the price of such obligation does not rise
sufficiently above the exercise price of the option, in the case of a
call, or fall below the exercise price, in the case of a put, the option
will not be exercised and the Fund will retain the amount of the
premium, less related transaction costs, which will constitute a partial
hedge against any decline that may have occurred in the Fund's portfolio
holdings or any increase in the cost of the instruments to be acquired.
Where the price of the underlying obligation moves sufficiently in
favor of the holder to warrant exercise of the option, however, and the
option is exercised, the Fund will incur a loss which may only be
partially offset by the amount of the premium it received. Moreover, by
writing an option, the Fund may be required to forego the benefits which
might otherwise have been obtained from an increase in the value of
portfolio securities or other assets or a decline in the value of
securities or assets to be acquired. In the event of the occurrence of
any of the foregoing adverse market events, the Fund's overall return
may be lower than if it had not engaged in the hedging transactions.
Furthermore, the cost of using these techniques may make it economically
infeasible for the Fund to engage in such transactions.
RISKS OF NON-HEDGING TRANSACTIONS: The Fund may enter transactions in
derivatives for non-hedging purposes as well as hedging purposes. Non-
hedging transactions in such instruments involve greater risks and may
result in losses which may not be offset by increases in the value of
portfolio securities or declines in the cost of securities to be
acquired. The Fund will only write covered options, such that liquid and
unencumbered assets necessary to satisfy an option exercise will be
identified, unless the option is covered in such other manner as may be
in accordance with the rules of the exchange on which, or the
counterparty with which, the option is traded and applicable laws and
regulations. Nevertheless, the method of covering an option employed by
the Fund may not fully protect it against risk of loss and, in any
event, the Fund could suffer losses on the option position which might
not be offset by corresponding portfolio gains. The Fund may also enter
into futures, Forward Contracts or swaps for non-hedging purposes. For
example, the Fund may enter into such a transaction as an alternative to
purchasing or selling the underlying instrument or to obtain desired
exposure to an index or market. In such instances, the Fund will be
exposed to the same economic risks incurred in purchasing or selling the
underlying instrument or instruments. However, transactions in futures,
Forward Contracts or swaps may be leveraged, which could expose the Fund
to greater risk of loss than such purchases or sales. Entering into
transactions in derivatives for other than hedging purposes, therefore,
could expose the Fund to significant risk of loss if the prices, rates
or values of the underlying instruments or indices do not move in the
direction or to the extent anticipated.
With respect to the writing of straddles on securities, the Fund
incurs the risk that the price of the underlying security will not
remain stable, that one of the options written will be exercised and
that the resulting loss will not be offset by the amount of the premiums
received. Such transactions, therefore, create an opportunity for
increased return by providing the Fund with two simultaneous premiums on
the same security, but involve additional risk, since the Fund may have
an option exercised against it regardless of whether the price of the
security increases or decreases.
RISK OF A POTENTIAL LACK OF A LIQUID SECONDARY MARKET: Prior to
exercise or expiration, a futures or option position can only be
terminated by entering into a closing purchase or sale transaction. This
requires a secondary market for such instruments on the exchange on
which the initial transaction was entered into. While the Fund will
enter into options or futures positions only if there appears to be a
liquid secondary market therefor, there can be no assurance that such a
market will exist for any particular contract at any specific time. In
that event, it may not be possible to close out a position held by the
Fund, and the Fund could be required to purchase or sell the instrument
underlying an option, make or receive a cash settlement or meet ongoing
variation margin requirements. Under such circumstances, if the Fund has
insufficient cash available to meet margin requirements, it will be
necessary to liquidate portfolio securities or other assets at a time
when it is disadvantageous to do so. The inability to close out options
and futures positions, therefore, could have an adverse impact on the
Fund's ability effectively to hedge its portfolio, and could result in
trading losses.
The liquidity of a secondary market in a Futures Contract or option
thereon may be adversely affected by "daily price fluctuation limits,"
established by exchanges, which limit the amount of fluctuation in the
price of a contract during a single trading day. Once the daily limit
has been reached in the contract, no trades may be entered into at a
price beyond the limit, thus preventing the liquidation of open futures
or option positions and requiring traders to make additional margin
deposits. Prices have in the past moved to the daily limit on a number
of consecutive trading days.
The trading of Futures Contracts and options is also subject to the
risk of trading halts, suspensions, exchange or clearinghouse equipment
failures, government intervention, insolvency of a brokerage firm or
clearinghouse or other disruptions of normal trading activity, which
could at times make it difficult or impossible to liquidate existing
positions or to recover excess variation margin payments.
MARGIN: Because of low initial margin deposits made upon the
establishment of a futures, forward or swap position (certain of which
may require no initial margin deposits) and the writing of an option,
such transactions involve substantial leverage. As a result, relatively
small movements in the price of the contract can result in substantial
unrealized gains or losses. Where the Fund enters into such transactions
for hedging purposes, any losses incurred in connection therewith
should, if the hedging strategy is successful, be offset, in whole or in
part, by increases in the value of securities or other assets held by
the Fund or decreases in the prices of securities or other assets the
Fund intends to acquire. Where the Fund enters into such transactions
for other than hedging purposes, the margin requirements associated with
such transactions could expose the Fund to greater risk.
POTENTIAL BANKRUPTCY OF A CLEARINGHOUSE OR BROKER: When the Fund
enters into transactions in exchange-traded futures or options, it is
exposed to the risk of the potential bankruptcy of the relevant exchange
clearinghouse or the broker through which the Fund has effected the
transaction. In that event, the Fund might not be able to recover
amounts deposited as margin, or amounts owed to the Fund in connection
with its transactions, for an indefinite period of time, and could
sustain losses of a portion or all of such amounts, Moreover, the
performance guarantee of an exchange clearinghouse generally extends
only to its members and the Fund could sustain losses, notwithstanding
such guarantee, in the event of the bankruptcy of its broker.
TRADING AND POSITION LIMITS: The exchanges on which futures and
options are traded may impose limitations governing the maximum number
of positions on the same side of the market and involving the same
underlying instrument which may be held by a single investor, whether
acting alone or in concert with others (regardless of whether such
contracts are held on the same or different exchanges or held or written
in one or more accounts or through one or more brokers). Further, the
CFTC and the various contract markets have established limits referred
to as "speculative position limits" on the maximum net long or net short
position which any person may hold or control in a particular futures or
option contract. An exchange may order the liquidation of positions
found to be in violation of these limits and it may impose other
sanctions or restrictions. The Adviser does not believe that these
trading and position limits will have any adverse impact on the
strategies for hedging the portfolios of the Fund.
RISKS OF OPTIONS ON FUTURES CONTRACTS: The amount of risk the Fund
assumes when it purchases an Option on a Futures Contract is the premium
paid for the option, plus related transaction costs. In order to profit
from an option purchased, however, it may be necessary to exercise the
option and to liquidate the underlying Futures Contract, subject to the
risks of the availability of a liquid offset market described herein.
The writer of an Option on a Futures Contract is subject to the risks of
commodity futures trading, including the requirement of initial and
variation margin payments, as well as the additional risk that movements
in the price of the option may not correlate with movements in the price
of the underlying security, index, currency or Futures Contract.
RISKS OF TRANSACTIONS IN FOREIGN CURRENCIES AND OVER-THE-COUNTER
DERIVATIVES AND OTHER TRANSACTIONS NOT CONDUCTED ON U.S. EXCHANGES:
Transactions in Forward Contracts on foreign currencies, as well as
futures and options on foreign currencies and transactions executed on
foreign exchanges, are subject to all of the correlation, liquidity and
other risks outlined above. In addition, however, such transactions are
subject to the risk of governmental actions affecting trading in or the
prices of currencies underlying such contracts, which could restrict or
eliminate trading and could have a substantial adverse effect on the
value of positions held by the Fund. Further, the value of such
positions could be adversely affected by a number of other complex
political and economic factors applicable to the countries issuing the
underlying currencies.
Further, unlike trading in most other types of instruments, there is
no systematic reporting of last sale information with respect to the
foreign currencies underlying contracts thereon. As a result, the
available information on which trading systems will be based may not be
as complete as the comparable data on which the Fund makes investment
and trading decisions in connection with other transactions. Moreover,
because the foreign currency market is a global, 24-hour market, events
could occur in that market which will not be reflected in the forward,
futures or options market until the following day, thereby making it
more difficult for the Fund to respond to such events in a timely
manner.
Settlements of exercises of over-the-counter Forward Contracts or
foreign currency options generally must occur within the country issuing
the underlying currency, which in turn requires traders to accept or
make delivery of such currencies in conformity with any U.S. or foreign
restrictions and regulations regarding the maintenance of foreign
banking relationships, fees, taxes or other charges.
Unlike transactions entered into by the Fund in Futures Contracts and
exchange-traded options, options on foreign currencies, Forward
Contracts, over-the-counter options on securities, swaps and other
over-the-counter derivatives are not traded on contract markets
regulated by the CFTC or (with the exception of certain foreign currency
options) the SEC. To the contrary, such instruments are traded through
financial institutions acting as market-makers, although foreign
currency options are also traded on certain national securities
exchanges, such as the Philadelphia Stock Exchange and the Chicago Board
Options Exchange, subject to SEC regulation. In an over-the-counter
trading environment, many of the protections afforded to exchange
participants will not be available. For example, there are no daily
price fluctuation limits, and adverse market movements could therefore
continue to an unlimited extent over a period of time. Although the
purchaser of an option cannot lose more than the amount of the premium
plus related transaction costs, this entire amount could be lost.
Moreover, the option writer and a trader of Forward Contracts could lose
amounts substantially in excess of their initial investments, due to the
margin and collateral requirements associated with such positions.
In addition, over-the-counter transactions can only be entered into
with a financial institution willing to take the opposite side, as
principal, of the Fund's position unless the institution acts as broker
and is able to find another counterparty willing to enter into the
transaction with the Fund. Where no such counterparty is available, it
will not be possible to enter into a desired transaction. There also may
be no liquid secondary market in the trading of over-the-counter
contracts, and the Fund could be required to retain options purchased or
written, or Forward Contracts or swaps entered into, until exercise,
expiration or maturity. This in turn could limit the Fund's ability to
profit from open positions or to reduce losses experienced, and could
result in greater losses.
Further, over-the-counter transactions are not subject to the
guarantee of an exchange clearinghouse, and the Fund will therefore be
subject to the risk of default by, or the bankruptcy of, the financial
institution serving as its counterparty. One or more of such
institutions also may decide to discontinue their role as market-makers
in a particular currency or security, thereby restricting the Fund's
ability to enter into desired hedging transactions. The Fund will enter
into an over-the-counter transaction only with parties whose
creditworthiness has been reviewed and found satisfactory by the
Adviser.
Options on securities, options on stock indices, Futures Contracts,
Options on Futures Contracts and options on foreign currencies may be
traded on exchanges located in foreign countries. Such transactions may
not be conducted in the same manner as those entered into on U.S.
exchanges, and may be subject to different margin, exercise, settlement
or expiration procedures. As a result, many of the risks of
over-the-counter trading may be present in connection with such
transactions.
Options on foreign currencies traded on national securities exchanges
are within the jurisdiction of the SEC, as are other securities traded
on such exchanges. As a result, many of the protections provided to
traders on organized exchanges will be available with respect to such
transactions. In particular, all foreign currency option positions
entered into on a national securities exchange are cleared and
guaranteed by the Options Clearing Corporation (the "OCC"), thereby
reducing the risk of counterparty default. Further, a liquid secondary
market in options traded on a national securities exchange may be more
readily available than in the over-the-counter market, potentially
permitting the Fund to liquidate open positions at a profit prior to
exercise or expiration, or to limit losses in the event of adverse
market movements.
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of the availability of a liquid
secondary market described above, as well as the risks regarding adverse
market movements, margining of options written, the nature of the
foreign currency market, possible intervention by governmental
authorities and the effects of other political and economic events. In
addition, exchange- traded options on foreign currencies involve certain
risks not presented by the over-the-counter market. For example,
exercise and settlement of such options must be made exclusively through
the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it
determines that foreign governmental restrictions or taxes would prevent
the orderly settlement of foreign currency option exercises, or would
result in undue burdens on the OCC or its clearing member, impose
special procedures on exercise and settlement, such as technical changes
in the mechanics of delivery of currency, the fixing of dollar
settlement prices or prohibitions on exercise.
POLICIES ON THE USE OF FUTURES AND OPTIONS ON FUTURES CONTRACTS: In
order to assure that the Fund will not be deemed to be a "commodity
pool" for purposes of the Commodity Exchange Act, regulations of the
CFTC require that the Fund enter into transactions in Futures Contracts,
Options on Futures Contracts and Options on Foreign Currencies traded on
a CFTC- regulated exchange only (i) for bona fide hedging purposes (as
defined in CFTC regulations), or (ii) for non-bona fide hedging
purposes, provided that the aggregate initial margin and premiums
required to establish such non-bona fide hedging positions does not
exceed 5% of the liquidation value of the Fund's assets, after taking
into account unrealized profits and unrealized losses on any such
contracts the Fund has entered into, and excluding, in computing such
5%, the in-the-money amount with respect to an option that is
in-the-money at the time of purchase.
<PAGE>
PART II - APPENDIX D
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the
quality of various debt instruments. It should be emphasized, however,
that ratings are not absolute standards of quality. Consequently, debt
instruments with the same maturity, coupon and rating may have different
yields while debt instruments of the same maturity and coupon with
different ratings may have the same yield.
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt edged." Interest payments are protected by a large
or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risk appear
somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
some time in the future.
Baa: Bonds which are rated Baa are considered as medium-grade
obligations, (i.e., they are neither highly protected nor poorly
secured). Interest payments and principal security appear adequate for
the present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds
lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection
of interest and principal payments may be very moderate, and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to
principal or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
ABSENCE OF RATING: Where no rating has been assigned or where a rating
has been suspended or withdrawn, it may be for reasons unrelated to the
quality of the issue. Should no rating be assigned, the reason may be
one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies
that are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or
issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances
arise, the effects of which preclude satisfactory analysis; if there is
no longer available reasonable up-to-date data to permit a judgment to
be formed; if a bond is called for redemption; or for other reasons.
STANDARD & POOR'S RATINGS SERVICES
AAA: An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
EXTREMELY STRONG.
AA: An obligation rated AA differs from the highest rated obligations
only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is VERY STRONG.
A: An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
obligations in higher rated categories. However, the obligor's capacity
to meet its financial commitment on the obligation is still STRONG.
BBB: An obligation rated BBB exhibits ADEQUATE protection parameters.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its
financial commitment on the obligation.
Obligations rated BB, B, CCC, CC, and C are regarded as having
significant speculative characteristics. BB indicates the least degree
of speculation and C the highest. While such obligations will likely
have some quality and protective characteristics, these may be
outweighed by large uncertainties or major exposures to adverse
conditions.
BB: An obligation rated BB is LESS VULNERABLE to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which
could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
B: An obligation rated B is MORE VULNERABLE to nonpayment than
obligations rated BB, but the obligor currently has the capacity to meet
its financial commitment on the obligation. Adverse business, financial,
or economic conditions will likely impair the obligor's capacity or
willingness to meet its financial commitment on the obligation.
CCC: An obligation rated CCC is CURRENTLY VULNERABLE to nonpayment, and
is dependent upon favorable business, financial, and economic conditions
for the obligor to meet its financial commitment on the obligation. In
the event of adverse business, financial, or economic conditions the
obligor is not likely to have the capacity to meet its financial
commitment on the obligation.
CC: An obligation rated CC is CURRENTLY HIGHLY VULNERABLE to nonpayment.
C: The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments
on this obligation are being continued.
D: An obligation rated D is in payment default. The D rating category is
used when payments on an obligation are not made on the date due even if
the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The D
rating also will be used upon the filing of a bankruptcy petition or the
taking of a similar action if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-) The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the
major rating categories.
R: This symbol is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or
volatility of expected returns which are not addressed in the credit
rating. Examples include: obligations linked or indexed to equities,
currencies, or commodities; obligations exposed to severe prepayment
risk -- such as interest-only or principal-only mortgage securities; and
obligations with unusually risky interest terms, such as inverse
floaters.
FITCH IBCA
AAA: Highest credit quality. AAA ratings denote the lowest expectation
of credit risk. They are assigned only in case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA: Very high credit quality. AA ratings denote a very low expectation
of credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A: High credit quality. A ratings denote a low expectation of credit
risk. The capacity for timely payment of financial commitments is
considered strong. This capacity may, nevertheless, be more vulnerable
to changes in circumstances or in economic conditions than is the case
for higher ratings.
BBB: Good credit quality. BBB ratings indicate that there is currently a
low expectation of credit risk. The capacity for timely payment of
financial commitments is considered adequate, but adverse changes in
circumstances and in economic conditions are more likely to impair this
capacity. This is the lowest investment-grade category.
Speculative Grade
BB: Speculative. BB ratings indicate that there is a possibility of
credit risk developing, particularly as the result of adverse economic
change over time; however, business or financial alternatives may be
available to allow financial commitments to be met. Securities rated in
this category are not investment grade.
B: Highly speculative. B ratings indicate that significant credit risk
is present, but a limited margin of safety remains. Financial
commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.
CCC, CC, C: High default risk. Default is a real possibility. Capacity
for meeting financial commitments is solely reliant upon sustained,
favorable business or economic developments. A CC rating indicates that
default of some kind appears probable. C ratings signal imminent
default.
DDD, DD, D: Default. Securities are not meeting current obligations and
are extremely speculative. DDD designates the highest potential for
recovery of amounts outstanding on any securities involved. For U.S.
corporates, for example, DD indicates expected recovery of 50% -- 90% of
such outstandings, and D the lowest recovery potential, i.e. below 50%.
DUFF & PHELPS CREDIT RATING CO.
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong. Risk
is modest but may vary slightly from time to time because of economic
conditions.
A+, A, A-: Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
BBB+, BBB, BBB-: Below-average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk
during economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet
obligations when due. Present or prospective financial protection
factors fluctuate according to industry conditions or company fortunes.
Overall quality may move up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that obligations
will not be met when due. Financial protection factors will fluctuate
widely according to economic cycles, industry conditions and/or company
fortunes. Potential exists for frequent changes in the rating within
this category or into a higher or lower rating grade.
CCC: Well below investment-grade securities. Considerable uncertainty
exists as to timely payment of principal, interest or preferred
dividends. Protection factors are narrow and risk can be substantial
with unfavorable economic/industry conditions, and/or with unfavorable
company developments.
DD: Defaulted debt-obligations. Issuer failed to meet scheduled
principal and/or interest payments.
DP: Preferred stock with dividend arrearages.
<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) GLOBAL TOTAL RETURN FUND
[logo] M F S (R)
INVESTMENT MANAGEMENT
We invented the mutual fund(R)
500 Boylston Street, Boston, MA 02116
MGE-16-3/99
<PAGE>
MFS(R) UTILITIES FUND
SUPPLEMENT DATED MARCH 1, 1999 TO THE CURRENT PROSPECTUS
THIS SUPPLEMENT DESCRIBES THE FUND'S CLASS I SHARES, AND IT SUPPLEMENTS CERTAIN
INFORMATION IN THE FUND'S PROSPECTUS DATED MARCH 1, 1999. THE CAPTION HEADINGS
USED IN THIS SUPPLEMENT CORRESPOND WITH THE CAPTION HEADINGS USED IN THE
PROSPECTUS.
You may purchase class I shares only if you are an eligible institutional
investor, as described under the caption "Description of Share Classes" below.
1. RISK RETURN SUMMARY
PERFORMANCE TABLE. The "Performance Table" is supplemented as follows:
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
1 YEAR 5 YEARS LIFE*
Class I shares % % %
[Broad-based securities market % % %
index]
[Optional Lipper category] % % %
[Optional additional index] % % %
- --------------
* For the period from the commencement of the Fund's investment operations on
February 14, 1992, through December 31, 1998.
** The Standard & Poor's 500 Composite Index is a market capitalization
weighted price index composed of 500 widely held companies.
+ Source: CDA/Wisenberger
The fund initially offered class A shares on February 14, 1992 and class I
shares on January 2, 1997. Class I share performance includes the performance of
the fund's class A shares for periods prior to the offering of class I shares.
Class I share performance generally would have been higher than class A share
performance had class I shares been offered for the entire period, because
operating expenses (e.g., distribution and service fees) attributable to class I
shares are lower than those of class A shares. Class I share performance has
been adjusted to take into account the fact that class I shares have no initial
sales charge.
2. EXPENSE SUMMARY
EXPENSE TABLE. The "Expense Table" is supplemented as follows:
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
Management Fees ............................................... 0.60%
Distribution and Service (12b-1) Fees ......................... 0.00%
Other Expenses(1) ............................................. 0.30%
----
Total Annual Fund Operating Expenses .......................... 0.90%
Fee Waiver(2) ................................................. (0.10)%
----
Net Expense ................................................... 0.80%
- -----------------------
(1)The fund has an expense offset arrangement which reduces the fund's
custodian fee based upon the amount of cash maintained by the fund with its
custodian and dividend disbursing agent. The fund may enter into other
similar arrangements and directed brokerage arrangements, which would also
have the effect of reducing the fund's expenses. "Other Expenses" do not take
into account these expense reductions, and therefore do not represent the
actual expenses of the fund.
(2)The Adviser has voluntarily reduced the management fee to 0.50% of the
fund's average daily net assets for an indefinite period of time.
<PAGE>
EXAMPLE OF EXPENSES. The "Example of Expenses" table is supplemented as
follows:
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
----------- ------ ------ ------ -------
Class I shares $82 $255 $444 $990
DESCRIPTIONS OF SHARE CLASSES
The "Description of Share Classes" is supplemented as follows:
If you are an eligible institutional investor (as described below), you may
purchase class I shares at net asset value without an initial sales charge or
CDSC upon redemption. Class I shares do not have annual distribution and service
fees, and do not convert to any other class of shares of the fund.
The following eligible institutional investors may purchase class I shares:
o certain retirement plans established for the benefit of employees of MFS
and employees of MFS' affiliates;
o any fund distributed by MFS, if the fund seeks to achieve its investment
objective by investing primarily in shares of the fund and other MFS
funds;
o any retirement plan, endowment or foundation which:
> purchases shares directly through MFD (rather than through a third
party broker or dealer or other financial adviser);
> has, at the time of purchase of class I shares, aggregate assets
of at least $100 million; and
> invests at least $10 million in class I shares of the fund either
alone or in combination with investments in class I shares of other
MFS Funds (additional investments may be made in any amount).
MFD may accept purchases from smaller plans, endowments or foundations or
in smaller amounts if it believes, in its sole discretion, that such
entity's aggregate assets will equal or exceed $100 million, or that such
entity will make additional investments which will cause its total
investment to equal or exceed $10 million, within a reasonable period of
time;
o bank trust departments or law firms acting as trustee or manager for trust
accounts which initially invest, on behalf of their clients, at least
$100,000 in class I shares of the fund (additional investments may be made
in any amount). MFD may accept smaller initial purchases if it believes,
in its sole discretion, that the bank trust department or law firm will
make additional investments, on behalf of its trust clients, which will
cause its total investment to equal or exceed $100,000 within a reasonable
period of time; and
o certain retirement plans offered, administered or sponsored by insurance
companies, provided that these plans and insurance companies meet certain
criteria established by MFD from time to time.
In no event will the fund, MFS, MFD or any of their affiliates pay any sales
commissions or compensation to any third party in connection with the sale of
class I shares. The payment of any such sales commission or compensation would,
under the fund's policies, disqualify the purchaser as an eligible investor in
class I shares.
4. HOW TO PURCHASE, EXCHANGE AND REDEEM SHARES
The discussion of "How to Purchase, Exchange and Redeem Shares" is supplemented
as follows:
You may purchase, redeem and exchange class I shares only through your MFD
representative or by contacting MFSC (see the back cover of the Prospectus for
address and phone number). You may exchange your class I shares for class I
shares of another MFS Fund (if you are eligible to purchase them) and for shares
of the MFS Money Market Fund at net asset value.
<PAGE>
5. FINANCIAL HIGHLIGHTS
The "Financial Highlights" table is supplemented as follows:
FINANCIAL STATEMENTS - CLASS I SHARES
YEAR ENDED PERIOD ENDED
OCTOBER 31, OCTOBER 31,
1998 1997*
---------- ------------
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $10.39 $ 8.90
Income from investment operations# -
Net investment incomess $ 0.30 $ 0.29
Net realized and unrealized gain on
investments and foreign currency 1.80 1.48
Total from investment operations $ 2.10 $ 1.77
------ ------
Less distributions declared to shareholders -
From net investment income $(0.29) $(0.28)
From net realized gain on investments
and foreign currency transactions (1.39) --
In excess of net investment income (0.03) --
------ ------
Total distributions declared
to shareholders $(1.71) $(0.28)
------ ------
Net asset value - end of period $10.78 $10.39
Total return 22.52% 20.15%++
Ratios (to average net assets)/Supplemental data(S) -
Expenses## 0.80% 0.86%+
Net investment income 2.84% 3.39%+
Portfolio turnover 124% 153%
Net assets at end of period (000 omitted) $1,145 $ 725
- ----------
* For the period from the inception of Class I, January 2, 1997, through
October 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its
custodian and dividend disbursing agent. The Fund's expenses are calculated
without reduction for this expense offset arrangement.
(S) The investment advisor voluntarily waived a portion of its management fee
for the periods indicated. If the fee had not been waived, the net
investment income per share and the ratios would have been:
Net investment income $ 0.29 $ 0.27
Ratios (to average net assets):
Expenses## 0.90% 1.05%+
Net investment income 2.74% 3.20%+
THE DATE OF THIS SUPPLEMENT IS MARCH 1, 1999
<PAGE>
-------------------------
MFS(R) UTILITIES FUND
-------------------------
MARCH 1, 1999
PROSPECTUS
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
- --------------------------------------------------------------------------------
This Prospectus describes the MFS Utilities Fund. The investment objective of
the fund is capital growth and current income (income above that available
from a portfolio invested entirely in equity securities).
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED THE FUND'S SHARES OR
DETERMINED WHETHER THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANYONE WHO TELLS
YOU OTHERWISE IS COMMITTING A CRIME.
<PAGE>
- ---------------------
TABLE OF CONTENTS
- ---------------------
Page
I Risk Return Summary ................................... 1
II Expense Summary ....................................... 6
III Investment Objective, Strategies and Principal Risks .. 8
IV Management of the Fund ................................ 14
V Description of Share Classes .......................... 15
VI How to Purchase, Exchange and Redeem Shares ........... 18
VII Investor Services and Programs ........................ 22
VIII Other Information ..................................... 24
IX Financial Highlights .................................. 27
Appendix A -- Investment Techniques and Practices ..... A-1
Appendix B -- Sales Charge Categories Available to B-1
<PAGE>
- --------------------------
I RISK RETURN SUMMARY
- --------------------------
o INVESTMENT OBJECTIVE
Capital growth and current income (income above that available from a
portfolio invested entirely in equity securities).
o PRINCIPAL INVESTMENT STRATEGIES
The fund invests, under normal market conditions, at least 65% of its
total assets in equity and debt securities of domestic and foreign
companies in the utilities industry. MFS considers a company to be in the
utilities industry if, at the time of investment, MFS determines that a
substantial portion of the company's assets or revenues are derived from
one or more utilities. Securities in which the fund invests are not
selected based upon what sector of the utilities industry a company is in
(i.e., electric, gas, telecommunications) or upon a company's geographic
region.
EQUITY INVESTMENTS. The fund may invest in equity securities, including
common stocks and related securities, such as preferred stocks,
convertible securities and depositary receipts. MFS uses a bottom-up, as
opposed to a top-down, investment style in managing the equity-oriented
funds (including the equity portion of the fund) it advises. This means
that securities are selected based upon fundamental analysis performed by
the fund's portfolio manager and MFS' large group of equity research
analysts. In performing this analysis and selecting securities for the
fund, MFS places particular emphasis on each of the following factors:
o the current regulatory environment;
o the strength of the company's management team; and
o the company's growth prospects and valuation relative to its long-term
potential.
FIXED INCOME INVESTMENTS. The fund invests in securities which pay a
fixed interest rate. These securities include:
o corporate bonds, which are bonds or other debt obligations issued by
corporations or similar entities, including lower rated bonds, commonly
known as junk bonds, which are bonds assigned low credit ratings by credit
rating agencies or which are unrated and considered by MFS to be
comparable;
o mortgage-backed securities and asset- backed securities, which are
securities that represent interests in a pool of assets such as mortgage
loans, car loan receivables, or credit card receivables. These investments
entitle the fund to a share of the principal and interest payments made on
the underlying mortgage, car loan, or credit card; and
o U.S. government securities, which are bonds or other debt obligations
issued by, or whose principal and interest payments are guaranteed by, the
U.S. government or one of its agencies or instrumentalities.
In selecting fixed income investments for the fund, MFS considers the
views of its large group of fixed income portfolio managers and research
analysts. This group periodically assesses the three-month outlook for
various segments of the fixed income markets. This three-month "horizon"
outlook is used by the portfolio manager(s) of MFS' fixed income oriented
funds (including the fixed income portion of the fund) as a tool in making
or adjusting the fund's asset allocations to these various segments of the
fixed income markets. In assessing the credit quality of fixed income
securities, MFS does not rely solely on the credit ratings assigned by
credit rating agencies, but rather performs its own independent credit
analysis.
FOREIGN SECURITIES. The fund may invest in foreign securities and may
have exposure to foreign currencies through its investment in these
securities, its direct holdings of foreign currencies or through its use
of foreign currency exchange contracts for the purchase or sale of a fixed
quantity of foreign currency at a future date. The fund's investments in
foreign securities may include equity and fixed income securities of
foreign utility companies and fixed income securities issued by foreign
governments.
OTHER CONSIDERATIONS. The fund may engage in active and frequent trading
to achieve its principal investment strategies. This may result in the
realization and distribution to shareholders of higher capital gains as
compared to a fund with less active trading policies, which would increase
your tax liability. Frequent trading also increases transaction costs,
which could detract from the fund's performance.
The fund is a non-diversified mutual fund. This means that the fund may
invest a relatively high percentage of its assets in one or a few issuers.
PRINCIPAL RISKS OF AN INVESTMENT
Your investment in the fund is subject to certain risks:
o Concentration: Because the fund invests primarily in securities of
companies in the utilities industry, the fund's performance is
particularly sensitive to changes in the value of the securities of these
companies. A decline in the value of these types of securities may result
in a decline in the fund's net asset value and your investment.
o Regulation: The value of utility company securities may decline because
governmental regulation controlling the utilities industry may prevent or
delay utility companies from passing along cost increases to their
customers or may prevent utilities from imposing future rate increases.
o Market and Company Risk: The value of the securities in which the fund
invests may decline due to changing economic, political or market
conditions, or due to the financial condition of the company which issued
the security.
o Non-Diversified Status Risk: Because the fund may invest its assets in a
small number of issuers, the fund is more susceptible to any single
economic, political or regulatory event affecting those issuers than is a
diversified fund.
o Interest Rate Risk: When interest rates rise, the prices of fixed income
securities in the fund's portfolio will generally fall. Conversely, when
interest rates fall, the prices of fixed income securities in the fund's
portfolio will generally rise.
o Maturity Risk: This interest rate risk will affect the price of a fixed
income security more if the security has a longer maturity. The average
maturity of the fund's fixed income investments will affect the volatility
of the fund's share price.
o Credit Risk: The fund is subject to the risk that the issuer of a fixed
income security will not be able to pay principal and interest when due.
o Foreign Markets Risk: Investment in foreign securities involves additional
risks relating to political, social and economic developments abroad.
Other risks from these investments result from the differences between the
regulations to which U.S. and foreign issuers and markets are subject.
o Currency Risk: Exposure to foreign currencies may cause the value of the
fund to decline in the event that the U.S. dollar strengthens against
these currencies, or in the event that foreign governments intervene in
the currency markets.
o As with any mutual fund, you could lose money on your investment in the
fund.
An investment in the fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the fund by showing changes in the fund's
performance over time. The chart and table provide past performance
information. The fund's past performance does not necessarily indicate how
the fund will perform in the future. The performance information in the
chart and table is based upon calendar year periods, while the performance
information presented under the caption "Financial Highlights" and in the
fund's shareholder reports is based upon the fund's fiscal year.
Therefore, these performance results differ.
BAR CHART
The bar chart shows changes in the annual total returns of the fund's
class A shares for each calendar year since class A shares were first
offered. The chart and related notes do not take into account any sales
charges that you may be required to pay upon purchase or redemption of the
fund's shares, but do include the reinvestment of distributions. Any sales
charge will reduce your return. The return of the fund's other classes of
shares will differ from the class A returns shown in the bar chart,
depending upon the expenses of those classes.
<PAGE>
1993 19.53%
1994 (4.95)%
1995 32.54%
1996 20.14%
1997 31.58%
1998
During the period shown in the bar chart, the highest quarterly return was
% (for the calendar quarter ended , 199 ) and the lowest
quarterly return was % (for the calendar quarter ended ,
199 ).
PERFORMANCE TABLE
This table shows how the average annual total returns of each class of the
fund compares to various market indicators and assumes the reinvestment of
distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
..........................................................................
1 Year 5 Years % Life*
Class A shares % % %
Class B shares % % %
Class C shares % % %
Standard & Poor's Utility Index** % % %
Lipper Average Utility Fund Index*** % % %
- ----------
* For the period from the commencement of the fund's investment operations on
February 14, 1992, through December 31, 1998.
+ Source: Lipper Analytical Services, Inc.
++ Source: CDA/Wiesenberger.
** The Standard & Poor's Utilities Index is an unmanaged index representing the
capitalization-weighted performance of approximately 43 of the largest
utility companies listed on the New York Stock Exchange.
*** The Lipper Mutual Fund Indices are unmanaged, net-asset-value- weighted
indices of the largest qualifying mutual funds within their respective
investment objectives, adjusted for the reinvestment of capital gain
distributions and income dividends.
Share performance is calculated according to Securities and Exchange
Commission rules. Class A share performance takes into account the
deduction of the 4.75% maximum sales charge. Class B share performance
takes into account the deduction of the applicable contingent deferred
sales charge (referred to as a CDSC), which declines over six years from
4% to 0%. Class C share performance takes into account the deduction of
the 1% CDSC.
The fund initially offered class A shares on February 14, 1992, class B
shares on September 7, 1993 and class C shares on January 3, 1994. Class B
and class C share performance includes the performance of the fund's class
A shares for periods prior to the offering of class B and class C shares.
Class B and class C share performance generally would have been lower than
class A share performance had class B and class C shares been offered for
the entire period, because certain operating expenses (e.g., distribution
and service fees) attributable to class B and class C shares are higher
than those of class A shares. Class B and class C share performance has
been adjusted to take into account the CDSC applicable to class B and
class C shares, rather than the initial sales charge applicable to class A
shares.
If you would like the fund's current yield, contact the MFS Service Center
at the toll-free number set forth on the back cover page.
<PAGE>
- -----------------------
II EXPENSE SUMMARY
- -----------------------
o EXPENSE TABLE
This table describes the fees and expenses that you may pay when you buy,
redeem and hold shares of the fund.
SHAREHOLDER FEES (fees paid directly from your investment)
..........................................................................
CLASS A CLASS B CLASS C
Maximum Sales Charge (Load) Imposed
on Purchases (as a percentage of
offering price) ..................... 4.75% 0.00% 0.00%
Maximum Deferred Sales Charge (Load)
(as a percentage of original purchase
price or redemption proceeds,
whichever is less) .................. See Below(1) 4.00% 1.00%
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund assets)
............................................................................
Management Fees ............................... 0.60% 0.60% 0.60%
Distribution and Service (12b-1) Fees(2) ...... 0.25% 1.00% 1.00%
Other Expenses(3) ............................. 0.30% 0.30% 0.30%
---- ---- ----
Total Annual Fund Operating Expenses .......... 1.15% 1.90% 1.90%
Fee Waiver(4) ............................... (0.10)% (0.10)% (0.10)%
---- ---- ----
Net Expenses ................................ 1.05% 1.80% 1.80%
- ----------
(1) An initial sales charge will not be deducted from your purchase if you buy
$1 million or more of class A shares, or if you are investing through a
retirement plan and your class A purchase meets certain requirements.
However, in this case, a contingent deferred sales charge (referred to as a
CDSC) of 1% may be deducted from your redemption proceeds if you redeem your
investment within 12 months.
(2) The fund adopted a distribution plan under Rule 12b-1 that permits it to pay
marketing and other fees to support the sale and distribution of class A, B
and C shares and the services provided to you by your financial adviser
(referred to as distribution and service fees).
(3) The fund has an expense offset arrangement which reduces the fund's
custodian fee based upon the amount of cash maintained by the fund with its
custodian and dividend disbursing agent. The fund may enter into other
similar arrangements and directed brokerage arrangements, which would also
have the effect of reducing the fund's expenses. "Other Expenses" do not
take into account these expense reductions, and are therefore higher than
the actual expenses of the fund.
(4) MFS has voluntarily waived its right to recieve the management fee to 0.50%
of the average daily net assets of the fund. This arrangement will remain in
effect until at least March 1, 2000, absent an earlier modification approved
by the board of trustees which oversees the fund.
<PAGE>
o EXAMPLE OF EXPENSES
These examples are intended to help you compare the cost of investing in
the fund with the cost of investing in other mutual funds.
The examples assume that:
o You invest $10,000 in the fund for the time periods indicated and you
redeem your shares at the end of the time periods;
o Your investment has a 5% return each year and dividends and other
distributions are reinvested; and
o The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, under these assumptions
your costs would be:
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
- ----------------------------------------------------------------------------
Class A $577 $793 $1,027 $1,697
Class B
Assuming redemption at end of period $583 $866 $1,175 $1,917
Assuming no redemption $183 $566 $ 975 $1,917
Class C
Assuming redemption at end of period $283 $566 $ 975 $2,116
Assuming no redemption $183 $566 $ 975 $2,116
<PAGE>
- -------------------------------------------------------------
III INVESTMENT OBJECTIVE, STRATEGIES AND PRINCIPAL RISKS
- -------------------------------------------------------------
o 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). The fund's objective may be modified without
shareholder approval.
o HOW THE FUND INTENDS TO ACHIEVE ITS OBJECTIVE
The fund invests, under normal market conditions, at least 65% of its
total assets in equity and debt securities of domestic and foreign
companies in the utilities industry. MFS considers a company to be in the
utilities industry if, at the time of investment, MFS determines that a
substantial portion of the company's assets or revenues are derived from
one or more utilities. Securities in which the fund invests are not
selected based upon what sector of the utilities industry a company is in
(i.e., electric, gas, telecommunications) or upon a company's geographic
region. Companies in the utilities industry include:
o 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
o companies engaged in telecommunications, including telephone, cellular
telephone, telegraph, satellite, microwave, cable television and other
communications media (but not companies engaged in public broadcasting).
EQUITY INVESTMENTS. MFS uses a bottom-up, as opposed to a top-down,
investment style in managing the equity-oriented funds (including the
equity portion of the fund) it advises. This means that securities are
selected based upon fundamental analysis performed by the fund's portfolio
manager and MFS' large group of equity research analysts. In performing
this analysis and selecting securities for the fund, MFS places particular
emphasis on each of the following factors:
o the current regulatory environment;
o the strength of the company's management team; and
o the company's growth prospects and valuation relative to its long-term
potential.
Equity securities consist of:
o common stocks;
o securities that are convertible into common stocks;
o preferred stocks and preference stocks; and
o depositary receipts for the securities listed above.
Equity securities may be listed on a securities exchange or traded in the
over-the-counter markets.
As noted above, the fund's investments in equity securities include
convertible securities. A convertible security is a security that may be
converted within a specified period of time into a certain amount of
common stock of the same or a different issuer. A convertible security
generally provides:
o a fixed income stream, and
o the opportunity, through its conversion feature, to participate in an
increase in the market price of the underlying common stock.
FIXED INCOME INVESTMENTS. The fund invests in securities which pay a
fixed interest rate. These securities include:
o corporate bonds, which are bonds or other debt obligations issued by
corporations or similar entities, including lower rated bonds, commonly
known as junk bonds, which are bonds assigned low credit ratings by credit
rating agencies or which are unrated and considered by MFS to be
comparable;
o mortgage-backed securities and asset- backed securities, The fund may
invest in securities that represent interests in a pool of assets such as
mortgage loans, car loan receivables, or credit card receivables. These
investments entitle the fund to a share of the principal and interest
payments made on the underlying mortgage, car loan, or credit card. For
example, if the fund invested in a pool that included your mortgage loan,
a share of the principal and interest payments on your mortgage would pass
to the fund; and
o U.S. government securities, which are bonds or other debt obligations
issued by, or whose principal and interest payments are guaranteed by, the
U.S. government or one of its agencies or instrumentalities.
In selecting fixed income investments for the fund, MFS considers the
views of its large group of fixed income portfolio managers and research
analysts. Every two weeks, this group convenes to assess the three-month
outlook for various segments of the fixed income markets. The group
analyzes changes in inflation rates, economic growth and other fiscal
measures to assess the probable changes in long and short-term U.S.
Treasury interest rates. Using that assessment, the group then determines
the probable difference between the yield on U.S. Treasury securities and
the yield on other types of fixed income securities, and then draws
conclusions on the probable total returns of these various types of fixed
income securities. This three-month "horizon" outlook is used by the
portfolio manager(s) of MFS' fixed income oriented funds (including the
fixed income portion of the fund) as a tool in making or adjusting the
fund's asset allocations to these various segments of the fixed income
markets. In assessing the credit quality of fixed income securities, MFS
does not rely solely on the credit ratings assigned by credit rating
agencies, but rather performs its own independent credit analysis.
FOREIGN SECURITIES. The fund invests in foreign securities such as:
o equity securities of foreign companies in the utilities industry,
o fixed income securities of foreign companies in the utilities industry,
and
o fixed income securities issued by foreign governments.
The fund may have exposure to foreign currencies through its investments
in foreign securities, its direct holdings of foreign currencies, or
through its use of foreign currency exchange contracts for the purchase or
sale of a fixed quantity of a foreign currency at a future date.
OTHER CONSIDERATIONS.
The fund is a non-diversified mutual fund. This means that the fund may
invest a relatively high percentage of its assets in one or a few issuers.
The fund may depart from its principal investment strategies by
temporarily investing for defensive purposes when adverse market, economic
or political conditions exist. While the fund invests defensively, it may
not be able to pursue its investment objective. The fund's defensive
investment position may not be effective in protecting its value.
The fund may engage in active and frequent trading to achieve its
principal investment strategies. This may result in the realization and
distribution to shareholders of higher capital gains, which would increase
your tax liability. Frequent trading also increases transaction costs,
which could detract from the fund's performance.
The fund may invest in various types of securities and engage in various
investment techniques and practices which are not the principal focus of
the fund and therefore are not described in this Prospectus. The types of
securities and investment techniques and practices in which the fund may
engage are identified in Appendix A to this Prospectus, and are discussed,
together with their risks, in the fund's Statement of Additional
Information (referred to as the SAI), which you may obtain by contacting
MFS Service Center, Inc. (see back cover for address and phone number).
o PRINCIPAL RISKS
The principal risks of investing in the fund and the circumstances
reasonably likely to cause the value of your investment in the fund to
decline are described below. As with any non-money market mutual fund, the
share price of the fund will change daily based on market conditions and
other factors. Please note that there are many circumstances which could
cause the value of your investment in the fund to decline, and which could
prevent the fund from achieving its objective, that are not described
here.
The principal risks of investing in the fund are:
o Concentration: The fund's investment performance will be closely tied to
the performance of utility companies. 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;
|> restrictions on operations and increased costs and delays as a result
of environmental and nuclear safety regulations;
|> coping with the general effects of energy conservation;
|> technological innovations which may render existing plants, equipment
or products obsolete;
|> the potential impact of natural or man- made disasters;
|> difficulty obtaining adequate returns on invested capital, even if
frequent rate increases are approved by public service commissions;
|> the high cost of obtaining financing during periods of inflation;
|> difficulties of the capital markets in absorbing utility debt and
equity securities; and
|> increased competition.
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. Because utility
companies are faced with the same obstacles, issues and regulatory
burdens, their securities may react similarly and more in unison to these
or other market conditions. These price movements may have a larger impact
on the fund than on a fund with a more broadly diversified portfolio.
o Regulation: The value of utility company securities may decline because
governmental regulation controlling the utilities industry can change.
This regulation may prevent or delay the utility company from passing
along cost increases to its customers. Furthermore, regulatory authorities
may not grant future rate increases. Any increases granted may not be
adequate to permit the payment of dividends on common stocks.
o Non-Diversified Status Risk: Because the fund may invest a higher
percentage of its assets in a small number of issuers, the fund is more
susceptible to any single economic, political or regulatory event
affecting those issuers than is a diversified fund.
o Market Risk: This is the risk that the price of a security held by the
fund will fall due to changing economic, political or market conditions or
disappointing earnings results.
o Company Risk: Prices of securities react to the economic condition of the
company that issued the security. The fund's equity investments in an
issuer may rise and fall based on the issuer's actual and anticipated
earnings, changes in management and the potential for takeovers and
acquisitions.
o Interest Rate Risk: When interest rates rise, the prices of fixed income
securities in the fund's portfolio will generally fall. Conversely, when
interest rates fall, the prices of fixed income securities in the fund's
portfolio will generally rise.
o Convertible Securities Risk: Convertible securities, like fixed income
securities, tend to increase in value when interest rates decline and
decrease in value when interest rates rise. The market value of a
convertible security also tends to increase as the market value of the
underlying stock rises and decrease as the market value of the underlying
stock declines.
o Maturity Risk: Interest rate risk will affect the price of a fixed income
security more if the security has a longer maturity because changes in
interest rates are increasingly difficult to predict over longer periods
of time. Fixed income securities with longer maturities will therefore be
more volatile than other fixed income securities with shorter maturities.
Conversely, fixed income securities with shorter maturities will be less
volatile but generally provide lower returns than fixed income securities
with longer maturities. The average maturity of the fund's fixed income
investments will affect the volatility of the fund's share price.
o Credit Risk: Credit risk is the risk that the issuer of a fixed income
security will not be able to pay principal and interest when due. Rating
agencies assign credit ratings to certain fixed income securities to
indicate their credit risk. The price of a fixed income security will
generally fall if the issuer defaults on its obligation to pay principal
or interest, the rating agencies downgrade the issuer's credit rating or
other news affects the market's perception of the issuer's credit risk.
o Mortgage-Backed and Asset-Backed Securities Risk
|> Maturity Risk:
+ Mortgage-Backed Securities: A mortgage-backed security will
mature when all the mortgages in the pool mature or are prepaid.
Therefore, mortgage-backed securities do not have a fixed
maturity, and their expected maturities may vary when interest
rates rise or fall.
/\ When interest rates fall, homeowners are more likely to
prepay their mortgage loans. An increased rate of
prepayments on the fund's mortgage-backed securities will
result in an unforeseen loss of interest income to the fund.
Because prepayments increase when interest rates fall, the
prices of mortgage-backed securities do not increase as much
as other fixed income securities when interest rates fall.
/\ When interest rates rise, homeowners are less likely to
prepay their mortgage loans. A decreased rate of prepayments
lengthens the expected maturity of a mortgage-backed
security. Therefore, the prices of mortgage-backed
securities may decrease more than prices of other fixed
income securities when interest rates rise.
+ Collateralized Mortgage Obligations: The fund may invest in
mortgage-backed securities called collateralized mortgage
obligations (CMOs). CMOs are issued in separate classes with
different stated maturities. As the mortgage pool experiences
prepayments, the pool pays off investors in classes with shorter
maturities first. By investing in CMOs, the fund may manage the
prepayment risk of mortgage-backed securities. However,
prepayments may cause the actual maturity of a CMO to be
substantially shorter than its stated maturity.
+ Asset-Backed Securities: Asset-backed securities have prepayment
risks similar to mortgage-backed securities.
|> Credit Risk: As with any fixed income security, mortgage-backed and
asset- backed securities are subject to the risk that the issuer will
default on principal and interest payments. It may be difficult to
enforce rights against the assets underlying mortgage-backed and
asset-backed securities in the case of default. The U.S. government
or its agencies may guarantee the payment of principal and interest
on some mortgage-backed securities. Mortgage- backed securities and
asset-backed securities issued by private lending institutions or
other financial intermediaries may be supported by insurance or other
forms of guarantees.
o Foreign Markets Risk: Investing in foreign securities involves risks
relating to political, social and economic developments abroad, as well as
risks resulting from the differences between the regulations to which U.S.
and foreign issuers and markets are subject:
|> These risks may include the seizure by the government of company
assets, excessive taxation, withholding taxes on dividends and
interest, limitations on the use or transfer of portfolio assets, and
political or social instability.
|> Enforcing legal rights may be difficult, costly and slow in foreign
countries, and there may be special problems enforcing claims against
foreign governments.
|> Foreign companies may not be subject to accounting standards or
governmental supervision comparable to U.S. companies, and there may
be less public information about their operations.
|> Foreign markets may be less liquid and more volatile than U.S.
markets.
|> Foreign securities often trade in currencies other than the U.S.
dollar, and the fund may directly hold foreign currencies and
purchase and sell foreign currencies through forward exchange
contracts. Changes in currency exchange rates will affect the fund's
net asset value, the value of dividends and interest earned, and
gains and losses realized on the sale of securities. An increase in
the strength of the U.S. dollar relative to these other currencies
may cause the value of the fund to decline. Certain foreign
currencies may be particularly volatile, and foreign governments may
intervene in the currency markets, causing a decline in value or
liquidity in the fund's foreign currency holdings. By entering into
forward foreign currency exchange contracts, the fund may be required
to forego the benefits of advantageous changes in exchange rates and,
in the case of forward contracts entered into for the purpose of
increasing return, the fund may sustain losses which will reduce its
gross income. Forward foreign currency exchange contracts involve the
risk that the party with which the fund enters the contract may fail
to perform its obligations to the fund.
<PAGE>
- ------------------------------
IV MANAGEMENT OF THE FUND
- ------------------------------
o INVESTMENT ADVISER
Massachusetts Financial Services Company (referred to as MFS or the
adviser) is the fund's investment adviser. MFS is America's oldest mutual
fund organization. MFS and its predecessor organizations have a history of
money management dating from 1924 and the founding of the first mutual
fund, Massachusetts Investors Trust. Net assets under the management of
the MFS organization were approximately $ billion on behalf of
approximately million investor accounts as of January 31, 1999. As of
such date, the MFS organization managed approximately $ billion of net
assets in equity funds and equity portfolios and $ billion of net assets
in fixed income funds and fixed income portfolios. Approximately $
billion of the assets managed by MFS are invested in securities of foreign
issuers and foreign denominated securities of U.S. issuers. MFS is located
at 500 Boylston Street, Boston, Massachusetts 02116.
MFS provides overall investment advisory services and facilities to the
fund, for which the fund pays MFS an annual management fee equal to the
sum of 0.375% of the fund's average daily net assets and 6.25% of the
fund's gross income. MFS has voluntarily waived its right to receive a
portion of this fee as described under "Expense Summary."
o PORTFOLIO MANAGER
The fund's portfolio manager is Maura A. Shaughnessy, a Senior Vice
President of MFS. Ms. Shaughnessy has been the portfolio manager of the
fund since 1992 and has been employed as a portfolio manager by MFS since
1991.
o ADMINISTRATOR
MFS provides the fund with certain financial, legal, compliance,
shareholder communications and other administrative services. MFS is
reimbursed by the fund for a portion of the costs it incurs in providing
these services.
o DISTRIBUTOR
MFS Fund Distributors, Inc. (referred to as MFD), a wholly owned
subsidiary of MFS, is the distributor of shares of the fund.
o SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (referred to as MFSC), a wholly owned subsidiary
of MFS, performs transfer agency and certain other services for the fund,
for which it receives compensation from the fund.
<PAGE>
- -----------------------------------
V DESCRIPTION OF SHARE CLASSES
- -----------------------------------
The fund offers class A, B and C shares through this prospectus. The fund
also offers an additional class of shares, class I shares, exclusively to
certain institutional investors. Class I shares are made available through
a separate prospectus supplement provided to institutional investors
eligible to purchase them.
o SALES CHARGES
You may be subject to an initial sales charge when you purchase, or a CDSC
when you redeem, class A, B or C shares. These sales charges are described
below. In certain circumstances, these sales charges are waived. These
circumstances are described in the SAI. Special considerations concerning
the calculation of the CDSC that apply to each of these classes of shares
are described below under the heading "Calculation of CDSC."
If you purchase your fund shares through a financial adviser (such as a
broker or bank), the adviser may receive commissions or other concessions
which are paid from various sources, such as from the sales charges and
distribution and service fees, or from MFS or MFD. These commissions and
concessions are described in the SAI.
o CLASS A SHARES
You may purchase class A shares at net asset value plus an initial sales
charge (referred to as the offering price), but in some cases you may
purchase class A shares without an initial sales charge but subject to a
1% CDSC upon redemption within one year. Class A shares have annual
distribution and service fees up to a maximum of 0.35% of net assets
annually.
PURCHASES SUBJECT TO AN INITIAL SALES CHARGE. The amount of the initial
sales charge you pay when you buy class A shares differs depending upon
the amount you invest, as follows:
SALES CHARGE* AS PERCENTAGE
OF:
------------------------------
Offering Net Amount
Amount of Purchase Price Invested
Less than $100,000 4.75% 4.99%
$100,000 but less than $250,000 4.00 4.17
$250,000 but less than $500,000 2.95 3.04
$500,000 but less than $1,000,000 2.20 2.25
$1,000,000 or more None** None**
- ----------
* Because of rounding in the calculation of offering price, actual sales
charges you pay may be more or less than those calculated using these
percentages.
** A 1% CDSC will apply to such purchases, as discussed below.
PURCHASES SUBJECT TO A CDSC (BUT NOT AN INITIAL SALES CHARGE). You pay no
initial sales charge when you invest $1 million or more in class A shares.
However, a CDSC of 1% will be deducted from your redemption proceeds if
you redeem within 12 months of your purchase. This pricing structure also
applies to investments in class A shares by certain retirement plans, as
described in Appendix B.
o CLASS B SHARES
You may purchase class B shares at net asset value without an initial
sales charge, but if you redeem your shares within the first six years you
may be subject to a CDSC (declining from 4.00% during the first year to 0%
after six years). Class B shares have annual distribution and service fees
up to a maximum of 1.00% of net assets annually.
The CDSC is imposed according to the following schedule:
CONTINGENT DEFERRED
YEAR OF REDEMPTION AFTER PURCHASE SALES CHARGE
- --------------------------------------------------------------------------------
First 4%
Second 4%
Third 3%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh and following 0%
If you hold class B shares for approximately eight years, they will
convert to class A shares of the fund. All class B shares you purchased
through the reinvestment of dividends and distributions will be held in a
separate sub-account. Each time any class B shares in your account convert
to class A shares, a proportionate number of the class B shares in the
sub-account will also convert to class A shares.
o CLASS C SHARES
You may purchase class C shares at net asset value without an initial
sales charge, but if you redeem your shares within the first year you may
be subject to a CDSC of 1.00%. Class C shares have annual distribution and
service fees up to a maximum of 1.00% of net assets annually. Class C
shares do not convert to any other class of shares of the fund.
o CALCULATION OF CDSC
As discussed above, certain investments in class A, B and C shares will be
subject to a CDSC. Three different aging schedules apply to the
calculation of the CDSC:
o Purchases of class A shares made on any day during a calendar month will
age one month on the last day of the month, and each subsequent month.
o Purchases of class C shares, and purchases of class B shares on or after
January 1, 1993, made on any day during a calendar month will age one year
at the close of business on the last day of that month in the following
calendar year, and each subsequent year.
o Purchases of class B shares prior to January 1, 1993 made on any day
during a calendar year will age one year at the close of business on
December 31 of that year, and each subsequent year.
No CDSC is assessed on the value of your account represented by
appreciation or additional shares acquired through the automatic
reinvestment of dividends or capital gain distributions. Therefore, when
you redeem your shares, only the value of the shares in excess of these
amounts (i.e., your direct investment) is subject to a CDSC.
The CDSC will be applied in a manner that results in the CDSC being
imposed at the lowest possible rate, which means that the CDSC will be
applied against the lesser of your direct investment or the total cost of
your shares. The applicability of a CDSC will not be affected by exchanges
or transfers of registration, except as described in the SAI.
o DISTRIBUTION AND SERVICE FEES
The fund has adopted a plan under Rule 12b-1 that permits it to pay
marketing and other fees to support the sale and distribution of class A,
B and C shares and the services provided to you by your financial adviser.
These annual distribution and service fees may equal up to 0.35% for class
A shares and 1.00% for each of class B and class C shares, and are paid
out of the assets of these classes. Over time, these fees will increase
the cost of your shares and may cost you more than paying other types of
sales charges. The Class A distribution fee is currently not being imposed
and will be paid by the fund when the Trustees of the fund approve the
fee.
<PAGE>
- ---------------------------------------------------
VI HOW TO PURCHASE, EXCHANGE AND REDEEM SHARES
- ---------------------------------------------------
You may purchase, exchange and redeem class A, B and C shares of the fund
in the manner described below. In addition, you may be eligible to
participate in certain investor services and programs to purchase,
exchange and redeem these classes of shares, which are described in the
next section under the caption "Investor Services and Programs."
o HOW TO PURCHASE SHARES
INITIAL PURCHASE. You can establish an account by having your financial
adviser process your purchase. The minimum initial investment is $1,000.
However, in the following circumstances the minimum initial investment is
only $50 per account:
o if you establish an automatic investment plan;
o if you establish an automatic exchange plan; or
o if you establish an account under either:
|> tax-deferred retirement programs (other than IRAs) where investments
are made by means of group remittal statements; or
|> employer sponsored investment programs.
The minimum initial investment for IRAs is $250 per account. The maximum
investment in class C shares is $1,000,000 per transaction. Class C shares
are not available for purchase by any retirement plan qualified under
Section 401(a) or 403(b) of the Internal Revenue Code if the plan or its
sponsor subscribes to certain recordkeeping services made available by
MFSC, such as the MFS Fundamental 401(k) Plan.
ADDING TO YOUR ACCOUNT. There are several easy ways you can make
additional investments of at least $50 to your account:
o send a check with the returnable portion of your statement;
o ask your financial adviser to purchase shares on your behalf;
o wire additional investments through your bank (call MFSC first for
instructions); or
o authorize transfers by phone between your bank account and your MFS
account (the maximum purchase amount for this method is $100,000). You
must elect this privilege on your account application if you wish to use
it.
o HOW TO EXCHANGE SHARES
You can exchange your shares for shares of the same class of certain other
MFS funds at net asset value by having your financial adviser process your
exchange request or by contacting MFSC directly. The minimum exchange
amount is generally $1,000 ($50 for exchanges made under the automatic
exchange plan). Shares otherwise subject to a CDSC will not be charged a
CDSC in an exchange. However, when you redeem the shares acquired through
the exchange, the shares you redeem may be subject to a CDSC, depending
upon when you originally purchased the shares you exchanged. For purposes
of computing the CDSC, the length of time you have owned your shares will
be measured from the date of original purchase and will not be affected by
any exchange.
Sales charges may apply to exchanges made from the MFS money market
funds. Certain qualified retirement plans may make exchanges between the
MFS Funds and the MFS Fixed Fund, a bank collective investment fund, and
sales charges may also apply to these exchanges. Call MFSC for information
concerning these sales charges.
Exchanges are subject to the MFS Funds' market timing policies, which
are policies designed to protect the funds and their shareholders from the
effect of frequent exchanges. These market timing policies are described
below under the caption "Market Timing Policies." You should read the
prospectus of the MFS Fund into which you are exchanging and consider the
differences in objectives, policies and rules before making any exchange.
o HOW TO REDEEM SHARES
You may redeem your shares either by having your financial adviser process
your redemption or by contacting MFSC directly. The fund sends out your
redemption proceeds within seven days after your request is received in
good order. "Good order" generally means that the stock power, written
request for redemption, letter of instruction or certificate must be
endorsed by the record owner(s) exactly as the shares are registered. In
addition, you need to have your signature guaranteed and/or submit
additional documentation to redeem your shares. See "Signature Guarantee/
Additional Documentation" below, or contact MFSC for details (see back
cover page for address and phone number).
Under unusual circumstances such as when the New York Stock Exchange is
closed, trading on the Exchange is restricted or if there is an emergency,
the fund may suspend redemptions or postpone payment. If you purchased the
shares you are redeeming by check, the fund may delay the payment of the
redemption proceeds for up to 15 days from the purchase date to assure
that the check has cleared.
REDEEMING DIRECTLY THROUGH MFSC.
o BY TELEPHONE. You can call MFSC to have shares redeemed from your account
and the proceeds wired or mailed (depending on the amount redeemed)
directly to a pre- designated bank account. MFSC will request personal or
other information from you and will generally record the calls. MFSC will
be responsible for losses that result from unauthorized telephone
transactions if it does not follow reasonable procedures designed to
verify your identity. You must elect this privilege on your account
application if you wish to use it.
o BY MAIL. To redeem shares by mail, you can send a letter to MFSC with the
name of your fund, your account number, and the number of shares or dollar
amount to be sold.
REDEEMING THROUGH YOUR FINANCIAL AVISER. You can call your financial
adviser to process a redemption on your behalf. Your financial adviser
will be responsible for furnishing all necessary documents to MFSC and may
charge you for this service.
SIGNATURE GUARANTEE/ADDITIONAL DOCUMENTATION. In order to protect against
fraud, the fund requires that your signature be guaranteed in order to
redeem your shares. Your signature may be guaranteed by an eligible bank,
broker, dealer, credit union, national securities exchange, registered
securities association, clearing agency, or savings association. MFSC may
require additional documentation for certain types of registrations and
transactions. Signature guarantees and this additional documentation shall
be accepted in accordance with policies established by MFSC, and MFSC may
make certain de minimis exceptions to these requirements.
o OTHER CONSIDERATIONS
RIGHT TO REJECT PURCHASE AND EXCHANGE ORDERS. Purchases and exchanges
should be made for investment purposes only. The MFS Funds each reserve
the right to reject or restrict any specific purchase or exchange request.
Because an exchange request involves both a request to redeem shares of
one fund and to purchase shares of another fund, the MFS Funds consider
the underlying redemption and purchase requests conditioned upon the
acceptance of each of these underlying requests. Therefore, in the event
that the MFS Funds reject an exchange request, neither the redemption nor
the purchase side of the exchange will be processed.
MARKET TIMING POLICIES. The MFS Funds are not designed for professional
market timing organizations or other entities using programmed or frequent
exchanges. The MFS Funds define a "market timer" as an individual, or
organization acting on behalf of one or more individuals, if:
o the individual or organization makes during the calendar year either (i)
six or more exchange requests among the MFS Funds or (ii) three or more
exchange requests out of any of the MFS high yield bond funds or MFS
municipal bond funds; and
o any one of such exchange requests represents shares equal in value to $1
million or more.
Accounts under common ownership or control, including accounts
administered by market timers, will be aggregated for purposes of this
definition.
The MFS Funds may impose specific limitations on market timers,
including:
o delaying for up to seven days the purchase side of an exchange request by
market timers;
o rejecting or otherwise restricting purchase or exchange requests by market
timers; and
o permitting exchanges by market timers only into certain MFS Funds.
REINSTATEMENT PRIVILEGE. After you have redeemed shares, you have a one-
time right to reinvest the proceeds within 90 days of the redemption at
the current net asset value (without an initial sales charge). If the
redemption involved a CDSC, your account will be credited with the
appropriate amount of the CDSC paid; however, your new shares will be
subject to a CDSC which will be determined from the date you originally
purchased the shares redeemed. This privilege applies to shares of the MFS
money market funds only under certain circumstances.
IN-KIND DISTRIBUTIONS. The MFS Funds have reserved the right to pay
redemption proceeds by a distribution in-kind of portfolio securities
(rather than cash). In the event that the fund makes an in-kind
distribution, you could incur the brokerage and transaction charges when
converting the securities to cash. The fund does not expect to make in-
kind distributions, and if it does, the fund will pay, during any 90-day
period, your redemption proceeds in cash up to either $250,000 or 1% of
the fund's net assets, whichever is less.
INVOLUNTARY REDEMPTIONS/SMALL ACCOUNTS. Because it is costly to maintain
small accounts, the MFS funds have generally reserved the right to
automatically redeem shares and close your account when it contains less
than $500 due to your redemptions or exchanges. Before making this
automatic redemption, you will be notified and given 60 days to make
additional investments to avoid having your shares redeemed.
<PAGE>
- ---------------------------------------
VII INVESTOR SERVICES AND PROGRAMS
- ---------------------------------------
As a shareholder of the fund, you have available to you a number of
services and investment programs. Some of these services and programs may
not be available to you if your shares are held in the name of your
financial adviser or if your investment in the fund is made through a
retirement plan.
o DISTRIBUTION OPTIONS
The following distribution options are generally available to all accounts
and you may change your distribution option as often as you desire by
notifying MFSC:
o Dividends and capital gain distributions reinvested in additional shares
(this option will be assigned if no other option is specified);
o Dividends in cash; capital gain distributions reinvested in additional
shares; or
o Dividends and capital gain distributions in cash.
Reinvestments (net of any tax withholding) will be made in additional full
and fractional shares of the same class of shares at the net asset value
as of the close of business on the record date. Dividends and capital gain
distributions in amounts less than $10 will automatically be reinvested in
additional shares of the fund. If you have elected to receive dividends
and/or capital gain distributions in cash, and the postal or other
delivery service is unable to deliver checks to your address of record, or
you do not respond to mailings from MFSC with regard to uncashed
distribution checks, your distribution option will automatically be
converted to having all dividends and other distributions reinvested in
additional shares. Your request to change a distribution option must be
received by MFSC by the record date for a dividend or distribution in
order to be effective for that dividend or distribution. No interest will
accrue on amounts represented by uncashed distribution or redemption
checks.
o PURCHASE AND REDEMPTION PROGRAMS
For your convenience, the following purchase and redemption programs are
made available to you with respect to class A, B and C shares, without
extra charge:
AUTOMATIC INVESTMENT PLAN. You can make cash investments of $50 or more
through your checking account or savings account on any day of the month.
If you do not specify a date, the investment will automatically occur on
the first business day of the month.
AUTOMATIC EXCHANGE PLAN. If you have an account balance of at least $5,000
in any MFS fund, you may participate in the automatic exchange plan, a
dollar-cost averaging program. This plan permits you to make automatic
monthly or quarterly exchanges from your account in an MFS fund for shares
of the same class of shares of other MFS funds. You may make exchanges of
at least $50 to up to six different funds under this plan. Exchanges will
generally be made at net asset value without any sales charges. If you
exchange shares out of the MFS Money Market Fund or MFS Government Money
Market Fund, or if you exchange class A shares out of the MFS Cash Reserve
Fund, into class A shares of any other MFS fund, you will pay the initial
sales charge if you have not already paid this charge on these shares.
REINVEST WITHOUT A SALES CHARGE. You can reinvest dividend and capital
gain distributions into your account without a sales charge to add to your
investment easily and automatically.
DISTRIBUTION INVESTMENT PROGRAM. You may purchase shares of any MFS fund
without paying an initial sales charge or a CDSC upon redemption by
automatically reinvesting a minimum of $50 of dividend and capital gain
distributions from the same class of another MFS fund.
LETTER OF INTENT (LOI). If you intend to invest $50,000 or more in the MFS
funds (including the MFS Fixed Fund) within 13 months, you may buy class A
shares of the funds at the reduced sales charge as though the total amount
were invested in class A shares in one lump sum. If you intend to invest
$1 million or more under this program, the time period is extended to 36
months. If the intended purchases are not completed within the time
period, shares will automatically be redeemed from a special escrow
account established with a portion of your investment at the time of
purchase to cover the higher sales charge you would have paid had you not
purchased your shares through this program.
RIGHT OF ACCUMULATION. You will qualify for a lower sales charge on your
purchases of class A shares when your new investment in class A shares,
together with the current (offering price) value of all your holdings in
the MFS funds (including the MFS Fixed Fund), reaches a reduced sales
charge level.
SYSTEMATIC WITHDRAWAL PLAN. You may elect to automatically receive (or
designate someone else to receive) regular periodic payments of at least
$100. Each payment under this systematic withdrawal is funded through the
redemption of your fund shares. For class B and C shares, you can receive
up to 10% (15% for certain IRA distributions) of the value of your account
through these payments in any one year (measured at the time you establish
this plan). You will incur no CDSC on class B and C shares redeemed under
this plan. For class A shares, there is no similar percentage limitation;
however, you may incur the CDSC (if applicable) when class A shares are
redeemed under this plan.
<PAGE>
- ---------------------------
VIII OTHER INFORMATION
- ---------------------------
o PRICING OF FUND SHARES
The price of each class of the fund's shares is based on its net asset
value. The net asset value of each class of shares is determined at the
close of regular trading each day that the New York Stock Exchange is open
for trading (generally, 4:00 p.m., Eastern time) (referred to as the
valuation time). To determine net asset value, the fund values its assets
at current market values, or at fair value as determined by the Adviser
under the direction of the Board of Trustees that oversees the fund if
current market values are unavailable. Fair value pricing may be used by
the fund when current market values are unavailable or when an event
occurs after the close of the exchange on which the fund's portfolio
securities are principally traded that is likely to have changed the value
of the securities. The use of fair value pricing by the fund may cause the
net asset value of its shares to differ significantly from the net asset
value that would be calculated using current market values.
You will receive the net asset value next calculated, after the
deduction of applicable sales charges and any required tax withholding, if
your order is complete (has all required information) and MFSC receives
your order by:
o the valuation time, if placed directly by you (not through a financial
adviser such as a broker or bank) to MFSC; or
o MFSC's close of business, if placed through a financial adviser, so long
as the financial adviser (or its authorized designee) received your order
by the valuation time.
The fund invests in certain securities which are primarily listed on
foreign exchanges that trade on weekends and other days when the fund does
not price its shares. Therefore, the value of the fund's shares may change
on days when you will not be able to purchase or redeem the fund's shares.
o DISTRIBUTIONS
The fund intends to declare daily and pay substantially all of its net
income (including net short-term capital gain) to shareholders as
dividends at least monthly. Any realized net capital gains are distributed
at least annually.
o TAX CONSIDERATIONS
The following discussion is very general and therefore prospective
investors are urged to consult their own tax advisers regarding the effect
that an investment in the fund may have on their own tax situations.
TAXABILITY OF DISTRIBUTIONS. As long as the fund qualifies for treatment
as a regulated investment company (which it has in the past and intends to
do in the future), it pays no federal income tax on the earnings it
distributes to shareholders.
You will normally have to pay federal income taxes, and any state or local
taxes, on the distributions you receive from the fund, whether you take
the distributions in cash or reinvest them in additional shares.
Distributions designated as capital gain dividends are taxable as long-
term capital gains. Other distributions are generally taxable as ordinary
income. Some dividends paid in January may be taxable as if they had been
paid the previous December.
The Form 1099 that is mailed to you every January details your
distributions and how they are treated for federal tax purposes.
Fund distributions will reduce the fund's net asset value per share.
Therefore, if you buy shares shortly before the record date of a
distribution, you may pay the full price for the shares and then
effectively receive a portion of the purchase price back as a taxable
distribution.
If you are neither a citizen nor a resident of the U.S., the fund will
withhold U.S. federal income tax at the rate of 30% on taxable dividends
and other payments that are subject to such withholding. You may be able
to arrange for a lower withholding rate under an applicable tax treaty if
you supply the appropriate documentation required by the fund. The fund is
also required in certain circumstances to apply backup withholding at the
rate of 31% on taxable dividends and redemption proceeds paid to any
shareholder (including a shareholder who is neither a citizen nor a
resident of the U.S.) who does not furnish to the fund certain information
and certifications or who is otherwise subject to backup withholding.
Backup withholding will not, however, be applied to payments that have
been subject to 30% withholding. Prospective investors should read the
fund's Account Application for additional information regarding backup
withholding of federal income tax.
TAXABILITY OF TRANSACTIONS. When you redeem, sell or exchange shares, it
is generally considered a taxable event for you. Depending on the purchase
price and the sale price of the shares you redeem, sell or exchange, you
may have a gain or a loss on the transaction. You are responsible for any
tax liabilities generated by your transaction.
o UNIQUE NATURE OF FUND
MFS may serve as the investment adviser to other funds which have similar
investment goals and principal investment policies and risks to the fund,
and which may be managed by the fund's portfolio manager(s). While the
fund may have many similarities to these other funds, its investment
performance will differ from their investment performance. This is due to
a number of differences between the funds, including differences in sales
charges, expense ratios and cash flows.
o YEAR 2000 ISSUES
The fund could be adversely affected if the computer systems used by MFS,
the fund's other service providers or the companies in which the fund
invests do not properly process date-related information from and after
January 1, 2000 (the "Year 2000 Issue"). MFS recognizes the importance of
the Year 2000 Issue and, to address Year 2000 compliance, created a Year
2000 Program Management Office in 1996, which is separately funded, has a
specialized staff and reports directly to MFS senior management. The
Office, with the help of external consultants, is responsible for
ascertaining that all internal systems, data feeds and third party
applications are Year 2000 compliant. While MFS is confident that all MFS
systems will be Year 2000 compliant before the turn of the century, there
are significant systems interdependencies in the domestic and foreign
markets for securities, the business environments in which companies held
by the fund operate and in MFS' own business environment. MFS has been
actively working with the fund's other service providers to identify and
respond to potential problems in an effort to ensure Year 2000 compliance
or develop contingency plans. Year 2000 compliance is also one of the
factors considered by MFS in its ongoing assessment of companies in which
the fund invests. There can be no assurance, however, that these steps
will be sufficient to avoid any adverse impact on the fund.
o PROVISION OF ANNUAL AND SEMIANNUAL REPORTS
To avoid sending duplicate copies of materials to households, only one
copy of the fund's annual and semiannual report will be mailed to
shareholders having the same residential address on the fund's records.
However, any shareholder may contact MFSC (see back cover for address and
phone number) to request that copies of these reports be sent personally
to that shareholder.
<PAGE>
- ----------------------------
IX FINANCIAL HIGHLIGHTS
- ----------------------------
The financial highlights table is intended to help you understand the
fund's financial performance for the past 5 years, or, if the fund has not
been in operation that long, since the time it commenced investment
operations. Certain information reflects financial results for a single
fund share. The total returns in the table represent the rate by which an
investor would have earned (or lost) on an investment in the fund
(assuming reinvestment of all distributions). This information has been
audited by the fund's independent auditors, whose report, together with
the fund's financial statements, are included in the fund's Annual Report
to shareholders. These financial statements are incorporated by reference
into the SAI. The fund's independent auditors are Ernst & Young LLP.
<TABLE>
CLASS A SHARES
<CAPTION>
.............................................................................................................................
YEAR ENDED OCTOBER 31,
--------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value -- beginning of period $ 10.39 $ 9.12 $ 8.20 $ 7.00 $ 7.86
-------- -------- -------- -------- --------
Income from investment operations# --
Net investment income(S) $ 0.27 $ 0.32 $ 0.38 $ 0.31 $ 0.33
Net realized and unrealized gain
(loss) on investments and foreign
currency 1.78 2.08 1.07 1.22 (0.63)
-------- -------- -------- -------- --------
Total from investment operations $ 2.05 $ 2.40 $ 1.45 $ 1.53 $ (0.30)
-------- -------- -------- -------- --------
Less distributions declared to
shareholders -
From net investment income $ (0.27) $ (0.34) $ (0.32) $ (0.33) $ (0.35)
From net realized gain on investments
and foreign currency transactions (1.39) (0.79) (0.21) -- (0.21)
In excess of net investment income (0.02) -- -- -- --
-------- -------- -------- -------- --------
Total distributions declared to
shareholders $ (1.68) $ (1.13) $ (0.53) $ (0.33) $ (0.56)
======== ======== ======== ======== ========
Net asset value -- end of period $ 10.76 $ 10.39 $ 9.12 $ 8.20 $ 7.00
======== ======== ======== ======== ========
Total return(+) 22.13% 28.62% 18.41% 22.48% (3.89)%
Ratios (to average net assets)/
Supplemental data(S):
Expenses## 1.05% 1.10% 1.08% 0.83% 0.65%
Net investment income 2.60% 3.27% 4.37% 4.30% 4.58%
Portfolio turnover 124% 153% 137% 152% 115%
Net assets at end of period (000
omitted) $324,098 $ 90,083 $ 60,345 $ 52,474 $ 42,027
- ----------
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of cash maintained
by the Fund with its custodian and dividend disbursing agent. For fiscal years ending after September 1, 1995, the Fund's
expenses are calculated without reduction for this expense offset arrangement.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
(S) The investment adviser voluntarily waived all or a portion of its management fee for the periods indicated. For the year
ended October 31, 1994, the investment adviser further agreed to reduce a portion of the Fund's expenses. If these fees
had not been waived, the net investment income per share and the ratios would have been:
Net investment income $ 0.26 $ 0.30 $ 0.34 $ 0.28 $ 0.28
Ratios (to average net assets):
Expenses## 1.15% 1.29% 1.42% 1.23% 1.41%
Net investment income 2.50% 3.08% 4.03% 3.90% 3.82%
</TABLE>
<TABLE>
CLASS B SHARES
.............................................................................................................................
YEAR ENDED OCTOBER 31,
--------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value -- beginning of period $ 10.36 $ 9.10 $ 8.18 $ 6.98 $ 7.84
-------- -------- -------- -------- --------
Income from investment operations# --
Net investment income(S) $ 0.19 $ 0.24 $ 0.31 $ 0.24 $ 0.25
Net realized and unrealized gain
(loss) on investments and foreign
currency 1.79 2.08 1.07 1.22 (0.63)
-------- -------- -------- -------- --------
Total from investment operations $ 1.98 $ 2.32 $ 1.38 $ 1.46 $ (0.38)
-------- -------- -------- -------- --------
Less distributions declared to
shareholders -
From net investment income $ (0.20) $ (0.27) $ (0.25) $ (0.26) $ (0.27)
From net realized gain on investments
and foreign currency transactions (1.39) (0.79) (0.21) -- (0.21)
In excess of net investment income (0.02) -- -- -- --
-------- -------- -------- -------- --------
Total distributions declared to
shareholders $ (1.61) $ (1.06) $ (0.46) $ (0.26) $ (0.48)
======== ======== ======== ======== ========
Net asset value -- end of period $ 10.73 $ 10.36 $ 9.10 $ 8.18 $ 6.98
======== ======== ======== ======== ========
Total return 21.27% 27.59% 17.50% 21.43% (4.92)%
Ratios (to average net assets)/
Supplemental data(S):
Expenses## 1.80% 1.87% 1.89% 1.74% 1.72%
Net investment income 1.85% 2.49% 3.53% 3.33% 3.51%
Portfolio turnover 124% 153% 137% 152% 115%
Net assets at end of period (000
omitted) $361,439 $ 91,973 $ 49,877 $ 33,239 $ 19,774
- ---------------
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of cash maintained
by the Fund with its custodian and dividend disbursing agent. For fiscal years ending after September 1, 1995, the Fund's
expenses are calculated without reduction for this expense offset arrangement.
(S) The investment adviser voluntarily waived all or a portion of its management fee for the periods indicated. For the year
ended October 31, 1994, the investment adviser further agreed to reduce a portion of the Fund's expenses. If these fees
had not been waived, the net investment income per share and the ratios would have been:
Net investment income $ 0.18 $ 0.22 $ 0.28 $ 0.21 $ 0.20
Ratios (to average net assets):
Expenses## 1.90% 2.06% 2.23% 2.14% 2.48%
Net investment income 1.75% 2.30% 3.19% 2.93% 2.74%
</TABLE>
<TABLE>
CLASS C SHARES
<CAPTION>
...............................................................................................................................
YEAR ENDED OCTOBER 31, PERIOD ENDED
-------------------------------------------------------------- OCTOBER 31,
1998 1997 1996 1995 1994*
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share
outstanding throughout each period):
Net asset value -- beginning of
period $ 10.37 $ 9.10 $ 8.18 $ 6.99 $ 7.48
-------- -------- -------- -------- --------
Income from investment
operations# --
Net investment income(S) $ 0.19 $ 0.24 $ 0.31 $ 0.24 $ 0.25
Net realized and unrealized gain
(loss) on investments and foreign
currency 1.80 2.09 1.07 1.21 (0.54)
-------- -------- -------- -------- --------
Total from investment operations $ 1.99 $ 2.33 $ 1.38 $ 1.45 $ (0.29)
-------- -------- -------- -------- --------
Less distributions declared to
shareholders -
From net investment income $ (0.20) $ (0.27) $ (0.25) $ (0.26) $ (0.20)
From net realized gain on investments
and foreign currency transactions (1.39) (0.79) (0.21) -- --
In excess of net investment income (0.02) -- -- -- --
-------- -------- -------- -------- --------
Total distributions declared to
shareholders $ (1.61) $ (1.06) $ (0.46) $ (0.26) $ (0.20)
======== ======== ======== ======== ========
Net asset value -- end of period $ 10.75 $ 10.37 $ 9.10 $ 8.18 $ 6.99
======== ======== ======== ======== ========
Total return 21.25% 27.71% 17.57% 21.19% (3.87)%++
Ratios (to average net assets)/
Supplemental data(S):
Expenses## 1.80% 1.85% 1.82% 1.81% 1.65%+
Net investment income 1.85% 2.47% 3.60% 3.32% 3.56%+
Portfolio turnover 124% 153% 137% 152% 115%
Net assets at end of period
(000 omitted) $ 95,856 $ 22,788 $ 8,231 $ 4,943 $ 2,399
- ---------------
* For the period from the inception of Class C, January 3, 1994, through October 31, 1994.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of cash maintained
by the Fund with its custodian and dividend disbursing agent. For fiscal years ending after September 1, 1995, the Fund's
expenses are calculated without reduction for this expense offset arrangement.
(S) The investment adviser voluntarily waived all or a portion of its management fee for the periods indicated. For the period
ended October 31, 1994, the investment adviser further agreed to reduce a portion of the Fund's expenses. If these fees
had not been waived, the net investment income per share and the ratios would have been:
Net investment income $ 0.18 $ 0.22 $ 0.28 $ 0.21 $ 0.20
Ratios (to average net assets):
Expenses## 1.90% 2.04% 2.16% 2.21% 2.41%+
Net investment income 1.75% 2.28% 3.26% 2.83% 2.80%+
</TABLE>
<PAGE>
- --------------
APPENDIX A
- --------------
o INVESTMENT TECHNIQUES AND PRACTICES
In pursuing its investment objective, the fund may engage in the following
investment techniques and practices, which are described, together with
their risks, in the SAI.
INVESTMENT TECHNIQUES/PRACTICES
..........................................................................
SYMBOLS x permitted -- not permitted
--------------------------------------------------------------------------
Debt Securities
Asset-Backed Securities x
Collateralized Mortgage Obligations and Multiclass
Pass-Through Securities x
Corporate Asset-Backed Securities x
Mortgage Pass-Through Securities x
Stripped Mortgage-Backed Securities --
Corporate Securities x
Loans and Other Direct Indebtedness --
Lower Rated Bonds x
Municipal Bonds x
Speculative Bonds x
U.S. Government Securities x
Variable and Floating Rate Obligations x
Zero Coupon Bonds, Deferred Interest Bonds and PIK Bonds x
Equity Securities x
Foreign Securities Exposure
Brady Bonds x
Depositary Receipts x
Dollar-Denominiated Foreign Debt Securities x
Emerging Markets x
Foreign Securities x
Forward Contracts x
Futures Contracts x
Indexed Securities/Structured Products x
Inverse Floating Rate Obligations --
Investment in Other Investment Companies
Open-End x
Closed-End x
Lending of Portfolio Securities x
Leveraging Transactions
Bank Borrowings --
Mortgage "Dollar-Roll" Transactions x
Reverse Repurchase Agreements --
Options
Options on Foreign Currencies x
Options on Futures Contracts x
Options on Securities x
Options on Stock Indices x
Reset Options --
"Yield Curve" Options --
Repurchase Agreements x
Restricted Securities x
Short Sales --
Short Sales Against the Box --
Short Term Instruments x
Swaps and Related Derivative Instruments --
Temporary Borrowings x
Temporary Defensive Positions x
Warrants x
"When-Issued" Securities x
<PAGE>
- --------------
APPENDIX B
- --------------
o SALES CHARGE CATEGORIES AVAILABLE TO CERTAIN RETIREMENT PLANS
Purchases made under the following four categories are not subject to an
initial sales charge. However, a CDSC of 1% will be deducted from
redemption proceeds if the redemption is made within 12 months of
purchase. The CDSC is based on the value of the shares redeemed (excluding
reinvested dividend and capital gain distributions) or the total cost of
the shares, whichever is less.
o Investments in class A shares by certain retirement plans subject to the
Employee Retirement Income Security Act of 1974, as amended (referred to
as ERISA), if, prior to July 1, 1996
|> the plan had established an account with MFSC; and
|> the sponsoring organization had demonstrated to the satisfaction of
MFD that either;
+ the employer had at least 25 employees; or
+ the total purchases by the retirement plan of class A shares of
the MFS Family of Funds (the MFS Funds) would be in the amount of
at least $250,000 within a reasonable period of time, as
determined by MFD in its sole discretion.
o Investments in class A shares by certain retirement plans subject to
ERISA, if
|> the retirement plan and/or sponsoring organization participates in
the MFS Fundamental 401(k) Program or any similar recordkeeping
system made available by MFSC (referred to as the MFS participant
recordkeeping system);
|> the plan establishes an account with MFSC on or after July 1, 1996;
|> the total purchases by the retirement plan of class A shares of the
MFS Funds will be in the amount of at least $500,000 within a
reasonable period of time, as determined by MFD in its sole
discretion; and
|> the plan has not redeemed its class B shares in the MFS Funds in
order to purchase class A shares under this category.
o Investments in class A shares by certain retirement plans subject to
ERISA, if
|> the plan establishes an account with MFSC on or after July 1, 1996;
and
|> the plan has, at the time of purchase, a market value of $500,000 or
more invested in shares of any class or classes of the MFS Funds.
THE RETIREMENT PLAN WILL QUALIFY UNDER THIS CATEGORY ONLY IF THE PLAN
OR ITS SPONSORING ORGANIZATION INFORMS MFSC PRIOR TO THE PURCHASES
THAT THE PLAN HAS A MARKET VALUE OF $500,000 OR MORE INVESTED IN
SHARES OF ANY CLASS OR CLASSES OF THE MFS FUNDS; MFSC HAS NO
OBLIGATION INDEPENDENTLY TO DETERMINE WHETHER SUCH A PLAN QUALIFIES
UNDER THIS CATEGORY; AND
o Investments in class A shares by certain retirement plans subject to
ERISA, if
|> the plan establishes an account with MFSC on or after July 1, 1997;
|> the plan's records are maintained on a pooled basis by MFSC; and
|> the sponsoring organization demonstrates to the satisfaction of MFD
that, at the time of purchase, the employer has at least 200 eligible
employees and the plan has aggregate assets of at least $2,000,000.
<PAGE>
MFS(R) UTILITIES FUND
If you want more information about the fund, the following documents are
available free upon request:
ANNUAL/SEMIANNUAL REPORTS. These reports contain information about the fund's
actual investments. Annual reports discuss the effect of recent market
conditions and the fund's investment strategy on the fund's performance during
its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI). The SAI, dated March 1, 1999,
provides more detailed information about the fund and is incorporated into
this prospectus by reference.
YOU CAN GET FREE COPIES OF THE ANNUAL/SEMIANNUAL REPORTS, THE SAI AND OTHER
INFORMATION ABOUT THE FUND, AND MAKE INQUIRIES ABOUT THE FUND, BY CONTACTING:
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116-3741
Telephone: 1-800-225-2606
Internet: http://www.mfs.com
Information about the fund (including its prospectus, SAI and shareholder
reports) can be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C., 20549-6009
Information on the operation of the Public Reference Room may be obtained by
calling the Commission at 1-800-SEC-0330. Reports and other information about
the fund are available on the Commission's Internet website at http://
www.sec.gov, and copies of this information may be obtained, upon payment of a
duplicating fee, by writing the Public Reference Section at the above address.
The fund's Investment Company Act file number is 811-6102.
<PAGE>
MFS(R) UTILITIES FUND
MARCH 1, 1999
[Logo] M F S(R)
INVESTMENT MANAGEMENT
75 YEARS
WE INVENTED THE MUTUAL FUND(R)
STATEMENT OF ADDITIONAL
A SERIES OF MFS SERIES TRUST VI INFORMATION
500 BOYLSTON STREET, BOSTON, MA 02116
(617) 954-5000
This Statement of Additional Information, as amended or supplemented from time
to time (the "SAI"), sets forth information which may be of interest to
investors but which is not necessarily included in the Fund's Prospectus dated
March 1, 1999. This SAI should be read in conjunction with the Prospectus. The
Fund's financial statements are incorporated into this SAI by reference to the
Fund's most recent Annual Report to shareholders. A copy of the Annual Report
accompanies this SAI. You may obtain a copy of the Fund's Prospectus and Annual
Report without charge by contacting MFS Service Center, Inc. (see back cover for
address and phone number).
This SAI is divided into two Parts -- Part I and Part II. Part I contains
information that is particular to the Fund, while Part II contains information
that generally applies to each of the funds in the MFS Family of Funds (the "MFS
Funds"). Each Part of the SAI has a variety of appendices which can be found at
the end of Part I and Part II, respectively.
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE
INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
PART I
Part I of this SAI contains information that is particular to the Fund.
TABLE OF CONTENTS
Page
I Definitions ................................................... 1
II Management of the Fund ........................................ 1
The Fund ...................................................... 1
Trustees and Officers -- Identification and Background ........ 1
Trustees Compensation ......................................... 1
Affiliated Service Provider Compensation ...................... 1
III Sales Charges and Distribution Plan Payments .................. 1
Sales Charges ................................................. 1
Distribution Plan Payments ................................... 1
IV Portfolio Transactions and Brokerage Commissions .............. 1
V Share Ownership ............................................... 1
VI Performance Information ....................................... 1
VII Investment Techniques, Practices, Risks and Restrictions ...... 1
Investment Techniques, Practices and Risks .................... 1
Investment Restrictions ....................................... 1
VIII Tax Considerations ............................................ 3
IX Independent Auditors and Financial Statements ................. 3
Appendix A -- Trustees and Officers -- Identification
and Background .................................. A-1
Appendix B -- Trustee Compensation ............................ B-1
Appendix C -- Affiliated Service Provider Compensation ........ C-1
Appendix D -- Sales Charges and Distribution Plan Payments .... D-1
Appendix E -- Portfolio Transactions and Brokerage Commissions E-1
Appendix F -- Share Ownership ................................. F-1
Appendix G -- Performance Information ......................... G-1
<PAGE>
(I) DEFINITIONS
"Fund" - MFS Utilities Fund, a series of the Trust.
"Trust" - 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.
"MFSC" - MFS Service Center, Inc., a Delaware corporation.
"Prospectus" - The Prospectus of the Fund, dated March 1, 1999, as
amended or supplemented from time to time.
(II) MANAGEMENT OF THE FUND
THE FUND
The Fund is a non-diversified series of the Trust. The Trust is an open-
end management investment company.
TRUSTEES AND OFFICERS - IDENTIFICATION AND BACKGROUND
The identification and background of the Trustees and officers of the
Trust are set forth in Appendix A of this Part I.
TRUSTEE COMPENSATION
Compensation paid to the non-interested Trustees and to Trustees who are
not officers of the Trust, for certain specified periods, is set forth
in Appendix B of this Part I.
AFFILIATED SERVICE PROVIDER COMPENSATION
Compensation paid by the Fund to its affiliated service providers -- to
MFS, for investment advisory and administrative services, and to MFSC,
for transfer agency services -- for certain specified periods is set
forth in Appendix C to this Part I.
MFS has agreed to waive certain Fund expenses as described in the
"Expense Summary" of the Prospectus.
(III) SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS
SALES CHARGES
Sales charges paid in connection with the purchase and sale of Fund
shares for certain specified periods are set forth in Appendix D to this
Part I, together with the Fund's schedule of dealer reallowances.
DISTRIBUTION PLAN PAYMENTS
Payments made by the Fund under the Distribution Plan for its most
recent fiscal year end are set forth in Appendix D to this Part I.
(IV) PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Brokerage commissions paid by the Fund for certain specified periods,
and information concerning purchases by the Fund of securities issued by
its regular broker-dealers for its most recent fiscal year, are set
forth in Appendix E to this Part I.
(V) SHARE OWNERSHIP
Information concerning the ownership of Fund shares by Trustees and
officers of the Trust as a group, by investors who control the Fund, if
any, and by investors who own 5% or more of any class of Fund shares, if
any, is set forth in Appendix F to this Part I.
(VI) PERFORMANCE INFORMATION
Performance information, as quoted by the Fund in sales literature and
marketing materials, is set forth in Appendix G to this Part I.
(VII) INVESTMENT TECHNIQUES, PRACTICES, RISKS AND RESTRICTIONS
INVESTMENT TECHNIQUES, PRACTICES AND RISKS
The investment objective and principal investment policies of the Fund
are described in the Prospectus. In pursuing its investment objective
and principal investment policies, the Fund may engage in a number of
investment techniques and practices, which involve certain risks. These
investment techniques and practices, which may be changed without
shareholder approval unless indicated otherwise, are identified in
Appendix A to the Prospectus, and are more fully described, together
with their associated risks, in Part II of this SAI. The following
percentage limitations apply to these investment techniques and
practices.
o Foreign Securities Exposure may not exceed 35% of the Fund's net
assets
o Junk Bond Exposure may be up to but not including 20% of the Fund's
net assets.
o Lending of Portfolio Securities may not exceed 30% of the Fund's net
assets.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions which cannot be changed
without the approval of the holders of a majority of the Fund's shares
(which, as used in this SAI, means the lesser of (i) more than 50% of
the outstanding shares of the Trust or a series or class, as applicable,
or (ii) 67% or more of the outstanding shares of the Trust or a series
or class, as applicable, present at a meeting at which holders of more
than 50% of the outstanding shares of the Trust or a series or class, as
applicable, are represented in person or by proxy).
Terms used below (such as Options and Futures Contracts) are defined
in Part II of this SAI.
The Fund may not:
(1) Borrow amounts in excess of 33 1/3% of its 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.
In addition, the Fund has the following nonfundamental policies which
may be changed without shareholder approval:
(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 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); and
(h) the Fund will only borrow amounts from banks and then only as
permitted by Investment Restriction (1).
Except with respect to Investment Restriction (1) and nonfundamental
policy (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.
(VIII) TAX CONSIDERATIONS
For a discussion of tax considerations, see Part II of this SAI.
(IX) 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 Securities and Exchange Commission.
The Portfolio of Investments and the Statement of Assets and
Liabilities at October 31, 1998, the Statement of Operations for the
year ended October 31, 1998, the Statement of Changes in Net Assets for
the two years ended October 31, 1998, the Notes to Financial Statements
and the Report of the Independent Auditors, each of which is included in
the Annual Report to Shareholders of the Fund, are incorporated by
reference into this SAI in reliance upon the report of Ernst & Young
LLP, independent auditors, given upon their authority as experts in
accounting and auditing. A copy of the Annual Report accompanies this
SAI.
<PAGE>
PART I - APPENDIX A
TRUSTEES AND OFFICERS - IDENTIFICATION AND BACKGROUND
The Trustees and officers of the Trust are listed below, together with
their principal occupations during the past five years. (Their titles
may have varied during that period.)
TRUSTEES
JEFFREY L. SHAMES* (born 6/2/55)
Massachusetts Financial Services Company, Chairman and Chief Executive
Officer
RICHARD B. BAILEY* (born 9/14/26)
Private Investor; Massachusetts Financial Services Company, former
Chairman and Director (prior to September 30, 1991); Cambridge Bancorp,
Director; Cambridge Trust Company, Director
MARSHALL N. COHAN (born 11/14/26)
Private Investor
Address: 2524 Bedford Mews Drive, Wellington, Florida
LAWRENCE H. COHN, M.D., (born 3/11/37)
Brigham and Women's Hospital, Chief of Cardiac Surgery; Harvard Medical
School, Professor of Surgery
Address: 75 Francis Street, Boston, Massachusetts
THE HON. SIR J. DAVID GIBBONS, KBE (born 6/15/27)
Edmund Gibbons Limited, Chief Executive Officer; Colonial Insurance
Company Ltd., Director and Chairman
Address: 21 Reid Street, Hamilton, Bermuda
ABBY M. O'NEILL (born 4/27/28)
Private Investor; Rockefeller Financial Services, Inc. (investment
advisers), Director
Address: 30 Rockefeller Plaza, Room 5600, New York, New York
WALTER E. ROBB, III (born 8/18/26)
Benchmark Advisors, Inc. (corporate financial consultants), President
and Treasurer; Benchmark Consulting Group, Inc. (office services),
President; CitiFunds and CitiSelect Folios (mutual funds), Trustee
Address: 110 Broad Street, Boston, Massachusetts
ARNOLD D. SCOTT* (born 12/16/42)
Massachusetts Financial Services Company, Senior Executive Vice
President and Secretary
J. DALE SHERRATT (born 9/23/38)
Insight Resources, Inc. (acquisition planning specialists), President;
Wellfleet Investments (investor in health care companies), Managing
General Partner (since 1993)
Address: 294 Washington Street, Boston, Massachusetts
WARD SMITH (born 9/13/30)
NACCO Industries (holding company), Chairman (prior to June 1994);
Sundstrand Corporation (diversified mechanical manufacturer), Director
Address: 36080 Shaker Blvd., Hunting Valley, Ohio
OFFICERS
W. THOMAS LONDON,* Treasurer (born 3/1/44)
Massachusetts Financial Services Company, Senior Vice President
JAMES O. YOST,* Assistant Treasurer (born 6/12/60)
Massachusetts Financial Services Company, Vice President
ELLEN MOYNIHAN,* Assistant Treasurer (born 11/13/57)
Massachusetts Financial Services Company, Vice President (since
September 1996); Deloitte & Touch LLP, Senior Manager (prior to
September 1996)
MARK E. BRADLEY,* Assistant Treasurer (born 11/23/59)
Massachusetts Financial Services Company, Vice President (since March
1997); Putnam Investments, Vice President (from September 1994 until
March 1997); Ernst & Young LLP, Senior Tax Manager (prior to September
1994)
STEPHEN E. CAVAN,* Secretary and Clerk (born 11/6/53)
Massachusetts Financial Services Company, Senior Vice President, General
Counsel and Assistant Secretary
JAMES R. BORDEWICK, JR.,* Assistant Secretary
(born 3/6/59) Massachusetts Financial Services Company, Senior Vice
President and Associate General Counsel
----------------
*"Interested persons" (as defined in the 1940 Act) of the Adviser, whose
address is 500 Boylston Street, Boston, Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain
affiliates of MFS or with certain other funds of which MFS or a
subsidiary is the investment adviser or distributor. Messrs. Shames and
Scott, Directors of MFD, and Mr. Cavan, the Secretary of MFD, hold
similar positions with certain other MFS affiliates. Mr. Bailey is a
Director of Sun Life Assurance Company of Canada (U.S.), a subsidiary of
Sun Life Assurance Company of Canada.
<PAGE>
PART I - APPENDIX B
TRUSTEE COMPENSATION
The Fund pays the compensation of non-interested Trustees and of
Trustees who are not officers of the Trust, who currently receive a fee
of $1,250 per year plus $225 per meeting and $225 per committee meeting
attended, together with such Trustee's out-of-pocket expenses. In
addition, the Trust has a retirement plan for these Trustees as
described under the caption "Management of the Fund -- Trustee
Retirement Plan" in Part II. The Retirement Age under the plan is 75.
<TABLE>
<CAPTION>
TRUSTEE COMPENSATION TABLE
.......................................................................................................................
RETIREMENT BENEFIT TOTAL TRUSTEE
TRUSTEE FEES ACCRUED AS PART ESTIMATED CREDITED FEES FROM FUND
TRUSTEE FROM FUND(1) OF FUND EXPENSES(1) YEARS OF SERVICE(2) AND FUND COMPLEX(3)
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Bailey $3,500 8 $
Marshall N. Cohan 4,175 8
Dr. Lawrence Cohn 3,922 20
Sir David Gibbons 3,500 8
Abby M. O'Neill 3,500 9
Walter E. Robb, III 4,822 8
Arnold D. Scott 0 N/A
James L. Shames 0 N/A
J. Dale Sherratt 4,836 22
Ward Smith 4,386 12
----------------
(1)For the fiscal year ending October 31, 1998.
(2)Based upon normal retirement age (75).
(3)Information provided is provided for calendar year 1998. All Trustees served as Trustees of funds within the MFS
fund complex (having aggregate net assets at December 31, 1998, of approximately $ billion) except Mr. Bailey,
who served as Trustee of funds within the MFS complex (having aggregate net assets at December 31, 1998 of
approximately $ billion).
</TABLE>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
..........................................................................
YEARS OF SERVICE
AVERAGE
TRUSTEE FEES 3 5 7 10 OR MORE
--------------------------------------------------------------------------
$3,150 $473 $ 788 $1,103 $1,575
3,584 538 896 1,254 1,792
4,018 603 1,004 1,406 2,009
4,452 668 1,113 1,558 2,226
4,886 733 1,221 1,710 2,443
5,320 798 1,330 1,862 2,660
----------------
(4)Other funds in the MFS Fund complex provide similar retirement benefits
to the Trustees.
<PAGE>
PART I - APPENDIX C
<TABLE>
<CAPTION>
AFFILIATED SERVICE PROVIDER COMPENSATION
...............................................................................................................................
The Fund paid compensation to its affiliated service providers over the
specified periods as follows:
PAID TO MFS AMOUNT PAID TO MFS FOR PAID TO MFSC AMOUNT AGGREGATE
FOR ADVISORY WAIVED ADMINISTRATIVE FOR TRANSFER WAIVED AMOUNT PAID TO
FISCAL YEAR ENDED SERVICES BY MFS SERVICES AGENCY SERVICES BY MFSC MFS AND MFSC
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
October 31, 1998 $2,127,640 $413,288 $61,787 $486,597 $ 0 $2,676,024
October 31, 1997 $ 721,515 $294,109 $17,086* $214,026 $ 0 $ 952,627
October 31, 1996 $ 385,142 $347,146 $ 0 $183,371 $ 0 $ 568,513
--------------------
*From March 1, 1997, the commencement of the Master Administrative Service Agreement.
</TABLE>
<PAGE>
PART I - APPENDIX D
SALES CHARGES AND DISTIBUTION PLAN PAYMENTS
<TABLE>
<CAPTION>
SALES CHARGES
...............................................................................................................................
The following sales charges were paid during the specified periods:
CLASS A INITIAL SALES CHARGES: CDSC PAID TO MFD ON:
RETAINED REALLOWED CLASS A CLASS B CLASS C
FISCAL YEAR END TOTAL BY MFD TO DEALERS SHARES SHARES SHARES
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
October 31, 1998 $3,694,838 $618,527 $3,076,311 $1,102 $295,694 $29,251
October 31, 1997 $ 656,332 $108,685 $ 547,647 $ 138 $141,942 $ 4,517
October 31, 1996 $ 345,085 $ 54,931 $ 290,154 $ 700 $ 96,691 $ 716
</TABLE>
DEALER REALLOWANCES
..........................................................................
As shown above, MFD pays (or "reallows") a portion of the Class A initial
sales charge to dealers. The dealer reallowance as expressed as a
percentage of the Class A shares' offering price is:
DEALER REALLOWANCE AS A
AMOUNT OF PURCHASE PERCENT OF OFFERING PRICE
--------------------------------------------------------------------------
Less than $100,000 4.00%
$100,000 but less than $250,000 3.20%
$250,000 but less than $500,000 2.25%
$500,000 but less than $1,000,000 1.70%
$1,000,000 or more None*
----------------
*A CDSC will apply to such purchase.
<TABLE>
<CAPTION>
DISTRIBUTION PLAN PAYMENTS
..........................................................................................................
During the fiscal year ended October 31, 1998, the Fund made the following
Distribution Plan payments:
AMOUNT OF DISTRIBUTION AND SERVICE FEES:
CLASS OF SHARES PAID BY FUND RETAINED BY MFD PAID TO DEALERS
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A Shares $ 402,562 $ 31,818 $370,744
Class B Shares $2,091,070 $1,582,128 $508,942
Class C Shares $ 549,445 $ 582 $548,863
Distribution plan payments retained by MFD are used to compensate MFD for commissions advanced by MFD to
dealers upon sale of fund shares.
</TABLE>
<PAGE>
PART I - APPENDIX E
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
BROKERAGE COMMISSIONS
...........................................................................
The following brokerage commissions were paid by the Fund during the
specified time periods:
BROKERAGE COMMISSIONS
FISCAL YEAR END PAID BY FUND
---------------------------------------------------------------------------
October 31, 1998 $
October 31, 1997 $647,563
October 31, 1996 $886,781
SECURITIES ISSUED BY REGULAR BROKER-DEALERS
..........................................................................
During the fiscal year ended October 31, 1998, the Fund purchased
securities issued by the following regular broker-dealers of the Fund,
which had the following values as of October 31, 1998:
VALUE OF SECURITIES
BROKER-DEALER AS OF OCTOBER 31, 1998
--------------------------------------------------------------------------
[Merrill Lynch $
Morgan Stanley-Dean Witter $
General Electric Capital Corp] $
<PAGE>
PART I - APPENDIX F
SHARE OWNERSHIP
OWNERSHIP BY TRUSTEES AND OFFICERS
As of November 30, 1998, the Trustees and officers of the Trust as a group
owned less than 1% of any class of the Fund's shares.
25% OR GREATER OWNERSHIP
The following table identifies those investors who own 25% or more of the
Fund's shares (all share classes taken together) as of November 30, 1998,
and are therefore presumed to control the Fund:
<TABLE>
<CAPTION>
JURISDICTION OF ORGANIZATION
NAME AND ADDRESS OF INVESTOR (IF A COMPANY) PERCENTAGE OWNERSHIP
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
None
<CAPTION>
5% OR GREATER OWNERSHIP OF SHARE CLASS
The following table identifies those investors who own 5% or more of any class of the Fund's shares as of November 30, 1998:
NAME AND ADDRESS OF INVESTOR OWNERSHIP PERCENTAGE
........................................................................................................................
<S> <C>
MLPF&S for the Sole Benefit of its Customers 30.09% of Class A shares
Attn: Fund Administration 97GT4
4800 Deer Lake Drive E 3rd FL
Jacksonville, FL 32246-6484
........................................................................................................................
MLPF&S for the Sole Benefit of its Customers 16.32% of Class B shares
Attn: Fund Administration 97N52
4800 Deer Lake Drive E 3rd FL
Jacksonville, FL 32246-6484
........................................................................................................................
MLPF&S for the Sole Benefit of its Customers 29.50% of Class C shares
Attn: Fund Administration 97N52
4800 Deer Lake Drive E 3rd FL
Jacksonville, FL 32246-6484
........................................................................................................................
TRS MFS DEF Contribution Plan 89.28% of Class I shares
c/o Mark Leary 19th FL
Mass Financial Services
500 Boylston Street
Boston, MA 02116-3740
........................................................................................................................
RSBCO 9.99% of Class I shares
P.O. Box 1410
Ruston, LA 71273-1410
........................................................................................................................
</TABLE>
<PAGE>
PART I - APPENDIX G
PERFORMANCE INFORMATION
..........................................................................
All performance quotations are as of October 31, 1998.
<TABLE>
<CAPTION>
AVERAGE ANNUAL ACTUAL 30-
TOTAL RETURNS DAY YIELD 30-DAY YIELD CURRENT
------------------------------------------- (INCLUDING (WITHOUT ANY DISTRIBUTION
1 YEAR 5 YEARS LIFE OF FUND* WAIVERS) WAIVERS) RATE+
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares, with
initial sales charge
(SEC Performance) 16.33% 15.83% 16.55% N/A 1.80% 2.67%
Class A Shares, at a
net asset value 22.13% 16.97% 17.40% 1.93% N/A N/A
Class B Shares, with
CDSC(SEC Performance) 17.27% 15.76% 16.61% N/A% 1.16% N/A
Class B Shares, at
net asset value 21.27% 15.98% 16.61% 1.31% N/A 2.07%
Class C Shares, with
CDSC (SEC Performance) 20.25% 16.03% 16.70% N/A% 1.16% N/A
Class C Shares, at
net asset value 21.25% 16.03% 16.70% 1.31% N/A% 2.07%
Class I Shares, at
net asset value 22.52% 17.09% 17.49% 2.27% 2.12% 3.05%
----------------------
*From the class inception date on February 14, 1992.
+Annualized, based upon the last distribution.
</TABLE>
Class A share performance calculated according to Securities and Exchange
Commission (referred to as the SEC) rules (referred to as SEC performance)
takes into account the deduction of the 4.75% maximum sales charge. Class
B SEC performance takes into account the deduction of the applicable
contingent deferred sales charge (referred to as a CDSC), which declines
over six years from 4% to 0%. Class C SEC performance takes into account
the deduction of the 1% CDSC. The fund initially offered Class A shares on
February 14, 1992, Class B shares on September 7, 1993, Class C shares on
January 3, 1994 and Class I shares on January 2, 1997.
Class B and Class C share performance include the performance of the
fund's Class A shares for periods prior to the offering of Class B and
Class C shares. Class B and Class C share performance generally would have
been lower than Class A share performance had Class B and Class C shares
been offered for the entire period, because the operating expenses (e.g.,
distribution and service fees) attributable to Class B and Class C shares
are higher than those of Class A shares. Class B and Class C share SEC
performance has been adjusted to take into account the CDSC applicable to
Class B and Class C shares, rather than the initial sales charge
applicable to Class A shares.
Class I share performance includes the performance of the fund's Class A
shares for periods prior to the offering of Class I shares. Class I share
performance generally would have been higher than Class A share
performance had Class I shares been offered for the entire period, because
operating expenses (e.g., distribution and service fees) attributable to
Class I shares are lower than those of Class A shares. Class I share
performance has been adjusted to take into account the fact that Class I
shares have no initial sales charge.
Performance results include any applicable expense subsidies and waivers,
which may cause the results to be more favorable. Current subsidies and
waivers may be discontinued at any time.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
PART II
Part II of this SAI describes policies and practices that apply to each of the
Funds in the MFS Family of Funds. References in this Part II to a "Fund" means
each Fund in the MFS Family of Funds, unless noted otherwise. References in
this Part II to a "Trust" means the Massachusetts business trust of which the
Fund is a series, or, if the Fund is not a series of a Massachusetts business
trust, references to a "Trust" shall mean the Fund.
TABLE OF CONTENTS
Page
I Management of the Fund ....................................... 1
Trustees/Officers ............................................ 1
Investment Adviser ........................................... 1
Administrator ................................................ 2
Custodian .................................................... 2
Shareholder Servicing Agent .................................. 2
Distributor .................................................. 2
II Principal Share Characteristics .............................. 2
Class A Shares ............................................... 2
Class B Shares, Class C Shares and Class I Shares ............ 2
Waiver of Sales Charges ...................................... 3
Dealer Commissions and Concessions ........................... 3
General ...................................................... 3
III Distribution Plan ............................................ 3
Features Common to Each Class of Shares ...................... 3
Features Unique to Each Class of Shares ...................... 4
IV Investment Techniques, Practices and Risks ................... 5
V Net Income and Distributions ................................. 5
Money Market Funds ........................................... 5
Other Funds .................................................. 5
VI Tax Considerations ........................................... 5
Taxation of the Fund ......................................... 5
Taxation of Shareholders ..................................... 6
Special Rules for Municipal Fund Distributions ............... 7
VII Portfolio Transactions and Brokerage Commissions ............. 8
VIII Determination of Net Asset Value ............................. 9
Money Market Funds ........................................... 10
Other Funds .................................................. 10
IX Performance Information ...................................... 10
Money Market Funds ........................................... 10
Other Funds .................................................. 11
General ...................................................... 12
MFS Firsts ................................................... 12
X Shareholder Services ......................................... 13
Investment and Withdrawal Programs ........................... 13
Exchange Privilege ........................................... 15
Tax-Deferred Retirement Plans ................................ 16
XI Description of Shares, Voting Rights and Liabilities ......... 16
Appendix A -- Waivers of Sales Charges ....................... A-1
Appendix B -- Dealer Commissions and Concessions ............. B-1
Appendix C -- Investment Techniques, Practices and Risks ..... C-1
Appendix D -- Description of Bond Ratings .................... D-1
<PAGE>
(I) MANAGEMENT OF THE FUND
TRUSTEES/OFFICERS
BOARD OVERSIGHT -- The Board of Trustees which oversees the Fund
provides broad supervision over the affairs of the Fund. The Adviser is
responsible for the investment management of the Fund's assets, and the
officers of the Trust are responsible for its operations.
TRUSTEE RETIREMENT PLAN -- The Trust has a retirement plan for Trustees
who are non-interested Trustees and Trustees who are not officers of the
Trust. Under this plan, a Trustee will retire upon reaching a specified
age (see Part I -- "Appendix B ") ("Retirement Age") and if the Trustee
has completed at least 5 years of service, he would be entitled to
annual payments during his lifetime of up to 50% of such Trustee's
average annual compensation (based on the three years prior to his
retirement) depending on his length of service. A Trustee may also
retire prior to his Retirement Age and receive reduced payments if he
has completed at least 5 years of service. Under the plan, a Trustee (or
his beneficiaries) will also receive benefits for a period of time in
the event the Trustee is disabled or dies. These benefits will also be
based on the Trustee's average annual compensation and length of
service. The Fund will accrue its allocable portion of compensation
expenses under the retirement plan each year to cover the current year's
service and amortize past service cost.
INDEMNIFICATION OF TRUSTEES AND OFFICERS -- The Declaration of Trust of
the Trust provides that the Trust will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with
litigation in which they may be involved because of their offices with
the Trust, unless, as to liabilities of the Trust or its shareholders,
it is determined that they engaged in willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in their
offices, or with respect to any matter, unless it is adjudicated that
they did not act in good faith in the reasonable belief that their
actions were in the best interest of the Trust. In the case of
settlement, such indemnification will not be provided unless it has been
determined pursuant to the Declaration of Trust, that they have not
engaged in willful misfeasance, bad faith, gross negligence or reckless
disregard of their duties.
INVESTMENT ADVISER The Trust has retained Massachusetts Financial
Services Company ("MFS" or the "Adviser") as the Fund's investment
adviser. MFS and its predecessor organizations have a history of money
management dating from 1924. MFS is a subsidiary of Sun Life of Canada
(U.S.) Financial Services Holdings, Inc., which in turn is an indirect
wholly owned subsidiary of Sun Life of Canada (an insurance company).
MFS has retained, on behalf of certain MFS Funds, sub-investment
advisers to assist MFS in the management of the Fund's assets. A
description of these sub-advisers, the services they provide and their
compensation is provided under the caption "Management of the Fund --
Sub- Adviser" in Part I of this SAI for Funds which use sub-advisers.
INVESTMENT ADVISORY AGREEMENT -- The Adviser manages the Fund pursuant
to an Investment Advisory Agreement (the "Advisory Agreement"). Under
the Advisory Agreement, the Adviser provides the Fund with overall
investment advisory services. Subject to such policies as the Trustees
may determine, the Adviser makes investment decisions for the Fund. For
these services and facilities, the Adviser receives an annual management
fee, computed and paid monthly, as disclosed in the Prospectus under the
heading "Management of the Fund[s]."
The Adviser pays the compensation of the Trust's officers and of any
Trustee who is an officer of the Adviser. The Adviser also furnishes at
its own expense all necessary administrative services, including office
space, equipment, clerical personnel, investment advisory facilities,
and all executive and supervisory personnel necessary for managing the
Fund's investments and effecting its portfolio transactions.
The Trust pays the compensation of the Trustees who are not officers
of MFS and all expenses of the Fund (other than those assumed by MFS)
including but not limited to: advisory and administrative services;
governmental fees; interest charges; taxes; membership dues in the
Investment Company Institute allocable to the Fund; fees and expenses of
independent auditors, of legal counsel, and of any transfer agent,
registrar or dividend disbursing agent of the Fund; expenses of
repurchasing and redeeming shares and servicing shareholder accounts;
expenses of preparing, printing and mailing prospectuses, periodic
reports, notices and proxy statements to shareholders and to
governmental officers and commissions; brokerage and other expenses
connected with the execution, recording and settlement of portfolio
security transactions; insurance premiums; fees and expenses of State
Street Bank and Trust Company, the Fund's custodian, for all services to
the Fund, including safekeeping of funds and securities and maintaining
required books and accounts; expenses of calculating the net asset value
of shares of the Fund; and expenses of shareholder meetings. Expenses
relating to the issuance, registration and qualification of shares of
the Fund and the preparation, printing and mailing of prospectuses are
borne by the Fund except that the Distribution Agreement with MFD
requires MFD to pay for prospectuses that are to be used for sales
purposes. Expenses of the Trust which are not attributable to a specific
series are allocated between the series in a manner believed by
management of the Trust to be fair and equitable.
The Advisory Agreement has an initial two year term and continues in
effect thereafter only if such continuance is specifically approved at
least annually by the Board of Trustees or by vote of a majority of the
Fund's shares (as defined in "Investment Restrictions" in Part I of this
SAI) and, in either case, by a majority of the Trustees who are not
parties to the Advisory Agreement or interested persons of any such
party. The Advisory Agreement terminates automatically if it is assigned
and may be terminated without penalty by vote of a majority of the
Fund's shares (as defined in "Investment Restrictions" in Part I of this
SAI), or by either party on not more than 60 days" nor less than 30
days" written notice. The Advisory Agreement provides that if MFS ceases
to serve as the Adviser to the Fund, the Fund will change its name so as
to delete the initials "MFS" and that MFS may render services to others
and may permit other fund clients to use the initials "MFS" in their
names. The Advisory Agreement also provides that neither the Adviser nor
its personnel shall be liable for any error of judgment or mistake of
law or for any loss arising out of any investment or for any act or
omission in the execution and management of the Fund, except for willful
misfeasance, bad faith or gross negligence in the performance of its or
their duties or by reason of reckless disregard of its or their
obligations and duties under the Advisory Agreement.
ADMINISTRATOR
MFS provides the Fund with certain financial, legal, compliance,
shareholder communications and other administrative services pursuant to
a Master Administrative Services Agreement. Under this Agreement, the
Fund pays MFS an administrative fee up to 0.015% per annum of the Fund's
average daily net assets. This fee reimburses MFS for a portion of the
costs it incurs to provide such services.
CUSTODIAN
State Street Bank and Trust Company (the "Custodian") is the custodian
of the Fund's assets. The Custodian's responsibilities include
safekeeping and controlling the Fund's cash and securities, handling the
receipt and delivery of securities, determining income and collecting
interest and dividends on the Fund's investments, maintaining books of
original entry for portfolio and fund accounting and other required
books and accounts, and calculating the daily net asset value of each
class of shares of the Fund. The Custodian does not determine the
investment policies of the Fund or decide which securities the Fund will
buy or sell. The Fund may, however, invest in securities of the
Custodian and may deal with the Custodian as principal in securities
transactions. The Custodian also acts as the dividend disbursing agent
of the Fund.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of MFS, is
the Fund's shareholder servicing agent, pursuant to an Amended and
Restated Shareholder Servicing Agreement (the "Agency Agreement"). The
Shareholder Servicing Agent's responsibilities under the Agency
Agreement include administering and performing transfer agent functions
and the keeping of records in connection with the issuance, transfer and
redemption of each class of shares of the Fund. For these services, MFSC
will receive a fee calculated as a percentage of the average daily net
assets of the Fund at an effective annual rate of up to 0.1125%. In
addition, MFSC will be reimbursed by the Fund for certain expenses
incurred by MFSC on behalf of the Fund. The Custodian has contracted
with MFSC to perform certain dividend disbursing agent functions for the
Fund.
DISTRIBUTOR
MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary of MFS,
serves as distributor for the continuous offering of shares of the Fund
pursuant to an Amended and Restated Distribution Agreement (the
"Distribution Agreement"). The Distribution Agreement has an initial two
year term and continues in effect thereafter only if such continuance is
specifically approved at least annually by the Board of Trustees or by
vote of a majority of the Fund's shares (as defined in "Investment
Restrictions" in Part I of this SAI) and in either case, by a majority
of the Trustees who are not parties to the Distribution Agreement or
interested persons of any such party. The Distribution Agreement
terminates automatically if it is assigned and may be terminated without
penalty by either party on not more than 60 days' nor less than 30 days'
notice.
(II) PRINCIPAL SHARE CHARACTERISTICS
Set forth below is a description of Class A, B, C and I shares offered
by the MFS Family of Funds. Some MFS Funds may not offer each class of
shares -- see the Prospectus of the Fund to determine which classes of
shares the Fund offers.
CLASS A SHARES
MFD acts as agent in selling Class A shares of the Fund to dealers. The
public offering price of Class A shares of the Fund is their net asset
value next computed after the sale plus a sales charge which varies
based upon the quantity purchased. The public offering price of a Class
A share of the Fund is calculated by dividing the net asset value of a
Class A share by the difference (expressed as a decimal) between 100%
and the sales charge percentage of offering price applicable to the
purchase (see "How to Purchase, Exchange and Redeem Shares" in the
Prospectus). The sales charge scale set forth in the Prospectus applies
to purchases of Class A shares of the Fund alone or in combination with
shares of all classes of certain other funds in the MFS Family of Funds
and other funds (as noted under Right of Accumulation) by any person,
including members of a family unit (e.g., husband, wife and minor
children) and bona fide trustees, and also applies to purchases made
under the Right of Accumulation or a Letter of Intent (see "Investment
and Withdrawal Programs" below). A group might qualify to obtain
quantity sales charge discounts (see "Investment and Withdrawal
Programs" below). Certain purchases of Class A shares may be subject to
a 1% CDSC instead of an initial sales charge, as described in the Fund's
Prospectus.
CLASS B SHARES, CLASS C SHARES AND CLASS I SHARES
MFD acts as agent in selling Class B, Class C and Class I shares of the
Fund. The public offering price of Class B, Class C and Class I shares
is their net asset value next computed after the sale. Class B and C
shares are generally subject to a CDSC, as described in the Fund's
Prospectus.
WAIVER OF SALES CHARGES
In certain circumstances, the initial sales charge imposed upon
purchases of Class A shares and the CDSC imposed upon redemptions of
Class A, B and C shares are waived. These circumstances are described in
Appendix A of this Part II. Such sales are made without a sales charge
to promote good will with employees and others with whom MFS, MFD and/or
the Fund have business relationships, because the sales effort, if any,
involved in making such sales is negligible, or in the case of certain
CDSC waivers, because the circumstances surrounding the redemption of
Fund shares were not foreseeable or voluntary.
DEALER COMMISSIONS AND CONCESSIONS
MFD pays commission and provides concessions to dealers that sell Fund
shares. These dealer commissions and concession are described in
Appendix B of this Part II.
GENERAL
Neither MFD nor dealers are permitted to delay placing orders to benefit
themselves by a price change. On occasion, MFD may obtain brokers loans
from various banks, including the custodian banks for the MFS Funds, to
facilitate the settlement of sales of shares of the Fund to dealers. MFD
may benefit from its temporary holding of funds paid to it by investment
dealers for the purchase of Fund shares.
(III) DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class A, Class B and
Class C shares (the "Distribution Plan") pursuant to Section 12(b) of
the 1940 Act and Rule 12b-1 thereunder (the "Rule") after having
concluded that there is a reasonable likelihood that the Distribution
Plan would benefit the Fund and each respective class of shareholders.
The provisions of the Distribution Plan are severable with respect to
each Class of shares offered by the Fund. The Distribution Plan is
designed to promote sales, thereby increasing the net assets of the
Fund. Such an increase may reduce the expense ratio to the extent the
Fund's fixed costs are spread over a larger net asset base. Also, an
increase in net assets may lessen the adverse effect that could result
were the Fund required to liquidate portfolio securities to meet
redemptions. There is, however, no assurance that the net assets of the
Fund will increase or that the other benefits referred to above will be
realized.
In certain circumstances, the fees described below may not be imposed,
are being waived or do not apply to certain MFS Funds. Current
distribution and service fees for each Fund are reflected under the
caption "Expense Summary" in the Prospectus.
FEATURES COMMON TO EACH CLASS OF SHARES
There are features of the Distribution Plan that are common to each
Class of shares, as described below.
SERVICE FEES -- The Distribution Plan provides that the Fund may pay MFD
a service fee of up to 0.25% of the average daily net assets
attributable to the class of shares to which the Distribution Plan
relates (i.e., Class A, Class B or Class C shares, as appropriate) (the
"Designated Class") annually in order that MFD may pay expenses on
behalf of the Fund relating to the servicing of shares of the Designated
Class. The service fee is used by MFD to compensate dealers which enter
into a sales agreement with MFD in consideration for all personal
services and/or account maintenance services rendered by the dealer with
respect to shares of the Designated Class owned by investors for whom
such dealer is the dealer or holder of record. MFD may from time to time
reduce the amount of the service fees paid for shares sold prior to a
certain date. Service fees may be reduced for a dealer that is the
holder or dealer of record for an investor who owns shares of the Fund
having an aggregate net asset value at or above a certain dollar level.
Dealers may from time to time be required to meet certain criteria in
order to receive service fees. MFD or its affiliates are entitled to
retain all service fees payable under the Distribution Plan for which
there is no dealer of record or for which qualification standards have
not been met as partial consideration for personal services and/or
account maintenance services performed by MFD or its affiliates to
shareholder accounts.
DISTRIBUTION FEES -- The Distribution Plan provides that the Fund may
pay MFD a distribution fee in addition to the service fee described
above based on the average daily net assets attributable to the
Designated Class as partial consideration for distribution services
performed and expenses incurred in the performance of MFD's obligations
under its distribution agreement with the Fund. MFD pays commissions to
dealers as well as expenses of printing prospectuses and reports used
for sales purposes, expenses with respect to the preparation and
printing of sales literature and other distribution related expenses,
including, without limitation, the cost necessary to provide
distribution-related services, or personnel, travel, office expense and
equipment. The amount of the distribution fee paid by the Fund with
respect to each class differs under the Distribution Plan, as does the
use by MFD of such distribution fees. Such amounts and uses are
described below in the discussion of the provisions of the Distribution
Plan relating to each Class of shares. While the amount of compensation
received by MFD in the form of distribution fees during any year may be
more or less than the expenses incurred by MFD under its distribution
agreement with the Fund, the Fund is not liable to MFD for any losses
MFD may incur in performing services under its distribution agreement
with the Fund.
OTHER COMMON FEATURES -- Fees payable under the Distribution Plan are
charged to, and therefore reduce, income allocated to shares of the
Designated Class. The provisions of the Distribution Plan relating to
operating policies as well as initial approval, renewal, amendment and
termination are substantially identical as they relate to each Class of
shares covered by the Distribution Plan.
The Distribution Plan remains in effect from year to year only if its
continuance is specifically approved at least annually by vote of both
the Trustees and a majority of the Trustees who are not "interested
persons" or financially interested parties of such Plan ("Distribution
Plan Qualified Trustees"). The Distribution Plan also requires that the
Fund and MFD each shall provide the Trustees, and the Trustees shall
review, at least quarterly, a written report of the amounts expended
(and purposes therefor) under such Plan. The Distribution Plan may be
terminated at any time by vote of a majority of the Distribution Plan
Qualified Trustees or by vote of the holders of a majority of the
respective class of the Fund's shares (as defined in "Investment
Restrictions" in Part I of this SAI). All agreements relating to the
Distribution Plan entered into between the Fund or MFD and other
organizations must be approved by the Board of Trustees, including a
majority of the Distribution Plan Qualified Trustees. Agreements under
the Distribution Plan must be in writing, will be terminated
automatically if assigned, and may be terminated at any time without
payment of any penalty, by vote of a majority of the Distribution Plan
Qualified Trustees or by vote of the holders of a majority of the
respective class of the Fund's shares. The Distribution Plan may not be
amended to increase materially the amount of permitted distribution
expenses without the approval of a majority of the respective class of
the Fund's shares (as defined in "Investment Restrictions" in Part I of
this SAI) or may not be materially amended in any case without a vote of
the Trustees and a majority of the Distribution Plan Qualified Trustees.
The selection and nomination of Distribution Plan Qualified Trustees
shall be committed to the discretion of the non-interested Trustees then
in office. No Trustee who is not an "interested person" has any
financial interest in the Distribution Plan or in any related agreement.
FEATURES UNIQUE TO EACH CLASS OF SHARES
There are certain features of the Distribution Plan that are unique to
each class of shares, as described below.
CLASS A SHARES -- Class A shares are generally offered pursuant to an
initial sales charge, a substantial portion of which is paid to or
retained by the dealer making the sale (the remainder of which is paid
to MFD). In addition to the initial sales charge, the dealer also
generally receives the ongoing 0.25% per annum service fee, as discussed
above.
No service fees will be paid: (i) to any dealer who is the holder or
dealer or record for investors who own Class A shares having an
aggregate net asset value less than $750,000, or such other amount as
may be determined from time to time by MFD (MFD, however, may waive this
minimum amount requirement from time to time); or (ii) to any insurance
company which has entered into an agreement with the Fund and MFD that
permits such insurance company to purchase Class A shares from the Fund
at their net asset value in connection with annuity agreements issued in
connection with the insurance company's separate accounts.
The distribution fee paid to MFD under the Distribution Plan is equal,
on an annual basis, to 0.10% of the Fund's average daily net assets
attributable to Class A shares (0.25% per annum for certain Funds). As
noted above, MFD may use the distribution fee to cover distribution-
related expenses incurred by it under its distribution agreement with
the Fund, including commissions to dealers and payments to wholesalers
employed by MFD (e.g., MFD pays commissions to dealers with respect to
purchases of $1 million or more and purchases by certain retirement
plans of Class A shares which are sold at net asset value but which are
subject to a 1% CDSC for one year after purchase). In addition, to the
extent that the aggregate service and distribution fees paid under the
Distribution Plan do not exceed 0.35% per annum of the average daily net
assets of the Fund attributable to Class A shares (0.50% per annum for
certain Funds), the Fund is permitted to pay such distribution-related
expenses or other distribution-related expenses.
CLASS B SHARES -- Class B shares are offered at net asset value without
an initial sales charge but subject to a CDSC. MFD will advance to
dealers the first year service fee described above at a rate equal to
0.25% of the purchase price of such shares and, as compensation
therefor, MFD may retain the service fee paid by the Fund with respect
to such shares for the first year after purchase. Dealers will become
eligible to receive the ongoing 0.25% per annum service fee with respect
to such shares commencing in the thirteenth month following purchase.
Except in the case of the first year service fee, no service fees will
be paid to any securities dealer who is the holder or dealer of record
for investors who own Class B shares having an aggregate net asset value
of less than $750,000 or such other amount as may be determined by MFD
from time to time. MFD, however, may waive this minimum amount
requirement from time to time.
Under the Distribution Plan, the Fund pays MFD a distribution fee
equal, on an annual basis, to 0.75% of the Fund's average daily net
assets attributable to Class B shares. As noted above, this distribution
fee may be used by MFD to cover its distribution-related expenses under
its distribution agreement with the Fund (including the 3.75% commission
it pays to dealers upon purchase of Class B shares).
CLASS C SHARES -- Class C shares are offered at net asset value
without an initial sales charge but subject to a CDSC of 1.00% upon
redemption during the first year. MFD will pay a commission to dealers
of 1.00% of the purchase price of Class C shares purchased through
dealers at the time of purchase. In compensation for this 1.00%
commission paid by MFD to dealers, MFD will retain the 1.00% per annum
Class C distribution and service fees paid by the Fund with respect to
such shares for the first year after purchase, and dealers will become
eligible to receive from MFD the ongoing 1.00% per annum distribution
and service fees paid by the Fund to MFD with respect to such shares
commencing in the thirteenth month following purchase.
This ongoing 1.00% fee is comprised of the 0.25% per annum service fee
paid to MFD under the Distribution Plan (which MFD in turn pays to
dealers), as discussed above, and a distribution fee paid to MFD (which
MFD also in turn pays to dealers) under the Distribution Plan, equal, on
an annual basis, to 0.75% of the Fund's average daily net assets
attributable to Class C shares.
(IV) INVESTMENT TECHNIQUES, PRACTICES AND RISKS
Set forth in Appendix C of this Part II is a description of investment
techniques and practices which the MFS Funds may generally use in
pursuing their investment objectives and principal investment policies,
and the risks associated with these investment techniques and practices.
The Fund will engage only in certain of these investment techniques and
practices, as identified in Part I. Investment practices and techniques
that are not identified in Part I do not apply to the Fund.
(V) NET INCOME AND DISTRIBUTIONS
MONEY MARKET FUNDS
The net income attributable to each MFS Fund that is a money market
fund is determined each day during which the New York Stock Exchange is
open for trading (see "Determination of Net Asset Value" below for a
list of days the Exchange is closed).
For this purpose, the net income attributable to shares of a money
market fund (from the time of the immediately preceding determination
thereof) shall consist of (i) all interest income accrued on the
portfolio assets of the money market fund, (ii) less all actual and
accrued expenses of the money market fund determined in accordance with
generally accepted accounting principles, and (iii) plus or minus net
realized gains and losses and net unrealized appreciation or
depreciation on the assets of the money market fund, if any. Interest
income shall include discount earned (including both original issue and
market discount) on discount paper accrued ratably to the date of
maturity.
Since the net income is declared as a dividend each time the net
income is determined, the net asset value per share (i.e., the value of
the net assets of the money market fund divided by the number of shares
outstanding) remains at $1.00 per share immediately after each such
determination and dividend declaration. Any increase in the value of a
shareholder's investment, representing the reinvestment of dividend
income, is reflected by an increase in the number of shares in the
shareholder's account.
It is expected that the shares of the money market fund will have a
positive net income at the time of each determination thereof. If for
any reason the net income determined at any time is a negative amount,
which could occur, for instance, upon default by an issuer of a
portfolio security, the money market fund would first offset the
negative amount with respect to each shareholder account from the
dividends declared during the month with respect to each such account.
If and to the extent that such negative amounts exceeds such declared
dividends at the end of the month (or during the month in the case of an
account liquidated in its entirety), the money market fund could reduce
the number of its outstanding shares by treating each shareholder of the
money market fund as having contributed to its capital that number of
full and fractional shares of the money market fund in the account of
such shareholder which represents its proportion of such excess. Each
shareholder of the money market fund will be deemed to have agreed to
such contribution in these circumstances by its investment in the money
market fund. This procedure would permit the net asset value per share
of the money market fund to be maintained at a constant $1.00 per share.
OTHER FUNDS
Each MFS Fund other than the MFS money market funds intends to
distribute to its shareholders dividends equal to all of its net
investment income with such frequency as is disclosed in the Fund's
prospectus. These Funds' net investment income consists of non-capital
gain income less expenses. In addition, these Funds intend to distribute
net realized short- and long-term capital gains, if any, at least
annually. Shareholders will be informed of the tax consequences of such
distributions, including whether any portion represents a return of
capital, after the end of each calendar year.
(VI) TAX CONSIDERATIONS
The following discussion is a brief summary of some of the important
federal (and, where noted, state) income tax consequences affecting the
Fund and its shareholders. The discussion is very general, and therefore
prospective investors are urged to consult their tax advisors about the
impact an investment in the Fund may have on their own federal, state
and local taxes.
TAXATION OF THE FUND
FEDERAL TAXES -- The Fund (even if it is a fund in a Trust with
multiple series) is treated as a separate entity for federal income tax
purposes under the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund has elected (or in the case of a new Fund, intends to
elect) to be, and intends to qualify to be treated each year as, a
"regulated investment company" under Subchapter M of the Code by meeting
all applicable requirements of Subchapter M, including requirements as
to the nature of the Fund's gross income, the amount of its
distributions (as a percentage of both its overall income and any
tax-exempt income), and the composition of its portfolio assets. As a
regulated investment company, the fund will not be subject to any
federal income or excise taxes on its net investment income and net
realized capital gains that it distributes to shareholders in accordance
with the timing requirements imposed by the Code. The Fund's
foreign-source income, if any, may be subject to foreign withholding
taxes. If the Fund failed to qualify as a "regulated investment company"
in any year, it would incur regular federal corporate income tax on all
of its taxable income, whether or not distributed, and Fund
distributions would generally be taxable as ordinary dividend income to
the shareholders.
MASSACHUSETTS TAXES -- As long as it qualifies as a regulated investment
company under the Code, the Fund will not be required to pay
Massachusetts income or excise taxes.
TAXATION OF SHAREHOLDERS
TAX TREATMENT OF DISTRIBUTIONS -- Subject to the special rules discussed
below for Municipal Funds, shareholders of the Fund normally will have
to pay federal income tax and any state or local income taxes on the
dividends and capital gain distributions they receive from the Fund. Any
distributions from ordinary income and from net short-term capital gains
are taxable to shareholders as ordinary income for federal income tax
purposes whether paid in cash or reinvested in additional shares.
Distributions of net capital gain (i.e., the excess of net long-term
capital gain over net short-term capital loss), whether paid in cash or
reinvested in additional shares, are taxable to shareholders as
long-term capital gains for federal income tax purposes without regard
to the length of time the shareholders have held their shares. Any Fund
dividend that is declared in October, November, or December of any
calendar year, payable to shareholders of record in such a month, and
paid during the following January will be treated as if received by the
shareholders on December 31 of the year in which the dividend is
declared. The Fund will notify shareholders regarding the federal tax
status of its distributions after the end of each calendar year.
Any Fund distribution, other than dividends that are declared by the
fund on a daily basis will have the effect of reducing the per share net
asset value of Fund shares by the amount of the distribution.
Shareholders purchasing shares shortly before the record date of any
distribution (other than an exempt-interest dividend) may thus pay the
full price for the shares and then effectively receive a portion of the
purchase price back as a taxable distribution.
DIVIDENDS-RECEIVED DEDUCTION -- If the Fund receives dividend income
from U.S. corporations, a portion of the Fund's ordinary income
dividends is normally eligible for the dividends-received deduction for
corporations if the recipient otherwise qualifies for that deduction
with respect to its holding of Fund shares. Availability of the
deduction for particular corporate shareholders is subject to certain
limitations, and deducted amounts may be subject to the alternative
minimum tax or result in certain basis adjustments.
DISPOSITION OF SHARES -- In general, any gain or loss realized upon a
disposition of Fund shares by a shareholder that holds such shares as a
capital asset will be treated as a long-term capital gain or loss if the
shares have been held for more than twelve months and otherwise as a
short-term capital gain or loss. However, any loss realized upon a
disposition of Fund shares held for six months or less will be treated
as a long-term capital loss to the extent of any distributions of net
capital gain made with respect to those shares. Any loss realized upon a
disposition of shares may also be disallowed under rules relating to
"wash sales." Gain may be increased (or loss reduced) upon a redemption
of Class A Fund shares held for 90 days or less followed by any purchase
(including purchases by exchange or by reinvestment) without payment of
an additional sales charge of Class A shares of the Fund or of any other
shares of an MFS Fund generally sold subject to a sales charge.
DISTRIBUTION/ACCOUNTING POLICIES -- The Fund's current distribution and
accounting policies will affect the amount, timing, and character of
distributions to shareholders and may, under certain circumstances, make
an economic return of capital taxable to shareholders.
FOREIGN INCOME TAXES -- Investment income received by the Fund and gains
with respect to foreign securities may be subject to foreign income
taxes withheld at the source. The United States has entered into tax
treaties with many foreign countries that may entitle the Fund to a
reduced rate of tax or an exemption from tax on such income; the Fund
intends to qualify for treaty reduced rates where available. It is not
possible, however, to determine the Fund's effective rate of foreign tax
in advance, since the amount of the Fund's assets to be invested within
various countries is not known.
If the Fund holds more than 50% of its assets in foreign stock and
securities at the close of its taxable year, it may elect to "pass
through" to its shareholders foreign income taxes paid by it. If the
Fund so elects, shareholders will be required to treat their pro rata
portions of the foreign income taxes paid by the Fund as part of the
amounts distributed to them by it and thus includable in their gross
income for federal income tax purposes. Shareholders who itemize
deductions would then be allowed to claim a deduction or credit (but not
both) on their federal income tax returns for such amounts, subject to
certain limitations. Shareholders who do not itemize deductions would
(subject to such limitations) be able to claim a credit but not a
deduction. No deduction will be permitted to individuals in computing
their alternative minimum tax liability. If the Fund is not eligible, or
does not elect, to "pass through" to its shareholders foreign income
taxes it has paid, shareholders will not be able to claim any deduction
or credit for any part of the foreign taxes paid by the Fund.
U.S. TAXATION OF NON-U.S. PERSONS -- Dividends and certain other
payments (but not including distributions of net capital gains) to
persons who are not citizens or residents of the United States or U.S.
entities ("Non-U.S. Persons") are generally subject to U.S. tax
withholding at the rate of 30%. The Fund intends to withhold at that
rate on taxable dividends and other payments to Non-U.S. Persons that
are subject to such withholding. The Fund may withhold at a lower rate
permitted by an applicable treaty if the shareholder provides the
documentation required by the Fund. Any amounts overwithheld may be
recovered by such persons by filing a claim for refund with the U.S.
Internal Revenue Service within the time period appropriate to such
claims.
BACKUP WITHHOLDING -- The Fund is also required in certain circumstances
to apply backup withholding at the rate of 31% on taxable dividends and
capital gain distributions (and redemption proceeds, if applicable) paid
to any non-corporate shareholder (including a Non-U.S. Person) who does
not furnish to the Fund certain information and certifications or who is
otherwise subject to backup withholding. Backup withholding will not,
however, be applied to payments that have been subject to 30%
withholding.
FOREIGN INCOME TAXATION OF NON-U.S. PERSONS -- Distributions received
from the Fund by Non-U.S. Persons may also be subject to tax under the
laws of their own jurisdictions.
STATE AND LOCAL INCOME TAXES: U.S. GOVERNMENT SECURITIES -- Dividends
paid by the Fund that are derived from interest on obligations of the
U.S. Government and certain of its agencies and instrumentalities (but
generally not distributions of capital gains realized upon the
disposition of such obligations) may be exempt from state and local
income taxes. The Fund generally intends to advise shareholders of the
extent to which its dividends consist of such interest. Shareholders are
urged to consult their tax advisors regarding the possible exclusion of
such portion of their dividends for state and local income tax purposes.
CERTAIN SPECIFIC INVESTMENTS -- Any investment in zero coupon bonds,
deferred interest bonds, payment-in-kind bonds, certain stripped
securities, and certain securities purchased at a market discount will
cause the Fund to recognize income prior to the receipt of cash payments
with respect to those securities. To distribute this income (as well as
non-cash income described in the next two paragraphs) and avoid a tax on
the Fund, the Fund may be required to liquidate portfolio securities
that it might otherwise have continued to hold, potentially resulting in
additional taxable gain or loss to the Fund. Any investment in residual
interests of a CMO that has elected to be treated as a real estate
mortgage investment conduit, or "REMIC," can create complex tax
problems, especially if the Fund has state or local governments or other
tax-exempt organizations as shareholders.
OPTIONS, FUTURES CONTRACTS, AND FORWARD CONTRACTS -- The Fund's
transactions in options, Futures Contracts, Forward Contracts, short
sales "against the box," and swaps and related transactions will be
subject to special tax rules that may affect the amount, timing, and
character of Fund income and distributions to shareholders. For example,
certain positions held by the Fund on the last business day of each
taxable year will be marked to market (i.e., treated as if closed out)
on that day, and any gain or loss associated with the positions will be
treated as 60% long-term and 40% short-term capital gain or loss.
Certain positions held by the Fund that substantially diminish its risk
of loss with respect to other positions in its portfolio may constitute
"straddles," and may be subject to special tax rules that would cause
deferral of Fund losses, adjustments in the holding periods of Fund
securities, and conversion of short-term into long-term capital losses.
Certain tax elections exist for straddles that may alter the effects of
these rules. The Fund will limit its activities in options, Futures
Contracts, Forward Contracts short sales "against the box" and swaps and
related transactions to the extent necessary to meet the requirements of
Subchapter M of the Code.
FOREIGN INVESTMENTS -- Special tax considerations apply with respect to
foreign investments by the Fund. Foreign exchange gains and losses
realized by the Fund may be treated as ordinary income and loss. Use of
foreign currencies for non-hedging purposes and investment by the Fund
in certain "passive foreign investment companies" may be limited in
order to avoid a tax on the Fund. The Fund may elect to mark to market
any investments in "passive foreign investment companies" on the last
day of each year. This election may cause the Fund to recognize income
prior to the receipt of cash payments with respect to those investments;
in order to distribute this income and avoid a tax on the Fund, the Fund
may be required to liquidate portfolio securities that it might
otherwise have continued to hold, potentially resulting in additional
taxable gain or loss to the fund.
SPECIAL RULES FOR MUNICIPAL FUND DISTRIBUTIONS
The following special rules apply to shareholders of funds whose
objective is to invest primarily in obligations that pay interest that
is exempt from federal income tax ("Municipal Funds").
TAX EXEMPT DISTRIBUTIONS -- The portion of a Municipal Fund's
distributions of net investment income that is attributable to interest
from tax-exempt securities will be designated by the Fund as an "exempt-
interest dividend" under the Code and will generally be exempt from
federal income tax in the hands of shareholders so long as at least 50%
of the total value of the Fund's assets consists of tax-exempt
securities at the close of each quarter of the Fund's taxable year.
Distributions of tax-exempt interest earned from certain securities may,
however, be treated as an item of tax preference for shareholders under
the federal alternative minimum tax, and all exempt-interest dividends
may increase a corporate shareholder's alternative minimum tax. Except
when the Fund provides actual monthly percentage breakdowns, the
percentage of income designated as tax-exempt will be applied uniformly
to all distributions by the Fund of net investment income made during
each fiscal year of the Fund and may differ from the percentage of
distributions consisting of tax- exempt interest in any particular
month. Shareholders are required to report exempt-interest dividends
received from the Fund on their federal income tax returns.
TAXABLE DISTRIBUTIONS -- A Municipal Fund may also earn some income that
is taxable (including interest from any obligations that lose their
federal tax exemption) and may recognize capital gains and losses as a
result of the disposition of securities and from certain options and
futures transactions. Shareholders normally will have to pay federal
income tax on the non-exempt-interest dividends and capital gain
distributions they receive from the Fund, whether paid in cash or
reinvested in additional shares. However, the Fund does not expect that
the non-tax-exempt portion of its net investment income, if any, will be
substantial. Because the Fund expects to earn primarily tax-exempt
interest income, it is expected that no Fund dividends will qualify for
the dividends-received deduction for corporations.
CONSEQUENCES OF DISTRIBUTIONS BY A MUNICIPAL FUND: EFFECT OF ACCRUED
TAX- EXEMPT INCOME -- Shareholders redeeming shares after tax-exempt
income has been accrued but not yet declared as a dividend should be
aware that a portion of the proceeds realized upon redemption of the
shares will reflect the existence of such accrued tax-exempt income and
that this portion will be subject to tax as a capital gain even though
it would have been tax-exempt had it been declared as a dividend prior
to the redemption. For this reason, if a shareholder wishes to redeem
shares of a Municipal Fund that does not declare dividends on a daily
basis, the shareholder may wish to consider whether he or she could
obtain a better tax result by redeeming immediately after the Fund
declares dividends representing substantially all the ordinary income
(including tax-exempt income) accrued for that month.
CERTAIN ADDITIONAL INFORMATION FOR MUNICIPAL FUND SHAREHOLDERS --
Interest on indebtedness incurred by shareholders to purchase or carry
Fund shares will not be deductible for federal income tax purposes.
Exempt-interest dividends are taken into account in calculating the
amount of social security and railroad retirement benefits that may be
subject to federal income tax. Entities or persons who are "substantial
users" (or persons related to "substantial users") of facilities
financed by private activity bonds should consult their tax advisors
before purchasing Fund shares.
CONSEQUENCES OF REDEMPTION OF SHARES -- Any loss realized on a
redemption of Municipal Fund shares held for six months or less will be
disallowed to the extent of any exempt-interest dividends received with
respect to those shares. If not disallowed, any such loss will be
treated as a long-term capital loss to the extent of any distributions
of net capital gain made with respect to those shares.
STATE AND LOCAL INCOME TAXES: MUNICIPAL OBLIGATIONS -- The exemption of
exempt-interest dividends for federal income tax purposes does not
necessarily result in exemption under the income tax laws of any state
or local taxing authority. Some states do exempt from tax that portion
of an exempt-interest dividend that represents interest received by a
regulated investment company on its holdings of securities issued by
that state and its political subdivisions and instrumentalities.
Therefore, the Fund will report annually to its shareholders the
percentage of interest income earned by it during the preceding year on
Municipal Bonds and will indicate, on a state-by-state basis only, the
source of such income.
(VII) PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are made
by persons affiliated with the Adviser. Any such person may serve other
clients of the Adviser, or any subsidiary of the Adviser in a similar
capacity. Changes in the Fund's investments are reviewed by the Trust's
Board of Trustees.
The primary consideration in placing portfolio security transactions
is execution at the most favorable prices. The Adviser has complete
freedom as to the markets in and broker-dealers through which it seeks
this result. In the U.S. and in some other countries debt securities are
traded principally in the over-the-counter market on a net basis through
dealers acting for their own account and not as brokers. In other
countries both debt and equity securities are traded on exchanges at
fixed commission rates. The cost of securities purchased from
underwriters includes an underwriter's commission or concession, and the
prices at which securities are purchased and sold from and to dealers
include a dealer's mark-up or mark-down. The Adviser normally seeks to
deal directly with the primary market makers or on major exchanges
unless, in its opinion, better prices are available elsewhere. Subject
to the requirement of seeking execution at the best available price,
securities may, as authorized by the Advisory Agreement, be bought from
or sold to dealers who have furnished statistical, research and other
information or services to the Adviser. At present no arrangements for
the recapture of commission payments are in effect.
Consistent with the foregoing primary consideration, the Conduct Rules
of the National Association of Securities Dealers, Inc. ("NASD") and
such other policies as the Trustees may determine, the Adviser may
consider sales of shares of the Fund and of the other investment company
clients of MFD as a factor in the selection of broker-dealers to execute
the Fund's portfolio transactions.
Under the Advisory Agreement and as permitted by Section 28(e) of the
Securities Exchange Act of 1934, the Adviser may cause the Fund to pay a
broker-dealer which provides brokerage and research services to the
Adviser, an amount of commission for effecting a securities transaction
for the Fund in excess of the amount other broker-dealers would have
charged for the transaction, if the Adviser determines in good faith
that the greater commission is reasonable in relation to the value of
the brokerage and research services provided by the executing
broker-dealer viewed in terms of either a particular transaction or
their respective overall responsibilities to the Fund or to their other
clients. Not all of such services are useful or of value in advising the
Fund.
The term "brokerage and research services" includes advice as to the
value of securities, the advisability of investing in, purchasing or
selling securities, and the availability of securities or of purchasers
or sellers of securities; furnishing analyses and reports concerning
issues, industries, securities, economic factors and trends, portfolio
strategy and the performance of accounts; and effecting securities
transactions and performing functions incidental thereto, such as
clearance and settlement.
Although commissions paid on every transaction will, in the judgment
of the Adviser, be reasonable in relation to the value of the brokerage
services provided, commissions exceeding those which another broker
might charge may be paid to broker-dealers who were selected to execute
transactions on behalf of the Fund and the Adviser's other clients in
part for providing advice as to the availability of securities or of
purchasers or sellers of securities and services in effecting securities
transactions and performing functions incidental thereto, such as
clearance and settlement.
Broker-dealers may be willing to furnish statistical, research and
other factual information or services ("Research") to the Adviser for no
consideration other than brokerage or underwriting commissions.
Securities may be bought or sold from time to time through such
broker-dealers, on behalf of the Fund. The Trustees (together with the
Trustees of the other MFS Family of Funds) have directed the Adviser to
allocate a total of $54,160 of commission business from the MFS Family
of Funds to the Pershing Division of Donaldson Lufkin & Jenrette as
consideration for the annual renewal of certain publications provided by
Lipper Analytical Securities Corporation (which provides information
useful to the Trustees in reviewing the relationship between the Fund
and the Adviser).
The Adviser's investment management personnel attempt to evaluate the
quality of Research provided by brokers. The Adviser sometimes uses
evaluations resulting from this effort as a consideration in the
selection of brokers to execute portfolio transactions.
The management fee of the Adviser will not be reduced as a consequence
of the Adviser's receipt of brokerage and research service. To the
extent the Fund's portfolio transactions are used to obtain brokerage
and research services, the brokerage commissions paid by the Fund will
exceed those that might otherwise be paid for such portfolio
transactions, or for such portfolio transactions and research, by an
amount which cannot be presently determined. Such services would be
useful and of value to the Adviser in serving both the Fund and other
clients and, conversely, such services obtained by the placement of
brokerage business of other clients would be useful to the Adviser in
carrying out its obligations to the Fund. While such services are not
expected to reduce the expenses of the Adviser, the Adviser would,
through use of the services, avoid the additional expenses which would
be incurred if it should attempt to develop comparable information
through its own staff.
In certain instances there may be securities which are suitable for
the Fund's portfolio as well as for that of one or more of the other
clients of the Adviser or any subsidiary of the Adviser. Investment
decisions for the Fund and for such other clients are made with a view
to achieving their respective investment objectives. It may develop that
a particular security is bought or sold for only one client even though
it might be held by, or bought or sold for, other clients. Likewise, a
particular security may be bought for one or more clients when one or
more other clients are selling that same security. Some simultaneous
transactions are inevitable when several clients receive investment
advice from the same investment adviser, particularly when the same
security is suitable for the investment objectives of more than one
client. When two or more clients are simultaneously engaged in the
purchase or sale of the same security, the securities are allocated
among clients in a manner believed by the adviser to be equitable to
each. It is recognized that in some cases this system could have a
detrimental effect on the price or volume of the security as far as the
Fund is concerned. In other cases, however, the Fund believes that its
ability to participate in volume transactions will produce better
executions for the Fund.
(VIII) DETERMINATION OF NET ASSET VALUE
The net asset value per share of each class of the Fund is determined
each day during which the New York Stock Exchange is open for trading.
(As of the date of this SAI, the Exchange is open for trading every
weekday except for the following holidays (or the days on which they are
observed): New Year's Day; Martin Luther King Day; Presidents' Day; Good
Friday; Memorial Day; Independence Day; Labor Day; Thanksgiving Day and
Christmas Day.) This determination is made once each day as of the close
of regular trading on the Exchange by deducting the amount of the
liabilities attributable to the class from the value of the assets
attributable to the class and dividing the difference by the number of
shares of the class outstanding.
MONEY MARKET FUNDS
Portfolio securities of each MFS Fund that is a money market fund are
valued at amortized cost, which the Board of Trustees which oversees the
money market fund has determined in good faith constitutes fair value
for the purposes of complying with the 1940 Act. This valuation method
will continue to be used until such time as the Board of Trustees
determines that it does not constitute fair value for such purposes.
Each money market fund will limit its portfolio to those investments in
U.S. dollar- denominated instruments which its Board of Trustees
determines present minimal credit risks, and which are of high quality
as determined by any major rating service or, in the case of any
instrument that is not so rated, of comparable quality as determined by
the Board of Trustees. Each money market fund has also agreed to
maintain a dollar-weighted average maturity of 90 days or less and to
invest only in securities maturing in 13 months or less. The Board of
Trustees which oversee each money market fund has established procedures
designed to stabilize its net asset value per share, as computed for the
purposes of sales and redemptions, at $1.00 per share. If the Board
determines that a deviation from the $1.00 per share price may exist
which may result in a material dilution or other unfair result to
investors or existing shareholders, it will take corrective action it
regards as necessary and appropriate, which action could include the
sale of instruments prior to maturity (to realize capital gains or
losses); shortening average portfolio maturity; withholding dividends;
or using market quotations for valuation purposes.
OTHER FUNDS
The following valuation techniques apply to each MFS Fund that is not
a money market fund.
Equity securities in the Fund's portfolio are valued at the last sale
price on the exchange on which they are primarily traded or on the
Nasdaq stock market system for unlisted national market issues, or at
the last quoted bid price for listed securities in which there were no
sales during the day or for unlisted securities not reported on the
Nasdaq stock market system. Bonds and other fixed income securities
(other than short-term obligations) of U.S. issuers in the Fund's
portfolio are valued on the basis of valuations furnished by a pricing
service which utilizes both dealer-supplied valuations and electronic
data processing techniques which take into account appropriate factors
such as institutional-size trading in similar groups of securities,
yield, quality, coupon rate, maturity, type of issue, trading
characteristics and other market data without exclusive reliance upon
quoted prices or exchange or over-the-counter prices, since such
valuations are believed to reflect more accurately the fair value of
such securities. Forward Contracts will be valued using a pricing model
taking into consideration market data from an external pricing source.
Use of the pricing services has been approved by the Board of Trustees.
All other securities, futures contracts and options in the Fund's
portfolio (other than short-term obligations) for which the principal
market is one or more securities or commodities exchanges (whether
domestic or foreign) will be valued at the last reported sale price or
at the settlement price prior to the determination (or if there has been
no current sale, at the closing bid price) on the primary exchange on
which such securities, futures contracts or options are traded; but if a
securities exchange is not the principal market for securities, such
securities will, if market quotations are readily available, be valued
at current bid prices, unless such securities are reported on the Nasdaq
stock market system, in which case they are valued at the last sale
price or, if no sales occurred during the day, at the last quoted bid
price. Short-term obligations in the Fund's portfolio are valued at
amortized cost, which constitutes fair value as determined by the Board
of Trustees. Short-term obligations with a remaining maturity in excess
of 60 days will be valued upon dealer supplied valuations. Portfolio
investments for which there are no such quotations or valuations are
valued at fair value as determined in good faith by or at the direction
of the Board of Trustees.
Generally, trading in foreign securities is substantially completed
each day at various times prior to the close of regular trading on the
Exchange. Occasionally, events affecting the values of such securities
may occur between the times at which they are determined and the close
of regular trading on the Exchange which will not be reflected in the
computation of the Fund's net asset value unless the Trustees deem that
such event would materially affect the net asset value in which case an
adjustment would be made.
All investments and assets are expressed in U.S. dollars based upon
current currency exchange rates. A share's net asset value is effective
for orders received by the dealer prior to its calculation and received
by MFD prior to the close of that business day.
(IX) PERFORMANCE INFORMATION
MONEY MARKET FUNDS
Each MFS Fund that is a money market fund will provide current
annualized and effective annualized yield quotations based on the daily
dividends of shares of the money market fund. These quotations may from
time to time be used in advertisements, shareholder reports or other
communications to shareholders.
Any current yield quotation of a money market fund which is used in
such a manner as to be subject to the provisions of Rule 482(d) under
the 1933 Act shall consist of an annualized historical yield, carried at
least to the nearest hundredth of one percent based on a specific seven
calendar day period and shall be calculated by dividing the net change
in the value of an account having a balance of one share of that class
at the beginning of the period by the value of the account at the
beginning of the period and multiplying the quotient by 365/7. For this
purpose the net change in account value would reflect the value of
additional shares purchased with dividends declared on the original
share and dividends declared on both the original share and any such
additional shares, but would not reflect any realized gains or losses
from the sale of securities or any unrealized appreciation or
depreciation on portfolio securities. In addition, any effective yield
quotation of a money market fund so used shall be calculated by
compounding the current yield quotation for such period by multiplying
such quotation by 7/365, adding 1 to the product, raising the sum to a
power equal to 365/7, and subtracting 1 from the result. These yield
quotations should not be considered as representative of the yield of a
money market fund in the future since the yield will vary based on the
type, quality and maturities of the securities held in its portfolio,
fluctuations in short-term interest rates and changes in the money
market fund's expenses.
OTHER FUNDS
Each MFS Fund that is not a money market fund may quote the following
performance results.
TOTAL RATE OF RETURN -- The Fund will calculate its total rate of
return for each class of shares for certain periods by determining the
average annual compounded rates of return over those periods that would
cause an investment of $1,000 (made with all distributions reinvested
and reflecting the CDSC or the maximum public offering price) to reach
the value of that investment at the end of the periods. The Fund may
also calculate (i) a total rate of return, which is not reduced by any
applicable CDSC and therefore may result in a higher rate of return,
(ii) a total rate of return assuming an initial account value of $1,000,
which will result in a higher rate of return since the value of the
initial account will not be reduced by any applicable sales charge
and/or (iii) total rates of return which represent aggregate performance
over a period or year- by-year performance, and which may or may not
reflect the effect of the maximum or other sales charge or CDSC.
The Fund offers multiple classes of shares which were initially
offered for sale to, and purchased by, the public on different dates
(the class "inception date"). The calculation of total rate of return
for a class of shares which has a later class inception date than
another class of shares of the Fund is based both on (i) the performance
of the Fund's newer class from its inception date and (ii) the
performance of the Fund's oldest class from its inception date up to the
class inception date of the newer class.
As discussed in the Prospectus, the sales charges, expenses and
expense ratios, and therefore the performance, of the Fund's classes of
shares differ. In calculating total rate of return for a newer class of
shares in accordance with certain formulas required by the SEC, the
performance will be adjusted to take into account the fact that the
newer class is subject to a different sales charge than the oldest class
(e.g., if the newer class is Class A shares, the total rate of return
quoted will reflect the deduction of the initial sales charge applicable
to Class A shares; if the newer class is Class B shares, the total rate
of return quoted will reflect the deduction of the CDSC applicable to
Class B shares). However, the performance will not be adjusted to take
into account the fact that the newer class of shares bears different
class specific expenses than the oldest class of shares (e.g., Rule
12b-1 fees). Therefore, the total rate of return quoted for a newer
class of shares will differ from the return that would be quoted had the
newer class of shares been outstanding for the entire period over which
the calculation is based (i.e., the total rate of return quoted for the
newer class will be higher than the return that would have been quoted
had the newer class of shares been outstanding for the entire period
over which the calculation is based if the class specific expenses for
the newer class are higher than the class specific expenses of the
oldest class, and the total rate of return quoted for the newer class
will be lower than the return that would be quoted had the newer class
of shares been outstanding for this entire period if the class specific
expenses for the newer class are lower than the class specific expenses
of the oldest class).
Any total rate of return quotation provided by the Fund should not be
considered as representative of the performance of the Fund in the
future since the net asset value of shares of the Fund will vary based
not only on the type, quality and maturities of the securities held in
the Fund's portfolio, but also on changes in the current value of such
securities and on changes in the expenses of the Fund. These factors and
possible differences in the methods used to calculate total rates of
return should be considered when comparing the total rate of return of
the Fund to total rates of return published for other investment
companies or other investment vehicles. Total rate of return reflects
the performance of both principal and income. Current net asset value
and account balance information may be obtained by calling
1-800-MFS-TALK (637-8255).
YIELD -- Any yield quotation for a class of shares of the Fund is
based on the annualized net investment income per share of that class
for the 30- day period. The yield for each class of the Fund is
calculated by dividing the net investment income allocated to that class
earned during the period by the maximum offering price per share of that
class of the Fund on the last day of the period. The resulting figure is
then annualized. Net investment income per share of a class is
determined by dividing (i) the dividends and interest allocated to that
class during the period, minus accrued expense of that class for the
period by (ii) the average number of shares of the class entitled to
receive dividends during the period multiplied by the maximum offering
price per share on the last day of the period. The Fund's yield
calculations assume a maximum sales charge of 5.75% in the case of Class
A shares and no payment of any CDSC in the case of Class B and Class C
shares.
TAX-EQUIVALENT YIELD -- The tax-equivalent yield for a class of shares
of a Fund is calculated by determining the rate of return that would
have to be achieved on a fully taxable investment in such shares to
produce the after-tax equivalent of the yield of that class. In
calculating tax- equivalent yield, a Fund assumes certain federal tax
brackets for shareholders and does not take into account state taxes.
CURRENT DISTRIBUTION RATE -- Yield, which is calculated according to a
formula prescribed by the Securities and Exchange Commission, is not
indicative of the amounts which were or will be paid to the Fund's
shareholders. Amounts paid to shareholders of each class are reflected
in the quoted "current distribution rate" for that class. The current
distribution rate for a class is computed by (i) annualizing the
distributions (excluding short-term capital gains) of the class for a
stated period; (ii) adding any short-term capital gains paid within the
immediately preceding twelve-month period; and (iii) dividing the result
by the maximum offering price or net asset value per share on the last
day of the period. The current distribution rate differs from the yield
computation because it may include distributions to shareholders from
sources other than dividends and interest, such as premium income for
option writing, short-term capital gains and return of invested capital,
and may be calculated over a different period of time. The Fund's
current distribution rate calculation for Class B shares and Class C
shares assumes no CDSC is paid.
GENERAL
From time to time the Fund may, as appropriate, quote Fund rankings or
reprint all or a portion of evaluations of fund performance and
operations appearing in various independent publications, including but
not limited to the following: Money, Fortune, U.S. News and World
Report, Kiplinger's Personal Finance, The Wall Street Journal, Barron's,
Investors Business Daily, Newsweek, Financial World, Financial Planning,
Investment Advisor, USA Today, Pensions and Investments, SmartMoney,
Forbes, Global Finance, Registered Representative, Institutional
Investor, the Investment Company Institute, Johnson's Charts,
Morningstar, Lipper Analytical Securities Corporation, CDA Wiesenberger,
Shearson Lehman and Salomon Bros. Indices, Ibbotson, Business Week,
Lowry Associates, Media General, Investment Company Data, The New York
Times, Your Money, Strangers Investment Advisor, Financial Planning on
Wall Street, Standard and Poor's, Individual Investor, The 100 Best
Mutual Funds You Can Buy, by Gordon K. Williamson, Consumer Price Index,
and Sanford C. Bernstein & Co. Fund performance may also be compared to
the performance of other mutual funds tracked by financial or business
publications or periodicals. The Fund may also quote evaluations
mentioned in independent radio or television broadcasts and use charts
and graphs to illustrate the past performance of various indices such as
those mentioned above and illustrations using hypothetical rates of
return to illustrate the effects of compounding and tax-deferral. The
Fund may advertise examples of the effects of periodic investment plans,
including the principle of dollar cost averaging. In such a program, an
investor invests a fixed dollar amount in a fund at periodic intervals,
thereby purchasing fewer shares when prices are high and more shares
when prices are low. While such a strategy does not assure a profit or
guard against a loss in a declining market, the investor's average cost
per share can be lower than if fixed numbers of shares are purchased at
the same intervals.
From time to time, the Fund may discuss or quote its current portfolio
manager as well as other investment personnel, including such persons'
views on: the economy; securities markets; portfolio securities and
their issuers; investment philosophies, strategies, techniques and
criteria used in the selection of securities to be purchased or sold for
the Fund; the Fund's portfolio holdings; the investment research and
analysis process; the formulation and evaluation of investment
recommendations; and the assessment and evaluation of credit, interest
rate, market and economic risks, and similar or related matters.
The Fund may also use charts, graphs or other presentation formats to
illustrate the historical correlation of its performance to fund
categories established by Morningstar (or other nationally recognized
statistical ratings organizations) and to other MFS Funds.
From time to time the Fund may also discuss or quote the views of its
distributor, its investment adviser and other financial planning, legal,
tax, accounting, insurance, estate planning and other professionals, or
from surveys, regarding individual and family financial planning. Such
views may include information regarding: retirement planning; tax
management strategies; estate planning; general investment techniques
(e.g., asset allocation and disciplined saving and investing); business
succession; ideas and information provided through the MFS Heritage
Planning(SM) program, an intergenerational financial planning assistance
program; issues with respect to insurance (e.g., disability and life
insurance and Medicare supplemental insurance); issues regarding
financial and health care management for elderly family members; and
other similar or related matters.
From time to time, the Fund may also advertise annual returns showing
the cumulative value of an initial investment in the Fund in various
amounts over specified periods, with capital gain and dividend
distributions invested in additional shares or taken in cash, and with
no adjustment for any income taxes (if applicable) payable by
shareholders.
MFS FIRSTS
MFS has a long history of innovations.
o 1924 -- Massachusetts Investors Trust is established as the first
open-end mutual fund in America.
o 1924 -- Massachusetts Investors Trust is the first mutual fund to
make full public disclosure of its operations in shareholder reports.
o 1932 -- One of the first internal research departments is established
to provide in- house analytical capability for an investment
management firm.
o 1933 -- Massachusetts Investors Trust is the first mutual fund to
register under the Securities Act of 1933 ("Truth in Securities Act"
or "Full Disclosure Act").
o 1936 -- Massachusetts Investors Trust is the first mutual fund to
allow shareholders to take capital gain distributions either in
additional shares or in cash.
o 1976 -- MFS(R) Municipal Bond Fund is among the first municipal bond
funds established.
o 1979 -- Spectrum becomes the first combination fixed/ variable
annuity with no initial sales charge.
o 1981 -- MFS(R) Global Governments Fund is established as America's
first globally diversified fixed-income mutual fund.
o 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.
o 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual fund to
target and shift investments among industry sectors for shareholders.
o 1986 -- MFS(R) Municipal Income Trust is the first closed-end,
high-yield municipal bond fund traded on the New York Stock Exchange.
o 1987 -- MFS(R) Multimarket Income Trust is the first closed-end,
multimarket high income fund listed on the New York Stock Exchange.
o 1989 -- MFS(R) Regatta becomes America's first non-qualified market
value adjusted fixed/variable annuity.
o 1990 -- MFS(R) Global Total Return Fund is the first global balanced
fund.
o 1993 -- MFS(R) Global Growth Fund is the first global emerging
markets fund to offer the expertise of two sub-advisers.
o 1993 -- MFS(R) becomes money manager of MFS(R) Union Standard(R)
Equity Fund, the first fund to invest principally in companies deemed
to be union-friendly by an advisory board of senior labor officials,
senior managers of companies with significant labor contracts,
academics and other national labor leaders or experts.
(X) SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS
The Fund makes available the following programs designed to enable
shareholders to add to their investment or withdraw from it with a
minimum of paper work. These programs are described below and, in
certain cases, in the Prospectus. The programs involve no extra charge
to shareholders (other than a sales charge in the case of certain Class
A share purchases) and may be changed or discontinued at any time by a
shareholder or the Fund.
LETTER OF INTENT -- If a shareholder (other than a group purchaser
described below) anticipates purchasing $50,000 or more of Class A
shares of the Fund alone or in combination with shares of any class of
MFS Funds or MFS Fixed Fund (a bank collective investment fund) within a
13-month period (or 36-month period, in the case of purchases of $1
million or more), the shareholder may obtain Class A shares of the Fund
at the same reduced sales charge as though the total quantity were
invested in one lump sum by completing the Letter of Intent section of
the Account Application or filing a separate Letter of Intent
application (available from MFSC) within 90 days of the commencement of
purchases. Subject to acceptance by MFD and the conditions mentioned
below, each purchase will be made at a public offering price applicable
to a single transaction of the dollar amount specified in the Letter of
Intent application. The shareholder or his dealer must inform MFD that
the Letter of Intent is in effect each time shares are purchased. The
shareholder makes no commitment to purchase additional shares, but if
his purchases within 13 months (or 36 months in the case of purchases of
$1 million or more) plus the value of shares credited toward completion
of the Letter of Intent do not total the sum specified, he will pay the
increased amount of the sales charge as described below. Instructions
for issuance of shares in the name of a person other than the person
signing the Letter of Intent application must be accompanied by a
written statement from the dealer stating that the shares were paid for
by the person signing such Letter. Neither income dividends nor capital
gain distributions taken in additional shares will apply toward the
completion of the Letter of Intent. Dividends and distributions of other
MFS Funds automatically reinvested in shares of the Fund pursuant to the
Distribution Investment Program will also not apply toward completion of
the Letter of Intent.
Out of the shareholder's initial purchase (or subsequent purchases if
necessary), 5% of the dollar amount specified in the Letter of Intent
application shall be held in escrow by MFSC in the form of shares
registered in the shareholder's name. All income dividends and capital
gain distributions on escrowed shares will be paid to the shareholder or
to his order. When the minimum investment so specified is completed
(either prior to or by the end of the 13-month period or 36-month
period, as applicable), the shareholder will be notified and the
escrowed shares will be released.
If the intended investment is not completed, MFSC will redeem an
appropriate number of the escrowed shares in order to realize such
difference. Shares remaining after any such redemption will be released
by MFSC. By completing and signing the Account Application or separate
Letter of Intent application, the shareholder irrevocably appoints MFSC
his attorney to surrender for redemption any or all escrowed shares with
full power of substitution in the premises.
RIGHT OF ACCUMULATION -- A shareholder qualifies for cumulative quantity
discounts on the purchase of Class A shares when his new investment,
together with the current offering price value of all holdings of Class
A, Class B and Class C shares of that shareholder in the MFS Funds or
MFS Fixed Fund reaches a discount level. See "Purchases" in the
Prospectus for the sales charges on quantity discounts. A shareholder
must provide MFSC (or his investment dealer must provide MFD) with
information to verify that the quantity sales charge discount is
applicable at the time the investment is made.
SUBSEQUENT INVESTMENT BY TELEPHONE -- Each shareholder may purchase
additional shares of any MFS Fund by telephoning MFSC toll-free at (800)
225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this
telephone purchase privilege must so elect on their Account Application
and designate thereon a bank and account number from which purchases
will be made. If a telephone purchase request is received by MFSC on any
business day prior to the close of regular trading on the Exchange
(generally, 4:00 p.m., Eastern time), the purchase will occur at the
closing net asset value of the shares purchased on that day. MFSC may be
liable for any losses resulting from unauthorized telephone transactions
if it does not follow reasonable procedures designed to verify the
identity of the caller. MFSC will request personal or other information
from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after
their receipt.
DISTRIBUTION INVESTMENT PROGRAM -- Distributions of dividends and
capital gains made by the Fund with respect to a particular class of
shares may be automatically invested in shares of the same class of one
of the other MFS Funds, if shares of that fund are available for sale.
Such investments will be subject to additional purchase minimums.
Distributions will be invested at net asset value (exclusive of any
sales charge) and will not be subject to any CDSC. Distributions will be
invested at the close of business on the payable date for the
distribution. A shareholder considering the Distribution Investment
Program should obtain and read the prospectus of the other fund and
consider the differences in objectives and policies before making any
investment.
SYSTEMATIC WITHDRAWAL PLAN -- A shareholder may direct MFSC to send him
(or anyone he designates) regular periodic payments based upon the value
of his account. Each payment under a Systematic Withdrawal Plan ("SWP")
must be at least $100, except in certain limited circumstances. The
aggregate withdrawals of Class B and Class C shares in any year pursuant
to a SWP generally are limited to 10% of the value of the account at the
time of establishment of the SWP. SWP payments are drawn from the
proceeds of share redemptions (which would be a return of principal and,
if reflecting a gain, would be taxable). Redemptions of Class B and
Class C shares will be made in the following order: (i) shares
representing reinvested distributions; (ii) shares representing
undistributed capital gains and income; and (iii) to the extent
necessary, shares representing direct investments subject to the lowest
CDSC. The CDSC will be waived in the case of redemptions of Class B and
Class C shares pursuant to a SWP, but will not be waived in the case of
SWP redemptions of Class A shares which are subject to a CDSC. To the
extent that redemptions for such periodic withdrawals exceed dividend
income reinvested in the account, such redemptions will reduce and may
eventually exhaust the number of shares in the shareholder's account.
All dividend and capital gain distributions for an account with a SWP
will be received in full and fractional shares of the Fund at the net
asset value in effect at the close of business on the record date for
such distributions. To initiate this service, shares having an aggregate
value of at least $5,000 either must be held on deposit by, or
certificates for such shares must be deposited with, MFSC. With respect
to Class A shares, maintaining a withdrawal plan concurrently with an
investment program would be disadvantageous because of the sales charges
included in share purchases and the imposition of a CDSC on certain
redemptions. The shareholder may deposit into the account additional
shares of the Fund, change the payee or change the dollar amount of each
payment. MFSC may charge the account for services rendered and expenses
incurred beyond those normally assumed by the Fund with respect to the
liquidation of shares. No charge is currently assessed against the
account, but one could be instituted by MFSC on 60 days' notice in
writing to the shareholder in the event that the Fund ceases to assume
the cost of these services. The Fund may terminate any SWP for an
account if the value of the account falls below $5,000 as a result of
share redemptions (other than as a result of a SWP) or an exchange of
shares of the Fund for shares of another MFS Fund. Any SWP may be
terminated at any time by either the shareholder or the Fund.
INVEST BY MAIL -- Additional investments of $50 or more may be made at
any time by mailing a check payable to the Fund directly to MFSC. The
shareholder's account number and the name of his investment dealer must
be included with each investment.
GROUP PURCHASES -- A bona fide group and all its members may be treated
as a single purchaser and, under the Right of Accumulation (but not the
Letter of Intent) obtain quantity sales charge discounts on the purchase
of Class A shares if the group (1) gives its endorsement or
authorization to the investment program so it may be used by the
investment dealer to facilitate solicitation of the membership, thus
effecting economies of sales effort; (2) has been in existence for at
least six months and has a legitimate purpose other than to purchase
mutual fund shares at a discount; (3) is not a group of individuals
whose sole organizational nexus is as credit cardholders of a company,
policyholders of an insurance company, customers of a bank or
broker-dealer, clients of an investment Adviser or other similar groups;
and (4) agrees to provide certification of membership of those members
investing money in the MFS Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN -- Shareholders having account balances of at
least $5,000 in any MFS Fund may participate in the Automatic Exchange
Plan. The Automatic Exchange Plan provides for automatic exchanges of
funds from the shareholder's account in an MFS Fund for investment in
the same class of shares of other MFS Funds selected by the shareholder
(if available for sale). Under the Automatic Exchange Plan, exchanges of
at least $50 each may be made to up to six different funds effective on
the seventh day of each month or of every third month, depending whether
monthly or quarterly exchanges are elected by the shareholder. If the
seventh day of the month is not a business day, the transaction will be
processed on the next business day. Generally, the initial transfer will
occur after receipt and processing by MFSC of an application in good
order. Exchanges will continue to be made from a shareholder's account
in any MFS Fund, as long as the balance of the account is sufficient to
complete the exchanges. Additional payments made to a shareholder's
account will extend the period that exchanges will continue to be made
under the Automatic Exchange Plan. However, if additional payments are
added to an account subject to the Automatic Exchange Plan shortly
before an exchange is scheduled, such funds may not be available for
exchanges until the following month; therefore, care should be used to
avoid inadvertently terminating the Automatic Exchange Plan through
exhaustion of the account balance.
No transaction fee for exchanges will be charged in connection with
the Automatic Exchange Plan. However, exchanges of shares of MFS Money
Market Fund, MFS Government Money Market Fund and Class A shares of MFS
Cash Reserve Fund will be subject to any applicable sales charge.
Changes in amounts to be exchanged to the Fund, the funds to which
exchanges are to be made and the timing of exchanges (monthly or
quarterly), or termination of a shareholder's participation in the
Automatic Exchange Plan will be made after instructions in writing or by
telephone (an "Exchange Change Request") are received by MFSC in proper
form (i.e., if in writing -- signed by the record owner(s) exactly as
shares are registered; if by telephone -- proper account identification
is given by the dealer or shareholder of record). Each Exchange Change
Request (other than termination of participation in the program) must
involve at least $50. Generally, if an Exchange Change Request is
received by telephone or in writing before the close of business on the
last business day of a month, the Exchange Change Request will be
effective for the following month's exchange.
A shareholder's right to make additional investments in any of the MFS
Funds, to make exchanges of shares from one MFS Fund to another and to
withdraw from an MFS Fund, as well as a shareholder's other rights and
privileges are not affected by a shareholder's participation in the
Automatic Exchange Plan. The Automatic Exchange Plan is part of the
Exchange Privilege. For additional information regarding the Automatic
Exchange Plan, including the treatment of any CDSC, see "Exchange
Privilege" below.
REINSTATEMENT PRIVILEGE -- Shareholders of the Fund and shareholders
of the other MFS Funds (except MFS Money Market Fund, MFS Government
Money Market Fund and holders of Class A shares of MFS Cash Reserve Fund
in the case where shares of such funds are acquired through direct
purchase or reinvested dividends) who have redeemed their shares have a
one-time right to reinvest the redemption proceeds in the same class of
shares of any of the MFS Funds (if shares of the fund are available for
sale) at net asset value (without a sales charge) and, if applicable,
with credit for any CDSC paid. In the case of proceeds reinvested in MFS
Money Market Fund, MFS Government Money Market Fund and Class A shares
of MFS Cash Reserve Fund, the shareholder has the right to exchange the
acquired shares for shares of another MFS Fund at net asset value
pursuant to the exchange privilege described below. Such a reinvestment
must be made within 90 days of the redemption and is limited to the
amount of the redemption proceeds. If the shares credited for any CDSC
paid are then redeemed within six years of the initial purchase in the
case of Class B shares or 12 months of the initial purchase in the case
of Class C shares and certain Class A shares, a CDSC will be imposed
upon redemption. Although redemptions and repurchases of shares are
taxable events, a reinvestment within a certain period of time in the
same fund may be considered a "wash sale" and may result in the
inability to recognize currently all or a portion of a loss realized on
the original redemption for federal income tax purposes. Please see your
tax adviser for further information.
EXCHANGE PRIVILEGE
Subject to the requirements set forth below, some or all of the shares
of the same class in an account with the Fund for which payment has been
received by the Fund (i.e., an established account) may be exchanged for
shares of the same class of any of the other MFS Funds (if available for
sale and if the purchaser is eligible to purchase the Class of shares)
at net asset value. Exchanges will be made only after instructions in
writing or by telephone (an "Exchange Request") are received for an
established account by MFSC.
EXCHANGES AMONG MFS FUNDS (excluding exchanges from MFS money market
funds) -- No initial sales charge or CDSC will be imposed in connection
with an exchange from shares of an MFS Fund to shares of any other MFS
Fund, except with respect to exchanges from an MFS money market fund to
another MFS Fund which is not an MFS money market fund (discussed
below). With respect to an exchange involving shares subject to a CDSC,
the CDSC will be unaffected by the exchange and the holding period for
purposes of calculating the CDSC will carry over to the acquired shares.
EXCHANGES FROM AN MFS MONEY MARKET FUND -- Special rules apply with
respect to the imposition of an initial sales charge or a CDSC for
exchanges from an MFS money market fund to another MFS Fund which is not
an MFS money market fund. These rules are described under the caption
"How to Purchase, Exchange and Redeem Shares" in the Prospectuses of
those MFS money market funds.
EXCHANGES INVOLVING THE MFS FIXED FUND -- Class A shares of any MFS
Fund held by certain qualified retirement plans may be exchanged for
units of participation of the MFS Fixed Fund (a bank collective
investment fund) (the "Units"), and Units may be exchanged for Class A
shares of any MFS Fund. With respect to exchanges between Class A shares
subject to a CDSC and Units, the CDSC will carry over to the acquired
shares or Units and will be deducted from the redemption proceeds when
such shares or Units are subsequently redeemed, assuming the CDSC is
then payable (the period during which the Class A shares and the Units
were held will be aggregated for purposes of calculating the applicable
CDSC). In the event that a shareholder initially purchases Units and
then exchanges into Class A shares subject to an initial sales charge of
an MFS Fund, the initial sales charge shall be due upon such exchange,
but will not be imposed with respect to any subsequent exchanges between
such Class A shares and Units with respect to shares on which the
initial sales charge has already been paid. In the event that a
shareholder initially purchases Units and then exchanges into Class A
shares subject to a CDSC of an MFS Fund, the CDSC period will commence
upon such exchange, and the applicability of the CDSC with respect to
subsequent exchanges shall be governed by the rules set forth above in
this paragraph.
GENERAL -- Each Exchange Request must be in proper form (i.e., if in
writing -- signed by the record owner(s) exactly as the shares are
registered; if by telephone -- proper account identification is given by
the dealer or shareholder of record), and each exchange must involve
either shares having an aggregate value of at least $1,000 ($50 in the
case of retirement plan participants whose sponsoring organizations
subscribe to MFS FUNDamental 401(k) Plan or another similar 401(k)
recordkeeping system made available by MFSC) or all the shares in the
account. Each exchange involves the redemption of the shares of the Fund
to be exchanged and the purchase of shares of the same class of the
other MFS Fund. Any gain or loss on the redemption of the shares
exchanged is reportable on the shareholder's federal income tax return,
unless both the shares received and the shares surrendered in the
exchange are held in a tax-deferred retirement plan or other tax-exempt
account. No more than five exchanges may be made in any one Exchange
Request by telephone. If the Exchange Request is received by MFSC prior
to the close of regular trading on the Exchange the exchange usually
will occur on that day if all the requirements set forth above have been
complied with at that time. However, payment of the redemption proceeds
by the Fund, and thus the purchase of shares of the other MFS Fund, may
be delayed for up to seven days if the Fund determines that such a delay
would be in the best interest of all its shareholders. Investment
dealers which have satisfied criteria established by MFD may also
communicate a shareholder's Exchange Request to MFD by facsimile subject
to the requirements set forth above.
Additional information with respect to any of the MFS Funds, including
a copy of its current prospectus, may be obtained from investment
dealers or MFSC. A shareholder considering an exchange should obtain and
read the prospectus of the other fund and consider the differences in
objectives and policies before making any exchange.
Any state income tax advantages for investment in shares of each
state- specific series of MFS Municipal Series Trust may only benefit
residents of such states. Investors should consult with their own tax
advisers to be sure this is an appropriate investment, based on their
residency and each state's income tax laws. The exchange privilege (or
any aspect of it) may be changed or discontinued and is subject to
certain limitations imposed from time to time at the discretion of the
Funds in order to protect the Funds.
TAX-DEFERRED RETIREMENT PLANS
Shares of the Fund may be purchased by all types of tax-deferred
retirement plans. MFD makes available, through investment dealers, plans
and/or custody agreements, the following:
o Traditional Individual Retirement Accounts (IRAs) (for individuals
who desire to make limited contributions to a Tax-deferred
retirement program and, if eligible, to receive a federal Income
tax deduction for amounts contributed);
o Roth Individual Retirement Accounts (Roth IRAs) (for individuals
who desire to make limited contributions to a tax-favored
retirement program);
o Simplified Employee Pension (SEP-IRA) Plans;
o Retirement Plans Qualified under Section 401(k) of the Internal
Revenue Code of 1986, as amended (the "Code");
o 403(b) Plans (deferred compensation arrangements for employees of
public School systems and certain non-profit organizations); and
o Certain other qualified pension and profit-sharing plans.
The plan documents provided by MFD designate a trustee or custodian
(unless another trustee or custodian is designated by the individual or
group establishing the plan) and contain specific information about the
plans. Each plan provides that dividends and distributions will be
reinvested automatically. For further details with respect to any plan,
including fees charged by the trustee, custodian or MFD, tax
consequences and redemption information, see the specific documents for
that plan. Plan documents other than those provided by MFD may be used
to establish any of the plans described above. Third party
administrative services, available for some corporate plans, may limit
or delay the processing of transactions.
An investor should consult with his tax adviser before establishing
any of the tax-deferred retirement plans described above.
Class C shares are not currently available for purchase by any
retirement plan qualified under Internal Revenue Code Section 401(a) or
403(b) if the retirement plan and/or the sponsoring organization
subscribe to the MFS FUNDamental 401(k) Plan or another similar Section
401(a) or 403(b) recordkeeping program made available by MFSC.
(XI) DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional Shares of Beneficial Interest (without par
value) of one or more separate series and to divide or combine the
shares of any series into a greater or lesser number of shares without
thereby changing the proportionate beneficial interests in that series.
The Declaration of Trust further authorizes the Trustees to classify or
reclassify any series of shares into one or more classes. Each share of
a class of the Fund represents an equal proportionate interest in the
assets of the Fund allocable to that class. Upon liquidation of the
Fund, shareholders of each class of the Fund are entitled to share pro
rata in the Fund's net assets allocable to such class available for
distribution to shareholders. The Trust reserves the right to create and
issue a number of series and additional classes of shares, in which case
the shares of each class of a series would participate equally in the
earnings, dividends and assets allocable to that class of the particular
series.
Shareholders are entitled to one vote for each share held and may vote
in the election of Trustees and on other matters submitted to meetings
of shareholders. To the extent a shareholder of the Fund owns a
controlling percentage of the Fund's shares, such shareholder may affect
the outcome of such matters to a greater extent than other Fund
shareholders. Although Trustees are not elected annually by the
shareholders, the Declaration of Trust provides that a Trustee may be
removed from office at a meeting of shareholders by a vote of two-thirds
of the outstanding shares of the Trust. A meeting of shareholders will
be called upon the request of shareholders of record holding in the
aggregate not less than 10% of the outstanding voting securities of the
Trust. No material amendment may be made to the Declaration of Trust
without the affirmative vote of a majority of the Trust's outstanding
shares (as defined in "Investment Restrictions" in Part I of this SAI).
The Trust or any series of the Trust may be terminated (i) upon the
merger or consolidation of the Trust or any series of the Trust with
another organization or upon the sale of all or substantially all of its
assets (or all or substantially all of the assets belonging to any
series of the Trust), if approved by the vote of the holders of
two-thirds of the Trust's or the affected series' outstanding shares
voting as a single class, or of the affected series of the Trust, except
that if the Trustees recommend such merger, consolidation or sale, the
approval by vote of the holders of a majority of the Trust's or the
affected series' outstanding shares will be sufficient, or (ii) upon
liquidation and distribution of the assets of a Fund, if approved by the
vote of the holders of two-thirds of its outstanding shares of the
Trust, or (iii) by the Trustees by written notice to its shareholders.
If not so terminated, the Trust will continue indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a trust
may, under certain circumstances, be held personally liable as partners
for its obligations. However, the Declaration of Trust contains an
express disclaimer of shareholder liability for acts or obligations of
the Trust and provides for indemnification and reimbursement of expenses
out of Trust property for any shareholder held personally liable for the
obligations of the Trust. The Declaration of Trust also provides that
the Trust shall maintain appropriate insurance (for example, fidelity
bonding and errors and omissions insurance) for the protection of the
Trust and its shareholders and the Trustees, officers, employees and
agents of the Trust covering possible tort and other liabilities. Thus,
the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which both
inadequate insurance existed and the Trust itself was unable to meet its
obligations.
The Declaration of Trust further provides that obligations of the
Trust are not binding upon the Trustees individually but only upon the
property of the Trust and that the Trustees will not be liable for any
action or failure to act, but nothing in the Declaration of Trust
protects a Trustee against any liability to which he would otherwise be
subject by reason of his willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct
of his office.
<PAGE>
PART II - APPENDIX A
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all
applicable sales charges are waived (Section I), the initial sales
charge and the CDSC for Class A shares are waived (Section II), and the
CDSC for Class B and Class C shares is waived (Section III). Some of the
following information will not apply to certain funds in the MFS Family
of Funds, depending on which classes of shares are offered by such fund.
As used in this Appendix, the term "dealer" includes any broker, dealer,
bank (including bank trust departments), registered investment adviser,
financial planner and any other financial institutions having a selling
agreement or other similar agreement with MFD.
(I) WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on
purchases of Class A shares and the CDSC imposed on certain redemptions
of Class A shares and on redemptions of Class B and Class C shares, as
applicable, are waived:
DIVIDEND REINVESTMENT
o Shares acquired through dividend or capital gain reinvestment; and
o Shares acquired by automatic reinvestment of distributions of
dividends and capital gains of any fund in the MFS Funds pursuant
to the Distribution Investment Program.
CERTAIN ACQUISITIONS/LIQUIDATIONS
o Shares acquired on account of the acquisition or liquidation of
assets of other investment companies or personal holding companies.
AFFILIATES OF AN MFS FUND/CERTAIN DEALERS.
Shares acquired by:
o Officers, eligible directors, employees (including retired
employees) and agents of MFS, Sun Life or any of their subsidiary
companies;
o Trustees and retired trustees of any investment company for which
MFD serves as distributor;
o Employees, directors, partners, officers and trustees of any
sub-adviser to any MFS Fund;
o Employees or registered representatives of dealers;
o Certain family members of any such individual and their spouses
identified above and certain trusts, pension, profit- sharing or
other retirement plans for the sole benefit of such persons,
provided the shares are not resold except to the MFS Fund which
issued the shares; and
o Institutional Clients of MFS or MFS Institutional Advisors, Inc.
INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
o Shares redeemed at an MFS Fund's direction due to the small size of
a shareholder's account. See "Redemptions and Repurchases --
General -- Involuntary Redemptions/Small Accounts" in the
Prospectus.
RETIREMENT PLANS (CDSC WAIVER ONLY).
Shares redeemed on account of distributions made under the following
circumstances:
o Individual Retirement Accounts ("IRAs")
> Death or disability of the IRA owner.
o Section 401(a) Plans ("401(a) Plans") and Section 403(b) Employer
Sponsored Plans ("ESP Plans")
> Death, disability or retirement of 401(a) or ESP Plan
participant;
> Loan from 401(a) or ESP Plan;
> Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
> Termination of employment of 401(a) or ESP Plan participant
(excluding, however, a partial or other termination of the
Plan);
> Tax-free return of excess 401(a) or ESP Plan contributions;
> To the extent that redemption proceeds are used to pay expenses
(or certain participant expenses) of the 401(a) or ESP Plan
(e.g., participant account fees), provided that the Plan sponsor
subscribes to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping system made available by MFSC (the "MFS
Participant Recordkeeping System"); and
> Distributions from a 401(a) or ESP Plan that has invested its
assets in one or more of the MFS Funds for more than 10 years
from the later to occur of: (i) January 1, 1993 or (ii) the date
such 401(a) or ESP Plan first invests its assets in one or more
of the MFS Funds. The sales charges will be waived in the case
of a redemption of all of the 401(a) or ESP Plan's shares in all
MFS Funds (i.e., all the assets of the 401(a) or ESP Plan
invested in the MFS Funds are withdrawn), unless immediately
prior to the redemption, the aggregate amount invested by the
401(a) or ESP Plan in shares of the MFS Funds (excluding the
reinvestment of distributions) during the prior four years
equals 50% or more of the total value of the 401(a) or ESP
Plan's assets in the MFS Funds, in which case the sales charges
will not be waived.
> Shares purchased by certain retirement plans or trust accounts
if: (i) the plan is currently a party to a retirement plan
recordkeeping or administration services agreement with MFD or
one of its affiliates and (ii) the shares purchased or redeemed
represent transfers from or transfers to plan investments other
than the MFS Funds for which retirement plan recordkeeping
services are provided under the terms of such agreement.
o Section 403(b) Salary Reduction Only Plans ("SRO Plans")
> Death or disability of SRO Plan participant.
CERTAIN TRANSFERS OF REGISTRATION
(CDSC WAIVER ONLY).
Shares transferred:
o To an IRA rollover account where any sales charges with respect to
the shares being reregistered would have been waived had they been
redeemed; and
o From a single account maintained for a 401(a) Plan to multiple
accounts maintained by MFSC on behalf of individual participants of
such Plan, provided that the Plan sponsor subscribes to the MFS
FUNDamental 401(k) Plan or another similar recordkeeping system
made available by MFSC.
LOAN REPAYMENTS
o Shares acquired pursuant to repayments by retirement plan
participants of loans from 401(a) or ESP Plans with respect to
which such Plan or its sponsoring organization subscribes to the
MFS FUNDamental 401(k) Program or the MFS Recordkeeper Plus Program
(but not the MFS Recordkeeper Program).
(II) WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the
following circumstances the initial sales charge imposed on purchases of
Class A shares and the CDSC imposed on certain redemptions of Class A
shares are waived:
WRAP ACCOUNT AND FUND "SUPERMARKET" INVESTMENTS
o Shares acquired by investments through certain dealers (including
registered investment advisers and financial planners) which have
established certain operational arrangements with MFD which include
a requirement that such shares be sold for the sole benefit of
clients participating in a "wrap" account, mutual fund
"supermarket" account or a similar program under which such clients
pay a fee to such dealer.
INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
o Shares acquired by insurance company separate accounts.
RETIREMENT PLANS
o Administrative Services Arrangements
> Shares acquired by retirement plans or trust accounts whose
third party administrators or dealers have entered into an
administrative services agreement with MFD or one of its
affiliates to perform certain administrative services, subject
to certain operational and minimum size requirements specified
from time to time by MFD or one or more of its affiliates.
o Reinvestment of Distributions from Qualified Retirement Plans
> Shares acquired through the automatic reinvestment in Class A
shares of Class A or Class B distributions which constitute
required withdrawals from qualified retirement plans.
SHARES REDEEMED ON ACCOUNT OF DISTRIBUTIONS MADE UNDER THE FOLLOWING
CIRCUMSTANCES:
o IRAs
> Distributions made on or after the IRA owner has attained the
age of 59 1/2 years old; and
> Tax-free returns of excess IRA contributions.
o 401(a) Plans
> Distributions made on or after the 401(a) Plan participant has
attained the age of 59 1/2 years old; and
> Certain involuntary redemptions and redemptions in connection
with certain automatic withdrawals from a 401(a) Plan.
o ESP Plans and SRO Plans
> Distributions made on or after the ESP or SRO Plan participant
has attained the age of 59 1/2 years old.
o 401(a) Plans and ESP Plans
> where the retirement plan and/or sponsoring organization does
not subscribe to the MFS Participant Recordkeeping System; and
> where the retirement plan and/or sponsoring organization
demonstrates to the satisfaction of, and certifies to, MFSC that
the retirement plan has, at the time of certification or will
have pursuant to a purchase order placed with the certification,
a market value of $500,000 or more invested in shares of any
class or classes of the MFS Family of Funds and aggregate assets
of at least $10 million;
provided, however, that the CDSC will not be waived (i.e., it will be
imposed) (a) with respect to plans which establish an account with MFSC
on or after November 1, 1997, in the event that the plan makes a
complete redemption of all of its shares in the MFS Family of Funds, or
(b) with respect to plans which establish an account with MFSC prior to
November 1, 1997, in the event that there is a change in law or
regulations which result in a material adverse change to the tax
advantaged nature of the plan, or in the event that the plan and/or
sponsoring organization: (i) becomes insolvent or bankrupt; (ii) is
terminated under ERISA or is liquidated or dissolved; or (iii) is
acquired by, merged into, or consolidated with any other entity.
PURCHASES OF AT LEAST $5 MILLION
(CDSC WAIVER ONLY)
o Shares acquired of Eligible Funds (as defined below) if the
shareholder's investment equals or exceeds $5 million in one or
more Eligible Funds (the "Initial Purchase") (this waiver applies
to the shares acquired from the Initial Purchase and all shares of
Eligible Funds subsequently acquired by the shareholder); provided
that the dealer through which the Initial Purchase is made enters
into an agreement with MFD to accept delayed payment of commissions
with respect to the Initial Purchase and all subsequent investments
by the shareholder in the Eligible Funds subject to such
requirements as may be established from time to time by MFD (for a
schedule of the amount of commissions paid by MFD to the dealer on
such investments, see "Purchases -- Class A Shares -- Purchases
subject to a CDSC" in the Prospectus). The Eligible Funds are all
funds included in the MFS Family of Funds, except for Massachusetts
Investors Trust, Massachusetts Investors Growth Stock Fund, MFS
Municipal Bond Fund, MFS Municipal Limited Maturity Fund, MFS Money
Market Fund, MFS Government Money Market Fund and MFS Cash Reserve
Fund.
BANK TRUST DEPARTMENTS AND LAW FIRMS
o Shares acquired by certain bank trust departments or law firms
acting as trustee or manager for trust accounts which have entered
into an administrative services agreement with MFD and are
acquiring such shares for the benefit of their trust account
clients.
INVESTMENT OF PROCEEDS FROM CERTAIN
REDEMPTIONS OF CLASS I SHARES.
o The initial sales charge imposed on purchases of Class A shares,
and the contingent deferred sales charge imposed on certain
redemptions of Class A shares, are waived with respect to Class A
shares acquired of any of the MFS Funds through the immediate
reinvestment of the proceeds of a redemption of Class I shares of
any of the MFS Funds.
(III) WAIVERS OF CLASS B AND CLASS C SALES CHARGES
In addition to the waivers set forth in Section I above, in the
following circumstances the CDSC imposed on redemptions of Class B
and Class C shares is waived:
SYSTEMATIC WITHDRAWAL PLAN
o Systematic Withdrawal Plan redemptions with respect to up to 10%
per year (or 15% per year, in the case of accounts registered as
IRAs where the redemption is made pursuant to Section 72(t) of the
Internal Revenue Code of 1986, as amended) of the account value at
the time of establishment.
DEATH OF OWNER
o Shares redeemed on account of the death of the account owner if the
shares are held solely in the deceased individual's name or in a
living trust for the benefit of the deceased individual.
DISABILITY OF OWNER
o Shares redeemed on account of the disability of the account owner
if shares are held either solely or jointly in the disabled
individual's name or in a living trust for the benefit of the
disabled individual (in which case a disability certification form
is required to be submitted to MFSC.).
RETIREMENT PLANS.
Shares redeemed on account of distributions made under the following
circumstances:
o IRAs, 401(a) Plans, ESP Plans and SRO Plans
> Distributions made on or after the IRA owner or the 401(a), ESP
or SRO Plan participant, as applicable, has attained the age of
70 1/2 years old, but only with respect to the minimum
distribution under Code rules.
> Salary Reduction Simplified Employee Pension Plans ("SAR-SEP
Plans")
> Distributions made on or after the SAR- SEP Plan participant has
attained the age of 70 1/2 years old, but only with respect to
the minimum distribution under applicable Code rules; and
> Death or disability of a SAR-SEP Plan participant.
o 401(a) and ESP Plans Only (Class B CDSC Waiver Only)
> By a retirement plan whose sponsoring organization subscribes to
the MFS Participant Recordkeeping System and which established
an account with MFSC between July 1, 1996 and December 31, 1998;
provided, however, that the CDSC will not be waived (i.e., it
will be imposed) in the event that there is a change in law or
regulations which results in a material adverse change to the
tax advantaged nature of the plan, or in the event that the plan
and/or sponsoring organization: (i) becomes insolvent or
bankrupt; (ii) is terminated under ERISA or is liquidated or
dissolved; or (iii) is acquired by, merged into, or consolidated
with any other entity.
> By a retirement plan whose sponsoring organization subscribes to
the MFS Recordkeeper Plus product and which established its
account with MFSC on or after January 1, 1999 (provided that the
plan establishment paperwork is received by MFSC in good order
on or after November 15, 1998). A plan with a pre-existing
account(s) with any MFS Fund which switches to the MFS
Recordkeeper Plus product will not become eligible for this
waiver category.
<PAGE>
PART II - APPENDIX B
DEALER COMMISSIONS AND CONCESSIONS
This Appendix describes the various commissions paid and concessions
made to dealers by MFD in connection with the sale of Fund shares. As
used in this Appendix, the term "dealer" includes any broker, dealer,
bank (including bank trust departments), registered investment adviser,
financial planner and any other financial institutions having a selling
agreement or other similar agreement with MFD.
CLASS A SHARES
Purchases Subject to an Initial Sales Charge. For purchases of Class A
shares subject to an initial sales charge, MFD reallows a portion of the
initial sales charge to dealers (which are alike for all dealers), as
shown in Appendix D to Part I of this SAI. The difference between the
total amount invested and the sum of (a) the net proceeds to the Fund
and (b) the dealer reallowance, is the amount of the initial sales
charge retained by MFD (as shown in Appendix D to Part I of this SAI).
Because of rounding in the computation of offering price, the portion of
the sales charge retained by MFD may vary and the total sales charge may
be more or less than the sales charge calculated using the sales charge
expressed as a percentage of the offering price or as a percentage of
the net amount invested as listed in the Prospectus.
Purchases Subject to a CDSC (but not an Initial Sales Charge). For
purchases of Class A shares subject to a CDSC, MFD pays commissions to
dealers on new investments made through such dealers as follows:
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
purchases for each shareholder account (and certain other accounts for
which the shareholder is a record or beneficial holder) will be
aggregated over a 12-month period (commencing from the date of the first
such purchase).
CLASS B SHARES
For purchases of Class B shares, MFD will pay commissions to dealers of
3.75% of the purchase price of Class B shares purchased through dealers.
MFD will also advance to dealers the first year service fee payable
under the Fund's Distribution Plan at a rate equal to 0.25% of the
purchase price of such shares. Therefore, the total amount paid to a
dealer upon the sale of Class B shares is 4% of the purchase price of
the shares (commission rate of 3.75% plus a service fee equal to 0.25%
of the purchase price).
For purchases of Class B shares by a retirement plan whose sponsoring
organization subscribes to the MFS Participant Recordkeeping System and
which established its account with MFSC between July 1, 1996 and
December 31, 1998, MFD pays an amount to dealers equal to 3.00% of the
amount purchased through such dealers (rather than the 4.00% payment
described above), which is comprised of a commission of 2.75% plus the
advancement of the first year service fee equal to 0.25% of the purchase
price payable under the Fund's Distribution Plan.
For purchases of Class B shares by a retirement plan whose sponsoring
organization subscribes to the MFS Recordkeeper Plus product and which
has established its account with MFSC on or after January 1, 1999
(provided that the plan establishment paperwork is received by MFSC in
good order on or after November 15, 1998), MFD pays no up front
commissions to dealers, but instead pays an amount to dealers equal to
1% per annum of the average daily net assets of the Fund attributable to
plan assets, payable at the rate of 0.25% at the end of each calendar
quarter, in arrears. This commission structure is not available with
respect to a plan with a pre- existing account(s) with any MFS Fund
which seeks to switch to the MFS Recordkeeper Plus product.
CLASS C SHARES
For purchases of Class C shares, MFD will pay dealers 1.00% of the
purchase price of Class C shares purchased through dealers and, as
compensation therefor, MFD will retain the 1.00% per annum distribution
and service fee paid under the Fund's Distribution Plan to MFD for the
first year after purchase.
ADDITIONAL DEALER COMMISSIONS/CONCESSIONS
Dealers may receive different compensation with respect to sales of
Class A, Class B and Class C shares. In addition, from time to time, MFD
may pay dealers 100% of the applicable sales charge on sales of Class A
shares of certain specified Funds sold by such dealer during a specified
sales period. In addition, MFD or its affiliates may, from time to time,
pay dealers an additional commission equal to 0.50% of the net asset
value of all of the Class B and/or Class C shares of certain specified
Funds sold by such dealer during a specified sales period. In addition,
from time to time, MFD, at its expense, may provide additional
commissions, compensation or promotional incentives ("concessions") to
dealers which sell or arrange for the sale of shares of the Fund. Such
concessions provided by MFD may include financial assistance to dealers
in connection with preapproved conferences or seminars, sales or
training programs for invited registered representatives and other
employees, payment for travel expenses, including lodging, incurred by
registered representatives and other employees for such seminars or
training programs, seminars for the public, advertising and sales
campaigns regarding one or more Funds, and/ or other dealer-sponsored
events. From time to time, MFD may make expense reimbursements for
special training of a dealer's registered representatives and other
employees in group meetings or to help pay the expenses of sales
contests. Other concessions may be offered to the extent not prohibited
by state laws or any self-regulatory agency, such as the NASD.
<PAGE>
PART II - APPENDIX C
INVESTMENT TECHNIQUES, PRACTICES AND RISKS
Set forth below is a description of investment techniques and practices
which the MFS Funds may generally use in pursuing their investment
objectives and principal investment policies, and the associated risks
associated with these investment techniques and practices. The Fund will
engage only in certain of these investment techniques and practices, as
identified in Appendix A of the Fund's Prospectus. Investment practices
and techniques that are not identified in Appendix A of the Fund's
Prospectus do not apply to the Fund.
INVESTMENT TECHNIQUES AND PRACTICES
DEBT SECURITIES
To the extent the Fund invests in the following types of debt
securities, its net asset value may change as the general levels of
interest rates fluctuate. When interest rates decline, the value of debt
securities can be expected to rise. Conversely, when interest rates
rise, the value of debt securities can be expected to decline. The
Fund's investment in debt securities with longer terms to maturity are
subject to greater volatility than the Fund's shorter-term obligations.
Debt securities may have all types of interest rate payment and reset
terms, including fixed rate, adjustable rate, zero coupon, contingent,
deferred, payment in kind and auction rate features.
ASSET-BACKED SECURITIES: The Fund may purchase the following types of
asset-backed securities:
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH
SECURITIES: The Fund may invest a portion of its assets in
collateralized mortgage obligations or "CMOs," which are debt
obligations collateralized by mortgage loans or mortgage pass-through
securities (such collateral referred to collectively as "Mortgage
Assets"). Unless the context indicates otherwise, all references herein
to CMOs include multiclass pass-through securities.
Interest is paid or accrues on all classes of the CMOs on a monthly,
quarterly or semi-annual basis. The principal of and interest on the
Mortgage Assets may be allocated among the several classes of a CMO in
innumerable ways. In a common structure, payments of principal,
including any principal prepayments, on the Mortgage Assets are applied
to the classes of a CMO in the order of their respective stated
maturities or final distribution dates, so that no payment of principal
will be made on any class of CMOs until all other classes having an
earlier stated maturity or final distribution date have been paid in
full. Certain CMOs may be stripped (securities which provide only the
principal or interest factor of the underlying security). See "Stripped
Mortgage-Backed Securities" below for a discussion of the risks of
investing in these stripped securities and of investing in classes
consisting of interest payments or principal payments.
The Fund may also invest in parallel pay CMOs and Planned Amortization
Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to provide
payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated
maturity date or final distribution date of each class, which, as with
other CMO structures, must be retired by its stated maturity date or
final distribution date but may be retired earlier.
CORPORATE ASSET-BACKED SECURITIES: The Fund may invest in corporate
asset-backed securities. These securities, issued by trusts and special
purpose corporations, are backed by a pool of assets, such as credit
card and automobile loan receivables, representing the obligations of a
number of different parties. These securities present certain risks. For
instance, in the case of credit card receivables, these securities may
not have the benefit of any security interest in the related collateral.
Credit card receivables are generally unsecured and the debtors are
entitled to the protection of a number of state and federal consumer
credit laws, many of which give such debtors the right to set off
certain amounts owed on the credit cards, thereby reducing the balance
due. Most issuers of automobile receivables permit the servicers to
retain possession of the underlying obligations. If the servicer were to
sell these obligations to another party, there is a risk that the
purchaser would acquire an interest superior to that of the holders of
the related automobile receivables. In addition, because of the large
number of vehicles involved in a typical issuance and technical
requirements under state laws, the trustee for the holders of the
automobile receivables may not have a proper security interest in all of
the obligations backing such receivables. Therefore, there is the
possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities. The
underlying assets (e.g., loans) are also subject to prepayments which
shorten the securities weighted average life and may lower their return.
Corporate asset-backed securities are backed by a pool of assets
representing the obligations of a number of different parties. To lessen
the effect of failures by obligors on underlying assets to make
payments, the securities may contain elements of credit support which
fall into two categories: (i) liquidity protection and (ii) protection
against losses resulting from ultimate default by an obligor on the
underlying assets. Liquidity protection refers to the provision of
advances, generally by the entity administering the pool of assets, to
ensure that the receipt of payments on the underlying pool occurs in a
timely fashion. Protection against losses resulting from ultimate
default ensures payment through insurance policies or letters of credit
obtained by the issuer or sponsor from third parties. The Fund will not
pay any additional or separate fees for credit support. The degree of
credit support provided for each issue is generally based on historical
information respecting the level of credit risk associated with the
underlying assets. Delinquency or loss in excess of that anticipated or
failure of the credit support could adversely affect the return on an
investment in such a security.
MORTGAGE PASS-THROUGH SECURITIES: The Fund may invest in mortgage
pass- through securities. Mortgage pass-through securities are
securities representing interests in "pools" of mortgage loans. Monthly
payments of interest and principal by the individual borrowers on
mortgages are passed through to the holders of the securities (net of
fees paid to the issuer or guarantor of the securities) as the mortgages
in the underlying mortgage pools are paid off. The average lives of
mortgage pass-throughs are variable when issued because their average
lives depend on prepayment rates. The average life of these securities
is likely to be substantially shorter than their stated final maturity
as a result of unscheduled principal prepayment. Prepayments on
underlying mortgages result in a loss of anticipated interest, and all
or part of a premium if any has been paid, and the actual yield (or
total return) to the Fund may be different than the quoted yield on the
securities. Mortgage premiums generally increase with falling interest
rates and decrease with rising interest rates. Like other fixed income
securities, when interest rates rise the value of mortgage pass-through
security generally will decline; however, when interest rates are
declining, the value of mortgage pass-through securities with prepayment
features may not increase as much as that of other fixed-income
securities. In the event of an increase in interest rates which results
in a decline in mortgage prepayments, the anticipated maturity of
mortgage pass-through securities held by the Fund may increase,
effectively changing a security which was considered short or
intermediate-term at the time of purchase into a long-term security.
Long- term securities generally fluctuate more widely in response to
changes in interest rates than short or intermediate-term securities.
Payment of principal and interest on some mortgage pass-through
securities (but not the market value of the securities themselves) may
be guaranteed by the full faith and credit of the U.S. Government (in
the case of securities guaranteed by the Government National Mortgage
Association ("GNMA")); or guaranteed by agencies or instrumentalities of
the U.S. Government (such as the Federal National Mortgage Association
"FNMA") or the Federal Home Loan Mortgage Corporation, ("FHLMC") which
are supported only by the discretionary authority of the U.S. Government
to purchase the agency's obligations). Mortgage pass-through securities
may also be issued by non-governmental issuers (such as commercial
banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers). Some of
these mortgage pass-through securities may be supported by various forms
of insurance or guarantees.
Interests in pools of mortgage-related securities differ from other
forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or
specified call dates. Instead, these securities provide a monthly
payment which consists of both interest and principal payments. In
effect, these payments are a "pass-through" of the monthly payments made
by the individual borrowers on their mortgage loans, net of any fees
paid to the issuer or guarantor of such securities. Additional payments
are caused by prepayments of principal resulting from the sale,
refinancing or foreclosure of the underlying property, net of fees or
costs which may be incurred. Some mortgage pass-through securities (such
as securities issued by the GNMA) are described as "modified
pass-through." These securities entitle the holder to receive all
interests and principal payments owed on the mortgages in the mortgage
pool, net of certain fees, at the scheduled payment dates regardless of
whether the mortgagor actually makes the payment.
The principal governmental guarantor of mortgage pass-through
securities is GNMA. GNMA is a wholly owned U.S. Government corporation
within the Department of Housing and Urban Development. GNMA is
authorized to guarantee, with the full faith and credit of the U.S.
Government, the timely payment of principal and interest on securities
issued by institutions approved by GNMA (such as savings and loan
institutions, commercial banks and mortgage bankers) and backed by pools
of Federal Housing Administration ("FHA")-insured or Veterans
Administration ("VA")- guaranteed mortgages. These guarantees, however,
do not apply to the market value or yield of mortgage pass-through
securities. GNMA securities are often purchased at a premium over the
maturity value of the underlying mortgages. This premium is not
guaranteed and will be lost if prepayment occurs.
Government-related guarantors (i.e., whose guarantees are not backed
by the full faith and credit of the U.S. Government) include FNMA and
FHLMC. FNMA is a government-sponsored corporation owned entirely by
private stockholders. It is subject to general regulation by the
Secretary of Housing and Urban Development. FNMA purchases conventional
residential mortgages (i.e., mortgages not insured or guaranteed by any
governmental agency) from a list of approved seller/servicers which
include state and federally chartered savings and loan associations,
mutual savings banks, commercial banks, credit unions and mortgage
bankers. Pass-through securities issued by FNMA are guaranteed as to
timely payment by FNMA of principal and interest.
FHLMC is also a government-sponsored corporation owned by private
stockholders. FHLMC issues Participation Certificates ("PCs") which
represent interests in conventional mortgages (i.e., not federally
insured or guaranteed) for FHLMC's national portfolio. FHLMC guarantees
timely payment of interest and ultimate collection of principal
regardless of the status of the underlying mortgage loans.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers
also create pass through pools of mortgage loans. Such issuers may also
be the originators and/or servicers of the underlying mortgage-related
securities. Pools created by such non-governmental issuers generally
offer a higher rate of interest than government and government-related
pools because there are no direct or indirect government or agency
guarantees of payments in the former pools. However, timely payment of
interest and principal of mortgage loans in these pools may be supported
by various forms of insurance or guarantees, including individual loan,
title, pool and hazard insurance and letters of credit. The insurance
and guarantees are issued by governmental entities, private insurers and
the mortgage poolers. There can be no assurance that the private
insurers or guarantors can meet their obligations under the insurance
policies or guarantee arrangements. The Fund may also buy
mortgage-related securities without insurance or guarantees.
STRIPPED MORTGAGE-BACKED SECURITIES: The Fund may invest a portion of
its assets in stripped mortgage-backed securities ("SMBS") which are
derivative multiclass mortgage securities issued by agencies or
instrumentalities of the U.S. Government, or by private originators of,
or investors in, mortgage loans, including savings and loan
institutions, mortgage banks, commercial banks and investment banks.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions from a pool of
mortgage assets. A common type of SMBS will have one class receiving
some of the interest and most of the principal from the Mortgage Assets,
while the other class will receive most of the interest and the
remainder of the principal. In the most extreme case, one class will
receive all of the interest (the interest-only or "I0" class) while the
other class will receive all of the principal (the principal-only or
"P0" class). The yield to maturity on an I0 is extremely sensitive to
the rate of principal payments, including prepayments on the related
underlying Mortgage Assets, and a rapid rate of principal payments may
have a material adverse effect on such security's yield to maturity. If
the underlying Mortgage Assets experience greater than anticipated
prepayments of principal, the Fund may fail to fully recoup its initial
investment in these securities. The market value of the class consisting
primarily or entirely of principal payments generally is unusually
volatile in response to changes in interest rates. Because SMBS were
only recently introduced, established trading markets for these
securities have not yet developed, although the securities are traded
among institutional investors and investment banking firms.
CORPORATE SECURITIES: The Fund may invest in debt securities, such as
convertible and non-convertible bonds, notes and debentures, issued by
corporations, limited partnerships and other similar entities.
LOANS AND OTHER DIRECT INDEBTEDNESS: The Fund may purchase loans and
other direct indebtedness. In purchasing a loan, the Fund acquires some
or all of the interest of a bank or other lending institution in a loan
to a corporate, governmental or other borrower. Many such loans are
secured, although some may be unsecured. Such loans may be in default at
the time of purchase. Loans that are fully secured offer the Fund more
protection than an unsecured loan in the event of non-payment of
scheduled interest or principal. However, there is no assurance that the
liquidation of collateral from a secured loan would satisfy the
corporate borrowers obligation, or that the collateral can be
liquidated.
These loans are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans are typically made by a syndicate of lending
institutions, represented by an agent lending institution which has
negotiated and structured the loan and is responsible for collecting
interest, principal and other amounts due on its own behalf and on
behalf of the others in the syndicate, and for enforcing its and their
other rights against the borrower. Alternatively, such loans may be
structured as a novation, pursuant to which the Fund would assume all of
the rights of the lending institution in a loan or as an assignment,
pursuant to which the Fund would purchase an assignment of a portion of
a lenders interest in a loan either directly from the lender or through
an intermediary. The Fund may also purchase trade or other claims
against companies, which generally represent money owned by the company
to a supplier of goods or services. These claims may also be purchased
at a time when the company is in default.
Certain of the loans and the other direct indebtedness acquired by the
Fund may involve revolving credit facilities or other standby financing
commitments which obligate the Fund to pay additional cash on a certain
date or on demand. These commitments may have the effect of requiring
the Fund to increase its investment in a company at a time when the Fund
might not otherwise decide to do so (including at a time when the
company's financial condition makes it unlikely that such amounts will
be repaid). To the extent that the Fund is committed to advance
additional funds, it will at all times hold and maintain in a segregated
account cash or other high grade debt obligations in an amount
sufficient to meet such commitments.
The Fund's ability to receive payment of principal, interest and other
amounts due in connection with these investments will depend primarily
on the financial condition of the borrower. In selecting the loans and
other direct indebtedness which the Fund will purchase, the Adviser will
rely upon its own (and not the original lending institution's) credit
analysis of the borrower. As the Fund may be required to rely upon
another lending institution to collect and pass onto the Fund amounts
payable with respect to the loan and to enforce the Fund's rights under
the loan and other direct indebtedness, an insolvency, bankruptcy or
reorganization of the lending institution may delay or prevent the Fund
from receiving such amounts. In such cases, the Fund will evaluate as
well the creditworthiness of the lending institution and will treat both
the borrower and the lending institution as an "issuer" of the loan for
purposes of certain investment restrictions pertaining to the
diversification of the Fund's portfolio investments. The highly
leveraged nature of many such loans and other direct indebtedness may
make such loans and other direct indebtedness especially vulnerable to
adverse changes in economic or market conditions. Investments in such
loans and other direct indebtedness may involve additional risk to the
Fund.
LOWER RATED BONDS: The Fund may invest in fixed income securities
rated Ba or lower by Moody's or BB or lower by S&P, Fitch or Duff &
Phelps and comparable unrated securities (commonly known as "junk
bonds"). See Appendix D for a description of bond ratings. No minimum
rating standard is required by the Fund. These securities are considered
speculative and, while generally providing greater income than
investments in higher rated securities, will involve greater risk of
principal and income (including the possibility of default or bankruptcy
of the issuers of such securities) and may involve greater volatility of
price (especially during periods of economic uncertainty or change) than
securities in the higher rating categories and because yields vary over
time, no specific level of income can ever be assured. These lower rated
high yielding fixed income securities generally tend to reflect economic
changes (and the outlook for economic growth), short-term corporate and
industry developments and the market's perception of their credit
quality (especially during times of adverse publicity) to a greater
extent than higher rated securities which react primarily to
fluctuations in the general level of interest rates (although these
lower rated fixed income securities are also affected by changes in
interest rates). In the past, economic downturns or an increase in
interest rates have, under certain circumstances, caused a higher
incidence of default by the issuers of these securities and may do so in
the future, especially in the case of highly leveraged issuers. The
prices for these securities may be affected by legislative and
regulatory developments. The market for these lower rated fixed income
securities may be less liquid than the market for investment grade fixed
income securities. Furthermore, the liquidity of these lower rated
securities may be affected by the market's perception of their credit
quality. Therefore, the Adviser's judgment may at times play a greater
role in valuing these securities than in the case of investment grade
fixed income securities, and it also may be more difficult during times
of certain adverse market conditions to sell these lower rated
securities to meet redemption requests or to respond to changes in the
market.
While the Adviser may refer to ratings issued by established credit
rating agencies, it is not the Fund's policy to rely exclusively on
ratings issued by these rating agencies, but rather to supplement such
ratings with the Adviser's own independent and ongoing review of credit
quality. To the extent a Fund invests in these lower rated securities,
the achievement of its investment objectives may be a more dependent on
the Adviser's own credit analysis than in the case of a fund investing
in higher quality fixed income securities. These lower rated securities
may also include zero coupon bonds, deferred interest bonds and PIK
bonds.
MUNICIPAL BONDS: The Fund may invest in debt securities issued by or
on behalf of states, territories and possessions of the United States
and the District of Columbia and their political subdivisions, agencies
or instrumentalities, the interest on which is exempt from federal
income tax ("Municipal Bonds"). Municipal Bonds include debt securities
which pay interest income that is subject to the alternative minimum
tax. The Fund may invest in Municipal Bonds whose issuers pay interest
on the Bonds from revenues from projects such as multifamily housing,
nursing homes, electric utility systems, hospitals or life care
facilities.
If a revenue bond is secured by payments generated from a project, and
the revenue bond is also secured by a lien on the real estate comprising
the project, foreclosure by the indenture trustee on the lien for the
benefit of the bondholders creates additional risks associated with
owning real estate, including environmental risks.
Housing revenue bonds typically are issued by a state, county or local
housing authority and are secured only by the revenues of mortgages
originated by the authority using the proceeds of the bond issue.
Because of the impossibility of precisely predicting demand for
mortgages from the proceeds of such an issue, there is a risk that the
proceeds of the issue will be in excess of demand, which would result in
early retirement of the bonds by the issuer. Moreover, such housing
revenue bonds depend for their repayment upon the cash flow from the
underlying mortgages, which cannot be precisely predicted when the bonds
are issued. Any difference in the actual cash flow from such mortgages
from the assumed cash flow could have an adverse impact upon the ability
of the issuer to make scheduled payments of principal and interest on
the bonds, or could result in early retirement of the bonds.
Additionally, such bonds depend in part for scheduled payments of
principal and interest upon reserve funds established from the proceeds
of the bonds, assuming certain rates of return on investment of such
reserve funds. If the assumed rates of return are not realized because
of changes in interest rate levels or for other reasons, the actual cash
flow for scheduled payments of principal and interest on the bonds may
be inadequate. The financing of multi-family housing projects is
affected by a variety of factors, including satisfactory completion of
construction within cost constraints, the achievement and maintenance of
a sufficient level of occupancy, sound management of the developments,
timely and adequate increases in rents to cover increases in operating
expenses, including taxes, utility rates and maintenance costs, changes
in applicable laws and governmental regulations and social and economic
trends.
Electric utilities face problems in financing large construction
programs in inflationary periods, cost increases and delay occasioned by
environmental considerations (particularly with respect to nuclear
facilities), difficulty in obtaining fuel at reasonable prices, the cost
of competing fuel sources, difficulty in obtaining sufficient rate
increases and other regulatory problems, the effect of energy
conservation and difficulty of the capital market to absorb utility
debt.
Health care facilities include life care facilities, nursing homes and
hospitals. Life care facilities are alternative forms of long-term
housing for the elderly which offer residents the independence of
condominium life style and, if needed, the comprehensive care of nursing
home services. Bonds to finance these facilities have been issued by
various state industrial development authorities. Since the bonds are
secured only by the revenues of each facility and not by state or local
government tax payments, they are subject to a wide variety of risks.
Primarily, the projects must maintain adequate occupancy levels to be
able to provide revenues adequate to maintain debt service payments.
Moreover, in the case of life care facilities, since a portion of
housing, medical care and other services may be financed by an initial
deposit, there may be risk if the facility does not maintain adequate
financial reserves to secure estimated actuarial liabilities. The
ability of management to accurately forecast inflationary cost pressures
weighs importantly in this process. The facilities may also be affected
by regulatory cost restrictions applied to health care delivery in
general, particularly state regulations or changes in Medicare and
Medicaid payments or qualifications, or restrictions imposed by medical
insurance companies. They may also face competition from alternative
health care or conventional housing facilities in the private or public
sector. Hospital bond ratings are often based on feasibility studies
which contain projections of expenses, revenues and occupancy levels. A
hospital's gross receipts and net income available to service its debt
are influenced by demand for hospital services, the ability of the
hospital to provide the services required, management capabilities,
economic developments in the service area, efforts by insurers and
government agencies to limit rates and expenses, confidence in the
hospital, service area economic developments, competition, availability
and expense of malpractice insurance, Medicaid and Medicare funding, and
possible federal legislation limiting the rates of increase of hospital
charges.
The Fund may invest in municipal lease securities. These are undivided
interests in a portion of an obligation in the from of a lease or
installment purchase which is issued by state and local governments to
acquire equipment and facilities. Municipal leases frequently have
special risks not normally associated with general obligation or revenue
bonds. Leases and installment purchase or conditional sale contracts
(which normally provide for title to the leased asset to pass eventually
to the governmental issuer) have evolved as a means for governmental
issuers to acquire property and equipment without meeting the
constitutional and statutory requirements for the issuance of debt. The
debt-issuance limitations are deemed to be inapplicable because of the
inclusion in many leases or contracts of "non-appropriation" clauses
that provide that the governmental issuer has no obligation to make
future payments under the lease or contract unless money is appropriated
for such purpose by the appropriate legislative body on a yearly or
other periodic basis. Although the obligations will be secured by the
leased equipment or facilities, the disposition of the property in the
event of non-appropriation or foreclosure might, in some cases, prove
difficult. There are, of course, variations in the security of municipal
lease securities, both within a particular classification and between
classifications, depending on numerous factors.
The Fund may also invest in bonds for industrial and other projects,
such as sewage or solid waste disposal or hazardous waste treatment
facilities. Financing for such projects will be subject to inflation and
other general economic factors as well as construction risks including
labor problems, difficulties with construction sites and the ability of
contractors to meet specifications in a timely manner. Because some of
the materials, processes and wastes involved in these projects may
include hazardous components, there are risks associated with their
production, handling and disposal.
SPECULATIVE BONDS: The Fund may invest in fixed income and convertible
securities rated Baa by Moody's or BBB by S&P, Fitch or Duff & Phelps
and comparable unrated securities. See Appendix D for a description of
bond ratings. These securities, while normally exhibiting adequate
protection parameters, have speculative characteristics and changes in
economic conditions or other circumstances are more likely to lead to a
weakened capacity to make principal and interest payments than in the
case of higher grade securities.
U.S. GOVERNMENT SECURITIES: The Fund may invest in U.S. Government
Securities including (i) U.S. Treasury obligations, all of which are
backed by the full faith and credit of the U.S. Government and (ii) U.S.
Government Securities, some of which are backed by the full faith and
credit of the U.S. Treasury, e.g., direct pass-through certificates of
the Government National Mortgage Association ("GNMA"); some of which are
backed only by the credit of the issuer itself, e.g., obligations of the
Student Loan Marketing Association; and some of which are supported by
the discretionary authority of the U.S. Government to purchase the
agency's obligations, e.g., obligations of the Federal National Mortgage
Association ("FNMA").
U.S. Government Securities also include interest in trust or other
entities representing interests in obligations that are issued or
guaranteed by the U.S. Government, its agencies, authorities or
instrumentalities.
VARIABLE AND FLOATING RATE OBLIGATIONS: The Fund may invest in
floating or variable rate securities. Investments in floating or
variable rate securities normally will involve industrial development or
revenue bonds which provide that the rate of interest is set as a
specific percentage of a designated base rate, such as rates on Treasury
Bonds or Bills or the prime rate at a major commercial bank, and that a
bondholder can demand payment of the obligations on behalf of the Fund
on short notice at par plus accrued interest, which amount may be more
or less than the amount the bondholder paid for them. The maturity of
floating or variable rate obligations (including participation interests
therein) is deemed to be the longer of (i) the notice period required
before the Fund is entitled to receive payment of the obligation upon
demand or (ii) the period remaining until the obligation's next interest
rate adjustment. If not redeemed by the Fund through the demand feature,
the obligations mature on a specified date which may range up to thirty
years from the date of issuance.
ZERO COUPON BONDS, DEFERRED INTEREST BONDS AND PIK BONDS: The Fund may
invest in zero coupon bonds, deferred interest bonds and bonds on which
the interest is payable in kind ("PIK bonds"). Zero coupon and deferred
interest bonds are debt obligations which are issued at a significant
discount from face value. The discount approximates the total amount of
interest the bonds will accrue and compound over the period until
maturity or the first interest payment date at a rate of interest
reflecting the market rate of the security at the time of issuance.
While zero coupon bonds do not require the periodic payment of interest,
deferred interest bonds provide for a period of delay before the regular
payment of interest begins. PIK bonds are debt obligations which provide
that the issuer may, at its option, pay interest on such bonds in cash
or in the form of additional debt obligations. Such investments benefit
the issuer by mitigating its need for cash to meet debt service, but
also require a higher rate of return to attract investors who are
willing to defer receipt of such cash. Such investments may experience
greater volatility in market value than debt obligations which make
regular payments of interest. The Fund will accrue income on such
investments for tax and accounting purposes, which is distributable to
shareholders and which, because no cash is received at the time of
accrual, may require the liquidation of other portfolio securities to
satisfy the Fund's distribution obligations.
EQUITY SECURITIES
The Fund may invest in all types of equity securities, including the
following: common stocks, preferred stocks and preference stocks;
securities such as bonds, warrants or rights that are convertible into
stocks; and depositary receipts for those securities. These securities
may be listed on securities exchanges, traded in various
over-the-counter markets or have no organized market.
FOREIGN SECURITIES EXPOSURE The Fund may invest in various types of
foreign securities, or securities which provide the Fund with exposure
to foreign securities or foreign currencies, as discussed below:
BRADY BONDS: The Fund may invest in Brady Bonds, which are securities
created through the exchange of existing commercial bank loans to public
and private entities in certain emerging markets for new bonds in
connection with debt restructurings under a debt restructuring plan
introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady
(the "Brady Plan"). Brady Plan debt restructurings have been implemented
to date in Argentina, Brazil, Bulgaria, Costa Rica, Croatia, Dominican
Republic, Ecuador, Jordan, Mexico, Morocco, Nigeria, Panama, Peru, the
Philippines, Poland, Slovenia, Uruguay and Venezuela. Brady Bonds have
been issued only recently, and for that reason do not have a long
payment history. Brady Bonds may be collateralized or uncollateralized,
are issued in various currencies (but primarily the U.S. dollar) and are
actively traded in over-the-counter secondary markets. U.S.
dollar-denominated, collateralized Brady Bonds, which may be fixed rate
bonds or floating-rate bonds, are generally collateralized in full as to
principal by U.S. Treasury zero coupon bonds having the same maturity as
the bonds. Brady Bonds are often viewed as having three or four
valuation components: the collateralized repayment of principal at final
maturity; the collateralized interest payments; the uncollateralized
interest payments; and any uncollateralized repayment of principal at
maturity (these uncollateralized amounts constituting the "residual
risk"). In light of the residual risk of Brady Bonds and the history of
defaults of countries issuing Brady Bonds with respect to commercial
bank loans by public and private entities, investments in Brady Bonds
may be viewed as speculative.
DEPOSITARY RECEIPTS: The Fund may invest in American Depositary
Receipts ("ADRs"), Global Depositary Receipts ("GDRs") and other types
of depositary receipts. ADRs are certificates by a U.S. depositary
(usually a bank) and represent a specified quantity of shares of an
underlying non- U.S. stock on deposit with a custodian bank as
collateral. GDRs and other types of depositary receipts are typically
issued by foreign banks or trust companies and evidence ownership of
underlying securities issued by either a foreign or a U.S. company.
Generally, ADRs are in registered form and are designed for use in U.S.
securities markets and GDRs are in bearer form and are designed for use
in foreign securities markets. For the purposes of the Fund's policy to
invest a certain percentage of its assets in foreign securities, the
investments of the Fund in ADRs, GDRs and other types of depositary
receipts are deemed to be investments in the underlying securities.
ADRs may be sponsored or unsponsored. A sponsored ADR is issued by a
depositary which has an exclusive relationship with the issuer of the
underlying security. An unsponsored ADR may be issued by any number of
U.S. depositories. Under the terms of most sponsored arrangements,
depositories agree to distribute notices of shareholder meetings and
voting instructions, and to provide shareholder communications and other
information to the ADR holders at the request of the issuer of the
deposited securities. The depository of an unsponsored ADR, on the other
hand, is under no obligation to distribute shareholder communications
received from the issuer of the deposited securities or to pass through
voting rights to ADR holders in respect of the deposited securities. The
Fund may invest in either type of ADR. Although the U.S. investor holds
a substitute receipt of ownership rather than direct stock certificates,
the use of the depositary receipts in the United States can reduce costs
and delays as well as potential currency exchange and other
difficulties. The Fund may purchase securities in local markets and
direct delivery of these ordinary shares to the local depositary of an
ADR agent bank in foreign country. Simultaneously, the ADR agents create
a certificate which settles at the Fund's custodian in five days. The
Fund may also execute trades on the U.S. markets using existing ADRs. A
foreign issuer of the security underlying an ADR is generally not
subject to the same reporting requirements in the United States as a
domestic issuer. Accordingly, information available to a U.S. investor
will be limited to the information the foreign issuer is required to
disclose in its country and the market value of an ADR may not reflect
undisclosed material information concerning the issuer of the underlying
security. ADRs may also be subject to exchange rate risks if the
underlying foreign securities are denominated in a foreign currency.
DOLLAR-DENOMINATED FOREIGN DEBT SECURITIES: The Fund may invest in
dollar- denominated foreign debt securities. Investing in
dollar-denominated foreign debt represents a greater degree of risk than
investing in domestic securities, due to less publicly available
information, less securities regulation, war or expropriation. Special
considerations may include higher brokerage costs and thinner trading
markets. Investments in foreign countries could be affected by other
factors including extended settlement periods.
EMERGING MARKETS: The Fund may invest in securities of government,
government-related, supranational and corporate issuers located in
emerging markets. Such investments entail significant risks as described
below.
o Company Debt -- Governments of many emerging market countries have
exercised and continue to exercise substantial influence over many
aspects of the private sector through the ownership or control of many
companies, including some of the largest in any given country. As a
result, government actions in the future could have a significant
effect on economic conditions in emerging markets, which in turn, may
adversely affect companies in the private sector, general market
conditions and prices and yields of certain of the securities in the
Fund's portfolio. Expropriation, confiscatory taxation,
nationalization, political, economic or social instability or other
similar developments have occurred frequently over the history of
certain emerging markets and could adversely affect the Fund's assets
should these conditions recur.
o Default; Legal Recourse -- The Fund may have limited legal recourse in
the event of a default with respect to certain debt obligations it may
hold. If the issuer of a fixed income security owned by the Fund
defaults, the Fund may incur additional expenses to seek recovery.
Debt obligations issued by emerging market governments differ from
debt obligations of private entities; remedies from defaults on debt
obligations issued by emerging market governments, unlike those on
private debt, must be pursued in the courts of the defaulting party
itself. The Fund's ability to enforce its rights against private
issuers may be limited. The ability to attach assets to enforce a
judgment may be limited. Legal recourse is therefore somewhat
diminished. Bankruptcy, moratorium and other similar laws applicable
to private issuers of debt obligations may be substantially different
from those of other countries. The political context, expressed as an
emerging market governmental issuer's willingness to meet the terms of
the debt obligation, for example, is of considerable importance. In
addition, no assurance can be given that the holders of commercial
bank debt may not contest payments to the holders of debt obligations
in the event of default under commercial bank loan agreements.
o Foreign Currencies -- The securities in which the Fund invests may be
denominated in foreign currencies and international currency units and
the Fund may invest a portion of its assets directly in foreign
currencies. Accordingly, the weakening of these currencies and units
against the U.S. dollar may result in a decline in the Fund's asset
value.
Some emerging market countries also may have managed currencies, which
are not free floating against the U.S. dollar. In addition, there is
risk that certain emerging market countries may restrict the free
conversion of their currencies into other currencies. Further, certain
emerging market currencies may not be internationally traded. Certain
of these currencies have experienced a steep devaluation relative to
the U.S. dollar. Any devaluations in the currencies in which a Fund's
portfolio securities are denominated may have a detrimental impact on
the Fund's net asset value.
o Inflation -- Many emerging markets have experienced substantial, and
in some periods extremely high, rates of inflation for many years.
Inflation and rapid fluctuations in inflation rates have had and may
continue to have adverse effects on the economies and securities
markets of certain emerging market countries. In an attempt to control
inflation, wage and price controls have been imposed in certain
countries. Of these countries, some, in recent years, have begun to
control inflation through prudent economic policies.
o Liquidity; Trading Volume; Regulatory Oversight -- The securities
markets of emerging market countries are substantially smaller, less
developed, less liquid and more volatile than the major securities
markets in the U.S. Disclosure and regulatory standards are in many
respects less stringent than U.S. standards. Furthermore, there is a
lower level of monitoring and regulation of the markets and the
activities of investors in such markets.
The limited size of many emerging market securities markets and
limited trading volume in the securities of emerging market issuers
compared to volume of trading in the securities of U.S. issuers could
cause prices to be erratic for reasons apart from factors that affect
the soundness and competitiveness of the securities issuers. For
example, limited market size may cause prices to be unduly influenced
by traders who control large positions. Adverse publicity and
investors' perceptions, whether or not based on in-depth fundamental
analysis, may decrease the value and liquidity of portfolio
securities.
The risk also exists that an emergency situation may arise in one or
more emerging markets, as a result of which trading of securities may
cease or may be substantially curtailed and prices for the Fund's
securities in such markets may not be readily available. The Fund may
suspend redemption of its shares for any period during which an
emergency exists, as determined by the Securities and Exchange
Commission (the "SEC"). Accordingly, if the Fund believes that
appropriate circumstances exist, it will promptly apply to the SEC for
a determination that an emergency is present. During the period
commencing from the Fund's identification of such condition until the
date of the SEC action, the Fund's securities in the affected markets
will be valued at fair value determined in good faith by or under the
direction of the Board of Trustees.
o Sovereign Debt -- Investment in sovereign debt can involve a high
degree of risk. The governmental entity that controls the repayment of
sovereign debt may not be able or willing to repay the principal
and/or interest when due in accordance with the terms of such debt. A
governmental entity's willingness or ability to repay principal and
interest due in a timely manner may be affected by, among other
factors, its cash flow situation, the extent of its foreign reserves,
the availability of sufficient foreign exchange on the date a payment
is due, the relative size of the debt service burden to the economy as
a whole, the governmental entity's policy towards the International
Monetary Fund and the political constraints to which a governmental
entity may be subject. Governmental entities may also be dependent on
expected disbursements from foreign governments, multilateral agencies
and others abroad to reduce principal and interest on their debt. The
commitment on the part of these governments, agencies and others to
make such disbursements may be conditioned on a governmental entity's
implementation of economic reforms and/or economic performance and the
timely service of such debtor's obligations. Failure to implement such
reforms, achieve such levels of economic performance or repay
principal or interest when due may result in the cancellation of such
third parties' commitments to lend funds to the governmental entity,
which may further impair such debtor's ability or willingness to
service its debts in a timely manner. Consequently, governmental
entities may default on their sovereign debt. Holders of sovereign
debt (including the Fund) may be requested to participate in the
rescheduling of such debt and to extend further loans to governmental
entities. There is no bankruptcy proceedings by which sovereign debt
on which governmental entities have defaulted may be collected in
whole or in part.
Emerging market governmental issuers are among the largest debtors to
commercial banks, foreign governments, international financial
organizations and other financial institutions. Certain emerging
market governmental issuers have not been able to make payments of
interest on or principal of debt obligations as those payments have
come due. Obligations arising from past restructuring agreements may
affect the economic performance and political and social stability of
those issuers.
The ability of emerging market governmental issuers to make timely
payments on their obligations is likely to be influenced strongly by
the issuer's balance of payments, including export performance, and
its access to international credits and investments. An emerging
market whose exports are concentrated in a few commodities could be
vulnerable to a decline in the international prices of one or more of
those commodities. Increased protectionism on the part of an emerging
market's trading partners could also adversely affect the country's
exports and tarnish its trade account surplus, if any. To the extent
that emerging markets receive payment for their exports in currencies
other than dollars or non-emerging market currencies, its ability to
make debt payments denominated in dollars or non-emerging market
currencies could be affected.
To the extent that an emerging market country cannot generate a trade
surplus, it must depend on continuing loans from foreign governments,
multilateral organizations or private commercial banks, aid payments
from foreign governments and on inflows of foreign investment. The
access of emerging markets to these forms of external funding may not
be certain, and a withdrawal of external funding could adversely
affect the capacity of emerging market country governmental issuers to
make payments on their obligations. In addition, the cost of servicing
emerging market debt obligations can be affected by a change in
international interest rates since the majority of these obligations
carry interest rates that are adjusted periodically based upon
international rates.
Another factor bearing on the ability of emerging market countries to
repay debt obligations is the level of international reserves of the
country. Fluctuations in the level of these reserves affect the amount
of foreign exchange readily available for external debt payments and
thus could have a bearing on the capacity of emerging market countries
to make payments on these debt obligations.
o Withholding -- Income from securities held by the Fund could be
reduced by a withholding tax on the source or other taxes imposed by
the emerging market countries in which the Fund makes its investments.
The Fund's net asset value may also be affected by changes in the
rates or methods of taxation applicable to the Fund or to entities in
which the Fund has invested. The Adviser will consider the cost of any
taxes in determining whether to acquire any particular investments,
but can provide no assurance that the taxes will not be subject to
change.
FOREIGN SECURITIES: The Fund may invest in dollar-denominated and non
dollar-denominated foreign securities. Investing in securities of
foreign issuers generally involves risks not ordinarily associated with
investing in securities of domestic issuers. These include changes in
currency rates, exchange control regulations, securities settlement
practices, governmental administration or economic or monetary policy
(in the United States or abroad) or circumstances in dealings between
nations. Costs may be incurred in connection with conversions between
various currencies. Special considerations may also include more limited
information about foreign issuers, higher brokerage costs, different
accounting standards and thinner trading markets. Foreign securities
markets may also be less liquid, more volatile and less subject to
government supervision than in the United States. Investments in foreign
countries could be affected by other factors including expropriation,
confiscatory taxation and potential difficulties in enforcing
contractual obligations and could be subject to extended settlement
periods. As a result of its investments in foreign securities, the Fund
may receive interest or dividend payments, or the proceeds of the sale
or redemption of such securities, in the foreign currencies in which
such securities are denominated. Under certain circumstances, such as
where the Adviser believes that the applicable exchange rate is
unfavorable at the time the currencies are received or the Adviser
anticipates, for any other reason, that the exchange rate will improve,
the Fund may hold such currencies for an indefinite period of time.
While the holding of currencies will permit the Fund to take advantage
of favorable movements in the applicable exchange rate, such strategy
also exposes the Fund to risk of loss if exchange rates move in a
direction adverse to the Fund's position. Such losses could reduce any
profits or increase any losses sustained by the Fund from the sale or
redemption of securities and could reduce the dollar value of interest
or dividend payments received.
FORWARD CONTRACTS
The Fund may enter into contracts for the purchase or sale of a specific
currency at a future date at a price set at the time the contract is
entered into (a "Forward Contract"), for hedging purposes (e.g., to
protect its current or intended investments from fluctuations in
currency exchange rates) as well as for non-hedging purposes.
A Forward Contract to sell a currency may be entered into where the
Fund seeks to protect against an anticipated increase in the exchange
rate for a specific currency which could reduce the dollar value of
portfolio securities denominated in such currency. Conversely, the Fund
may enter into a Forward Contract to purchase a given currency to
protect against a projected increase in the dollar value of securities
denominated in such currency which the Fund intends to acquire.
If a hedging transaction in Forward Contracts is successful, the
decline in the dollar value of portfolio securities or the increase in
the dollar cost of securities to be acquired may be offset, at least in
part, by profits on the Forward Contract. Nevertheless, by entering into
such Forward Contracts, the Fund may be required to forego all or a
portion of the benefits which otherwise could have been obtained from
favorable movements in exchange rates. The Fund does not presently
intend to hold Forward Contracts entered into until maturity, at which
time it would be required to deliver or accept delivery of the
underlying currency, but will seek in most instances to close out
positions in such Contracts by entering into offsetting transactions,
which will serve to fix the Fund's profit or loss based upon the value
of the Contracts at the time the offsetting transaction is executed.
The Fund will also enter into transactions in Forward Contracts for
other than hedging purposes, which presents greater profit potential but
also involves increased risk. For example, the Fund may purchase a given
foreign currency through a Forward Contract if, in the judgment of the
Adviser, the value of such currency is expected to rise relative to the
U.S. dollar. Conversely, the Fund may sell the currency through a
Forward Contract if the Adviser believes that its value will decline
relative to the dollar.
The Fund will profit if the anticipated movements in foreign currency
exchange rates occur, which will increase its gross income. Where
exchange rates do not move in the direction or to the extent
anticipated, however, the Fund may sustain losses which will reduce its
gross income. Such transactions, therefore, could be considered
speculative and could involve significant risk of loss.
The use by the Fund of Forward Contracts also involves the risks
described under the caption "Special Risk Factors -- Options, Futures,
Forwards, Swaps and Other Derivative Transactions" in this Appendix.
FUTURES CONTRACTS
The Fund may purchase and sell futures contracts ("Futures Contracts")
on stock indices, foreign currencies, interest rates or interest-rate
related instruments, indices of foreign currencies or commodities. The
Fund may also purchase and sell Futures Contracts on foreign or domestic
fixed income securities or indices of such securities including
municipal bond indices and any other indices of foreign or domestic
fixed income securities that may become available for trading. Such
investment strategies will be used for hedging purposes and for
non-hedging purposes, subject to applicable law.
A Futures Contract is a bilateral agreement providing for the purchase
and sale of a specified type and amount of a financial instrument,
foreign currency or commodity, or for the making and acceptance of a
cash settlement, at a stated time in the future for a fixed price. By
its terms, a Futures Contract provides for a specified settlement month
in which, in the case of the majority of commodities, interest rate and
foreign currency futures contracts, the underlying commodities, fixed
income securities or currency are delivered by the seller and paid for
by the purchaser, or on which, in the case of index futures contracts
and certain interest rate and foreign currency futures contracts, the
difference between the price at which the contract was entered into and
the contract's closing value is settled between the purchaser and seller
in cash. Futures Contracts differ from options in that they are
bilateral agreements, with both the purchaser and the seller equally
obligated to complete the transaction. Futures Contracts call for
settlement only on the expiration date and cannot be "exercised" at any
other time during their term.
The purchase or sale of a Futures Contract differs from the purchase
or sale of a security or the purchase of an option in that no purchase
price is paid or received. Instead, an amount of cash or cash
equivalents, which varies but may be as low as 5% or less of the value
of the contract, must be deposited with the broker as "initial margin."
Subsequent payments to and from the broker, referred to as "variation
margin," are made on a daily basis as the value of the index or
instrument underlying the Futures Contract fluctuates, making positions
in the Futures Contract more or less valuable -- a process known as
"mark-to-market."
Purchases or sales of stock index futures contracts are used to
attempt to protect the Fund's current or intended stock investments from
broad fluctuations in stock prices. For example, the Fund may sell stock
index futures contracts in anticipation of or during a market decline to
attempt to offset the decrease in market value of the Fund's securities
portfolio that might otherwise result. If such decline occurs, the loss
in value of portfolio securities may be offset, in whole or part, by
gains on the futures position. When the Fund is not fully invested in
the securities market and anticipates a significant market advance, it
may purchase stock index futures contracts in order to gain rapid market
exposure that may, in part or entirely, offset increases in the cost of
securities that the Fund intends to purchase. As such purchases are
made, the corresponding positions in stock index futures contracts will
be closed out. In a substantial majority of these transactions, the Fund
will purchase such securities upon termination of the futures position,
but under unusual market conditions, a long futures position may be
terminated without a related purchase of securities.
Interest rate Futures Contracts may be purchased or sold to attempt to
protect against the effects of interest rate changes on the Fund's
current or intended investments in fixed income securities. For example,
if the Fund owned long-term bonds and interest rates were expected to
increase, the Fund might enter into interest rate futures contracts for
the sale of debt securities. Such a sale would have much the same effect
as selling some of the long-term bonds in the Fund's portfolio. If
interest rates did increase, the value of the debt securities in the
portfolio would decline, but the value of the Fund's interest rate
futures contracts would increase at approximately the same rate, subject
to the correlation risks described below, thereby keeping the net asset
value of the Fund from declining as much as it otherwise would have.
Similarly, if interest rates were expected to decline, interest rate
futures contracts may be purchased to hedge in anticipation of
subsequent purchases of long-term bonds at higher prices. Since the
fluctuations in the value of the interest rate futures contracts should
be similar to that of long-term bonds, the Fund could protect itself
against the effects of the anticipated rise in the value of long-term
bonds without actually buying them until the necessary cash became
available or the market had stabilized. At that time, the interest rate
futures contracts could be liquidated and the Fund's cash reserves could
then be used to buy long- term bonds on the cash market. The Fund could
accomplish similar results by selling bonds with long maturities and
investing in bonds with short maturities when interest rates are
expected to increase. However, since the futures market may be more
liquid than the cash market in certain cases or at certain times, the
use of interest rate futures contracts as a hedging technique may allow
the Fund to hedge its interest rate risk without having to sell its
portfolio securities.
The Fund may purchase and sell foreign currency futures contracts for
hedging purposes, to attempt to protect its current or intended
investments from fluctuations in currency exchange rates. Such
fluctuations could reduce the dollar value of portfolio securities
denominated in foreign currencies, or increase the dollar cost of
foreign- denominated securities to be acquired, even if the value of
such securities in the currencies in which they are denominated remains
constant. The Fund may sell futures contracts on a foreign currency, for
example, where it holds securities denominated in such currency and it
anticipates a decline in the value of such currency relative to the
dollar. In the event such decline occurs, the resulting adverse effect
on the value of foreign-denominated securities may be offset, in whole
or in part, by gains on the futures contracts.
Conversely, the Fund could protect against a rise in the dollar cost
of foreign-denominated securities to be acquired by purchasing futures
contracts on the relevant currency, which could offset, in whole or in
part, the increased cost of such securities resulting from a rise in the
dollar value of the underlying currencies. Where the Fund purchases
futures contracts under such circumstances, however, and the prices of
securities to be acquired instead decline, the Fund will sustain losses
on its futures position which could reduce or eliminate the benefits of
the reduced cost of portfolio securities to be acquired.
The use by the Fund of Futures Contracts also involves the risks
described under the caption "Special Risk Factors -- Options, Futures,
Forwards, Swaps and Other Derivative Transactions" in this Appendix.
INDEXED SECURITIES
The Fund may purchase securities with principal and/or interest
payments whose prices are indexed to the prices of other securities,
securities indices, currencies, precious metals or other commodities, or
other financial indicators. Indexed securities typically, but not
always, are debt securities or deposits whose value at maturity or
coupon rate is determined by reference to a specific instrument or
statistic. The Fund may also purchase indexed deposits with similar
characteristics. Gold- indexed securities, for example, typically
provide for a maturity value that depends on the price of gold,
resulting in a security whose price tends to rise and fall together with
gold prices. Currency-indexed securities typically are short-term to
intermediate-term debt securities whose maturity values or interest
rates are determined by reference to the values of one or more specified
foreign currencies, and may offer higher yields than U.S. dollar
denominated securities of equivalent issuers. Currency-indexed
securities may be positively or negatively indexed; that is, their
maturity value may increase when the specified currency value increases,
resulting in a security that performs similarly to a foreign-
denominated instrument, or their maturity value may decline when foreign
currencies increase, resulting in a security whose price characteristics
are similar to a put on the underlying currency. Currency-indexed
securities may also have prices that depend on the values of a number of
different foreign currencies relative to each other. Certain indexed
securities may expose the Fund to the risk of loss of all or a portion
of the principal amount of its investment and/or the interest that might
otherwise have been earned on the amount invested.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they
are indexed, and may also be influenced by interest rate changes in the
U.S. and abroad. At the same time, indexed securities are subject to the
credit risks associated with the issuer of the security, and their
values may decline substantially if the issuer's creditworthiness
deteriorates. Recent issuers of indexed securities have included banks,
corporations, and certain U.S. Government-sponsored entities.
INVERSE FLOATING RATE OBLIGATIONS
The Fund may invest in so-called "inverse floating rate obligations"
or "residual interest bonds" or other obligations or certificates
relating thereto structured to have similar features. In creating such
an obligation, a municipality issues a certain amount of debt and pays a
fixed interest rate. Half of the debt is issued as variable rate short
term obligations, the interest rate of which is reset at short
intervals, typically 35 days. The other half of the debt is issued as
inverse floating rate obligations, the interest rate of which is
calculated based on the difference between a multiple of (approximately
two times) the interest paid by the issuer and the interest paid on the
short-term obligation. Under usual circumstances, the holder of the
inverse floating rate obligation can generally purchase an equal
principal amount of the short term obligation and link the two
obligations in order to create long-term fixed rate bonds. Because the
interest rate on the inverse floating rate obligation is determined by
subtracting the short-term rate from a fixed amount, the interest rate
will decrease as the short-term rate increases and will increase as the
short-term rate decreases. The magnitude of increases and decreases in
the market value of inverse floating rate obligations may be
approximately twice as large as the comparable change in the market
value of an equal principal amount of long-term bonds which bear
interest at the rate paid by the issuer and have similar credit quality,
redemption and maturity provisions.
INVESTMENT IN OTHER INVESTMENT COMPANIES
The Fund may invest in other investment companies. Such investment may
involve the payment of substantial premiums above the value of such
investment companies' portfolio securities, and the total return on such
investment will be reduced by the operating expenses and fees of such
other investment companies, including advisory fees.
LADDERING
As one way of managing the Fund's exposure to interest rate
fluctuations, the Adviser may engage in a portfolio management strategy
known as "laddering." Under this strategy, the Fund will allocate a
portion of its assets in securities with remaining maturities of less
than 1 year, a portion of its assets in securities with remaining
maturities of 1 to 2 years, a portion of its assets in securities with
remaining maturities of 2 to 3 years, a portion of its assets in
securities with remaining maturities of 3 to 4 years and a portion of
its assets in securities with remaining maturities of 4 to 5 years.
Under normal market conditions, approximately 50% or more of the assets
of the Fund will be devoted to this strategy. The Adviser will actively
manage securities within each rung of the "ladder." "Laddering" does not
require that individual bonds are held to maturity.
The Adviser believes that "laddering" provides additional stability to
the Fund's portfolio by allocating the Fund's assets across a range of
securities with shorter-term maturities. For example, in periods of
rising interest rates and falling bond prices, the bonds with one- and
two-year remaining maturities generally lose less of their value than
bonds with four- and five-year remaining maturities; conversely, in
periods of falling interest rates and corresponding rising bond prices,
the principal value of the bonds with four- and five-year remaining
maturities generally increase more than the bonds with one-and two-year
remaining maturities. Furthermore, with the passage of time, individual
bonds held in the Fund's portfolio tend to become less volatile as the
time of their remaining maturity decreases. In addition, bonds with
four- and five-year remaining maturities generally provide higher income
than bonds with one- and two- year remaining maturities.
"Laddering" does not assure profit and does not protect against loss
in a declining market.
LENDING OF PORTFOLIO SECURITIES
The Fund may seek to increase its income by lending portfolio
securities. Such loans will usually be made only to member firms of the
New York Stock Exchange (the "Exchange") (and subsidiaries thereof) and
member banks of the Federal Reserve System, and would be required to be
secured continuously by collateral in cash, an irrevocable letter of
credit or United States ("U.S.") Treasury securities maintained on a
current basis at an amount at least equal to the market value of the
securities loaned. The Fund would have the right to call a loan and
obtain the securities loaned at any time on customary industry
settlement notice (which will not usually exceed five business days).
For the duration of a loan, the Fund would continue to receive the
equivalent of the interest or dividends paid by the issuer on the
securities loaned. The Fund would also receive a fee from the borrower
or compensation from the investment of the collateral, less a fee paid
to the borrower (if the collateral is in the form of cash). The Fund
would not, however, have the right to vote any securities having voting
rights during the existence of the loan, but the Fund would call the
loan in anticipation of an important vote to be taken among holders of
the securities or of the giving or withholding of their consent on a
material matter affecting the investment. As with other extensions of
credit there are risks of delay in recovery or even loss of rights in
the collateral should the borrower of the securities fail financially.
However, the loans would be made only to firms deemed by the Adviser to
be of good standing, and when, in the judgment of the Adviser, the
consideration which can be earned currently from securities loans of
this type justifies the attendant risk.
LEVERAGING TRANSACTIONS
The Fund may engage in the types of transactions described below,
which involve "leverage" because in each case the Fund receives cash
which it can invest in portfolio securities and has a future obligation
to make a payment. The use of these transactions by the Fund will
generally cause its net asset value to increase or decrease at a greater
rate than would otherwise be the case. Any investment income or gains
earned from the portfolio securities purchased with the proceeds from
these transactions which is in excess of the expenses associated from
these transactions can be expected to cause the value of the Fund's
shares and distributions on the Fund's shares to rise more quickly than
would otherwise be the case. Conversely, if the investment income or
gains earned from the portfolio securities purchased with proceeds from
these transactions fail to cover the expenses associated with these
transactions, the value of the Fund's shares is likely to decrease more
quickly than otherwise would be the case and distributions thereon will
be reduced or eliminated. Hence, these transactions are speculative,
involve leverage and increase the risk of owning or investing in the
shares of the Fund. These transactions also increase the Fund's expenses
because of interest and similar payments and administrative expenses
associated with them. Unless the appreciation and income on assets
purchased with proceeds from these transactions exceed the costs
associated with them, the use of these transactions by a Fund would
diminish the investment performance of the Fund compared with what it
would have been without using these transactions.
BANK BORROWINGS: The Fund may borrow money for investment purposes
from banks and invest the proceeds in accordance with its investment
objectives and policies.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: The Fund may enter into mortgage
"dollar roll" transactions pursuant to which it sells mortgage-backed
securities for delivery in the future and simultaneously contracts to
repurchase substantially similar securities on a specified future date.
During the roll period, the Fund foregoes principal and interest paid on
the mortgage-backed securities. The Fund is compensated for the lost
interest by the difference between the current sales price and the lower
price for the future purchase (often referred to as the "drop") as well
as by the interest earned on, and gains from, the investment of the cash
proceeds of the initial sale. The Fund may also be compensated by
receipt of a commitment fee.
If the income and capital gains from the Fund's investment of the cash
from the initial sale do not exceed the income, capital appreciation and
gain or loss that would have been realized on the securities sold as
part of the dollar roll, the use of this technique will diminish the
investment performance of the Fund compared with what the performance
would have been without the use of the dollar rolls. Dollar roll
transactions involve the risk that the market value of the securities
the Fund is required to purchase may decline below the agreed upon
repurchase price of those securities. If the broker/dealer to whom the
Fund sells securities becomes insolvent, the Fund's right to purchase or
repurchase securities may be restricted. Successful use of mortgage
dollar rolls may depend upon the Adviser's ability to correctly predict
interest rates and prepayments. There is no assurance that dollar rolls
can be successfully employed.
REVERSE REPURCHASE AGREEMENTS: The Fund may enter into reverse
repurchase agreements. In a reverse repurchase agreement, the Fund will
sell securities and receive cash proceeds, subject to its agreement to
repurchase the securities at a later date for a fixed price reflecting a
market rate of interest. There is a risk that the counter party to a
reverse repurchase agreement will be unable or unwilling to complete the
transaction as scheduled, which may result in losses to the Fund. The
Fund will invest the proceeds received under a reverse repurchase
agreement in accordance with its investment objective and policies.
OPTIONS
The Fund may invest in the following types of options, which involves
the risks described under the caption "Special Risk Factors -- Option,
Futures, Forwards, Swaps and Other Derivative Transactions" in this
Appendix:
OPTIONS ON FOREIGN CURRENCIES: The Fund may purchase and write options
on foreign currencies for hedging and non-hedging purposes in a manner
similar to that in which Futures Contracts on foreign currencies, or
Forward Contracts, will be utilized. For example, a decline in the
dollar value of a foreign currency in which portfolio securities are
denominated will reduce the dollar value of such securities, even if
their value in the foreign currency remains constant. In order to
protect against such diminutions in the value of portfolio securities,
the Fund may purchase put options on the foreign currency. If the value
of the currency does decline, the Fund will have the right to sell such
currency for a fixed amount in dollars and will thereby offset, in whole
in part, the adverse effect on its portfolio which otherwise would have
resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby
increasing the cost of such securities, the Fund may purchase call
options thereon. The purchase of such options could offset, at least
partially, the effect of the adverse movements in exchange rates. As in
the case of other types of options, however, the benefit to the Fund
deriving from purchases of foreign currency options will be reduced by
the amount of the premium and related transaction costs. In addition,
where currency exchange rates do not move in the direction or to the
extent anticipated, the Fund could sustain losses on transactions in
foreign currency options which would require it to forego a portion or
all of the benefits of advantageous changes in such rates. The Fund may
write options on foreign currencies for the same types of hedging
purposes. For example, where the Fund anticipates a decline in the
dollar value of foreign-denominated securities due to adverse
fluctuations in exchange rates it could, instead of purchasing a put
option, write a call option on the relevant currency. If the expected
decline occurs, the option will most likely not be exercised, and the
diminution in value of portfolio securities will be offset by the amount
of the premium received less related transaction costs. As in the case
of other types of options, therefore, the writing of Options on Foreign
Currencies will constitute only a partial hedge.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired,
the Fund could write a put option on the relevant currency which, if
rates move in the manner projected, will expire unexercised and allow
the Fund to hedge such increased cost up to the amount of the premium.
Foreign currency options written by the Fund will generally be covered
in a manner similar to the covering of other types of options. As in the
case of other types of options, however, the writing of a foreign
currency option will constitute only a partial hedge up to the amount of
the premium, and only if rates move in the expected direction. If this
does not occur, the option may be exercised and the Fund would be
required to purchase or sell the underlying currency at a loss which may
not be offset by the amount of the premium. Through the writing of
options on foreign currencies, the Fund also may be required to forego
all or a portion of the benefits which might otherwise have been
obtained from favorable movements in exchange rates. The use of foreign
currency options for non-hedging purposes, like the use of other types
of derivatives for such purposes, presents greater profit potential but
also significant risk of loss and could be considered speculative.
OPTIONS ON FUTURES CONTRACTS: The Fund also may purchase and write
options to buy or sell those Futures Contracts in which it may invest
("Options on Futures Contracts") as described above under "Futures
Contracts." Such investment strategies will be used for hedging purposes
and for non- hedging purposes, subject to applicable law.
An Option on a Futures Contract provides the holder with the right to
enter into a "long" position in the underlying Futures Contract, in the
case of a call option, or a "short" position in the underlying Futures
Contract, in the case of a put option, at a fixed exercise price up to a
stated expiration date or, in the case of certain options, on such date.
Upon exercise of the option by the holder, the contract market
clearinghouse establishes a corresponding short position for the writer
of the option, in the case of a call option, or a corresponding long
position in the case of a put option. In the event that an option is
exercised, the parties will be subject to all the risks associated with
the trading of Futures Contracts, such as payment of initial and
variation margin deposits. In addition, the writer of an Option on a
Futures Contract, unlike the holder, is subject to initial and variation
margin requirements on the option position.
A position in an Option on a Futures Contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase
or sale transaction, subject to the availability of a liquid secondary
market, which is the purchase or sale of an option of the same type
(i.e., the same exercise price and expiration date) as the option
previously purchased or sold. The difference between the premiums paid
and received represents the trader's profit or loss on the transaction.
Options on Futures Contracts that are written or purchased by the Fund
on U.S. exchanges are traded on the same contract market as the
underlying Futures Contract, and, like Futures Contracts, are subject to
regulation by the Commodity Futures Trading Commission (the "CFTC") and
the performance guarantee of the exchange clearinghouse. In addition,
Options on Futures Contracts may be traded on foreign exchanges. The
Fund may cover the writing of call Options on Futures Contracts (a)
through purchases of the underlying Futures Contract, (b) through
ownership of the instrument, or instruments included in the index,
underlying the Futures Contract, or (c) through the holding of a call on
the same Futures Contract and in the same principal amount as the call
written where the exercise price of the call held (i) is equal to or
less than the exercise price of the call written or (ii) is greater than
the exercise price of the call written if the Fund owns liquid and
unencumbered assets equal to the difference. The Fund may cover the
writing of put Options on Futures Contracts (a) through sales of the
underlying Futures Contract, (b) through the ownership of liquid and
unencumbered assets equal to the value of the security or index
underlying the Futures Contract, or (c) through the holding of a put on
the same Futures Contract and in the same principal amount as the put
written where the exercise price of the put held (i) is equal to or
greater than the exercise price of the put written or where the exercise
price of the put held (ii) is less than the exercise price of the put
written if the Fund owns liquid and unencumbered assets equal to the
difference. Put and call Options on Futures Contracts may also be
covered in such other manner as may be in accordance with the rules of
the exchange on which the option is traded and applicable laws and
regulations. Upon the exercise of a call Option on a Futures Contract
written by the Fund, the Fund will be required to sell the underlying
Futures Contract which, if the Fund has covered its obligation through
the purchase of such Contract, will serve to liquidate its futures
position. Similarly, where a put Option on a Futures Contract written by
the Fund is exercised, the Fund will be required to purchase the
underlying Futures Contract which, if the Fund has covered its
obligation through the sale of such Contract, will close out its futures
position.
The writing of a call option on a Futures Contract for hedging
purposes constitutes a partial hedge against declining prices of the
securities or other instruments required to be delivered under the terms
of the Futures Contract. If the futures price at expiration of the
option is below the exercise price, the Fund will retain the full amount
of the option premium, less related transaction costs, which provides a
partial hedge against any decline that may have occurred in the Fund's
portfolio holdings. The writing of a put option on a Futures Contract
constitutes a partial hedge against increasing prices of the securities
or other instruments required to be delivered under the terms of the
Futures Contract. If the futures price at expiration of the option is
higher than the exercise price, the Fund will retain the full amount of
the option premium which provides a partial hedge against any increase
in the price of securities which the Fund intends to purchase. If a put
or call option the Fund has written is exercised, the Fund will incur a
loss which will be reduced by the amount of the premium it receives.
Depending on the degree of correlation between changes in the value of
its portfolio securities and the changes in the value of its futures
positions, the Fund's losses from existing Options on Futures Contracts
may to some extent be reduced or increased by changes in the value of
portfolio securities.
The Fund may purchase Options on Futures Contracts for hedging
purposes instead of purchasing or selling the underlying Futures
Contracts. For example, where a decrease in the value of portfolio
securities is anticipated as a result of a projected market-wide decline
or changes in interest or exchange rates, the Fund could, in lieu of
selling Futures Contracts, purchase put options thereon. In the event
that such decrease occurs, it may be offset, in whole or in part, by a
profit on the option. Conversely, where it is projected that the value
of securities to be acquired by the Fund will increase prior to
acquisition, due to a market advance or changes in interest or exchange
rates, the Fund could purchase call Options on Futures Contracts than
purchasing the underlying Futures Contracts.
OPTIONS ON SECURITIES: The Fund may write (sell) covered put and call
options, and purchase put and call options, on securities. Call and put
options written by the Fund may be covered in the manner set forth
below.
A call option written by the Fund is "covered" if the Fund owns the
security underlying the call or has an absolute and immediate right to
acquire that security without additional cash consideration (or for
additional cash consideration if the Fund owns liquid and unencumbered
assets equal to the amount of cash consideration) upon conversion or
exchange of other securities held in its portfolio. A call option is
also covered if the Fund holds a call on the same security and in the
same principal amount as the call written where the exercise price of
the call held (a) is equal to or less than the exercise price of the
call written or (b) is greater than the exercise price of the call
written if the Fund owns liquid and unencumbered assets equal to the
difference. A put option written by the Fund is "covered" if the Fund
owns liquid and unencumbered assets with a value equal to the exercise
price, or else holds a put on the same security and in the same
principal amount as the put written where the exercise price of the put
held is equal to or greater than the exercise price of the put written
or where the exercise price of the put held is less than the exercise
price of the put written if the Fund owns liquid and unencumbered assets
equal to the difference. Put and call options written by the Fund may
also be covered in such other manner as may be in accordance with the
requirements of the exchange on which, or the counterparty with which,
the option is traded, and applicable laws and regulations. If the
writer's obligation is not so covered, it is subject to the risk of the
full change in value of the underlying security from the time the option
is written until exercise.
Effecting a closing transaction in the case of a written call option
will permit the Fund to write another call option on the underlying
security with either a different exercise price or expiration date or
both, or in the case of a written put option will permit the Fund to
write another put option to the extent that the Fund owns liquid and
unencumbered assets. Such transactions permit the Fund to generate
additional premium income, which will partially offset declines in the
value of portfolio securities or increases in the cost of securities to
be acquired. Also, effecting a closing transaction will permit the cash
or proceeds from the concurrent sale of any securities subject to the
option to be used for other investments of the Fund, provided that
another option on such security is not written. If the Fund desires to
sell a particular security from its portfolio on which it has written a
call option, it will effect a closing transaction in connection with the
option prior to or concurrent with the sale of the security.
The Fund will realize a profit from a closing transaction if the
premium paid in connection with the closing of an option written by the
Fund is less than the premium received from writing the option, or if
the premium received in connection with the closing of an option
purchased by the Fund is more than the premium paid for the original
purchase. Conversely, the Fund will suffer a loss if the premium paid or
received in connection with a closing transaction is more or less,
respectively, than the premium received or paid in establishing the
option position. Because increases in the market price of a call option
will generally reflect increases in the market price of the underlying
security, any loss resulting from the repurchase of a call option
previously written by the Fund is likely to be offset in whole or in
part by appreciation of the underlying security owned by the Fund.
The Fund may write options in connection with buy-and-write
transactions; that is, the Fund may purchase a security and then write a
call option against that security. The exercise price of the call option
the Fund determines to write will depend upon the expected price
movement of the underlying security. The exercise price of a call option
may be below ("in-the-money"), equal to ("at-the-money") or above
("out-of-the- money") the current value of the underlying security at
the time the option is written. Buy-and-write transactions using
in-the-money call options may be used when it is expected that the price
of the underlying security will decline moderately during the option
period. Buy-and-write transactions using out-of-the-money call options
may be used when it is expected that the premiums received from writing
the call option plus the appreciation in the market price of the
underlying security up to the exercise price will be greater than the
appreciation in the price of the underlying security alone. If the call
options are exercised in such transactions, the Fund's maximum gain will
be the premium received by it for writing the option, adjusted upwards
or downwards by the difference between the Fund's purchase price of the
security and the exercise price, less related transaction costs. If the
options are not exercised and the price of the underlying security
declines, the amount of such decline will be offset in part, or
entirely, by the premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of
the underlying security rises or otherwise is above the exercise price,
the put option will expire worthless and the Fund's gain will be limited
to the premium received, less related transaction costs. If the market
price of the underlying security declines or otherwise is below the
exercise price, the Fund may elect to close the position or retain the
option until it is exercised, at which time the Fund will be required to
take delivery of the security at the exercise price; the Fund's return
will be the premium received from the put option minus the amount by
which the market price of the security is below the exercise price,
which could result in a loss. Out-of-the-money, at-the-money and
in-the-money put options may be used by the Fund in the same market
environments that call options are used in equivalent buy-and-write
transactions.
The Fund may also write combinations of put and call options on the
same security, known as "straddles" with the same exercise price and
expiration date. By writing a straddle, the Fund undertakes a
simultaneous obligation to sell and purchase the same security in the
event that one of the options is exercised. If the price of the security
subsequently rises sufficiently above the exercise price to cover the
amount of the premium and transaction costs, the call will likely be
exercised and the Fund will be required to sell the underlying security
at a below market price. This loss may be offset, however, in whole or
part, by the premiums received on the writing of the two options.
Conversely, if the price of the security declines by a sufficient
amount, the put will likely be exercised. The writing of straddles will
likely be effective, therefore, only where the price of the security
remains stable and neither the call nor the put is exercised. In those
instances where one of the options is exercised, the loss on the
purchase or sale of the underlying security may exceed the amount of the
premiums received.
By writing a call option, the Fund limits its opportunity to profit
from any increase in the market value of the underlying security above
the exercise price of the option. By writing a put option, the Fund
assumes the risk that it may be required to purchase the underlying
security for an exercise price above its then-current market value,
resulting in a capital loss unless the security subsequently appreciates
in value. The writing of options on securities will not be undertaken by
the Fund solely for hedging purposes, and could involve certain risks
which are not present in the case of hedging transactions. Moreover,
even where options are written for hedging purposes, such transactions
constitute only a partial hedge against declines in the value of
portfolio securities or against increases in the value of securities to
be acquired, up to the amount of the premium.
The Fund may also purchase options for hedging purposes or to increase
its return. Put options may be purchased to hedge against a decline in
the value of portfolio securities. If such decline occurs, the put
options will permit the Fund to sell the securities at the exercise
price, or to close out the options at a profit. By using put options in
this way, the Fund will reduce any profit it might otherwise have
realized in the underlying security by the amount of the premium paid
for the put option and by transaction costs.
The Fund may also purchase call options to hedge against an increase
in the price of securities that the Fund anticipates purchasing in the
future. If such increase occurs, the call option will permit the Fund to
purchase the securities at the exercise price, or to close out the
options at a profit. The premium paid for the call option plus any
transaction costs will reduce the benefit, if any, realized by the Fund
upon exercise of the option, and, unless the price of the underlying
security rises sufficiently, the option may expire worthless to the
Fund.
OPTIONS ON STOCK INDICES: The Fund may write (sell) covered call and
put options and purchase call and put options on stock indices. In
contrast to an option on a security, an option on a stock index provides
the holder with the right but not the obligation to make or receive a
cash settlement upon exercise of the option, rather than the right to
purchase or sell a security. The amount of this settlement is generally
equal to (i) the amount, if any, by which the fixed exercise price of
the option exceeds (in the case of a call) or is below (in the case of a
put) the closing value of the underlying index on the date of exercise,
multiplied by (ii) a fixed "index multiplier." The Fund may cover
written call options on stock indices by owning securities whose price
changes, in the opinion of the Adviser, are expected to be similar to
those of the underlying index, or by having an absolute and immediate
right to acquire such securities without additional cash consideration
(or for additional cash consideration if the Fund owns liquid and
unencumbered assets equal to the amount of cash consideration) upon
conversion or exchange of other securities in its portfolio. Where the
Fund covers a call option on a stock index through ownership of
securities, such securities may not match the composition of the index
and, in that event, the Fund will not be fully covered and could be
subject to risk of loss in the event of adverse changes in the value of
the index. The Fund may also cover call options on stock indices by
holding a call on the same index and in the same principal amount as the
call written where the exercise price of the call held (a) is equal to
or less than the exercise price of the call written or (b) is greater
than the exercise price of the call written if the Fund owns liquid and
unencumbered assets equal to the difference. The Fund may cover put
options on stock indices by owning liquid and unencumbered assets with a
value equal to the exercise price, or by holding a put on the same stock
index and in the same principal amount as the put written where the
exercise price of the put held (a) is equal to or greater than the
exercise price of the put written or (b) is less than the exercise price
of the put written if the Fund owns liquid and unencumbered assets equal
to the difference. Put and call options on stock indices may also be
covered in such other manner as may be in accordance with the rules of
the exchange on which, or the counterparty with which, the option is
traded and applicable laws and regulations.
The Fund will receive a premium from writing a put or call option,
which increases the Fund's gross income in the event the option expires
unexercised or is closed out at a profit. If the value of an index on
which the Fund has written a call option falls or remains the same, the
Fund will realize a profit in the form of the premium received (less
transaction costs) that could offset all or a portion of any decline in
the value of the securities it owns. If the value of the index rises,
however, the Fund will realize a loss in its call option position, which
will reduce the benefit of any unrealized appreciation in the Fund's
stock investments. By writing a put option, the Fund assumes the risk of
a decline in the index. To the extent that the price changes of
securities owned by the Fund correlate with changes in the value of the
index, writing covered put options on indices will increase the Fund's
losses in the event of a market decline, although such losses will be
offset in part by the premium received for writing the option.
The Fund may also purchase put options on stock indices to hedge its
investments against a decline in value. By purchasing a put option on a
stock index, the Fund will seek to offset a decline in the value of
securities it owns through appreciation of the put option. If the value
of the Fund's investments does not decline as anticipated, or if the
value of the option does not increase, the Fund's loss will be limited
to the premium paid for the option plus related transaction costs. The
success of this strategy will largely depend on the accuracy of the
correlation between the changes in value of the index and the changes in
value of the Fund's security holdings.
The purchase of call options on stock indices may be used by the Fund
to attempt to reduce the risk of missing a broad market advance, or an
advance in an industry or market segment, at a time when the Fund holds
uninvested cash or short-term debt securities awaiting investment. When
purchasing call options for this purpose, the Fund will also bear the
risk of losing all or a portion of the premium paid it the value of the
index does not rise. The purchase of call options on stock indices when
the Fund is substantially fully invested is a form of leverage, up to
the amount of the premium and related transaction costs, and involves
risks of loss and of increased volatility similar to those involved in
purchasing calls on securities the Fund owns.
The index underlying a stock index option may be a "broad-based"
index, such as the Standard & Poor's 500 Index or the New York Stock
Exchange Composite Index, the changes in value of which ordinarily will
reflect movements in the stock market in general. In contrast, certain
options may be based on narrower market indices, such as the Standard &
Poor's 100 Index, or on indices of securities of particular industry
groups, such as those of oil and gas or technology companies. A stock
index assigns relative values to the stocks included in the index and
the index fluctuates with changes in the market values of the stocks so
included. The composition of the index is changed periodically.
RESET OPTIONS:
In certain instances, the Fund may purchase or write options on U.S.
Treasury securities which provide for periodic adjustment of the strike
price and may also provide for the periodic adjustment of the premium
during the term of each such option. Like other types of options, these
transactions, which may be referred to as "reset" options or "adjustable
strike" options grant the purchaser the right to purchase (in the case
of a call) or sell (in the case of a put), a specified type of U.S.
Treasury security at any time up to a stated expiration date (or, in
certain instances, on such date). In contrast to other types of options,
however, the price at which the underlying security may be purchased or
sold under a "reset" option is determined at various intervals during
the term of the option, and such price fluctuates from interval to
interval based on changes in the market value of the underlying
security. As a result, the strike price of a "reset" option, at the time
of exercise, may be less advantageous than if the strike price had been
fixed at the initiation of the option. In addition, the premium paid for
the purchase of the option may be determined at the termination, rather
than the initiation, of the option. If the premium for a reset option
written by the Fund is paid at termination, the Fund assumes the risk
that (i) the premium may be less than the premium which would otherwise
have been received at the initiation of the option because of such
factors as the volatility in yield of the underlying Treasury security
over the term of the option and adjustments made to the strike price of
the option, and (ii) the option purchaser may default on its obligation
to pay the premium at the termination of the option. Conversely, where
the Fund purchases a reset option, it could be required to pay a higher
premium than would have been the case at the initiation of the option.
"YIELD CURVE" OPTIONS: The Fund may also enter into options on the
"spread," or yield differential, between two fixed income securities, in
transactions referred to as "yield curve" options. In contrast to other
types of options, a yield curve option is based on the difference
between the yields of designated securities, rather than the prices of
the individual securities, and is settled through cash payments.
Accordingly, a yield curve option is profitable to the holder if this
differential widens (in the case of a call) or narrows (in the case of a
put), regardless of whether the yields of the underlying securities
increase or decrease.
Yield curve options may be used for the same purposes as other options
on securities. Specifically, the Fund may purchase or write such options
for hedging purposes. For example, the Fund may purchase a call option
on the yield spread between two securities, if it owns one of the
securities and anticipates purchasing the other security and wants to
hedge against an adverse change in the yield spread between the two
securities. The Fund may also purchase or write yield curve options for
other than hedging purposes (i.e., in an effort to increase its current
income) if, in the judgment of the Adviser, the Fund will be able to
profit from movements in the spread between the yields of the underlying
securities. The trading of yield curve options is subject to all of the
risks associated with the trading of other types of options. In
addition, however, such options present risk of loss even if the yield
of one of the underlying securities remains constant, if the spread
moves in a direction or to an extent which was not anticipated. Yield
curve options written by the Fund will be "covered". A call (or put)
option is covered if the Fund holds another call (or put) option on the
spread between the same two securities and owns liquid and unencumbered
assets sufficient to cover the Fund's net liability under the two
options. Therefore, the Fund's liability for such a covered option is
generally limited to the difference between the amount of the Fund's
liability under the option written by the Fund less the value of the
option held by the Fund. Yield curve options may also be covered in such
other manner as may be in accordance with the requirements of the
counterparty with which the option is traded and applicable laws and
regulations. Yield curve options are traded over-the-counter and because
they have been only recently introduced, established trading markets for
these securities have not yet developed.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with sellers who are
member firms (or a subsidiary thereof) of the New York Stock Exchange or
members of the Federal Reserve System, recognized primary U.S.
Government securities dealers or institutions which the Adviser has
determined to be of comparable creditworthiness. The securities that the
Fund purchases and holds through its agent are U.S. Government
securities, the values of which are equal to or greater than the
repurchase price agreed to be paid by the seller. The repurchase price
may be higher than the purchase price, the difference being income to
the Fund, or the purchase and repurchase prices may be the same, with
interest at a standard rate due to the Fund together with the repurchase
price on repurchase. In either case, the income to the Fund is unrelated
to the interest rate on the Government securities.
The repurchase agreement provides that in the event the seller fails
to pay the amount agreed upon on the agreed upon delivery date or upon
demand, as the case may be, the Fund will have the right to liquidate
the securities. If at the time the Fund is contractually entitled to
exercise its right to liquidate the securities, the seller is subject to
a proceeding under the bankruptcy laws or its assets are otherwise
subject to a stay order, the Fund's exercise of its right to liquidate
the securities may be delayed and result in certain losses and costs to
the Fund. The Fund has adopted and follows procedures which are intended
to minimize the risks of repurchase agreements. For example, the Fund
only enters into repurchase agreements after the Adviser has determined
that the seller is creditworthy, and the Adviser monitors that seller's
creditworthiness on an ongoing basis. Moreover, under such agreements,
the value of the securities (which are marked to market every business
day) is required to be greater than the repurchase price, and the Fund
has the right to make margin calls at any time if the value of the
securities falls below the agreed upon collateral.
RESTRICTED SECURITIES
The Fund may purchase securities that are not registered under the
Securities Act of 1933, as amended ("1933 Act") ("restricted
securities"), including those that can be offered and sold to "qualified
institutional buyers" under Rule 144A under the 1933 Act ("Rule 144A
securities") and commercial paper issued under Section 4(2) of the 1933
Act ("4(2) Paper"). A determination is made, based upon a continuing
review of the trading markets for the Rule 144A security or 4(2) Paper,
whether such security is liquid and thus not subject to the Fund's
limitation on investing in illiquid investments. The Board of Trustees
has adopted guidelines and delegated to MFS the daily function of
determining and monitoring the liquidity of Rule 144A securities and
4(2) Paper. The Board, however, retains oversight of the liquidity
determinations focusing on factors such as valuation, liquidity and
availability of information. Investing in Rule 144A securities could
have the effect of decreasing the level of liquidity in the Fund to the
extent that qualified institutional buyers become for a time
uninterested in purchasing these Rule 144A securities held in the Fund's
portfolio. Subject to the Fund's limitation on investments in illiquid
investments, the Fund may also invest in restricted securities that may
not be sold under Rule 144A, which presents certain risks. As a result,
the Fund might not be able to sell these securities when the Adviser
wishes to do so, or might have to sell them at less than fair value. In
addition, market quotations are less readily available. Therefore,
judgment may at times play a greater role in valuing these securities
than in the case of unrestricted securities.
SHORT SALES
The Fund may seek to hedge investments or realize additional gains
through short sales. The Fund may make short sales, which are
transactions in which the Fund sells a security it does not own, in
anticipation of a decline in the market value of that security. To
complete such a transaction, the Fund must borrow the security to make
delivery to the buyer. The Fund then is obligated to replace the
security borrowed by purchasing it at the market price at the time of
replacement. The price at such time may be more or less than the price
at which the security was sold by the Fund. Until the security is
replaced, the Fund is required to repay the lender any dividends or
interest which accrue during the period of the loan. To borrow the
security, the Fund also may be required to pay a premium, which would
increase the cost of the security sold. The net proceeds of the short
sale will be retained by the broker, to the extent necessary to meet
margin requirements, until the short position is closed out. The Fund
also will incur transaction costs in effecting short sales.
The Fund will incur a loss as a result of the short sale if the price
of the security increases between the date of the short sale and the
date on which the Fund replaces the borrowed security. The Fund will
realize a gain if the price of the security declines between those
dates. The amount of any gain will be decreased, and the amount of any
loss increased, by the amount of the premium, dividends or interest the
Fund may be required to pay in connection with a short sale.
Whenever the Fund engages in short sales, it identifies liquid and
unencumbered assets in an amount that, when combined with the amount of
collateral deposited with the broker connection with the short sale,
equals the current market value of the security sold short.
SHORT SALES AGAINST THE BOX
The Fund may make short sales "against the box," i.e., when a security
identical to one owned by the Fund is borrowed and sold short. If the
Fund enters into a short sale against the box, it is required to
segregate securities equivalent in kind and amount to the securities
sold short (or securities convertible or exchangeable into such
securities) and is required to hold such securities while the short sale
is outstanding. The Fund will incur transaction costs, including
interest, in connection with opening, maintaining, and closing short
sales against the box.
SHORT TERM INSTRUMENTS
The Fund may hold cash and invest in cash equivalents, such as
short-term U.S. Government Securities, commercial paper and bank
instruments.
SWAPS AND RELATED DERIVATIVE INSTRUMENTS
The Fund may enter into interest rate swaps, currency swaps and other
types of available swap agreements, including swaps on securities,
commodities and indices, and related types of derivatives, such as caps,
collars and floors. A swap is an agreement between two parties pursuant
to which each party agrees to make one or more payments to the other on
regularly scheduled dates over a stated term, based on different
interest rates, currency exchange rates, security or commodity prices,
the prices or rates of other types of financial instruments or assets or
the levels of specified indices. Under a typical swap, one party may
agree to pay a fixed rate or a floating rate determined by reference to
a specified instrument, rate or index, multiplied in each case by a
specified amount (the "notional amount"), while the other party agrees
to pay an amount equal to a different floating rate multiplied by the
same notional amount. On each payment date, the obligations of parties
are netted, with only the net amount paid by one party to the other. All
swap agreements entered into by the Fund with the same counterparty are
generally governed by a single master agreement, which provides for the
netting of all amounts owed by the parties under the agreement upon the
occurrence of an event of default, thereby reducing the credit risk to
which such party is exposed.
Swap agreements are typically individually negotiated and structured
to provide exposure to a variety of different types of investments or
market factors. Swap agreements may be entered into for hedging or
non-hedging purposes and therefore may increase or decrease the Fund's
exposure to the underlying instrument, rate, asset or index. Swap
agreements can take many different forms and are known by a variety of
names. The Fund is not limited to any particular form or variety of swap
agreement if the Adviser determines it is consistent with the Fund's
investment objective and policies.
For example, the Fund may enter into an interest rate swap in order to
protect against declines in the value of fixed income securities held by
the Fund. In such an instance, the Fund would agree with a counterparty
to pay a fixed rate (multiplied by a notional amount) and the
counterparty would agree to pay a floating rate multiplied by the same
notional amount. If interest rates rise, resulting in a diminution in
the value of the Fund's portfolio, the Fund would receive payments under
the swap that would offset, in whole or part, such diminution in value.
The Fund may also enter into swaps to modify its exposure to particular
markets or instruments, such as a currency swap between the dollar and
another currency which would have the effect of increasing or decreasing
the Fund's exposure to each such currency. The Fund might also enter
into a swap on a particular security, or a basket or index of
securities, in order to gain exposure to the underlying security or
securities, as an alternative to purchasing such securities. Such
transactions could be more efficient or less costly in certain instances
than an actual purchase or sale of the securities.
The Fund may enter into other related types of over-the-counter
derivatives, such as "caps", "floors", "collars" and options on swaps,
or "swaptions", for the same types of hedging or non-hedging purposes.
Caps and floors are similar to swaps, except that one party pays a fee
at the time the transaction is entered into and has no further payment
obligations, while the other party is obligated to pay an amount equal
to the amount by which a specified fixed or floating rate exceeds or is
below another rate (multiplied by a notional amount). Caps and floors,
therefore, are also similar to options. A collar is in effect a
combination of a cap and a floor, with payments made only within or
outside a specified range of prices or rates. A swaption is an option to
enter into a swap agreement. Like other types of options, the buyer of a
swaption pays a non-refundable premium for the option and obtains the
right, but not the obligation, to enter into the underlying swap on the
agreed-upon terms.
The Fund will maintain liquid and unencumbered assets to cover its
current obligations under swap and other over-the-counter derivative
transactions. If the Fund enters into a swap agreement on a net basis
(i.e., the two payment streams are netted out, with the Fund receiving
or paying, as the case may be, only the net amount of the two payments),
the Fund will maintain liquid and unencumbered assets with a daily value
at least equal to the excess, if any, of the Fund's accrued obligations
under the swap agreement over the accrued amount the Fund is entitled to
receive under the agreement. If the Fund enters into a swap agreement on
other than a net basis, it will maintain liquid and unencumbered assets
with a value equal to the full amount of the Fund's accrued obligations
under the agreement.
The most significant factor in the performance of swaps, caps, floors
and collars is the change in the underlying price, rate or index level
that determines the amount of payments to be made under the arrangement.
If the Adviser is incorrect in its forecasts of such factors, the
investment performance of the Fund would be less than what it would have
been if these investment techniques had not been used. If a swap
agreement calls for payments by the Fund, the Fund must be prepared to
make such payments when due. In addition, if the counterparty's
creditworthiness would decline, the value of the swap agreement would be
likely to decline, potentially resulting in losses.
If the counterparty defaults, the Fund's risk of loss consists of the
net amount of payments that the Fund is contractually entitled to
receive. The Fund anticipates that it will be able to eliminate or
reduce its exposure under these arrangements by assignment or other
disposition or by entering into an offsetting agreement with the same or
another counterparty, but there can be no assurance that it will be able
to do so.
The uses by the Fund of Swaps and related derivative instruments also
involves the risks described under the caption "Special Risk Factors --
Options, Futures, Forwards, Swaps and Other Derivative Transactions" in
this Appendix.
TEMPORARY BORROWINGS
The Fund may borrow money for temporary purposes (e.g., to meet
redemption requests or settle outstanding purchases of portfolio
securities).
TEMPORARY DEFENSIVE POSITIONS
During periods of unusual market conditions when the Adviser believes
that investing for temporary defensive purposes is appropriate, or in
order to meet anticipated redemption requests, a large portion or all of
the assets of the Fund may be invested in cash (including foreign
currency) or cash equivalents, including, but not limited to,
obligations of banks (including certificates of deposit, bankers'
acceptances, time deposits and repurchase agreements), commercial paper,
short-term notes, U.S. Government Securities and related repurchase
agreements.
WARRANTS
The Fund may invest in warrants. Warrants are securities that give the
Fund the right to purchase equity securities from the issuer at a
specific price (the "strike price") for a limited period of time. The
strike price of warrants typically is much lower than the current market
price of the underlying securities, yet they are subject to similar
price fluctuations. As a result, warrants may be more volatile
investments than the underlying securities and may offer greater
potential for capital appreciation as well as capital loss. Warrants do
not entitle a holder to dividends or voting rights with respect to the
underlying securities and do not represent any rights in the assets of
the issuing company. Also, the value of the warrant does not necessarily
change with the value of the underlying securities and a warrant ceases
to have value if it is not exercised prior to the expiration date. These
factors can make warrants more speculative than other types of
investments.
"WHEN-ISSUED" SECURITIES
The Fund may purchase securities on a "when-issued" or on a "forward
delivery" basis which means that the securities will be delivered to the
Fund at a future date usually beyond customary settlement time. The
commitment to purchase a security for which payment will be made on a
future date may be deemed a separate security. In general, the Fund does
not pay for such securities until received, and does not start earning
interest on the securities until the contractual settlement date. While
awaiting delivery of securities purchased on such bases, a Fund will
identify liquid and unencumbered assets equal to its forward delivery
commitment.
SPECIAL RISK FACTORS -- OPTIONS, FUTURES, FORWARDS, SWAPS AND OTHER
DERIVATIVE TRANSACTIONS
RISK OF IMPERFECT CORRELATION OF HEDGING INSTRUMENTS WITH THE FUND'S
PORTFOLIO: The Fund's ability effectively to hedge all or a portion of
its portfolio through transactions in derivatives, including options,
Futures Contracts, Options on Futures Contracts, Forward Contracts,
swaps and other types of derivatives depends on the degree to which
price movements in the underlying index or instrument correlate with
price movements in the relevant portion of the Fund's portfolio. In the
case of derivative instruments based on an index, the portfolio will not
duplicate the components of the index, and in the case of derivative
instruments on fixed income securities, the portfolio securities which
are being hedged may not be the same type of obligation underlying such
derivatives. The use of derivatives for "cross hedging" purposes (such
as a transaction in a Forward Contract on one currency to hedge exposure
to a different currency) may involve greater correlation risks.
Consequently, the Fund bears the risk that the price of the portfolio
securities being hedged will not move in the same amount or direction as
the underlying index or obligation.
If the Fund purchases a put option on an index and the index decreases
less than the value of the hedged securities, the Fund would experience
a loss which is not completely offset by the put option. It is also
possible that there may be a negative correlation between the index or
obligation underlying an option or Futures Contract in which the Fund
has a position and the portfolio securities the Fund is attempting to
hedge, which could result in a loss on both the portfolio and the
hedging instrument. It should be noted that stock index futures
contracts or options based upon a narrower index of securities, such as
those of a particular industry group, may present greater risk than
options or futures based on a broad market index. This is due to the
fact that a narrower index is more susceptible to rapid and extreme
fluctuations as a result of changes in the value of a small number of
securities. Nevertheless, where the Fund enters into transactions in
options or futures on narrowly-based indices for hedging purposes,
movements in the value of the index should, if the hedge is successful,
correlate closely with the portion of the Fund's portfolio or the
intended acquisitions being hedged.
The trading of derivatives for hedging purposes entails the additional
risk of imperfect correlation between movements in the price of the
derivative and the price of the underlying index or obligation. The
anticipated spread between the prices may be distorted due to the
differences in the nature of the markets such as differences in margin
requirements, the liquidity of such markets and the participation of
speculators in the derivatives markets. In this regard, trading by
speculators in derivatives has in the past occasionally resulted in
market distortions, which may be difficult or impossible to predict,
particularly near the expiration of such instruments.
The trading of Options on Futures Contracts also entails the risk that
changes in the value of the underlying Futures Contracts will not be
fully reflected in the value of the option. The risk of imperfect
correlation, however, generally tends to diminish as the maturity date
of the Futures Contract or expiration date of the option approaches.
Further, with respect to options on securities, options on stock
indices, options on currencies and Options on Futures Contracts, the
Fund is subject to the risk of market movements between the time that
the option is exercised and the time of performance thereunder. This
could increase the extent of any loss suffered by the Fund in connection
with such transactions.
In writing a covered call option on a security, index or futures
contract, the Fund also incurs the risk that changes in the value of the
instruments used to cover the position will not correlate closely with
changes in the value of the option or underlying index or instrument.
For example, where the Fund covers a call option written on a stock
index through segregation of securities, such securities may not match
the composition of the index, and the Fund may not be fully covered. As
a result, the Fund could be subject to risk of loss in the event of
adverse market movements.
The writing of options on securities, options on stock indices or
Options on Futures Contracts constitutes only a partial hedge against
fluctuations in the value of the Fund's portfolio. When the Fund writes
an option, it will receive premium income in return for the holder's
purchase of the right to acquire or dispose of the underlying
obligation. In the event that the price of such obligation does not rise
sufficiently above the exercise price of the option, in the case of a
call, or fall below the exercise price, in the case of a put, the option
will not be exercised and the Fund will retain the amount of the
premium, less related transaction costs, which will constitute a partial
hedge against any decline that may have occurred in the Fund's portfolio
holdings or any increase in the cost of the instruments to be acquired.
Where the price of the underlying obligation moves sufficiently in
favor of the holder to warrant exercise of the option, however, and the
option is exercised, the Fund will incur a loss which may only be
partially offset by the amount of the premium it received. Moreover, by
writing an option, the Fund may be required to forego the benefits which
might otherwise have been obtained from an increase in the value of
portfolio securities or other assets or a decline in the value of
securities or assets to be acquired. In the event of the occurrence of
any of the foregoing adverse market events, the Fund's overall return
may be lower than if it had not engaged in the hedging transactions.
Furthermore, the cost of using these techniques may make it economically
infeasible for the Fund to engage in such transactions.
RISKS OF NON-HEDGING TRANSACTIONS: The Fund may enter transactions in
derivatives for non-hedging purposes as well as hedging purposes. Non-
hedging transactions in such instruments involve greater risks and may
result in losses which may not be offset by increases in the value of
portfolio securities or declines in the cost of securities to be
acquired. The Fund will only write covered options, such that liquid and
unencumbered assets necessary to satisfy an option exercise will be
identified, unless the option is covered in such other manner as may be
in accordance with the rules of the exchange on which, or the
counterparty with which, the option is traded and applicable laws and
regulations. Nevertheless, the method of covering an option employed by
the Fund may not fully protect it against risk of loss and, in any
event, the Fund could suffer losses on the option position which might
not be offset by corresponding portfolio gains. The Fund may also enter
into futures, Forward Contracts or swaps for non-hedging purposes. For
example, the Fund may enter into such a transaction as an alternative to
purchasing or selling the underlying instrument or to obtain desired
exposure to an index or market. In such instances, the Fund will be
exposed to the same economic risks incurred in purchasing or selling the
underlying instrument or instruments. However, transactions in futures,
Forward Contracts or swaps may be leveraged, which could expose the Fund
to greater risk of loss than such purchases or sales. Entering into
transactions in derivatives for other than hedging purposes, therefore,
could expose the Fund to significant risk of loss if the prices, rates
or values of the underlying instruments or indices do not move in the
direction or to the extent anticipated.
With respect to the writing of straddles on securities, the Fund
incurs the risk that the price of the underlying security will not
remain stable, that one of the options written will be exercised and
that the resulting loss will not be offset by the amount of the premiums
received. Such transactions, therefore, create an opportunity for
increased return by providing the Fund with two simultaneous premiums on
the same security, but involve additional risk, since the Fund may have
an option exercised against it regardless of whether the price of the
security increases or decreases.
RISK OF A POTENTIAL LACK OF A LIQUID SECONDARY MARKET: Prior to
exercise or expiration, a futures or option position can only be
terminated by entering into a closing purchase or sale transaction. This
requires a secondary market for such instruments on the exchange on
which the initial transaction was entered into. While the Fund will
enter into options or futures positions only if there appears to be a
liquid secondary market therefor, there can be no assurance that such a
market will exist for any particular contract at any specific time. In
that event, it may not be possible to close out a position held by the
Fund, and the Fund could be required to purchase or sell the instrument
underlying an option, make or receive a cash settlement or meet ongoing
variation margin requirements. Under such circumstances, if the Fund has
insufficient cash available to meet margin requirements, it will be
necessary to liquidate portfolio securities or other assets at a time
when it is disadvantageous to do so. The inability to close out options
and futures positions, therefore, could have an adverse impact on the
Fund's ability effectively to hedge its portfolio, and could result in
trading losses.
The liquidity of a secondary market in a Futures Contract or option
thereon may be adversely affected by "daily price fluctuation limits,"
established by exchanges, which limit the amount of fluctuation in the
price of a contract during a single trading day. Once the daily limit
has been reached in the contract, no trades may be entered into at a
price beyond the limit, thus preventing the liquidation of open futures
or option positions and requiring traders to make additional margin
deposits. Prices have in the past moved to the daily limit on a number
of consecutive trading days.
The trading of Futures Contracts and options is also subject to the
risk of trading halts, suspensions, exchange or clearinghouse equipment
failures, government intervention, insolvency of a brokerage firm or
clearinghouse or other disruptions of normal trading activity, which
could at times make it difficult or impossible to liquidate existing
positions or to recover excess variation margin payments.
MARGIN: Because of low initial margin deposits made upon the
establishment of a futures, forward or swap position (certain of which
may require no initial margin deposits) and the writing of an option,
such transactions involve substantial leverage. As a result, relatively
small movements in the price of the contract can result in substantial
unrealized gains or losses. Where the Fund enters into such transactions
for hedging purposes, any losses incurred in connection therewith
should, if the hedging strategy is successful, be offset, in whole or in
part, by increases in the value of securities or other assets held by
the Fund or decreases in the prices of securities or other assets the
Fund intends to acquire. Where the Fund enters into such transactions
for other than hedging purposes, the margin requirements associated with
such transactions could expose the Fund to greater risk.
POTENTIAL BANKRUPTCY OF A CLEARINGHOUSE OR BROKER: When the Fund
enters into transactions in exchange-traded futures or options, it is
exposed to the risk of the potential bankruptcy of the relevant exchange
clearinghouse or the broker through which the Fund has effected the
transaction. In that event, the Fund might not be able to recover
amounts deposited as margin, or amounts owed to the Fund in connection
with its transactions, for an indefinite period of time, and could
sustain losses of a portion or all of such amounts, Moreover, the
performance guarantee of an exchange clearinghouse generally extends
only to its members and the Fund could sustain losses, notwithstanding
such guarantee, in the event of the bankruptcy of its broker.
TRADING AND POSITION LIMITS: The exchanges on which futures and
options are traded may impose limitations governing the maximum number
of positions on the same side of the market and involving the same
underlying instrument which may be held by a single investor, whether
acting alone or in concert with others (regardless of whether such
contracts are held on the same or different exchanges or held or written
in one or more accounts or through one or more brokers). Further, the
CFTC and the various contract markets have established limits referred
to as "speculative position limits" on the maximum net long or net short
position which any person may hold or control in a particular futures or
option contract. An exchange may order the liquidation of positions
found to be in violation of these limits and it may impose other
sanctions or restrictions. The Adviser does not believe that these
trading and position limits will have any adverse impact on the
strategies for hedging the portfolios of the Fund.
RISKS OF OPTIONS ON FUTURES CONTRACTS: The amount of risk the Fund
assumes when it purchases an Option on a Futures Contract is the premium
paid for the option, plus related transaction costs. In order to profit
from an option purchased, however, it may be necessary to exercise the
option and to liquidate the underlying Futures Contract, subject to the
risks of the availability of a liquid offset market described herein.
The writer of an Option on a Futures Contract is subject to the risks of
commodity futures trading, including the requirement of initial and
variation margin payments, as well as the additional risk that movements
in the price of the option may not correlate with movements in the price
of the underlying security, index, currency or Futures Contract.
RISKS OF TRANSACTIONS IN FOREIGN CURRENCIES AND OVER-THE-COUNTER
DERIVATIVES AND OTHER TRANSACTIONS NOT CONDUCTED ON U.S. EXCHANGES:
Transactions in Forward Contracts on foreign currencies, as well as
futures and options on foreign currencies and transactions executed on
foreign exchanges, are subject to all of the correlation, liquidity and
other risks outlined above. In addition, however, such transactions are
subject to the risk of governmental actions affecting trading in or the
prices of currencies underlying such contracts, which could restrict or
eliminate trading and could have a substantial adverse effect on the
value of positions held by the Fund. Further, the value of such
positions could be adversely affected by a number of other complex
political and economic factors applicable to the countries issuing the
underlying currencies.
Further, unlike trading in most other types of instruments, there is
no systematic reporting of last sale information with respect to the
foreign currencies underlying contracts thereon. As a result, the
available information on which trading systems will be based may not be
as complete as the comparable data on which the Fund makes investment
and trading decisions in connection with other transactions. Moreover,
because the foreign currency market is a global, 24-hour market, events
could occur in that market which will not be reflected in the forward,
futures or options market until the following day, thereby making it
more difficult for the Fund to respond to such events in a timely
manner.
Settlements of exercises of over-the-counter Forward Contracts or
foreign currency options generally must occur within the country issuing
the underlying currency, which in turn requires traders to accept or
make delivery of such currencies in conformity with any U.S. or foreign
restrictions and regulations regarding the maintenance of foreign
banking relationships, fees, taxes or other charges.
Unlike transactions entered into by the Fund in Futures Contracts and
exchange-traded options, options on foreign currencies, Forward
Contracts, over-the-counter options on securities, swaps and other
over-the-counter derivatives are not traded on contract markets
regulated by the CFTC or (with the exception of certain foreign currency
options) the SEC. To the contrary, such instruments are traded through
financial institutions acting as market-makers, although foreign
currency options are also traded on certain national securities
exchanges, such as the Philadelphia Stock Exchange and the Chicago Board
Options Exchange, subject to SEC regulation. In an over-the-counter
trading environment, many of the protections afforded to exchange
participants will not be available. For example, there are no daily
price fluctuation limits, and adverse market movements could therefore
continue to an unlimited extent over a period of time. Although the
purchaser of an option cannot lose more than the amount of the premium
plus related transaction costs, this entire amount could be lost.
Moreover, the option writer and a trader of Forward Contracts could lose
amounts substantially in excess of their initial investments, due to the
margin and collateral requirements associated with such positions.
In addition, over-the-counter transactions can only be entered into
with a financial institution willing to take the opposite side, as
principal, of the Fund's position unless the institution acts as broker
and is able to find another counterparty willing to enter into the
transaction with the Fund. Where no such counterparty is available, it
will not be possible to enter into a desired transaction. There also may
be no liquid secondary market in the trading of over-the-counter
contracts, and the Fund could be required to retain options purchased or
written, or Forward Contracts or swaps entered into, until exercise,
expiration or maturity. This in turn could limit the Fund's ability to
profit from open positions or to reduce losses experienced, and could
result in greater losses.
Further, over-the-counter transactions are not subject to the
guarantee of an exchange clearinghouse, and the Fund will therefore be
subject to the risk of default by, or the bankruptcy of, the financial
institution serving as its counterparty. One or more of such
institutions also may decide to discontinue their role as market-makers
in a particular currency or security, thereby restricting the Fund's
ability to enter into desired hedging transactions. The Fund will enter
into an over-the-counter transaction only with parties whose
creditworthiness has been reviewed and found satisfactory by the
Adviser.
Options on securities, options on stock indices, Futures Contracts,
Options on Futures Contracts and options on foreign currencies may be
traded on exchanges located in foreign countries. Such transactions may
not be conducted in the same manner as those entered into on U.S.
exchanges, and may be subject to different margin, exercise, settlement
or expiration procedures. As a result, many of the risks of
over-the-counter trading may be present in connection with such
transactions.
Options on foreign currencies traded on national securities exchanges
are within the jurisdiction of the SEC, as are other securities traded
on such exchanges. As a result, many of the protections provided to
traders on organized exchanges will be available with respect to such
transactions. In particular, all foreign currency option positions
entered into on a national securities exchange are cleared and
guaranteed by the Options Clearing Corporation (the "OCC"), thereby
reducing the risk of counterparty default. Further, a liquid secondary
market in options traded on a national securities exchange may be more
readily available than in the over-the-counter market, potentially
permitting the Fund to liquidate open positions at a profit prior to
exercise or expiration, or to limit losses in the event of adverse
market movements.
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of the availability of a liquid
secondary market described above, as well as the risks regarding adverse
market movements, margining of options written, the nature of the
foreign currency market, possible intervention by governmental
authorities and the effects of other political and economic events. In
addition, exchange- traded options on foreign currencies involve certain
risks not presented by the over-the-counter market. For example,
exercise and settlement of such options must be made exclusively through
the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it
determines that foreign governmental restrictions or taxes would prevent
the orderly settlement of foreign currency option exercises, or would
result in undue burdens on the OCC or its clearing member, impose
special procedures on exercise and settlement, such as technical changes
in the mechanics of delivery of currency, the fixing of dollar
settlement prices or prohibitions on exercise.
POLICIES ON THE USE OF FUTURES AND OPTIONS ON FUTURES CONTRACTS: In
order to assure that the Fund will not be deemed to be a "commodity
pool" for purposes of the Commodity Exchange Act, regulations of the
CFTC require that the Fund enter into transactions in Futures Contracts,
Options on Futures Contracts and Options on Foreign Currencies traded on
a CFTC- regulated exchange only (i) for bona fide hedging purposes (as
defined in CFTC regulations), or (ii) for non-bona fide hedging
purposes, provided that the aggregate initial margin and premiums
required to establish such non-bona fide hedging positions does not
exceed 5% of the liquidation value of the Fund's assets, after taking
into account unrealized profits and unrealized losses on any such
contracts the Fund has entered into, and excluding, in computing such
5%, the in-the-money amount with respect to an option that is
in-the-money at the time of purchase.
<PAGE>
PART II - APPENDIX D
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the
quality of various debt instruments. It should be emphasized, however,
that ratings are not absolute standards of quality. Consequently, debt
instruments with the same maturity, coupon and rating may have different
yields while debt instruments of the same maturity and coupon with
different ratings may have the same yield.
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt edged." Interest payments are protected by a large
or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risk appear
somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
some time in the future.
Baa: Bonds which are rated Baa are considered as medium-grade
obligations, (i.e., they are neither highly protected nor poorly
secured). Interest payments and principal security appear adequate for
the present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds
lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection
of interest and principal payments may be very moderate, and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to
principal or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
ABSENCE OF RATING: Where no rating has been assigned or where a rating
has been suspended or withdrawn, it may be for reasons unrelated to the
quality of the issue. Should no rating be assigned, the reason may be
one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies
that are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or
issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances
arise, the effects of which preclude satisfactory analysis; if there is
no longer available reasonable up-to-date data to permit a judgment to
be formed; if a bond is called for redemption; or for other reasons.
STANDARD & POOR'S RATINGS SERVICES
AAA: An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
EXTREMELY STRONG.
AA: An obligation rated AA differs from the highest rated obligations
only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is VERY STRONG.
A: An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
obligations in higher rated categories. However, the obligor's capacity
to meet its financial commitment on the obligation is still STRONG.
BBB: An obligation rated BBB exhibits ADEQUATE protection parameters.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its
financial commitment on the obligation.
Obligations rated BB, B, CCC, CC, and C are regarded as having
significant speculative characteristics. BB indicates the least degree
of speculation and C the highest. While such obligations will likely
have some quality and protective characteristics, these may be
outweighed by large uncertainties or major exposures to adverse
conditions.
BB: An obligation rated BB is LESS VULNERABLE to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which
could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
B: An obligation rated B is MORE VULNERABLE to nonpayment than
obligations rated BB, but the obligor currently has the capacity to meet
its financial commitment on the obligation. Adverse business, financial,
or economic conditions will likely impair the obligor's capacity or
willingness to meet its financial commitment on the obligation.
CCC: An obligation rated CCC is CURRENTLY VULNERABLE to nonpayment, and
is dependent upon favorable business, financial, and economic conditions
for the obligor to meet its financial commitment on the obligation. In
the event of adverse business, financial, or economic conditions the
obligor is not likely to have the capacity to meet its financial
commitment on the obligation.
CC: An obligation rated CC is CURRENTLY HIGHLY VULNERABLE to nonpayment.
C: The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments
on this obligation are being continued.
D: An obligation rated D is in payment default. The D rating category is
used when payments on an obligation are not made on the date due even if
the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The D
rating also will be used upon the filing of a bankruptcy petition or the
taking of a similar action if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-) The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the
major rating categories.
R: This symbol is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or
volatility of expected returns which are not addressed in the credit
rating. Examples include: obligations linked or indexed to equities,
currencies, or commodities; obligations exposed to severe prepayment
risk -- such as interest-only or principal-only mortgage securities; and
obligations with unusually risky interest terms, such as inverse
floaters.
FITCH IBCA
AAA: Highest credit quality. AAA ratings denote the lowest expectation
of credit risk. They are assigned only in case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA: Very high credit quality. AA ratings denote a very low expectation
of credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A: High credit quality. A ratings denote a low expectation of credit
risk. The capacity for timely payment of financial commitments is
considered strong. This capacity may, nevertheless, be more vulnerable
to changes in circumstances or in economic conditions than is the case
for higher ratings.
BBB: Good credit quality. BBB ratings indicate that there is currently a
low expectation of credit risk. The capacity for timely payment of
financial commitments is considered adequate, but adverse changes in
circumstances and in economic conditions are more likely to impair this
capacity. This is the lowest investment-grade category.
Speculative Grade
BB: Speculative. BB ratings indicate that there is a possibility of
credit risk developing, particularly as the result of adverse economic
change over time; however, business or financial alternatives may be
available to allow financial commitments to be met. Securities rated in
this category are not investment grade.
B: Highly speculative. B ratings indicate that significant credit risk
is present, but a limited margin of safety remains. Financial
commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.
CCC, CC, C: High default risk. Default is a real possibility. Capacity
for meeting financial commitments is solely reliant upon sustained,
favorable business or economic developments. A CC rating indicates that
default of some kind appears probable. C ratings signal imminent
default.
DDD, DD, D: Default. Securities are not meeting current obligations and
are extremely speculative. DDD designates the highest potential for
recovery of amounts outstanding on any securities involved. For U.S.
corporates, for example, DD indicates expected recovery of 50% -- 90% of
such outstandings, and D the lowest recovery potential, i.e. below 50%.
DUFF & PHELPS CREDIT RATING CO.
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong. Risk
is modest but may vary slightly from time to time because of economic
conditions.
A+, A, A-: Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
BBB+, BBB, BBB-: Below-average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk
during economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet
obligations when due. Present or prospective financial protection
factors fluctuate according to industry conditions or company fortunes.
Overall quality may move up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that obligations
will not be met when due. Financial protection factors will fluctuate
widely according to economic cycles, industry conditions and/or company
fortunes. Potential exists for frequent changes in the rating within
this category or into a higher or lower rating grade.
CCC: Well below investment-grade securities. Considerable uncertainty
exists as to timely payment of principal, interest or preferred
dividends. Protection factors are narrow and risk can be substantial
with unfavorable economic/industry conditions, and/or with unfavorable
company developments.
DD: Defaulted debt-obligations. Issuer failed to meet scheduled
principal and/or interest payments.
DP: Preferred stock with dividend arrearages.
<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
[logo] M F S (R)
INVESTMENT MANAGEMENT
We invented the mutual fund(R)
500 Boylston Street, Boston, MA 02116
MGE-16-3/99
<PAGE>
MFS(R) GLOBAL EQUITY FUND
SUPPLEMENT DATED MARCH 1, 1999 TO THE CURRENT PROSPECTUS
THIS SUPPLEMENT DESCRIBES THE FUND'S CLASS I SHARES, AND IT SUPPLEMENTS CERTAIN
INFORMATION IN THE FUND'S PROSPECTUS DATED MARCH 1, 1999. THE CAPTION HEADINGS
USED IN THIS SUPPLEMENT CORRESPOND WITH THE CAPTION HEADINGS USED IN THE
PROSPECTUS.
You may purchase class I shares only if you are an eligible institutional
investor, as described under the caption "Description of Share Classes" below.
1. RISK RETURN SUMMARY
PERFORMANCE TABLE. The "Performance Table" is supplemented as follows:
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
1 YEAR 5 YEARS 10 YEARS
------ ------- --------
Class I shares % % %
[Broad-based securities market index] % % %
[Optional Lipper category] % % %
[Optional additional index] % % %
- --------------
** The Standard & Poor's 500 Composite Index is a market capitalization
weighted price index composed of 500 widely held companies.
+ Source: CDA/Wisenberger
The fund initially offered class B shares on December 29, 1986 and class I
shares on January 2, 1997. Class I share performance includes the performance of
the fund's class B shares for periods prior to the offering of class I shares.
Class I share performance generally would have been higher than Class B
performance had Class I shares been offered for the entire period because
operating expenses attributable to Class I shares are lower than those of Class
B. Class I share performance has been adjusted to reflect that Class I shares
have no CDSC.
2. EXPENSE SUMMARY
EXPENSE TABLE. The "Expense Table" is supplemented as follows:
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
Management Fees................................ 1.00%
Distribution and Service (12b-1) Fees ......... 0.00%
Other Expenses(1).............................. 0.35%
----
Total Annual Fund Operating Expenses .......... 1.35%
- ------------
(1) The fund has an expense offset arrangement which reduces the fund's
custodian fee based upon the amount of cash maintained by the fund with its
custodian and dividend disbursing agent. The fund may enter into other
similar arrangements and directed brokerage arrangements, which would also
have the effect of reducing the fund's expenses. "Other Expenses" do not
take into account these expense reductions, and therefore do not represent
the actual expenses of the fund.
EXAMPLE OF EXPENSES. The "Example of Expenses" table is supplemented as
follows:
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
----------- ------ ------ ------ -------
Class I shares $137 $428 $739 $1,624
<PAGE>
3. DESCRIPTIONS OF SHARE CLASSES
The "Description of Share Classes" is supplemented as follows:
If you are an eligible institutional investor (as described below), you may
purchase class I shares at net asset value without an initial sales charge or
CDSC upon redemption. Class I shares do not have annual distribution and service
fees, and do not convert to any other class of shares of the fund.
The following eligible institutional investors may purchase class I shares:
o certain retirement plans established for the benefit of employees of MFS
and employees of MFS' affiliates;
o any fund distributed by MFS, if the fund seeks to achieve its investment
objective by investing primarily in shares of the fund and other MFS
funds;
o any retirement plan, endowment or foundation which:
> purchases shares directly through MFD (rather than through a third
party broker or dealer or other financial adviser);
> has, at the time of purchase of class I shares, aggregate assets of
at least $100 million; and
> invests at least $10 million in class I shares of the fund either
alone or in combination with investments in class I shares of other
MFS Funds (additional investments may be made in any amount).
MFD may accept purchases from smaller plans, endowments or foundations
or in smaller amounts if it believes, in its sole discretion, that such
entity's aggregate assets will equal or exceed $100 million, or that
such entity will make additional investments which will cause its total
investment to equal or exceed $10 million, within a reasonable period of
time;
o bank trust departments or law firms acting as trustee or manager for
trust accounts which initially invest, on behalf of their clients, at
least $100,000 in class I shares of the fund (additional investments may
be made in any amount). MFD may accept smaller initial purchases if it
believes, in its sole discretion, that the bank trust department or law
firm will make additional investments, on behalf of its trust clients,
which will cause its total investment to equal or exceed $100,000 within
a reasonable period of time; and
o certain retirement plans offered, administered or sponsored by insurance
companies, provided that these plans and insurance companies meet
certain criteria established by MFD from time to time.
In no event will the fund, MFS, MFD or any of their affiliates pay any sales
commissions or compensation to any third party in connection with the sale of
class I shares. The payment of any such sales commission or compensation would,
under the fund's policies, disqualify the purchaser as an eligible investor in
class I shares.
4. HOW TO PURCHASE, EXCHANGE AND REDEEM SHARES
The discussion of "How to Purchase, Exchange and Redeem Shares" is supplemented
as follows:
You may purchase, redeem and exchange class I shares only through your MFD
representative or by contacting MFSC (see the back cover of the Prospectus for
address and phone number). You may exchange your class I shares for class I
shares of another MFS Fund (if you are eligible to purchase them) and for shares
of the MFS Money Market Fund at net asset value.
<PAGE>
5. FINANCIAL HIGHLIGHTS
The "Financial Highlights" table is supplemented as follows:
Financial Statements - Class I Shares
YEAR ENDED PERIOD ENDED
SEPTEMBER 30, 1998 OCTOBER 31, 1997**
------------------ ------------------
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 20.14 $17.57
Income from Investment Operations#
Net investment income $ 0.11 $ 0.13
Net realized and unrealized gain on
investments and foreign currency
transactions 1.37 2.44
------ ------
Total from investment operations $ 1.48 $ 2.57
------ ------
Less distributions declared to shareholders
From net investment income $(0.16) $ --
From net realized gain on investments
and foreign currency transactions (1.04) $ --
------ ------
Total distributions declared to
shareholders $(1.20) $ --
------ ------
Net asset value - end of period $20.42 $20.14
------ ------
Total return 7.78% 14.63%++
Ratios (to average net assets)/
Supplemental data:
Expenses## 1.35% 1.38%+
Net investment income 0.51% 0.77%+
Portfolio turnover 64% 65%
Net assets at end of period (000 omitted) $599 $472
- ----------------
* For the period from the inception of Class I, January 2, 1997, through
October 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for this expense. The
Fund has an expense offset arrangement which reduces the Fund's custodian fee
based upon the amount of cash maintained by the Fund with its custodian and
dividend disbursing agent.
THE DATE OF THIS SUPPLEMENT IS MARCH 1, 1999.
<PAGE>
MFS(R) GLOBAL EQUITY FUND
MARCH 1, 1999
PROSPECTUS
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
- --------------------------------------------------------------------------------
This Prospectus describes the MFS Global Equity Fund. The investment
objective of the fund is capital appreciation.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED THE FUND'S SHARES OR
DETERMINED WHETHER THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANYONE WHO TELLS
YOU OTHERWISE IS COMMITTING A CRIME.
<PAGE>
- ---------------------
TABLE OF CONTENTS
- ---------------------
Page
I Risk Return Summary ................................... 1
II Expense Summary ....................................... 4
III Investment Objective, Strategies and Principal Risks .. 6
IV Management of the Fund ................................ 9
V Description of Share Classes .......................... 10
VI How to Purchase, Exchange and Redeem Shares ........... 13
VII Investor Services and Programs ........................ 17
VIII Other Information ..................................... 19
IX Financial Highlights .................................. 22
Appendix A -- Investment Techniques and Practices ..... A-1
Appendix B -- Sales Charge Categories Available to
Certain Retirement Plans ............................ B-1
<PAGE>
----------------------
I RISK RETURN SUMMARY
----------------------
o INVESTMENT OBJECTIVE
Capital appreciation.
o PRINCIPAL INVESTMENT STRATEGIES
The fund invests, under normal market conditions, at least 65% of its
total assets in common stocks and related securities, such as preferred
stock, convertible securities and depositary receipts, of U.S. and foreign
(including emerging market) issuers. The fund diversifies its investments
across these markets and focuses on companies which its investment
adviser, Massachusetts Financial Service Company (referred to as MFS or
the adviser), believe have favorable growth prospects and attractive
valuations based on current and expected earnings or cash flow. The fund
generally seeks to purchase securities of companies with relatively large
market capitalizations relative to the market in which they are traded.
The fund's investments may include securities traded in the over-the-
counter markets.
MFS uses a bottom-up, as opposed to a top-down, investment style in
managing the equity-oriented funds (such as the fund) it advises. This
means that securities are selected based upon fundamental analysis
performed by the fund's portfolio manager and MFS' large group of equity
research analysts.
The fund may have exposure to foreign currencies through its investment
in foreign securities, its direct holdings of foreign currencies or
through its use of foreign currency exchange contracts for the purchase or
sale of a fixed quantity of a foreign currency at a future date.
o PRINCIPAL RISKS OF AN INVESTMENT
Your investment in the fund is subject to certain risks:
o Market and Company Risk: The value of the securities in which the fund
invests may decline due to changing economic, political or market
conditions, or due to the financial condition of the company which issued
the security.
o Over-the-Counter Risk: Equity securities that are traded over-the-counter
may be more volatile than exchange listed stocks, and the fund may
experience difficulty in establishing or closing out positions in these
stocks at prevailing market prices.
o Foreign Markets Risk: The fund's investment in foreign securities involves
additional risks relating to political, social and economic developments
abroad. Other risks from these investments result from the differences
between the regulations to which U.S. and foreign issuers and markets are
subject.
o Currency Risk: The fund's exposure to foreign currencies may cause the
value of the fund to decline in the event that the U.S. dollar strengthens
against these currencies, or in the event that foreign governments
intervene in the currency markets.
o As with any mutual fund, you could lose money on your investment in the
fund.
An investment in the fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
o BAR CHART AND PERFORMANCE TABLE
The bar chart and performance table below are intended to indicate some of
the risks of investing in the fund by showing changes in the fund's
performance over time. The chart and table provide past performance
information. The fund's past performance does not necessarily indicate how
the fund will perform in the future. The performance information in the
chart and table is based upon calendar year periods, while the performance
information presented under the caption "Financial Highlights" and in the
fund's shareholder reports is based upon the fund's fiscal year.
Therefore, these performance results differ.
BAR CHART
The bar chart shows changes in the annual total returns of the fund's
class B shares for each calendar year since class B shares were first
offered. The chart and related notes do not take into account any sales
charges that you may be required to pay upon purchase or redemption of the
fund's shares, but do include the reinvestment of distributions. Any sales
charge will reduce your return. The return of the fund's other classes of
shares will differ from the class B returns shown in the bar chart,
depending upon the expenses of those classes.
1989 27.54%
1990 (4.73)%
1991 7.34%
1992 1.55%
1993 29.06%
1994 (3.72)%
1995 17.33%
1996 19.51%
1997 15.47%
1998
During the period shown in the bar chart, the highest quarterly return
was % (for the calendar quarter ended , 19 ) and the lowest
quarterly return was % (for the calendar quarter ended ,
19 ).
PERFORMANCE TABLE
This table shows how the average annual total returns of each class of the
fund compares to various market indicators and assumes the reinvestment of
distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
..........................................................................
1 Year 5 Years 10 Years
------ ------- --------
Class A shares % % %
Class B shares % % %
Class C shares % % %
Standard & Poor's Composite Index** % % %
Morgan Stanley Capital International World
Index*** % % %
----------
+ Source: Lipper Analytical Services, Inc.
++ Source: CDA/Wiesenberger.
** The Standard & Poors 500 Composite Index is a market capitalization
weighted price index composed of 500 widely held common stocks.
*** The Morgan Stanley Capital International (MSCI) World Index is an
unmanaged market-capitalization-weighted total return index which
measures the performance of 23 developed-country global stock market,
including the United States, Canada, Europe, Australia, New Zealand, and
the Far East.
Share performance is calculated according to Securities and Exchange
Commission rules. Class A share performance takes into account the
deduction of the 5.75% maximum sales charge. Class B share performance
takes into account the deduction of the applicable contingent deferred
sales charge (referred to as a CDSC), which declines over six years from
4% to 0%. Class C share performance takes into account the deduction of
the 1% CDSC.
The fund initially offered class B shares on December 29, 1986, class A
shares on September 7, 1993 and class C shares on January 3, 1994. Class A
and class C share performance include the performance of the fund's class
B shares for periods prior to the offering of class A and class C shares.
Class A share performance generally would have been higher than class B
share performance had class A shares been offered for the entire period,
because certain operating expenses (e.g., distribution and service fees)
attributable to class A shares are lower than those of class B shares. The
operating expenses of class C shares are not significantly different from
those of class B shares. Class A share performance has been adjusted to
take into account the initial sales charge applicable to class A shares
rather than the CDSC applicable to class B shares. The class C share
performance has been adjusted to take into account the lower CDSC
applicable to class C shares than the CDSC applicable to class B shares.
If you would like the fund's current yield, contact the MFS Service
Center at the toll-free number set forth on the back cover page.
<PAGE>
- -----------------------
II EXPENSE SUMMARY
- -----------------------
o EXPENSE TABLE
This table describes the fees and expenses that you may pay when you buy,
redeem and hold shares of the fund.
SHAREHOLDER FEES (fees paid directly from your investment)
...........................................................................
CLASS A CLASS B CLASS C
------- ------- -------
Maximum Sales Charge (Load) Imposed
on Purchases (as a percentage of
offering price) ..................... 5.75% 0.00% 0.00%
Maximum Deferred Sales Charge (Load)
(as a percentage of original purchase
price or redemption proceeds,
whichever is less) .................. See Below(1) 4.00% 1.00%
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund assets)
...........................................................................
Management Fees ..................... 1.00% 1.00% 1.00%
Distribution and Service (12b-1)
Fees (2) ............................ 0.25% 1.00% 1.00%
Other Expenses(3) ................... 0.35% 0.35% 0.35%
----- ----- -----
Total Annual Fund Operating Expenses 1.60% 2.35% 2.35%
----------
(1) An initial sales charge will not be deducted from your purchase if you
buy $1 million or more of class A shares, or if you are investing
through a retirement plan and your class A purchase meets certain
requirements. However, in this case, a contingent deferred sales
charge (referred to as a CDSC) of 1% may be deducted from your
redemption proceeds if you redeem your investment within 12 months.
(2) The fund adopted a distribution plan under Rule 12b-1 that permits it
to pay marketing and other fees to support the sale and distribution
of class A, B and C shares and the services provided to you by your
financial adviser (referred to as distribution and service fees).
(3) The fund has an expense offset arrangement which reduces the fund's
custodian fee based upon the amount of cash maintained by the fund
with its custodian and dividend disbursing agent. The fund may enter
into other similar arrangements and directed brokerage arrangements,
which would also have the effect of reducing the fund's expenses.
"Other Expenses" do not take into account these expense reductions,
and are therefore higher than the actual expenses of the fund.
o EXAMPLE OF EXPENSES
These examples are intended to help you compare the cost of investing in
the fund with the cost of investing in other mutual funds.
The examples assume that:
o You invest $10,000 in the fund for the time periods indicated and you
redeem your shares at the end of the time periods;
o Your investment has a 5% return each year and dividends and other
distributions are reinvested; and
o The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, under these assumptions
your costs would be:
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
----------------------------------------------------------------------------
Class A shares $728 $1,051 $1,396 $2,366
Class B shares
Assuming redemption at end of
period $638 $1,033 $1,455 $2,496
Assuming no redemption $238 $ 733 $1,255 $2,496
Class C shares
Assuming redemption at end of
period $338 $ 733 $1,255 $2,686
Assuming no redemption $238 $ 733 $1,255 $2,686
<PAGE>
- -------------------------------------------------------------
III INVESTMENT OBJECTIVE, STRATEGIES AND PRINCIPAL RISKS
- -------------------------------------------------------------
o INVESTMENT OBJECTIVE
The fund's investment objective is capital appreciation. The fund's
objective may be modified without shareholder approval.
o HOW THE FUND INTENDS TO ACHIEVE ITS OBJECTIVE
The fund invests, under normal market conditions, at least 65% of its
total assets in common stocks and related securities, such as preferred
stock, convertible securities and depositary receipts, of U.S. and foreign
(including emerging market) issuers. The fund diversifies its investments
across these markets and focuses on companies which its investment
adviser, Massachusetts Financial Service Company (referred to as MFS or
the adviser), believe have favorable growth prospects and attractive
valuations based on current and expected earnings or cash flow. The fund
generally seeks to purchase securities of companies with relatively large
market capitalizations relative to the market in which they are traded.
The fund's investments may include securities traded in the over-the-
counter markets.
MFS uses a bottom-up, as opposed to a top-down, investment style in
managing the equity-oriented funds (such as the fund) it advises. This
means that securities are selected based upon fundamental analysis
performed by the fund's portfolio manager and MFS' large group of equity
research analysts.
The fund may have exposure to foreign currencies through its investment
in foreign securities, its direct holdings of foreign currencies or
through its use of foreign currency exchange contracts for the purchase or
sale of a fixed quantity of a foreign currency at a future date.
The fund may depart from its principal investment strategies by
temporarily investing for defensive purposes when adverse market, economic
or political conditions exist. While the fund invests defensively, it may
not be able to pursue its investment objective. The fund's defensive
investment position may not be effective in protecting its value.
The fund may engage in active and frequent trading to achieve its
principal investment strategies. This may result in the realization and
distribution to shareholders of higher capital gains as compared to a fund
with less active trading policies, which would increase your tax
liability. Frequent trading also increases transaction costs, which could
detract from the fund's performance.
The fund may invest in various types of securities and engage in various
investment techniques and practices which are not the principal focus of
the fund and therefore are not described in this Prospectus. The types of
securities and investment techniques and practices in which the fund may
engage are identified in Appendix A to this Prospectus, and are discussed,
together with their risks, in the Fund's Statement of Additional
Information (referred to as the SAI), which you may obtain by contacting
MFS Service Center, Inc. (see back cover for address and phone number).
o PRINCIPAL RISKS
The principal risks of investing in the fund and the circumstances
reasonably likely to cause the value of your investment in the fund to
decline are described below. As with any non-money market mutual fund, the
share price of the fund will change daily based on market conditions and
other factors. Please note that there are many circumstances which could
cause the value of your investment in the fund to decline, and which could
prevent the fund from achieving its objective, that are not described
here.
The principal risks of investing in the fund are:
o Market Risk: This is the risk that the price of a security held by the
fund will fall due to changing economic, political or market conditions or
disappointing earnings results.
o Company Risk: Prices of securities react to the economic condition of the
company that issued the security. The fund's equity investments in an
issuer may rise and fall based on the issuer's actual and anticipated
earnings, changes in management and the potential for takeovers and
acquisitions.
o Over-the-Counter Risk: Over-the-counter (OTC) transactions involve risks
in addition to those associated with transactions in securities traded on
exchanges. OTC-listed companies may have limited product lines, markets or
financial resources. Many OTC stocks trade less frequently and in smaller
volume than exchange-listed stocks. The values of these stocks may be more
volatile than exchange-listed stocks, and the fund may experience
difficulty in establishing or closing out positions in these stocks at
prevailing market prices.
o Foreign Securities Risk: Investments in foreign securities involve risks
relating to political, social and economic developments abroad, as well as
risks resulting from the differences between the regulations to which U.S.
and foreign issuers and markets are subject:
|> These risks may include the seizure by the government of company
assets, excessive taxation, withholding taxes on dividends and
interest, limitations on the use or transfer of portfolio assets, and
political or social instability.
|> Enforcing legal rights may be difficult, costly and slow in foreign
countries, and there may be special problems enforcing claims against
foreign governments.
|> Foreign companies may not be subject to accounting standards or
governmental supervision comparable to U.S. companies, and there may
be less public information about their operations.
|> Foreign markets may be less liquid and more volatile than U.S.
markets.
|> Foreign securities often trade in currencies other than the U.S.
dollar, and the fund may directly hold foreign currencies and
purchase and sell foreign currencies through forward exchange
contracts. Changes in currency exchange rates will affect the fund's
net asset value, the value of dividends and interest earned, and
gains and losses realized on the sale of securities. An increase in
the strength of the U.S. dollar relative to these other currencies
may cause the value of the fund to decline. Certain foreign
currencies may be particularly volatile, and foreign governments may
intervene in the currency markets, causing a decline in value or
liquidity in the fund's foreign currency holdings. Forward foreign
currency exchange contracts involve the risk that the party with
which the fund enters the contract may fail to perform its
obligations to the fund.
o Emerging Markets Risk: Emerging markets are generally defined as countries
in the initial stages of their industrialization cycles with low per
capita income. Investments in emerging markets securities involve all of
the risks of investments in foreign securities, and also have additional
risks:
|> All of the risks of investing in foreign securities are heightened by
investing in emerging markets countries.
|> The markets of emerging markets countries have been more volatile
than the markets of developed countries with more mature economies.
These markets often have provided higher rates of return, and
significantly greater risks, to investors.
<PAGE>
- ------------------------------
IV MANAGEMENT OF THE FUND
- ------------------------------
o INVESTMENT ADVISER
Massachusetts Financial Services Company (referred to as MFS or the
adviser) is the fund's investment adviser. MFS is America's oldest mutual
fund organization. MFS and its predecessor organizations have a history of
money management dating from 1924 and the founding of the first mutual
fund, Massachusetts Investors Trust. Net assets under the management of
the MFS organization were approximately $ billion on behalf of
approximately million investor accounts as of January 31, 1999. As of
such date, the MFS organization managed approximately $ billion of net
assets in equity funds and equity portfolios. Approximately $ billion
of the assets managed by MFS are invested in securities of foreign issuers
and foreign denominated securities of U.S. issuers. MFS is located at 500
Boylston Street, Boston, Massachusetts 02116.
MFS provides overall investment advisory services and facilities to the
fund, for which the fund pays MFS an annual management fee of 1.00% of the
fund's first $1 billion and 0.85% in excess of $1 billion, based on the
fund's average daily net asset value.
o PORTFOLIO MANAGER
The fund's portfolio manager is David R. Mannheim, a Senior Vice President
of MFS. Mr. Mannheim has been the portfolio manager of the fund since 1992
and has been employed as a portfolio manager by MFS since 1988.
o ADMINISTRATOR
MFS provides the fund with certain financial, legal, compliance,
shareholder communications and other administrative services. MFS is
reimbursed by the fund for a portion of the costs it incurs in providing
these services.
o DISTRIBUTOR
MFS Fund Distributors, Inc. (referred to as MFD), a wholly owned
subsidiary of MFS, is the distributor of shares of the fund.
o SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (referred to as MFSC), a wholly owned subsidiary
of MFS, performs transfer agency and certain other services for the fund,
for which it receives compensation from the fund.
<PAGE>
- -----------------------------------
V DESCRIPTION OF SHARE CLASSES
- -----------------------------------
The fund offers class A, B and C shares through this prospectus. The fund
also offers an additional class of shares, class I shares, exclusively to
certain institutional investors. Class I shares are made available through
a separate prospectus supplement provided to institutional investors
eligible to purchase them.
o SALES CHARGES
You may be subject to an initial sales charge when you purchase, or a CDSC
when you redeem, class A, B or C shares. These sales charges are described
below. In certain circumstances, these sales charges are waived. These
circumstances are described in the SAI. Special considerations concerning
the calculation of the CDSC that apply to each of these classes of shares
are described below under the heading "Calculation of CDSC."
If you purchase your fund shares through a financial adviser (such as a
broker or bank), the adviser may receive commissions or other concessions
which are paid from various sources, such as from the sales charges and
distribution and service fees, or from MFS or MFD. These commissions and
concessions are described in the SAI.
o CLASS A SHARES
You may purchase class A shares at net asset value plus an initial sales
charge (referred to as the offering price), but in some cases you may
purchase class A shares without an initial sales charge but subject to a
1% CDSC upon redemption within one year. Class A shares have annual
distribution and service fees up to a maximum of 0.35% of net assets
annually.
PURCHASES SUBJECT TO AN INITIAL SALES CHARGE. The amount of the initial
sales charge you pay when you buy class A shares differs depending upon
the amount you invest, as follows:
SALES CHARGE* AS PERCENTAGE OF:
------------------------------
Offering Net Amount
Amount of Purchase Price Invested
Less than $50,000 5.75% 6.10%
$50,000 but less than $100,000 4.75 4.99
$100,000 but less than $250,000 4.00 4.17
$250,000 but less than $500,000 2.95 3.04
$500,000 but less than $1,000,000 2.20 2.25
$1,000,000 or more None** None**
----------
* Because of rounding in the calculation of offering price, actual sales
charges you pay may be more or less than those calculated using these
percentages.
** A 1% CDSC will apply to such purchases, as discussed below.
PURCHASES SUBJECT TO A CDSC (BUT NOT AN INITIAL SALES CHARGE). You pay no
initial sales charge when you invest $1 million or more in class A shares.
However, a CDSC of 1% will be deducted from your redemption proceeds if
you redeem within 12 months of your purchase. This pricing structure also
applies to investments in class A shares by certain retirement plans, as
described in Appendix B.
o CLASS B SHARES
You may purchase class B shares at net asset value without an initial
sales charge, but if you redeem your shares within the first six years you
may be subject to a CDSC (declining from 4.00% during the first year to 0%
after six years). Class B shares have annual distribution and service fees
up to a maximum of 1.00% of net assets annually.
The CDSC is imposed according to the following schedule:
CONTINGENT DEFERRED
YEAR OF REDEMPTION AFTER PURCHASE SALES CHARGE
--------------------------------------------------------------------------
First 4%
Second 4%
Third 3%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh and following 0%
If you hold class B shares for approximately eight years, they will
convert to class A shares of the fund. All class B shares you purchased
through the reinvestment of dividends and distributions will be held in a
separate sub-account. Each time any class B shares in your account convert
to class A shares, a proportionate number of the class B shares in the
sub-account will also convert to class A shares.
o CLASS C SHARES
You may purchase class C shares at net asset value without an initial
sales charge, but if you redeem your shares within the first year you may
be subject to a CDSC of 1.00%. Class C shares have annual distribution and
service fees up to a maximum of 1.00% of net assets annually. Class C
shares do not convert to any other class of shares of the fund.
o CALCULATION OF CDSC
As discussed above, certain investments in class A, B and C shares will be
subject to a CDSC. Three different aging schedules apply to the
calculation of the CDSC:
o Purchases of class A shares made on any day during a calendar month will
age one month on the last day of the month, and each subsequent month.
o Purchases of class C shares, and purchases of class B shares on or after
January 1, 1993, made on any day during a calendar month will age one year
at the close of business on the last day of that month in the following
calendar year, and each subsequent year.
o Purchases of class B shares prior to January 1, 1993 made on any day
during a calendar year will age one year at the close of business on
December 31 of that year, and each subsequent year.
No CDSC is assessed on the value of your account represented by
appreciation or additional shares acquired through the automatic
reinvestment of dividends or capital gain distributions. Therefore, when
you redeem your shares, only the value of the shares in excess of these
amounts (i.e., your direct investment) is subject to a CDSC.
The CDSC will be applied in a manner that results in the CDSC being
imposed at the lowest possible rate, which means that the CDSC will be
applied against the lesser of your direct investment or the total cost of
your shares. The applicability of a CDSC will not be affected by exchanges
or transfers of registration, except as described in the SAI.
o DISTRIBUTION AND SERVICE FEES
The fund has adopted a plan under Rule 12b-1 that permits it to pay
marketing and other fees to support the sale and distribution of class A,
B and C shares and the services provided to you by your financial adviser.
These annual distribution and service fees may equal up to 0.35% for class
A shares and 1.00% for each of class B and class C shares, and are paid
out of the assets of these classes. Over time, these fees will increase
the cost of your shares and may cost you more than paying other types of
sales charges. The class A distribution fee is currently not being imposed
and will be paid by the Fund when the trustees of the Fund approve the
fee.
<PAGE>
- ---------------------------------------------------
VI HOW TO PURCHASE, EXCHANGE AND REDEEM SHARES
- ---------------------------------------------------
You may purchase, exchange and redeem class A, B and C shares of the fund
in the manner described below. In addition, you may be eligible to
participate in certain investor services and programs to purchase,
exchange and redeem these classes of shares, which are described in the
next section under the caption "Investor Services and Programs."
o HOW TO PURCHASE SHARES
INITIAL PURCHASE. You can establish an account by having your financial
adviser process your purchase. The minimum initial investment is $1,000.
However, in the following circumstances the minimum initial investment is
only $50 per account:
o if you establish an automatic investment plan;
o if you establish an automatic exchange plan; or
o if you establish an account under either:
|> tax-deferred retirement programs (other than IRAs) where investments
are made by means of group remittal statements; or
|> employer sponsored investment programs.
The minimum initial investment for IRAs is $250 per account. The maximum
investment in class C shares is $1,000,000 per transaction. Class C shares
are not available for purchase by any retirement plan qualified under
Section 401(a) or 403(b) of the Internal Revenue Code if the plan or its
sponsor subscribes to certain recordkeeping services made available by
MFSC, such as the MFS Fundamental 401(k) Plan.
ADDING TO YOUR ACCOUNT. There are several easy ways you can make
additional investments of at least $50 to your account:
o send a check with the returnable portion of your statement;
o ask your financial adviser to purchase shares on your behalf;
o wire additional investments through your bank (call MFSC first for
instructions); or
o authorize transfers by phone between your bank account and your MFS
account (the maximum purchase amount for this method is $100,000). You
must elect this privilege on your account application if you wish to use
it.
o HOW TO EXCHANGE SHARES
You can exchange your shares for shares of the same class of certain other
MFS funds at net asset value by having your financial adviser process your
exchange request or by contacting MFSC directly. The minimum exchange
amount is generally $1,000 ($50 for exchanges made under the automatic
exchange plan). Shares otherwise subject to a CDSC will not be charged a
CDSC in an exchange. However, when you redeem the shares acquired through
the exchange, the shares you redeem may be subject to a CDSC, depending
upon when you originally purchased the shares you exchanged. For purposes
of computing the CDSC, the length of time you have owned your shares will
be measured from the date of original purchase and will not be affected by
any exchange.
Sales charges may apply to exchanges made from the MFS money market
funds. Certain qualified retirement plans may make exchanges between the
MFS Funds and the MFS Fixed Fund, a bank collective investment fund, and
sales charges may also apply to these exchanges. Call MFSC for information
concerning these sales charges.
Exchanges are subject to the MFS funds' market timing policies, which
are policies designed to protect the funds and their shareholders from the
effect of frequent exchanges. These market timing policies are described
below under the caption "Market Timing Policies." You should read the
prospectus of the MFS fund into which you are exchanging and consider the
differences in objectives, policies and rules before making any exchange.
o HOW TO REDEEM SHARES
You may redeem your shares either by having your financial adviser process
your redemption or by contacting MFSC directly. The fund sends out your
redemption proceeds within seven days after your request is received in
good order. "Good order" generally means that the stock power, written
request for redemption, letter of instruction or certificate must be
endorsed by the record owner(s) exactly as the shares are registered. In
addition, you need to have your signature guaranteed and/or submit
additional documentation to redeem your shares. See "Signature Guarantee/
Additional Documentation" below, or contact MFSC for details (see back
cover page for address and phone number).
Under unusual circumstances such as when the New York Stock Exchange is
closed, trading on the Exchange is restricted or if there is an emergency,
the fund may suspend redemptions or postpone payment. If you purchased the
shares you are redeeming by check, the fund may delay the payment of the
redemption proceeds for up to 15 days from the purchase date to assure
that the check has cleared.
REDEEMING DIRECTLY THROUGH MFSC.
o BY TELEPHONE. You can call MFSC to have shares redeemed from your account
and the proceeds wired or mailed (depending on the amount redeemed)
directly to a pre- designated bank account. MFSC will request personal or
other information from you and will generally record the calls. MFSC will
be responsible for losses that result from unauthorized telephone
transactions if it does not follow reasonable procedures designed to
verify your identity. You must elect this privilege on your account
application if you wish to use it.
o BY MAIL. To redeem shares by mail, you can send a letter to MFSC with the
name of your fund, your account number, and the number of shares or dollar
amount to be sold.
REDEEMING THROUGH YOUR FINANCIAL ADVISER. You can call your financial
adviser to process a redemption on your behalf. Your financial adviser
will be responsible for furnishing all necessary documents to MFSC and may
charge you for this service.
SIGNATURE GUARANTEE/ADDITIONAL DOCUMENTATION. In order to protect against
fraud, the fund requires that your signature be guaranteed in order to
redeem your shares. Your signature may be guaranteed by an eligible bank,
broker, dealer, credit union, national securities exchange, registered
securities association, clearing agency, or savings association. MFSC may
require additional documentation for certain types of registrations and
transactions. Signature guarantees and this additional documentation shall
be accepted in accordance with policies established by MFSC, and MFSC may
make certain de minimis exceptions to these requirements.
o OTHER CONSIDERATIONS
RIGHT TO REJECT PURCHASE AND EXCHANGE ORDERS. Purchases and exchanges
should be made for investment purposes only. The MFS Funds each reserve
the right to reject or restrict any specific purchase or exchange request.
Because an exchange request involves both a request to redeem shares of
one fund and to purchase shares of another fund, the MFS Funds consider
the underlying redemption and purchase requests conditioned upon the
acceptance of each of these underlying requests. Therefore, in the event
that the MFS Funds reject an exchange request, neither the redemption nor
the purchase side of the exchange will be processed.
MARKET TIMING POLICIES. The MFS Funds are not designed for professional
market timing organizations or other entities using programmed or frequent
exchanges. The MFS Funds define a "market timer" as an individual, or
organization acting on behalf of one or more individuals, if:
o the individual or organization makes during the calendar year either (i)
six or more exchange requests among the MFS Funds or (ii) three or more
exchange requests out of any of the MFS high yield bond funds or MFS
municipal bond funds; and
o any one of such exchange requests represents shares equal in value to $1
million or more.
Accounts under common ownership or control, including accounts
administered by market timers, will be aggregated for purposes of this
definition.
The MFS Funds may impose specific limitations on market timers,
including:
o delaying for up to seven days the purchase side of an exchange request by
market timers;
o rejecting or otherwise restricting purchase or exchange requests by market
timers; and
o permitting exchanges by market timers only into certain MFS Funds.
REINSTATEMENT PRIVILEGE. After you have redeemed shares, you have a one-
time right to reinvest the proceeds within 90 days of the redemption at
the current net asset value (without an initial sales charge). If the
redemption involved a CDSC, your account will be credited with the
appropriate amount of the CDSC paid; however, your new shares will be
subject to a CDSC which will be determined from the date you originally
purchased the shares redeemed. This privilege applies to shares of the MFS
money market funds only under certain circumstances.
IN-KIND DISTRIBUTIONS. The MFS funds have reserved the right to pay
redemption proceeds by a distribution in-kind of portfolio securities
(rather than cash). In the event that the fund makes an in-kind
distribution, you could incur the brokerage and transaction charges when
converting the securities to cash. The fund does not expect to make in-
kind distributions, and if it does, the fund will pay, during any 90-day
period, your redemption proceeds in cash up to either $250,000 or 1% of
the fund's net assets, whichever is less.
INVOLUNTARY REDEMPTIONS/SMALL ACCOUNTS. Because it is costly to maintain
small accounts, the MFS funds have generally reserved the right to
automatically redeem shares and close your account when it contains less
than $500 due to your redemptions or exchanges. Before making this
automatic redemption, you will be notified and given 60 days to make
additional investments to avoid having your shares redeemed.
<PAGE>
- ---------------------------------------
VII INVESTOR SERVICES AND PROGRAMS
- ---------------------------------------
As a shareholder of the fund, you have available to you a number of
services and investment programs. Some of these services and programs may
not be available to you if your shares are held in the name of your
financial adviser or if your investment in the fund is made through a
retirement plan.
o DISTRIBUTION OPTIONS
The following distribution options are generally available to all accounts
and you may change your distribution option as often as you desire by
notifying MFSC:
o Dividends and capital gain distributions reinvested in additional shares
(this option will be assigned if no other option is specified);
o Dividends in cash; capital gain distributions reinvested in additional
shares; or
o Dividends and capital gain distributions in cash.
Reinvestments (net of any tax withholding) will be made in additional full
and fractional shares of the same class of shares at the net asset value
as of the close of business on the record date. Dividends and capital gain
distributions in amounts less than $10 will automatically be reinvested in
additional shares of the fund. If you have elected to receive dividends
and/or capital gain distributions in cash, and the postal or other
delivery service is unable to deliver checks to your address of record, or
you do not respond to mailings from MFSC with regard to uncashed
distribution checks, your distribution option will automatically be
converted to having all dividends and other distributions reinvested in
additional shares. Your request to change a distribution option must be
received by MFSC by the record date for a dividend or distribution in
order to be effective for that dividend or distribution. No interest will
accrue on amounts represented by uncashed distribution or redemption
checks.
o PURCHASE AND REDEMPTION PROGRAMS
For your convenience, the following purchase and redemption programs are
made available to you with respect to class A, B and C shares, without
extra charge:
AUTOMATIC INVESTMENT PLAN. You can make cash investments of $50 or more
through your checking account or savings account on any day of the month.
If you do not specify a date, the investment will automatically occur on
the first business day of the month.
AUTOMATIC EXCHANGE PLAN. If you have an account balance of at least $5,000
in any MFS fund, you may participate in the automatic exchange plan, a
dollar-cost averaging program. This plan permits you to make automatic
monthly or quarterly exchanges from your account in an MFS fund for shares
of the same class of shares of other MFS funds. You may make exchanges of
at least $50 to up to six different funds under this plan. Exchanges will
generally be made at net asset value without any sales charges. If you
exchange shares out of the MFS Money Market Fund or MFS Government Money
Market Fund, or if you exchange class A shares out of the MFS Cash Reserve
Fund, into class A shares of any other MFS fund, you will pay the initial
sales charge if you have not already paid this charge on these shares.
REINVEST WITHOUT A SALES CHARGE. You can reinvest dividend and capital
gain distributions into your account without a sales charge to add to your
investment easily and automatically.
DISTRIBUTION INVESTMENT PROGRAM. You may purchase shares of any MFS fund
without paying an initial sales charge or a CDSC upon redemption by
automatically reinvesting a minimum of $50 of dividend and capital gain
distributions from the same class of another MFS fund.
LETTER OF INTENT (LOI). If you intend to invest $50,000 or more in the MFS
funds (including the MFS Fixed Fund) within 13 months, you may buy class A
shares of the funds at the reduced sales charge as though the total amount
were invested in class A shares in one lump sum. If you intend to invest
$1 million or more under this program, the time period is extended to 36
months. If the intended purchases are not completed within the time
period, shares will automatically be redeemed from a special escrow
account established with a portion of your investment at the time of
purchase to cover the higher sales charge you would have paid had you not
purchased your shares through this program.
RIGHT OF ACCUMULATION. You will qualify for a lower sales charge on your
purchases of class A shares when your new investment in class A shares,
together with the current (offering price) value of all your holdings in
the MFS funds (including the MFS Fixed Fund), reaches a reduced sales
charge level.
SYSTEMATIC WITHDRAWAL PLAN. You may elect to automatically receive (or
designate someone else to receive) regular periodic payments of at least
$100. Each payment under this systematic withdrawal is funded through the
redemption of your fund shares. For class B and C shares, you can receive
up to 10% (15% for certain IRA distributions) of the value of your account
through these payments in any one year (measured at the time you establish
this plan). You will incur no CDSC on class B and C shares redeemed under
this plan. For class A shares, there is no similar percentage limitation;
however, you may incur the CDSC (if applicable) when class A shares are
redeemed under this plan.
<PAGE>
- ---------------------------
VIII OTHER INFORMATION
- ---------------------------
o PRICING OF FUND SHARES
The price of each class of the fund's shares is based on its net asset
value. The net asset value of each class of shares is determined at the
close of regular trading each day that the New York Stock Exchange is open
for trading (generally, 4:00 p.m., Eastern time) (referred to as the
valuation time). To determine net asset value, the fund values its assets
at current market values, or at fair value as determined by the Adviser
under the direction of the Board of Trustees that oversees the fund if
current market values are unavailable. Fair value pricing may be used by
the fund when current market values are unavailable or when an event
occurs after the close of the exchange on which the fund's portfolio
securities are principally traded that is likely to have changed the value
of the securities. The use of fair value pricing by the fund may cause the
net asset value of its shares to differ significantly from the net asset
value that would be calculated using current market values.
You will receive the net asset value next calculated, after the
deduction of applicable sales charges and any required tax withholding, if
your order is complete (has all required information) and MFSC receives
your order by:
o the valuation time, if placed directly by you (not through a financial
adviser such as a broker or bank) to MFSC; or
o MFSC's close of business, if placed through a financial adviser, so long
as the financial adviser (or its authorized designee) received your order
by the valuation time.
The fund invests in certain securities which are primarily listed on
foreign exchanges that trade on weekends and other days when the fund does
not price its shares. Therefore, the value of the fund's shares may change
on days when you will not be able to purchase or redeem the fund's shares.
o DISTRIBUTIONS
The fund intends to pay substantially all of its net income (including net
short-term capital gain) to shareholders as dividends at least annually.
Any realized net capital gains are also distributed at least annually.
o TAX CONSIDERATIONS
The following discussion is very general and therefore prospective
investors are urged to consult their own tax advisers regarding the effect
that an investment in the fund may have on their own tax situations.
TAXABILITY OF DISTRIBUTIONS. As long as the fund qualifies for treatment
as a regulated investment company (which it has in the past and intends to
do in the future), it pays no federal income tax on the earnings it
distributes to shareholders.
You will normally have to pay federal income taxes, and any state or
local taxes, on the distributions you receive from the fund, whether you
take the distributions in cash or reinvest them in additional shares.
Distributions designated as capital gain dividends are taxable as long-
term capital gains. Other distributions are generally taxable as ordinary
income. Some dividends paid in January may be taxable as if they had been
paid the previous December.
The Form 1099 that is mailed to you every January details your
distributions and how they are treated for federal tax purposes.
Fund distributions will reduce the fund's net asset value per share.
Therefore, if you buy shares shortly before the record date of a
distribution, you may pay the full price for the shares and then
effectively receive a portion of the purchase price back as a taxable
distribution.
If you are neither a citizen nor a resident of the U.S., the fund will
withhold U.S. federal income tax at the rate of 30% on taxable dividends
and other payments that are subject to such withholding. You may be able
to arrange for a lower withholding rate under an applicable tax treaty if
you supply the appropriate documentation required by the fund. The fund is
also required in certain circumstances to apply backup withholding at the
rate of 31% on taxable dividends and redemption proceeds paid to any
shareholder (including a shareholder who is neither a citizen nor a
resident of the U.S.) who does not furnish to the fund certain information
and certifications or who is otherwise subject to backup withholding.
Backup withholding will not, however, be applied to payments that have
been subject to 30% withholding. Prospective investors should read the
fund's Account Application for additional information regarding backup
withholding of federal income tax.
TAXABILITY OF TRANSACTIONS. When you redeem, sell or exchange shares, it
is generally considered a taxable event for you. Depending on the purchase
price and the sale price of the shares you redeem, sell or exchange, you
may have a gain or a loss on the transaction. You are responsible for any
tax liabilities generated by your transaction.
o UNIQUE NATURE OF FUND
MFS may serve as the investment adviser to other funds which have similar
investment goals and principal investment policies and risks to the fund,
and which may be managed by the fund's portfolio manager(s). While the
fund may have many similarities to these other funds, its investment
performance will differ from their investment performance. This is due to
a number of differences between the funds, including differences in sales
charges, expense ratios and cash flows.
o YEAR 2000 ISSUES
The fund could be adversely affected if the computer systems used by MFS,
the fund's other service providers or the companies in which the fund
invests do not properly process date-related information from and after
January 1, 2000 (the "Year 2000 Issue"). MFS recognizes the importance of
the Year 2000 Issue and, to address Year 2000 compliance, created a Year
2000 Program Management Office in 1996, which is separately funded, has a
specialized staff and reports directly to MFS senior management. The
Office, with the help of external consultants, is responsible for
ascertaining that all internal systems, data feeds and third party
applications are Year 2000 compliant. While MFS is confident that all MFS
systems will be Year 2000 compliant before the turn of the century, there
are significant systems interdependencies in the domestic and foreign
markets for securities, the business environments in which companies held
by the fund operate and in MFS' own business environment. MFS has been
actively working with the fund's other service providers to identify and
respond to potential problems in an effort to ensure Year 2000 compliance
or develop contingency plans. Year 2000 compliance is also one of the
factors considered by MFS in its ongoing assessment of companies in which
the fund invests. There can be no assurance, however, that these steps
will be sufficient to avoid any adverse impact on the fund.
o PROVISION OF ANNUAL AND SEMIANNUAL REPORTS
To avoid sending duplicate copies of materials to households, only one
copy of the fund's annual and semiannual report will be mailed to
shareholders having the same residential address on the fund's records.
However, any shareholder may contact MFSC (see back cover for address and
phone number) to request that copies of these reports be sent personally
to that shareholder.
<PAGE>
- ----------------------------
IX FINANCIAL HIGHLIGHTS
- ----------------------------
The financial highlights table is intended to help you understand the
fund's financial performance for the past 5 years, or, if the fund has not
been in operation that long, since the time it commenced investment
operations. Certain information reflects financial results for a single
fund share. The total returns in the table represent the rate by which an
investor would have earned (or lost) on an investment in the fund
(assuming reinvestment of all distributions). This information has been
audited by the fund's independent auditors, whose report, together with
the fund's financial statements, are included in the fund's Annual Report
to shareholders. These financial statements are incorporated by reference
into the SAI. The fund's independent auditors are Ernst & Young LLP.
<TABLE>
<CAPTION>
CLASS A SHARES
...............................................................................................................................
YEAR ENDED OCTOBER 31,
----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value -- beginning of period $ 20.09 $ 18.45 $ 16.68 $ 16.95 $ 16.56
-------- -------- -------- -------- --------
Income from investment operations# --
Net investment income $ 0.06 $ 0.08 $ 0.07 $ 0.09 $ 0.03
Net realized and unrealized gain on
investments and foreign currency
transactions 1.35 3.49 2.60 1.37 1.13
-------- -------- -------- -------- --------
Total from investment operations $ 1.41 $ 3.57 $ 2.67 $ 1.46 $ 1.16
-------- -------- -------- -------- --------
Less distributions declared to
shareholders -
From net investment income $ (0.11) $ -- $ -- $ -- $ --
From net realized gain on investments
and foreign currency transactions (1.04) (1.93) (0.90) (1.73) (0.70)
In excess of net investment income -- -- -- -- (0.07)
-------- -------- -------- -------- --------
Total distributions declared to
shareholders $ (1.15) $ (1.93) $ (0.90) $ (1.73) $ (0.77)
-------- -------- -------- -------- --------
Net asset value -- end of period $ 20.35 $ 20.09 $ 18.45 $ 16.68 $ 16.95
-------- -------- -------- -------- --------
Total return(+) 7.46% 20.81% 16.72% 10.16% 7.03%
Ratios (to average net assets)/
Supplemental data:
Expenses## 1.60% 1.63% 1.65% 1.61% 1.54%
Net investment income 0.28% 0.42% 0.38% 0.58% 0.15%
Portfolio turnover 64% 65% 83% 73% 99%
Net assets at end of period
(000 omitted) $280,454 $167,390 $ 94,909 $ 52,164 $ 16,968
- ----------
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's custodian fees based upon the amount of cash maintained
by the Fund with its custodian and dividend disbursing agent. For fiscal years ending after September 1, 1995, the Fund's
expenses are calculated without reduction for this expense.
(+) 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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CLASS B SHARES
...............................................................................................................................
YEAR ENDED OCTOBER 31,
----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value -- beginning of period $ 19.97 $ 18.36 $ 16.55 $ 16.78 $ 16.53
-------- -------- -------- -------- --------
Income from investment operations# --
Net investment loss $ (0.11) $ (0.07) $ (0.08) $ (0.05) $ (0.17)
Net realized and unrealized gain on
investments and foreign currency
transactions 1.39 3.46 2.60 1.37 1.13
-------- -------- -------- -------- --------
Total from investment operations $ 1.28 $ 3.39 $ 2.52 $ 1.32 $ 0.96
-------- -------- -------- -------- --------
Less distributions declared to
shareholders -
From net realized gain on investments
and foreign currency transactions $ (1.04) $ (1.78) $ (0.71) $ (1.55) $ (0.70)
In excess of net investment income -- -- -- -- (0.01)
-------- -------- -------- -------- --------
Total distributions declared to
shareholders $ (1.04) $ (1.78) $ (0.71) $ (1.55) $ (0.71)
-------- -------- -------- -------- --------
Net asset value -- end of period $ 20.21 $ 19.97 $ 18.36 $ 16.55 $ 16.78
-------- -------- -------- -------- --------
Total return 6.75% 19.74% 15.75% 9.07% 5.91%
Ratios (to average net assets)/
Supplemental data:
Expenses## 2.35% 2.39% 2.45% 2.55% 2.58%
Net investment loss (0.51)% (0.36)% (0.44)% (0.35)% (1.01)%
Portfolio turnover 64% 65% 83% 73% 99%
Net assets at end of period
(000 omitted) $267,886 $253,354 $182,139 $156,286 $175,438
- -----------
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's custodian fees based upon the amount of cash maintained
by the Fund with its custodian and dividend disbursing agent. For fiscal years ending after September 1, 1995, the Fund's
expenses are calculated without reduction for this expense.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CLASS C SHARES
...............................................................................................................................
YEAR ENDED OCTOBER 31,
----------------------------------------------------------------------------------
1998 1997 1996 1995 1994*
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value -- beginning of period $ 19.78 $ 18.24 $ 16.53 $ 16.80 $ 16.75
-------- -------- -------- -------- --------
Income from investment operations# --
Net investment loss $ (0.10) $ (0.06) $ (0.06) $ (0.05) $ (0.09)
Net realized and unrealized gain on
investments and foreign currency
transactions 1.34 3.44 2.57 1.37 0.14
-------- -------- -------- -------- --------
Total from investment operations $ 1.24 $ 3.38 $ 2.51 $ 1.32 $ 0.05
-------- -------- -------- -------- --------
Less distributions declared to
shareholders -
From net investment income $ (0.01) $ -- $ -- $ -- $ --
From net realized gain on investments
and foreign currency transactions (1.04) (1.84) (0.80) (1.59) --
-------- -------- -------- -------- --------
Total distributions declared to
shareholders $ (1.05) $ (1.84) $ (0.80) $ (1.59) $ --
-------- -------- -------- -------- --------
Net asset value -- end of period $ 19.97 $ 19.78 $ 18.24 $ 16.53 $ 16.80
-------- -------- -------- -------- --------
Total return 6.64% 19.86% 15.82% 9.20% 0.30%++
Ratios (to average net assets)/
Supplemental data:
Expenses## 2.35% 2.36% 2.39% 2.49% 2.55%+
Net investment loss (0.50)% (0.33)% (0.34)% (0.31)% (0.72)%+
Portfolio turnover 64% 65% 83% 73% 99%
Net assets at end of period
(000 omitted) $ 29,123 $ 16,658 $ 7,503 $ 2,908 $ 1,440
- ----------
* For the period from the inception of Class C, January 3, 1994, through October 31, 1994.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's custodian fees based upon the amount of cash maintained
by the Fund with its custodian and dividend disbursing agent. For fiscal years ending after September 1, 1995, the Fund's
expenses are calculated without reduction for this expense.
</TABLE>
<PAGE>
- --------------
APPENDIX A
- --------------
o INVESTMENT TECHNIQUES AND PRACTICES
In pursuing its investment objective, the fund may engage in the following
investment techniques and practices, which are described, together with
their risks, in the SAI.
INVESTMENT TECHNIQUES/PRACTICES
..........................................................................
SYMBOLS x permitted -- not permitted
--------------------------------------------------------------------------
Debt Securities
Asset-Backed Securities
Collateralized Mortgage Obligations and Multiclass
Pass-Through Securities --
Corporate Asset-Backed Securities --
Mortgage Pass-Through Securities --
Stripped Mortgage-Backed Securities --
Corporate Securities --
Loans and Other Direct Indebtedness --
Lower Rated Bonds --
Municipal Bonds --
Speculative Bonds --
U.S. Government Securities x
Variable and Floating Rate Obligations --
Zero Coupon Bonds, Deferred Interest Bonds and PIK Bonds --
Equity Securities x
Foreign Securities Exposure
Brady Bonds --
Depositary Receipts x
Dollar-Denominiated Foreign Debt Securities --
Emerging Markets x
Foreign Securities x
Forward Contracts x
Futures Contracts x
Indexed Securities/Structured Products --
Inverse Floating Rate Obligations --
Investment in Other Investment Companies --
Closed-End x
Open-End --
Lending of Portfolio Securities x
Leveraging Transactions
Bank Borrowings --
Mortgage "Dollar-Roll" Transactions --
Reverse Repurchase Agreements --
Options
Options on Foreign Currencies x
Options on Futures Contracts x
Options on Securities x
Options on Stock Indices x
Reset Options --
"Yield Curve" Options --
Repurchase Agreements x
Restricted Securities x
Short Sales --
Short Sales Against the Box --
Short Term Instruments x
Swaps and Related Derivative Instruments --
Temporary Borrowings x
Temporary Defensive Positions x
Warrants x
"When-Issued" Securities x
<PAGE>
- --------------
APPENDIX B
- --------------
o SALES CHARGE CATEGORIES AVAILABLE TO CERTAIN RETIREMENT PLANS
Purchases made under the following four categories are not subject to an
initial sales charge. However, a CDSC of 1% will be deducted from
redemption proceeds if the redemption is made within 12 months of
purchase. The CDSC is based on the value of the shares redeemed (excluding
reinvested dividend and capital gain distributions) or the total cost of
the shares, whichever is less.
o Investments in class A shares by certain retirement plans subject to the
Employee Retirement Income Security Act of 1974, as amended (referred to
as ERISA), if, prior to July 1, 1996
|> the plan had established an account with MFSC; and
|> the sponsoring organization had demonstrated to the satisfaction of
MFD that either;
+ the employer had at least 25 employees; or
+ the total purchases by the retirement plan of class A shares of
the MFS Family of Funds (the MFS Funds) would be in the amount of
at least $250,000 within a reasonable period of time, as
determined by MFD in its sole discretion.
o Investments in class A shares by certain retirement plans subject to
ERISA, if
|> the retirement plan and/or sponsoring organization participates in
the MFS Fundamental 401(k) Program or any similar recordkeeping
system made available by MFSC (referred to as the MFS participant
recordkeeping system);
|> the plan establishes an account with MFSC on or after July 1, 1996;
|> the total purchases by the retirement plan of class A shares of the
MFS Funds will be in the amount of at least $500,000 within a
reasonable period of time, as determined by MFD in its sole
discretion; and
|> the plan has not redeemed its class B shares in the MFS funds in
order to purchase class A shares under this category.
o Investments in class A shares by certain retirement plans subject to
ERISA, if
|> the plan establishes an account with MFSC on or after July 1, 1996;
and
|> the plan has, at the time of purchase, a market value of $500,000 or
more invested in shares of any class or classes of the MFS Funds.
THE RETIREMENT PLAN WILL QUALIFY UNDER THIS CATEGORY ONLY IF THE PLAN
OR ITS SPONSORING ORGANIZATION INFORMS MFSC PRIOR TO THE PURCHASES
THAT THE PLAN HAS A MARKET VALUE OF $500,000 OR MORE INVESTED IN
SHARES OF ANY CLASS OR CLASSES OF THE MFS FUNDS; MFSC HAS NO
OBLIGATION INDEPENDENTLY TO DETERMINE WHETHER SUCH A PLAN QUALIFIES
UNDER THIS CATEGORY; AND
o Investments in class A shares by certain retirement plans subject to
ERISA, if
|> the plan establishes an account with MFSC on or after July 1, 1997;
|> the plan's records are maintained on a pooled basis by MFSC; and
|> the sponsoring organization demonstrates to the satisfaction of MFD
that, at the time of purchase, the employer has at least 200 eligible
employees and the plan has aggregate assets of at least $2,000,000.
<PAGE>
MFS(R) GLOBAL EQUITY FUND
If you want more information about the fund, the following documents are
available free upon request:
ANNUAL/SEMIANNUAL REPORTS. These reports contain information about the
fund's actual investments. Annual reports discuss the effect of recent
market conditions and the fund's investment strategy on the fund's
performance during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI). The SAI, dated March 1, 1999,
provides more detailed information about the fund and is incorporated into
this prospectus by reference.
YOU CAN GET FREE COPIES OF THE ANNUAL/SEMIANNUAL REPORTS, THE SAI AND
OTHER INFORMATION ABOUT THE FUND, AND MAKE INQUIRIES ABOUT THE FUND, BY
CONTACTING:
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116-3741
Telephone: 1-800-225-2606
Internet: http://www.mfs.com
Information about the fund (including its prospectus, SAI and shareholder
reports) can be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C., 20549-6009
Information on the operation of the Public Reference Room may be obtained
by calling the Commission at 1-800-SEC-0330. Reports and other information
about the fund are available on the Commission's Internet website at
http://www.sec.gov, and copies of this information may be obtained, upon
payment of a duplicating fee, by writing the Public Reference Section at
the above address.
The fund's Investment Company Act file number is 811-6102.
<PAGE>
MFS(R) GLOBAL EQUITY FUND
MARCH 1, 1999
[Logo] M F S(R)
INVESTMENT MANAGEMENT
75 YEARS
WE INVENTED THE MUTUAL FUND(R)
STATEMENT OF ADDITIONAL
A SERIES OF MFS SERIES TRUST VI INFORMATION
500 BOYLSTON STREET, BOSTON, MA 02116
(617) 954-5000
This Statement of Additional Information, as amended or supplemented from time
to time (the "SAI"), sets forth information which may be of interest to
investors but which is not necessarily included in the Fund's Prospectus dated
March 1, 1999. This SAI should be read in conjunction with the Prospectus. The
Fund's financial statements are incorporated into this SAI by reference to the
Fund's most recent Annual Report to shareholders. A copy of the Annual Report
accompanies this SAI. You may obtain a copy of the Fund's Prospectus and Annual
Report without charge by contacting MFS Service Center, Inc. (see back cover for
address and phone number).
This SAI is divided into two Parts -- Part I and Part II. Part I contains
information that is particular to the Fund, while Part II contains information
that generally applies to each of the funds in the MFS Family of Funds (the "MFS
Funds"). Each Part of the SAI has a variety of appendices which can be found at
the end of Part I and Part II, respectively.
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE
INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
PART I
Part I of this SAI contains information that is particular to the Fund.
TABLE OF CONTENTS
Page
I Definitions ....................................................... 1
II Management of the Fund ............................................ 1
The Fund .......................................................... 1
Trustees and Officers -- Identification and Background ............ 1
Trustees Compensation ............................................. 1
Affiliated Service Provider Compensation .......................... 1
III Sales Charges and Distribution Plan Payments ...................... 1
Sales Charges ..................................................... 1
Distribution Plan Payments ....................................... 1
IV Portfolio Transactions and Brokerage Commissions .................. 1
V Share Ownership ................................................... 1
VI Performance Information ........................................... 1
VII Investment Techniques, Practices, Risks and Restrictions .......... 1
Investment Techniques, Practices and Risks ........................ 1
Investment Restrictions ........................................... 1
VIII Tax Considerations ................................................ 5
IX Independent Auditors and Financial Statements ..................... 5
Appendix A -- Trustees and Officers -- Identification
and Background ...................................... A-1
Appendix B -- Trustee Compensation ................................ B-1
Appendix C -- Affiliated Service Provider Compensation ............ C-1
Appendix D -- Sales Charges and Distribution Plan Payments ........ D-1
Appendix E -- Portfolio Transactions and Brokerage Commissions .... E-1
Appendix F -- Share Ownership ..................................... F-1
Appendix G -- Performance Information ............................. G-1
(I) DEFINITIONS
"Fund" - MFS Global Equity Fund, a series of the Trust. The Fund was
known as "MFS World Equity Fund" until August 24, 1998.
"Trust" - MFS Series Trust VI, a Massachusetts business trust, organized
in 1981. The Trust was 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.
"MFSC" - MFS Service Center, Inc., a Delaware corporation.
"Prospectus" - The Prospectus of the Fund, dated March 1, 1999, as
amended or supplemented from time to time.
(II) MANAGEMENT OF THE FUND
THE FUND
The Fund is a diversified series of the Trust. The Trust is an open-end
management investment company.
TRUSTEES AND OFFICERS - IDENTIFICATION AND BACKGROUND
The identification and background of the Trustees and officers of the
Trust are set forth in Appendix A of this Part I.
TRUSTEE COMPENSATION
Compensation paid to the non-interested Trustees and to Trustees who are
not officers of the Trust, for certain specified periods, is set forth
in Appendix B of this Part I.
AFFILIATED SERVICE PROVIDER COMPENSATION
Compensation paid by the Fund to its affiliated service providers -- to
MFS, for investment advisory and administrative services, and to MFSC,
for transfer agency services -- for certain specified periods is set
forth in Appendix C to this Part I.
(III) SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS
SALES CHARGES
Sales charges paid in connection with the purchase and sale of Fund
shares for certain specified periods are set forth in Appendix D to this
Part I, together with the Fund's schedule of dealer reallowances.
DISTRIBUTION PLAN PAYMENTS
Payments made by the Fund under the Distribution Plan for its most
recent fiscal year end are set forth in Appendix D to this Part I.
(IV) PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Brokerage commissions paid by the Fund for certain specified periods,
and information concerning purchases by the Fund of securities issued by
its regular broker-dealers for its most recent fiscal year, are set
forth in Appendix E to this Part I.
(V) SHARE OWNERSHIP
Information concerning the ownership of Fund shares by Trustees and
officers of the Trust as a group, by investors who control the Fund, if
any, and by investors who own 5% or more of any class of Fund shares, if
any, is set forth in Appendix F to this Part I.
(VI) PERFORMANCE INFORMATION
Performance information, as quoted by the Fund in sales literature and
marketing materials, is set forth in Appendix G to this Part I.
(VII) INVESTMENT TECHNIQUES, PRACTICES, RISKS AND RESTRICTIONS
INVESTMENT TECHNIQUES, PRACTICES AND RISKS
The investment objective and principal investment policies of the Fund
are described in the Prospectus. In pursuing its investment objective
and principal investment policies, the Fund may engage in a number of
investment techniques and practices, which involve certain risks. These
investment techniques and practices, which may be changed without
shareholder approval unless indicated otherwise, are identified in
Appendix A to the Prospectus, and are more fully described, together
with their associated risks, in Part II of this SAI. The following
percentage limitations apply to these investment techniques and
practices.
o Foreign Securities Exposure may be 100% of the Fund's net assets.
o U.S. and/or Canadian issuers may not exceed 50% of the Fund's net
assets.
o Lending of Portfolio Securities may not exceed 30% of the Fund's
net assets.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions which cannot be changed
without the approval of the holders of a majority of the Fund's shares
(which, as used in this SAI, means the lesser of (i) more than 50% of
the outstanding shares of the Trust or a series or class, as applicable,
or (ii) 67% or more of the outstanding shares of the Trust or a series
or class, as applicable, present at a meeting at which holders of more
than 50% of the outstanding shares of the Trust or a series or class, as
applicable, are represented in person or by proxy).
Terms used below (such as Options and Futures Contracts) are defined
in Part II of this SAI.
The Fund may not:
(1) Borrow 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.
In addition, the Fund has the following nonfundamental policies which
may be changed without shareholder approval.
The Fund will not:
(i) 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;
(ii) invest 25% or more of the market value of its total assets in
securities of issuers in any one industry.
Except with respect to Investment Restriction (1) and nonfundamental
policy (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.
(VIII) TAX CONSIDERATIONS
For a discussion of tax considerations, see Part II of this SAI.
(IX) 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 Securities and Exchange Commission.
The Portfolio of Investments and the Statement of Assets and
Liabilities at August 31, 1998, the Statement of Operations for the year
ended October 31, 1998, the Statement of Changes in Net Assets for the
two years ended October 31, 1998, the Notes to Financial Statements and
the Report of the Independent Auditors, each of which is included in the
Annual Report to Shareholders of the Fund, are incorporated by reference
into this SAI in reliance upon the report of Ernst & Young LLP,
independent auditors, given upon their authority as experts in
accounting and auditing. A copy of the Annual Report accompanies this
SAI.
<PAGE>
PART I - APPENDIX A
TRUSTEES AND OFFICERS - IDENTIFICATION AND BACKGROUND
The Trustees and officers of the Trust are listed below, together with
their principal occupations during the past five years. (Their titles may
have varied during that period.)
TRUSTEES
JEFFREY L. SHAMES* (born 6/2/55)
Massachusetts Financial Services Company, Chairman and Chief Executive
Officer
RICHARD B. BAILEY* (born 9/14/26)
Private Investor; Massachusetts Financial Services Company, former
Chairman and Director (prior to September 30, 1991); Cambridge Bancorp,
Director; Cambridge Trust Company, Director
MARSHALL N. COHAN (born 11/14/26)
Private Investor
Address: 2524 Bedford Mews Drive, Wellington, Florida
LAWRENCE H. COHN, M.D., (born 3/11/37)
Brigham and Women's Hospital, Chief of Cardiac Surgery;
Harvard Medical School, Professor of Surgery
Address: 75 Francis Street, Boston, Massachusetts
THE HON. SIR J. DAVID GIBBONS, KBE (born 6/15/27)
Edmund Gibbons Limited, Chief Executive Officer;
Colonial Insurance Company Ltd., Director and Chairman
Address: 21 Reid Street, Hamilton, Bermuda
ABBY M. O'NEILL (born 4/27/28)
Private Investor; Rockefeller Financial Services, Inc.
(investment advisers), Director
Address: 30 Rockefeller Plaza, Room 5600, New York,
New York
WALTER E. ROBB, III (born 8/18/26)
Benchmark Advisors, Inc. (corporate financial consultants), President and
Treasurer; Benchmark Consulting Group, Inc. (office services), President;
CitiFunds and CitiSelect Folios (mutual funds), Trustee
Address: 110 Broad Street, Boston, Massachusetts
ARNOLD D. SCOTT* (born 12/16/42)
Massachusetts Financial Services Company, Senior Executive Vice President
and Secretary
J. DALE SHERRATT (born 9/23/38)
Insight Resources, Inc. (acquisition planning specialists), President;
Wellfleet Investments (investor in health care companies), Managing
General Partner (since 1993)
Address: 294 Washington Street, Boston, Massachusetts
WARD SMITH (born 9/13/30)
NACCO Industries (holding company), Chairman (prior to June 1994);
Sundstrand Corporation (diversified mechanical manufacturer), Director
Address: 36080 Shaker Blvd., Hunting Valley, Ohio
OFFICERS
W. THOMAS LONDON,* Treasurer (born 3/1/44)
Massachusetts Financial Services Company, Senior Vice President
JAMES O. YOST,* Assistant Treasurer (born 6/12/60)
Massachusetts Financial Services Company, Vice President
ELLEN MOYNIHAN,* Assistant Treasurer (born 11/13/57)
Massachusetts Financial Services Company, Vice President (since September
1996); Deloitte & Touch LLP, Senior Manager (prior to September 1996)
MARK E. BRADLEY,* Assistant Treasurer (born 11/23/59)
Massachusetts Financial Services Company, Vice President (since March
1997); Putnam Investments, Vice President (from September 1994 until March
1997); Ernst & Young LLP, Senior Tax Manager (prior to September 1994)
STEPHEN E. CAVAN,* Secretary and Clerk (born 11/6/53)
Massachusetts Financial Services Company, Senior Vice President, General
Counsel and Assistant Secretary
JAMES R. BORDEWICK, JR.,* Assistant Secretary
(born 3/6/59) Massachusetts Financial Services Company,
Senior Vice President and Associate General Counsel
----------------
*"Interested persons" (as defined in the 1940 Act) of the Adviser, whose
address is 500 Boylston Street, Boston, Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain
affiliates of MFS or with certain other funds of which MFS or a subsidiary
is the investment adviser or distributor. Messrs. Shames and Scott,
Directors of MFD, and Mr. Cavan, the Secretary of MFD, hold similar
positions with certain other MFS affiliates. Mr. Bailey is a Director of
Sun Life Assurance Company of Canada (U.S.), a subsidiary of Sun Life
Assurance Company of Canada.
<PAGE>
PART I - APPENDIX B
TRUSTEE COMPENSATION
The Fund pays the compensation of non-interested Trustees and of Trustees
who are not officers of the Trust, who currently receive a fee of $1,250
per year plus $225 per meeting and $225 per committee meeting attended,
together with such
Trustee's out-of-pocket expenses. In addition, the Trust has a retirement
plan for these Trustees as described under the caption "Management of the
Fund -- Trustee Retirement Plan" in Part II. The Retirement Age under the
plan is 75.
<TABLE>
<CAPTION>
TRUSTEE COMPENSATION TABLE
...............................................................................................................................
RETIREMENT BENEFIT TOTAL TRUSTEE
TRUSTEE FEES ACCRUED AS PART ESTIMATED CREDITED FEES FROM FUND
TRUSTEE FROM FUND(1) OF FUND EXPENSES(1) YEARS OF SERVICE(2) AND FUND COMPLEX(3)
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Bailey $3,500 $ 10 $
Marshall N. Cohan 4,175 14
Dr. Lawrence Cohn 4,046 18
Sir David Gibbons 3,500 13
Abby M. O'Neill 3,500 10
Walter E. Robb, III 4,946 15
Arnold D. Scott 0 N/A
James L. Shames 0 N/A
J. Dale Sherratt 4,898 20
Ward Smith 4,448 13
----------------
(1)For the fiscal year ending October 31, 1998.
(2)Based upon normal retirement age (75).
(3)Information provided is provided for calendar year 1998. All Trustees served as Trustees of funds within the MFS fund
complex (having aggregate net assets at December 31, 1998, of approximately $ billion) except Mr. Bailey, who served
as Trustee of funds within the MFS complex (having aggregate net assets at December 31, 1998 of approximately $ billion).
</TABLE>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
..........................................................................
YEARS OF SERVICE
AVERAGE
TRUSTEE FEES 3 5 7 10 OR MORE
--------------------------------------------------------------------------
$ 945 $142 $ 236 $ 331 $ 472
1,844 277 461 645 922
2,743 411 686 960 1,372
3,642 546 911 1,275 1,821
4,541 681 1,135 1,589 2,271
5,440 816 1,360 1,904 2,720
----------------
(4)Other funds in the MFS Fund complex provide similar retirement benefits
to the Trustees.
<PAGE>
PART I - APPENDIX C
AFFILIATED SERVICE PROVIDER COMPENSATION
..........................................................................
The Fund paid compensation to its affiliated service providers over the
specified periods as follows:
<TABLE>
<CAPTION>
PAID TO MFS AMOUNT PAID TO MFS FOR PAID TO MFSC AMOUNT AGGREGATE
FOR ADVISORY WAIVED ADMINISTRATIVE FOR TRANSFER WAIVED AMOUNT PAID TO
FISCAL YEAR ENDED SERVICES BY MFS SERVICES AGENCY SERVICES BY MFSC MFS AND MFSC
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
October 31, 1998 $5,225,948 N/A $74,476 $600,700 N/A $5,901,124
October 31, 1997 $3,683,876 N/A 39,944* $511,818 N/A $4,235,638
October 31, 1996 $2,493,195 N/A N/A 493,667 N/A 2,986,862
--------------------
*From March 1, 1997, the commencement of the Master Administrative Service Agreement.
</TABLE>
<PAGE>
PART I - APPENDIX D
SALES CHARGES AND DISTIBUTION PLAN PAYMENTS
SALES CHARGES
..........................................................................
The following sales charges were paid during the specified periods:
<TABLE>
<CAPTION>
CLASS A INITIAL SALES CHARGES: CDSC PAID TO MFD ON:
RETAINED REALLOWED CLASS A CLASS B CLASS C
FISCAL YEAR END TOTAL BY MFD TO DEALERS SHARES SHARES SHARES
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
October 31, 1998 $1,188,250 $182,740 $1,005,510 $ 5,409 $253,263 $14,070
October 31, 1997 $ 857,971 $ 94,044 $ 763,927 $ 6,348 $196,759 $ 5,738
October 31, 1996 $ 365,306 $ 35,038 $ 330,268 $11,608 $187,701 $ 361
</TABLE>
DEALER REALLOWANCES
..........................................................................
As shown above, MFD pays (or "reallows") a portion of the Class A initial
sales charge to dealers. The dealer reallowance as expressed as a
percentage of the Class A shares' offering price is:
DEALER REALLOWANCE AS A
AMOUNT OF PURCHASE PERCENT OF OFFERING PRICE
--------------------------------------------------------------------------
Less than $50,000 5.00%
$50,000 but less than $100,000 4.00%
$100,000 but less than $250,000 3.20%
$250,000 but less than $500,000 2.25%
$500,000 but less than $1,000,000 1.70%
$1,000,000 or more None*
----------------
*A CDSC will apply to such purchase.
DISTRIBUTION PLAN PAYMENTS
..........................................................................
During the fiscal year ended October 31, 1998, the Fund made the following
Distribution Plan payments:
<TABLE>
<CAPTION>
AMOUNT OF DISTRIBUTION AND SERVICE FEES:
CLASS OF SHARES PAID BY FUND RETAINED BY MFD PAID TO DEALERS
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A Shares $ 574,106 $ 44,208 $529,898
Class B Shares $2,736,316 $2,080,089 $656,227
Class C Shares $ 227,023 $ 3 $227,020
</TABLE>
Distribution plan payments retained by MFD are used to compensate MFD for
commissions advanced by MFD to dealers upon sale of fund shares.
<PAGE>
PART I - APPENDIX E
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
BROKERAGE COMMISSIONS
..........................................................................
The following brokerage commissions were paid by the Fund during the
specified time periods:
BROKERAGE COMMISSIONS
FISCAL YEAR END PAID BY FUND
--------------------------------------------------------------------------
October 31, 1998 $1,361,157
October 31, 1997 1,123,039
October 31, 1996 354,752
SECURITIES ISSUED BY REGULAR BROKER-DEALERS
..........................................................................
During the fiscal year ended October 31, 1998, the Fund purchased
securities issued by the following regular broker-dealers of the Fund,
which had the following values as of October 31, 1998:
VALUE OF SECURITIES
BROKER-DEALER AS OF OCTOBER 31, 1998
--------------------------------------------------------------------------
[Merrill Lynch $
Morgan Stanley-Dean Witter
General Electric Capital Corp]
<PAGE>
PART I - APPENDIX F
SHARE OWNERSHIP
OWNERSHIP BY TRUSTEES AND OFFICERS
As of November 30, 1998, the Trustees and officers of the Trust as a group
owned less than 1% of any class of the Fund's shares.
25% OR GREATER OWNERSHIP
The following table identifies those investors who own 25% or more of the
Fund's shares (all share classes taken together) as of November 30, 1998,
and are therefore presumed to control the Fund:
JURISDICTION OF ORGANIZATION PERCENTAGE
NAME AND ADDRESS OF INVESTOR (IF A COMPANY) OWNERSHIP
----------------------------------------------------------------------------
None
5% OR GREATER OWNERSHIP OF SHARE CLASS
The following table identifies those investors who own 5% or more of any
class of the Fund's shares as of November 30, 1998:
NAME AND ADDRESS OF INVESTOR OWNERSHIP PERCENTAGE
.........................................................................
MLPF&S for the Sole Benefit of its Customers 9.42% of Class C shares
Attn: Fund Administration 97GT4
4800 Deer Lake Drive E 3rd FL
Jacksonville, FL 32246-6484
.........................................................................
TRS MFS DEF Contribution Plan 99.98% of Class I shares
c/o Mark Leary 19th FL
Mass Financial Services
500 Boylston Street
Boston, MA 02116-3740
.........................................................................
<PAGE>
PART I - APPENDIX G
PERFORMANCE INFORMATION
..........................................................................
All performance quotations are as of October 31, 1998.
<TABLE>
<CAPTION>
AVERAGE ANNUAL ACTUAL 30-
TOTAL RETURNS DAY YIELD 30-DAY YIELD CURRENT
--------------------------------------- (INCLUDING (WITHOUT ANY DISTRIBUTION
1 YEAR 5 YEARS 10 YEARS WAIVERS) WAIVERS) RATE+
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A Shares, with
initial sales charge
(SEC Performance) 1.28% 10.98% 10.55% N/A N/A N/A
Class A Shares, at a
net asset value 7.46% 12.31% 11.21% N/A N/A N/A
Class B Shares, with
CDSC(SEC Performance) 2.75% 11.05% 10.70% N/A N/A N/A
Class B Shares, at net
asset value 6.75% 11.32% 10.70% N/A N/A N/A
Class C Shares, with
CDSC (SEC Performance) 5.64% 11.37% 10.72% N/A N/A N/A
Class C Shares, at net
asset value 6.64% 11.37% 10.72% N/A N/A N/A
Class I Shares, at net
asset value 7.78% 11.74% 10.91% N/A N/A N/A
----------------------
+Annualized, based upon the last distribution.
</TABLE>
Class A share performance calculated according to Securities and Exchange
Commission (referred to as the SEC) rules (referred to as SEC performance)
takes into account the deduction of the 5.75% maximum sales charge. Class
B SEC performance takes into account the deduction of the applicable
contingent deferred sales charge (referred to as a CDSC), which declines
over six years from 4% to 0%. Class C SEC performance takes into account
the deduction of the 1% CDSC. The fund initially offered class A shares on
September 7, 1993, class B shares on December 29, 1986, class C shares on
January 3, 1994 and class I shares on January 2, 1997.
Class A, class C and class I share performance include the performance of
the fund's class B shares for periods prior to the offering of class A,
class C and class I shares. Class A and class I share performance
generally would have been higher than class B share performance had class
A and class I shares been offered for the entire period, because the
operating expenses (e.g., distribution and service fees) attributable to
class A and class I shares are lower than those of class B shares. There
are no significant differences in the operating expenses of class B and
class C shares. Class A share SEC performance has been adjusted to take
into account the initial sales charge applicable to class A shares rather
than the CDSC applicable to Class B shares. Class C share performance has
been adjusted to take into account the lower CDSC applicable to class C
shares and class I share performance has been adjusted to reflect that
class I shares have no CDSC.
Performance results include any applicable expense subsidies and waivers,
which may cause the results to be more favorable. Current subsidies and
waivers may be discontinued at any time.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
PART II
Part II of this SAI describes policies and practices that apply to each of the
Funds in the MFS Family of Funds. References in this Part II to a "Fund" means
each Fund in the MFS Family of Funds, unless noted otherwise. References in
this Part II to a "Trust" means the Massachusetts business trust of which the
Fund is a series, or, if the Fund is not a series of a Massachusetts business
trust, references to a "Trust" shall mean the Fund.
TABLE OF CONTENTS
Page
I Management of the Fund ..................................... 1
Trustees/Officers .......................................... 1
Investment Adviser ......................................... 1
Administrator .............................................. 2
Custodian .................................................. 2
Shareholder Servicing Agent ................................ 2
Distributor ................................................ 2
II Principal Share Characteristics ............................ 2
Class A Shares ............................................. 2
Class B Shares, Class C Shares and Class I Shares .......... 2
Waiver of Sales Charges .................................... 3
Dealer Commissions and Concessions ......................... 3
General .................................................... 3
III Distribution Plan .......................................... 3
Features Common to Each Class of Shares .................... 3
Features Unique to Each Class of Shares .................... 4
IV Investment Techniques, Practices and Risks ................. 5
V Net Income and Distributions ............................... 5
Money Market Funds ......................................... 5
Other Funds ................................................ 5
VI Tax Considerations ......................................... 5
Taxation of the Fund ....................................... 5
Taxation of Shareholders ................................... 6
Special Rules for Municipal Fund Distributions ............. 7
VII Portfolio Transactions and Brokerage Commissions ........... 8
VIII Determination of Net Asset Value ........................... 9
Money Market Funds ......................................... 9
Other Funds ................................................ 10
IX Performance Information .................................... 10
Money Market Funds ......................................... 10
Other Funds ................................................ 11
General .................................................... 12
MFS Firsts ................................................. 12
X Shareholder Services ....................................... 13
Investment and Withdrawal Programs ......................... 13
Exchange Privilege ......................................... 15
Tax-Deferred Retirement Plans .............................. 16
XI Description of Shares, Voting Rights and Liabilities ....... 16
Appendix A -- Waivers of Sales Charges ..................... A-1
Appendix B -- Dealer Commissions and Concessions ........... B-1
Appendix C -- Investment Techniques, Practices and Risks ... C-1
Appendix D -- Description of Bond Ratings .................. D-1
<PAGE>
(I) MANAGEMENT OF THE FUND
TRUSTEES/OFFICERS
BOARD OVERSIGHT -- The Board of Trustees which oversees the Fund
provides broad supervision over the affairs of the Fund. The Adviser is
responsible for the investment management of the Fund's assets, and the
officers of the Trust are responsible for its operations.
TRUSTEE RETIREMENT PLAN -- The Trust has a retirement plan for Trustees
who are non-interested Trustees and Trustees who are not officers of the
Trust. Under this plan, a Trustee will retire upon reaching a specified
age (see Part I -- "Appendix B ") ("Retirement Age") and if the Trustee
has completed at least 5 years of service, he would be entitled to
annual payments during his lifetime of up to 50% of such Trustee's
average annual compensation (based on the three years prior to his
retirement) depending on his length of service. A Trustee may also
retire prior to his Retirement Age and receive reduced payments if he
has completed at least 5 years of service. Under the plan, a Trustee (or
his beneficiaries) will also receive benefits for a period of time in
the event the Trustee is disabled or dies. These benefits will also be
based on the Trustee's average annual compensation and length of
service. The Fund will accrue its allocable portion of compensation
expenses under the retirement plan each year to cover the current year's
service and amortize past service cost.
INDEMNIFICATION OF TRUSTEES AND OFFICERS -- The Declaration of Trust of
the Trust provides that the Trust will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with
litigation in which they may be involved because of their offices with
the Trust, unless, as to liabilities of the Trust or its shareholders,
it is determined that they engaged in willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in their
offices, or with respect to any matter, unless it is adjudicated that
they did not act in good faith in the reasonable belief that their
actions were in the best interest of the Trust. In the case of
settlement, such indemnification will not be provided unless it has been
determined pursuant to the Declaration of Trust, that they have not
engaged in willful misfeasance, bad faith, gross negligence or reckless
disregard of their duties.
INVESTMENT ADVISER
The Trust has retained Massachusetts Financial Services Company ("MFS"
or the "Adviser") as the Fund's investment adviser. MFS and its
predecessor organizations have a history of money management dating from
1924. MFS is a subsidiary of Sun Life of Canada (U.S.) Financial
Services Holdings, Inc., which in turn is an indirect wholly owned
subsidiary of Sun Life of Canada (an insurance company).
MFS has retained, on behalf of certain MFS Funds, sub-investment
advisers to assist MFS in the management of the Fund's assets. A
description of these sub-advisers, the services they provide and their
compensation is provided under the caption "Management of the Fund --
Sub-Adviser" in Part I of this SAI for Funds which use sub-advisers.
INVESTMENT ADVISORY AGREEMENT -- The Adviser manages the Fund pursuant
to an Investment Advisory Agreement (the "Advisory Agreement"). Under
the Advisory Agreement, the Adviser provides the Fund with overall
investment advisory services. Subject to such policies as the Trustees
may determine, the Adviser makes investment decisions for the Fund. For
these services and facilities, the Adviser receives an annual management
fee, computed and paid monthly, as disclosed in the Prospectus under the
heading "Management of the Fund[s]."
The Adviser pays the compensation of the Trust's officers and of any
Trustee who is an officer of the Adviser. The Adviser also furnishes at
its own expense all necessary administrative services, including office
space, equipment, clerical personnel, investment advisory facilities,
and all executive and supervisory personnel necessary for managing the
Fund's investments and effecting its portfolio transactions.
The Trust pays the compensation of the Trustees who are not officers
of MFS and all expenses of the Fund (other than those assumed by MFS)
including but not limited to: advisory and administrative services;
governmental fees; interest charges; taxes; membership dues in the
Investment Company Institute allocable to the Fund; fees and expenses of
independent auditors, of legal counsel, and of any transfer agent,
registrar or dividend disbursing agent of the Fund; expenses of
repurchasing and redeeming shares and servicing shareholder accounts;
expenses of preparing, printing and mailing prospectuses, periodic
reports, notices and proxy statements to shareholders and to
governmental officers and commissions; brokerage and other expenses
connected with the execution, recording and settlement of portfolio
security transactions; insurance premiums; fees and expenses of State
Street Bank and Trust Company, the Fund's custodian, for all services to
the Fund, including safekeeping of funds and securities and maintaining
required books and accounts; expenses of calculating the net asset value
of shares of the Fund; and expenses of shareholder meetings. Expenses
relating to the issuance, registration and qualification of shares of
the Fund and the preparation, printing and mailing of prospectuses are
borne by the Fund except that the Distribution Agreement with MFD
requires MFD to pay for prospectuses that are to be used for sales
purposes. Expenses of the Trust which are not attributable to a specific
series are allocated between the series in a manner believed by
management of the Trust to be fair and equitable.
The Advisory Agreement has an initial two year term and continues in
effect thereafter only if such continuance is specifically approved at
least annually by the Board of Trustees or by vote of a majority of the
Fund's shares (as defined in "Investment Restrictions" in Part I of this
SAI) and, in either case, by a majority of the Trustees who are not
parties to the Advisory Agreement or interested persons of any such
party. The Advisory Agreement terminates automatically if it is assigned
and may be terminated without penalty by vote of a majority of the
Fund's shares (as defined in "Investment Restrictions" in Part I of this
SAI), or by either party on not more than 60 days" nor less than 30
days" written notice. The Advisory Agreement provides that if MFS ceases
to serve as the Adviser to the Fund, the Fund will change its name so as
to delete the initials "MFS" and that MFS may render services to others
and may permit other fund clients to use the initials "MFS" in their
names. The Advisory Agreement also provides that neither the Adviser nor
its personnel shall be liable for any error of judgment or mistake of
law or for any loss arising out of any investment or for any act or
omission in the execution and management of the Fund, except for willful
misfeasance, bad faith or gross negligence in the performance of its or
their duties or by reason of reckless disregard of its or their
obligations and duties under the Advisory Agreement.
ADMINISTRATOR
MFS provides the Fund with certain financial, legal, compliance,
shareholder communications and other administrative services pursuant to
a Master Administrative Services Agreement. Under this Agreement, the
Fund pays MFS an administrative fee up to 0.015% per annum of the Fund's
average daily net assets. This fee reimburses MFS for a portion of the
costs it incurs to provide such services.
CUSTODIAN
State Street Bank and Trust Company (the "Custodian") is the custodian
of the Fund's assets. The Custodian's responsibilities include
safekeeping and controlling the Fund's cash and securities, handling the
receipt and delivery of securities, determining income and collecting
interest and dividends on the Fund's investments, maintaining books of
original entry for portfolio and fund accounting and other required
books and accounts, and calculating the daily net asset value of each
class of shares of the Fund. The Custodian does not determine the
investment policies of the Fund or decide which securities the Fund will
buy or sell. The Fund may, however, invest in securities of the
Custodian and may deal with the Custodian as principal in securities
transactions. The Custodian also acts as the dividend disbursing agent
of the Fund.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of MFS, is
the Fund's shareholder servicing agent, pursuant to an Amended and
Restated Shareholder Servicing Agreement (the "Agency Agreement"). The
Shareholder Servicing Agent's responsibilities under the Agency
Agreement include administering and performing transfer agent functions
and the keeping of records in connection with the issuance, transfer and
redemption of each class of shares of the Fund. For these services, MFSC
will receive a fee calculated as a percentage of the average daily net
assets of the Fund at an effective annual rate of up to 0.1125%. In
addition, MFSC will be reimbursed by the Fund for certain expenses
incurred by MFSC on behalf of the Fund. The Custodian has contracted
with MFSC to perform certain dividend disbursing agent functions for the
Fund.
DISTRIBUTOR
MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary of MFS,
serves as distributor for the continuous offering of shares of the Fund
pursuant to an Amended and Restated Distribution Agreement (the
"Distribution Agreement"). The Distribution Agreement has an initial two
year term and continues in effect thereafter only if such continuance is
specifically approved at least annually by the Board of Trustees or by
vote of a majority of the Fund's shares (as defined in "Investment
Restrictions" in Part I of this SAI) and in either case, by a majority
of the Trustees who are not parties to the Distribution Agreement or
interested persons of any such party. The Distribution Agreement
terminates automatically if it is assigned and may be terminated without
penalty by either party on not more than 60 days' nor less than 30 days'
notice.
(II) PRINCIPAL SHARE CHARACTERISTICS
Set forth below is a description of Class A, B, C and I shares offered
by the MFS Family of Funds. Some MFS Funds may not offer each class of
shares -- see the Prospectus of the Fund to determine which classes of
shares the Fund offers.
CLASS A SHARES
MFD acts as agent in selling Class A shares of the Fund to dealers. The
public offering price of Class A shares of the Fund is their net asset
value next computed after the sale plus a sales charge which varies
based upon the quantity purchased. The public offering price of a Class
A share of the Fund is calculated by dividing the net asset value of a
Class A share by the difference (expressed as a decimal) between 100%
and the sales charge percentage of offering price applicable to the
purchase (see "How to Purchase, Exchange and Redeem Shares" in the
Prospectus). The sales charge scale set forth in the Prospectus applies
to purchases of Class A shares of the Fund alone or in combination with
shares of all classes of certain other funds in the MFS Family of Funds
and other funds (as noted under Right of Accumulation) by any person,
including members of a family unit (e.g., husband, wife and minor
children) and bona fide trustees, and also applies to purchases made
under the Right of Accumulation or a Letter of Intent (see "Investment
and Withdrawal Programs" below). A group might qualify to obtain
quantity sales charge discounts (see "Investment and Withdrawal
Programs" below). Certain purchases of Class A shares may be subject to
a 1% CDSC instead of an initial sales charge, as described in the Fund's
Prospectus.
CLASS B SHARES, CLASS C SHARES AND CLASS I SHARES
MFD acts as agent in selling Class B, Class C and Class I shares of the
Fund. The public offering price of Class B, Class C and Class I shares
is their net asset value next computed after the sale. Class B and C
shares are generally subject to a CDSC, as described in the Fund's
Prospectus.
WAIVER OF SALES CHARGES
In certain circumstances, the initial sales charge imposed upon
purchases of Class A shares and the CDSC imposed upon redemptions of
Class A, B and C shares are waived. These circumstances are described in
Appendix A of this Part II. Such sales are made without a sales charge
to promote good will with employees and others with whom MFS, MFD and/or
the Fund have business relationships, because the sales effort, if any,
involved in making such sales is negligible, or in the case of certain
CDSC waivers, because the circumstances surrounding the redemption of
Fund shares were not foreseeable or voluntary.
DEALER COMMISSIONS AND CONCESSIONS
MFD pays commission and provides concessions to dealers that sell Fund
shares. These dealer commissions and concession are described in
Appendix B of this Part II.
GENERAL
Neither MFD nor dealers are permitted to delay placing orders to benefit
themselves by a price change. On occasion, MFD may obtain brokers loans
from various banks, including the custodian banks for the MFS Funds, to
facilitate the settlement of sales of shares of the Fund to dealers. MFD
may benefit from its temporary holding of funds paid to it by investment
dealers for the purchase of Fund shares.
(III) DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class A, Class B and
Class C shares (the "Distribution Plan") pursuant to Section 12(b) of
the 1940 Act and Rule 12b-1 thereunder (the "Rule") after having
concluded that there is a reasonable likelihood that the Distribution
Plan would benefit the Fund and each respective class of shareholders.
The provisions of the Distribution Plan are severable with respect to
each Class of shares offered by the Fund. The Distribution Plan is
designed to promote sales, thereby increasing the net assets of the
Fund. Such an increase may reduce the expense ratio to the extent the
Fund's fixed costs are spread over a larger net asset base. Also, an
increase in net assets may lessen the adverse effect that could result
were the Fund required to liquidate portfolio securities to meet
redemptions. There is, however, no assurance that the net assets of the
Fund will increase or that the other benefits referred to above will be
realized.
In certain circumstances, the fees described below may not be imposed,
are being waived or do not apply to certain MFS Funds. Current
distribution and service fees for each Fund are reflected under the
caption "Expense Summary" in the Prospectus.
FEATURES COMMON TO EACH CLASS OF SHARES
There are features of the Distribution Plan that are common to each
Class of shares, as described below.
SERVICE FEES -- The Distribution Plan provides that the Fund may pay MFD
a service fee of up to 0.25% of the average daily net assets
attributable to the class of shares to which the Distribution Plan
relates (i.e., Class A, Class B or Class C shares, as appropriate) (the
"Designated Class") annually in order that MFD may pay expenses on
behalf of the Fund relating to the servicing of shares of the Designated
Class. The service fee is used by MFD to compensate dealers which enter
into a sales agreement with MFD in consideration for all personal
services and/or account maintenance services rendered by the dealer with
respect to shares of the Designated Class owned by investors for whom
such dealer is the dealer or holder of record. MFD may from time to time
reduce the amount of the service fees paid for shares sold prior to a
certain date. Service fees may be reduced for a dealer that is the
holder or dealer of record for an investor who owns shares of the Fund
having an aggregate net asset value at or above a certain dollar level.
Dealers may from time to time be required to meet certain criteria in
order to receive service fees. MFD or its affiliates are entitled to
retain all service fees payable under the Distribution Plan for which
there is no dealer of record or for which qualification standards have
not been met as partial consideration for personal services and/or
account maintenance services performed by MFD or its affiliates to
shareholder accounts.
DISTRIBUTION FEES -- The Distribution Plan provides that the Fund may
pay MFD a distribution fee in addition to the service fee described
above based on the average daily net assets attributable to the
Designated Class as partial consideration for distribution services
performed and expenses incurred in the performance of MFD's obligations
under its distribution agreement with the Fund. MFD pays commissions to
dealers as well as expenses of printing prospectuses and reports used
for sales purposes, expenses with respect to the preparation and
printing of sales literature and other distribution related expenses,
including, without limitation, the cost necessary to provide
distribution-related services, or personnel, travel, office expense and
equipment. The amount of the distribution fee paid by the Fund with
respect to each class differs under the Distribution Plan, as does the
use by MFD of such distribution fees. Such amounts and uses are
described below in the discussion of the provisions of the Distribution
Plan relating to each Class of shares. While the amount of compensation
received by MFD in the form of distribution fees during any year may be
more or less than the expenses incurred by MFD under its distribution
agreement with the Fund, the Fund is not liable to MFD for any losses
MFD may incur in performing services under its distribution agreement
with the Fund.
OTHER COMMON FEATURES -- Fees payable under the Distribution Plan are
charged to, and therefore reduce, income allocated to shares of the
Designated Class. The provisions of the Distribution Plan relating to
operating policies as well as initial approval, renewal, amendment and
termination are substantially identical as they relate to each Class of
shares covered by the Distribution Plan.
The Distribution Plan remains in effect from year to year only if its
continuance is specifically approved at least annually by vote of both
the Trustees and a majority of the Trustees who are not "interested
persons" or financially interested parties of such Plan ("Distribution
Plan Qualified Trustees"). The Distribution Plan also requires that the
Fund and MFD each shall provide the Trustees, and the Trustees shall
review, at least quarterly, a written report of the amounts expended
(and purposes therefor) under such Plan. The Distribution Plan may be
terminated at any time by vote of a majority of the Distribution Plan
Qualified Trustees or by vote of the holders of a majority of the
respective class of the Fund's shares (as defined in "Investment
Restrictions" in Part I of this SAI). All agreements relating to the
Distribution Plan entered into between the Fund or MFD and other
organizations must be approved by the Board of Trustees, including a
majority of the Distribution Plan Qualified Trustees. Agreements under
the Distribution Plan must be in writing, will be terminated
automatically if assigned, and may be terminated at any time without
payment of any penalty, by vote of a majority of the Distribution Plan
Qualified Trustees or by vote of the holders of a majority of the
respective class of the Fund's shares. The Distribution Plan may not be
amended to increase materially the amount of permitted distribution
expenses without the approval of a majority of the respective class of
the Fund's shares (as defined in "Investment Restrictions" in Part I of
this SAI) or may not be materially amended in any case without a vote of
the Trustees and a majority of the Distribution Plan Qualified Trustees.
The selection and nomination of Distribution Plan Qualified Trustees
shall be committed to the discretion of the non-interested Trustees then
in office. No Trustee who is not an "interested person" has any
financial interest in the Distribution Plan or in any related agreement.
FEATURES UNIQUE TO EACH CLASS OF SHARES
There are certain features of the Distribution Plan that are unique to
each class of shares, as described below.
CLASS A SHARES -- Class A shares are generally offered pursuant to an
initial sales charge, a substantial portion of which is paid to or
retained by the dealer making the sale (the remainder of which is paid
to MFD). In addition to the initial sales charge, the dealer also
generally receives the ongoing 0.25% per annum service fee, as discussed
above.
No service fees will be paid: (i) to any dealer who is the holder or
dealer or record for investors who own Class A shares having an
aggregate net asset value less than $750,000, or such other amount as
may be determined from time to time by MFD (MFD, however, may waive this
minimum amount requirement from time to time); or (ii) to any insurance
company which has entered into an agreement with the Fund and MFD that
permits such insurance company to purchase Class A shares from the Fund
at their net asset value in connection with annuity agreements issued in
connection with the insurance company's separate accounts.
The distribution fee paid to MFD under the Distribution Plan is equal,
on an annual basis, to 0.10% of the Fund's average daily net assets
attributable to Class A shares (0.25% per annum for certain Funds). As
noted above, MFD may use the distribution fee to cover distribution-
related expenses incurred by it under its distribution agreement with
the Fund, including commissions to dealers and payments to wholesalers
employed by MFD (e.g., MFD pays commissions to dealers with respect to
purchases of $1 million or more and purchases by certain retirement
plans of Class A shares which are sold at net asset value but which are
subject to a 1% CDSC for one year after purchase). In addition, to the
extent that the aggregate service and distribution fees paid under the
Distribution Plan do not exceed 0.35% per annum of the average daily net
assets of the Fund attributable to Class A shares (0.50% per annum for
certain Funds), the Fund is permitted to pay such distribution-related
expenses or other distribution-related expenses.
CLASS B SHARES -- Class B shares are offered at net asset value without
an initial sales charge but subject to a CDSC. MFD will advance to
dealers the first year service fee described above at a rate equal to
0.25% of the purchase price of such shares and, as compensation
therefor, MFD may retain the service fee paid by the Fund with respect
to such shares for the first year after purchase. Dealers will become
eligible to receive the ongoing 0.25% per annum service fee with respect
to such shares commencing in the thirteenth month following purchase.
Except in the case of the first year service fee, no service fees will
be paid to any securities dealer who is the holder or dealer of record
for investors who own Class B shares having an aggregate net asset value
of less than $750,000 or such other amount as may be determined by MFD
from time to time. MFD, however, may waive this minimum amount
requirement from time to time.
Under the Distribution Plan, the Fund pays MFD a distribution fee
equal, on an annual basis, to 0.75% of the Fund's average daily net
assets attributable to Class B shares. As noted above, this distribution
fee may be used by MFD to cover its distribution-related expenses under
its distribution agreement with the Fund (including the 3.75% commission
it pays to dealers upon purchase of Class B shares).
CLASS C SHARES -- Class C shares are offered at net asset value
without an initial sales charge but subject to a CDSC of 1.00% upon
redemption during the first year. MFD will pay a commission to dealers
of 1.00% of the purchase price of Class C shares purchased through
dealers at the time of purchase. In compensation for this 1.00%
commission paid by MFD to dealers, MFD will retain the 1.00% per annum
Class C distribution and service fees paid by the Fund with respect to
such shares for the first year after purchase, and dealers will become
eligible to receive from MFD the ongoing 1.00% per annum distribution
and service fees paid by the Fund to MFD with respect to such shares
commencing in the thirteenth month following purchase.
This ongoing 1.00% fee is comprised of the 0.25% per annum service fee
paid to MFD under the Distribution Plan (which MFD in turn pays to
dealers), as discussed above, and a distribution fee paid to MFD (which
MFD also in turn pays to dealers) under the Distribution Plan, equal, on
an annual basis, to 0.75% of the Fund's average daily net assets
attributable to Class C shares.
(IV) INVESTMENT TECHNIQUES, PRACTICES AND RISKS
Set forth in Appendix C of this Part II is a description of investment
techniques and practices which the MFS Funds may generally use in
pursuing their investment objectives and principal investment policies,
and the risks associated with these investment techniques and practices.
The Fund will engage only in certain of these investment techniques and
practices, as identified in Part I. Investment practices and techniques
that are not identified in Part I do not apply to the Fund.
(V) NET INCOME AND DISTRIBUTIONS
MONEY MARKET FUNDS
The net income attributable to each MFS Fund that is a money market
fund is determined each day during which the New York Stock Exchange is
open for trading (see "Determination of Net Asset Value" below for a
list of days the Exchange is closed).
For this purpose, the net income attributable to shares of a money
market fund (from the time of the immediately preceding determination
thereof) shall consist of (i) all interest income accrued on the
portfolio assets of the money market fund, (ii) less all actual and
accrued expenses of the money market fund determined in accordance with
generally accepted accounting principles, and (iii) plus or minus net
realized gains and losses and net unrealized appreciation or
depreciation on the assets of the money market fund, if any. Interest
income shall include discount earned (including both original issue and
market discount) on discount paper accrued ratably to the date of
maturity.
Since the net income is declared as a dividend each time the net
income is determined, the net asset value per share (i.e., the value of
the net assets of the money market fund divided by the number of shares
outstanding) remains at $1.00 per share immediately after each such
determination and dividend declaration. Any increase in the value of a
shareholder's investment, representing the reinvestment of dividend
income, is reflected by an increase in the number of shares in the
shareholder's account.
It is expected that the shares of the money market fund will have a
positive net income at the time of each determination thereof. If for
any reason the net income determined at any time is a negative amount,
which could occur, for instance, upon default by an issuer of a
portfolio security, the money market fund would first offset the
negative amount with respect to each shareholder account from the
dividends declared during the month with respect to each such account.
If and to the extent that such negative amounts exceeds such declared
dividends at the end of the month (or during the month in the case of an
account liquidated in its entirety), the money market fund could reduce
the number of its outstanding shares by treating each shareholder of the
money market fund as having contributed to its capital that number of
full and fractional shares of the money market fund in the account of
such shareholder which represents its proportion of such excess. Each
shareholder of the money market fund will be deemed to have agreed to
such contribution in these circumstances by its investment in the money
market fund. This procedure would permit the net asset value per share
of the money market fund to be maintained at a constant $1.00 per share.
OTHER FUNDS
Each MFS Fund other than the MFS money market funds intends to
distribute to its shareholders dividends equal to all of its net
investment income with such frequency as is disclosed in the Fund's
prospectus. These Funds' net investment income consists of non-capital
gain income less expenses. In addition, these Funds intend to distribute
net realized short- and long-term capital gains, if any, at least
annually. Shareholders will be informed of the tax consequences of such
distributions, including whether any portion represents a return of
capital, after the end of each calendar year.
(VI) TAX CONSIDERATIONS
The following discussion is a brief summary of some of the important
federal (and, where noted, state) income tax consequences affecting the
Fund and its shareholders. The discussion is very general, and therefore
prospective investors are urged to consult their tax advisors about the
impact an investment in the Fund may have on their own federal, state
and local taxes.
TAXATION OF THE FUND
FEDERAL TAXES -- The Fund (even if it is a fund in a Trust with
multiple series) is treated as a separate entity for federal income tax
purposes under the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund has elected (or in the case of a new Fund, intends to
elect) to be, and intends to qualify to be treated each year as, a
"regulated investment company" under Subchapter M of the Code by meeting
all applicable requirements of Subchapter M, including requirements as
to the nature of the Fund's gross income, the amount of its
distributions (as a percentage of both its overall income and any
tax-exempt income), and the composition of its portfolio assets. As a
regulated investment company, the fund will not be subject to any
federal income or excise taxes on its net investment income and net
realized capital gains that it distributes to shareholders in accordance
with the timing requirements imposed by the Code. The Fund's
foreign-source income, if any, may be subject to foreign withholding
taxes. If the Fund failed to qualify as a "regulated investment company"
in any year, it would incur regular federal corporate income tax on all
of its taxable income, whether or not distributed, and Fund
distributions would generally be taxable as ordinary dividend income to
the shareholders.
MASSACHUSETTS TAXES -- As long as it qualifies as a regulated
investment company under the Code, the Fund will not be required to pay
Massachusetts income or excise taxes.
TAXATION OF SHAREHOLDERS
TAX TREATMENT OF DISTRIBUTIONS -- Subject to the special rules
discussed below for Municipal Funds, shareholders of the Fund normally
will have to pay federal income tax and any state or local income taxes
on the dividends and capital gain distributions they receive from the
Fund. Any distributions from ordinary income and from net short-term
capital gains are taxable to shareholders as ordinary income for federal
income tax purposes whether paid in cash or reinvested in additional
shares. Distributions of net capital gain (i.e., the excess of net
long-term capital gain over net short-term capital loss), whether paid
in cash or reinvested in additional shares, are taxable to shareholders
as long-term capital gains for federal income tax purposes without
regard to the length of time the shareholders have held their shares.
Any Fund dividend that is declared in October, November, or December of
any calendar year, payable to shareholders of record in such a month,
and paid during the following January will be treated as if received by
the shareholders on December 31 of the year in which the dividend is
declared. The Fund will notify shareholders regarding the federal tax
status of its distributions after the end of each calendar year.
Any Fund distribution, other than dividends that are declared by the
fund on a daily basis will have the effect of reducing the per share net
asset value of Fund shares by the amount of the distribution.
Shareholders purchasing shares shortly before the record date of any
distribution (other than an exempt-interest dividend) may thus pay the
full price for the shares and then effectively receive a portion of the
purchase price back as a taxable distribution.
DIVIDENDS-RECEIVED DEDUCTION -- If the Fund receives dividend income
from U.S. corporations, a portion of the Fund's ordinary income
dividends is normally eligible for the dividends-received deduction for
corporations if the recipient otherwise qualifies for that deduction
with respect to its holding of Fund shares. Availability of the
deduction for particular corporate shareholders is subject to certain
limitations, and deducted amounts may be subject to the alternative
minimum tax or result in certain basis adjustments.
DISPOSITION OF SHARES -- In general, any gain or loss realized upon a
disposition of Fund shares by a shareholder that holds such shares as a
capital asset will be treated as a long-term capital gain or loss if the
shares have been held for more than twelve months and otherwise as a
short-term capital gain or loss. However, any loss realized upon a
disposition of Fund shares held for six months or less will be treated
as a long-term capital loss to the extent of any distributions of net
capital gain made with respect to those shares. Any loss realized upon a
disposition of shares may also be disallowed under rules relating to
"wash sales." Gain may be increased (or loss reduced) upon a redemption
of Class A Fund shares held for 90 days or less followed by any purchase
(including purchases by exchange or by reinvestment) without payment of
an additional sales charge of Class A shares of the Fund or of any other
shares of an MFS Fund generally sold subject to a sales charge.
DISTRIBUTION/ACCOUNTING POLICIES -- The Fund's current distribution
and accounting policies will affect the amount, timing, and character of
distributions to shareholders and may, under certain circumstances, make
an economic return of capital taxable to shareholders.
FOREIGN INCOME TAXES -- Investment income received by the Fund and
gains with respect to foreign securities may be subject to foreign
income taxes withheld at the source. The United States has entered into
tax treaties with many foreign countries that may entitle the Fund to a
reduced rate of tax or an exemption from tax on such income; the Fund
intends to qualify for treaty reduced rates where available. It is not
possible, however, to determine the Fund's effective rate of foreign tax
in advance, since the amount of the Fund's assets to be invested within
various countries is not known.
If the Fund holds more than 50% of its assets in foreign stock and
securities at the close of its taxable year, it may elect to "pass
through" to its shareholders foreign income taxes paid by it. If the
Fund so elects, shareholders will be required to treat their pro rata
portions of the foreign income taxes paid by the Fund as part of the
amounts distributed to them by it and thus includable in their gross
income for federal income tax purposes. Shareholders who itemize
deductions would then be allowed to claim a deduction or credit (but not
both) on their federal income tax returns for such amounts, subject to
certain limitations. Shareholders who do not itemize deductions would
(subject to such limitations) be able to claim a credit but not a
deduction. No deduction will be permitted to individuals in computing
their alternative minimum tax liability. If the Fund is not eligible, or
does not elect, to "pass through" to its shareholders foreign income
taxes it has paid, shareholders will not be able to claim any deduction
or credit for any part of the foreign taxes paid by the Fund.
U.S. TAXATION OF NON-U.S. PERSONS -- Dividends and certain other
payments (but not including distributions of net capital gains) to
persons who are not citizens or residents of the United States or U.S.
entities ("Non-U.S. Persons") are generally subject to U.S. tax
withholding at the rate of 30%. The Fund intends to withhold at that
rate on taxable dividends and other payments to Non-U.S. Persons that
are subject to such withholding. The Fund may withhold at a lower rate
permitted by an applicable treaty if the shareholder provides the
documentation required by the Fund. Any amounts overwithheld may be
recovered by such persons by filing a claim for refund with the U.S.
Internal Revenue Service within the time period appropriate to such
claims.
BACKUP WITHHOLDING -- The Fund is also required in certain
circumstances to apply backup withholding at the rate of 31% on taxable
dividends and capital gain distributions (and redemption proceeds, if
applicable) paid to any non-corporate shareholder (including a Non-U.S.
Person) who does not furnish to the Fund certain information and
certifications or who is otherwise subject to backup withholding. Backup
withholding will not, however, be applied to payments that have been
subject to 30% withholding.
FOREIGN INCOME TAXATION OF NON-U.S. PERSONS -- Distributions received
from the Fund by Non-U.S. Persons may also be subject to tax under the
laws of their own jurisdictions.
STATE AND LOCAL INCOME TAXES: U.S. GOVERNMENT SECURITIES -- Dividends
paid by the Fund that are derived from interest on obligations of the
U.S. Government and certain of its agencies and instrumentalities (but
generally not distributions of capital gains realized upon the
disposition of such obligations) may be exempt from state and local
income taxes. The Fund generally intends to advise shareholders of the
extent to which its dividends consist of such interest. Shareholders are
urged to consult their tax advisors regarding the possible exclusion of
such portion of their dividends for state and local income tax purposes.
CERTAIN SPECIFIC INVESTMENTS -- Any investment in zero coupon bonds,
deferred interest bonds, payment-in-kind bonds, certain stripped
securities, and certain securities purchased at a market discount will
cause the Fund to recognize income prior to the receipt of cash payments
with respect to those securities. To distribute this income (as well as
non-cash income described in the next two paragraphs) and avoid a tax on
the Fund, the Fund may be required to liquidate portfolio securities
that it might otherwise have continued to hold, potentially resulting in
additional taxable gain or loss to the Fund. Any investment in residual
interests of a CMO that has elected to be treated as a real estate
mortgage investment conduit, or "REMIC," can create complex tax
problems, especially if the Fund has state or local governments or other
tax-exempt organizations as shareholders.
OPTIONS, FUTURES CONTRACTS, AND FORWARD CONTRACTS -- The Fund's
transactions in options, Futures Contracts, Forward Contracts, short
sales "against the box," and swaps and related transactions will be
subject to special tax rules that may affect the amount, timing, and
character of Fund income and distributions to shareholders. For example,
certain positions held by the Fund on the last business day of each
taxable year will be marked to market (i.e., treated as if closed out)
on that day, and any gain or loss associated with the positions will be
treated as 60% long-term and 40% short-term capital gain or loss.
Certain positions held by the Fund that substantially diminish its risk
of loss with respect to other positions in its portfolio may constitute
"straddles," and may be subject to special tax rules that would cause
deferral of Fund losses, adjustments in the holding periods of Fund
securities, and conversion of short-term into long-term capital losses.
Certain tax elections exist for straddles that may alter the effects of
these rules. The Fund will limit its activities in options, Futures
Contracts, Forward Contracts short sales "against the box" and swaps and
related transactions to the extent necessary to meet the requirements of
Subchapter M of the Code.
FOREIGN INVESTMENTS -- Special tax considerations apply with respect
to foreign investments by the Fund. Foreign exchange gains and losses
realized by the Fund may be treated as ordinary income and loss. Use of
foreign currencies for non-hedging purposes and investment by the Fund
in certain "passive foreign investment companies" may be limited in
order to avoid a tax on the Fund. The Fund may elect to mark to market
any investments in "passive foreign investment companies" on the last
day of each year. This election may cause the Fund to recognize income
prior to the receipt of cash payments with respect to those investments;
in order to distribute this income and avoid a tax on the Fund, the Fund
may be required to liquidate portfolio securities that it might
otherwise have continued to hold, potentially resulting in additional
taxable gain or loss to the fund.
SPECIAL RULES FOR MUNICIPAL FUND DISTRIBUTIONS
The following special rules apply to shareholders of funds whose
objective is to invest primarily in obligations that pay interest that
is exempt from federal income tax ("Municipal Funds").
TAX EXEMPT DISTRIBUTIONS -- The portion of a Municipal Fund's
distributions of net investment income that is attributable to interest
from tax-exempt securities will be designated by the Fund as an "exempt-
interest dividend" under the Code and will generally be exempt from
federal income tax in the hands of shareholders so long as at least 50%
of the total value of the Fund's assets consists of tax-exempt
securities at the close of each quarter of the Fund's taxable year.
Distributions of tax-exempt interest earned from certain securities may,
however, be treated as an item of tax preference for shareholders under
the federal alternative minimum tax, and all exempt-interest dividends
may increase a corporate shareholder's alternative minimum tax. Except
when the Fund provides actual monthly percentage breakdowns, the
percentage of income designated as tax-exempt will be applied uniformly
to all distributions by the Fund of net investment income made during
each fiscal year of the Fund and may differ from the percentage of
distributions consisting of tax-exempt interest in any particular
month. Shareholders are required to report exempt-interest dividends
received from the Fund on their federal income tax returns.
TAXABLE DISTRIBUTIONS -- A Municipal Fund may also earn some income
that is taxable (including interest from any obligations that lose their
federal tax exemption) and may recognize capital gains and losses as a
result of the disposition of securities and from certain options and
futures transactions. Shareholders normally will have to pay federal
income tax on the non-exempt-interest dividends and capital gain
distributions they receive from the Fund, whether paid in cash or
reinvested in additional shares. However, the Fund does not expect that
the non-tax-exempt portion of its net investment income, if any, will be
substantial. Because the Fund expects to earn primarily tax-exempt
interest income, it is expected that no Fund dividends will qualify for
the dividends-received deduction for corporations.
CONSEQUENCES OF DISTRIBUTIONS BY A MUNICIPAL FUND: EFFECT OF ACCRUED
TAX-EXEMPT INCOME -- Shareholders redeeming shares after tax-exempt
income has been accrued but not yet declared as a dividend should be
aware that a portion of the proceeds realized upon redemption of the
shares will reflect the existence of such accrued tax-exempt income and
that this portion will be subject to tax as a capital gain even though
it would have been tax-exempt had it been declared as a dividend prior
to the redemption. For this reason, if a shareholder wishes to redeem
shares of a Municipal Fund that does not declare dividends on a daily
basis, the shareholder may wish to consider whether he or she could
obtain a better tax result by redeeming immediately after the Fund
declares dividends representing substantially all the ordinary income
(including tax-exempt income) accrued for that month.
CERTAIN ADDITIONAL INFORMATION FOR MUNICIPAL FUND SHAREHOLDERS --
Interest on indebtedness incurred by shareholders to purchase or carry
Fund shares will not be deductible for federal income tax purposes.
Exempt-interest dividends are taken into account in calculating the
amount of social security and railroad retirement benefits that may be
subject to federal income tax. Entities or persons who are "substantial
users" (or persons related to "substantial users") of facilities
financed by private activity bonds should consult their tax advisors
before purchasing Fund shares.
CONSEQUENCES OF REDEMPTION OF SHARES -- Any loss realized on a
redemption of Municipal Fund shares held for six months or less will be
disallowed to the extent of any exempt-interest dividends received with
respect to those shares. If not disallowed, any such loss will be
treated as a long-term capital loss to the extent of any distributions
of net capital gain made with respect to those shares.
STATE AND LOCAL INCOME TAXES: MUNICIPAL OBLIGATIONS -- The exemption
of exempt-interest dividends for federal income tax purposes does not
necessarily result in exemption under the income tax laws of any state
or local taxing authority. Some states do exempt from tax that portion
of an exempt-interest dividend that represents interest received by a
regulated investment company on its holdings of securities issued by
that state and its political subdivisions and instrumentalities.
Therefore, the Fund will report annually to its shareholders the
percentage of interest income earned by it during the preceding year on
Municipal Bonds and will indicate, on a state-by-state basis only, the
source of such income.
(VII) PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are
made by persons affiliated with the Adviser. Any such person may serve
other clients of the Adviser, or any subsidiary of the Adviser in a
similar capacity. Changes in the Fund's investments are reviewed by the
Trust's Board of Trustees.
The primary consideration in placing portfolio security transactions
is execution at the most favorable prices. The Adviser has complete
freedom as to the markets in and broker-dealers through which it seeks
this result. In the U.S. and in some other countries debt securities are
traded principally in the over-the-counter market on a net basis through
dealers acting for their own account and not as brokers. In other
countries both debt and equity securities are traded on exchanges at
fixed commission rates. The cost of securities purchased from
underwriters includes an underwriter's commission or concession, and the
prices at which securities are purchased and sold from and to dealers
include a dealer's mark-up or mark-down. The Adviser normally seeks to
deal directly with the primary market makers or on major exchanges
unless, in its opinion, better prices are available elsewhere. Subject
to the requirement of seeking execution at the best available price,
securities may, as authorized by the Advisory Agreement, be bought from
or sold to dealers who have furnished statistical, research and other
information or services to the Adviser. At present no arrangements for
the recapture of commission payments are in effect.
Consistent with the foregoing primary consideration, the Conduct Rules
of the National Association of Securities Dealers, Inc. ("NASD") and
such other policies as the Trustees may determine, the Adviser may
consider sales of shares of the Fund and of the other investment company
clients of MFD as a factor in the selection of broker-dealers to execute
the Fund's portfolio transactions.
Under the Advisory Agreement and as permitted by Section 28(e) of the
Securities Exchange Act of 1934, the Adviser may cause the Fund to pay a
broker-dealer which provides brokerage and research services to the
Adviser, an amount of commission for effecting a securities transaction
for the Fund in excess of the amount other broker-dealers would have
charged for the transaction, if the Adviser determines in good faith
that the greater commission is reasonable in relation to the value of
the brokerage and research services provided by the executing
broker-dealer viewed in terms of either a particular transaction or
their respective overall responsibilities to the Fund or to their other
clients. Not all of such services are useful or of value in advising the
Fund.
The term "brokerage and research services" includes advice as to the
value of securities, the advisability of investing in, purchasing or
selling securities, and the availability of securities or of purchasers
or sellers of securities; furnishing analyses and reports concerning
issues, industries, securities, economic factors and trends, portfolio
strategy and the performance of accounts; and effecting securities
transactions and performing functions incidental thereto, such as
clearance and settlement.
Although commissions paid on every transaction will, in the judgment
of the Adviser, be reasonable in relation to the value of the brokerage
services provided, commissions exceeding those which another broker
might charge may be paid to broker-dealers who were selected to execute
transactions on behalf of the Fund and the Adviser's other clients in
part for providing advice as to the availability of securities or of
purchasers or sellers of securities and services in effecting securities
transactions and performing functions incidental thereto, such as
clearance and settlement.
Broker-dealers may be willing to furnish statistical, research and
other factual information or services ("Research") to the Adviser for no
consideration other than brokerage or underwriting commissions.
Securities may be bought or sold from time to time through such
broker-dealers, on behalf of the Fund. The Trustees (together with the
Trustees of the other MFS Family of Funds) have directed the Adviser to
allocate a total of $54,160 of commission business from the MFS Family
of Funds to the Pershing Division of Donaldson Lufkin & Jenrette as
consideration for the annual renewal of certain publications provided by
Lipper Analytical Securities Corporation (which provides information
useful to the Trustees in reviewing the relationship between the Fund
and the Adviser).
The Adviser's investment management personnel attempt to evaluate the
quality of Research provided by brokers. The Adviser sometimes uses
evaluations resulting from this effort as a consideration in the
selection of brokers to execute portfolio transactions.
The management fee of the Adviser will not be reduced as a consequence
of the Adviser's receipt of brokerage and research service. To the
extent the Fund's portfolio transactions are used to obtain brokerage
and research services, the brokerage commissions paid by the Fund will
exceed those that might otherwise be paid for such portfolio
transactions, or for such portfolio transactions and research, by an
amount which cannot be presently determined. Such services would be
useful and of value to the Adviser in serving both the Fund and other
clients and, conversely, such services obtained by the placement of
brokerage business of other clients would be useful to the Adviser in
carrying out its obligations to the Fund. While such services are not
expected to reduce the expenses of the Adviser, the Adviser would,
through use of the services, avoid the additional expenses which would
be incurred if it should attempt to develop comparable information
through its own staff.
In certain instances there may be securities which are suitable for
the Fund's portfolio as well as for that of one or more of the other
clients of the Adviser or any subsidiary of the Adviser. Investment
decisions for the Fund and for such other clients are made with a view
to achieving their respective investment objectives. It may develop that
a particular security is bought or sold for only one client even though
it might be held by, or bought or sold for, other clients. Likewise, a
particular security may be bought for one or more clients when one or
more other clients are selling that same security. Some simultaneous
transactions are inevitable when several clients receive investment
advice from the same investment adviser, particularly when the same
security is suitable for the investment objectives of more than one
client. When two or more clients are simultaneously engaged in the
purchase or sale of the same security, the securities are allocated
among clients in a manner believed by the adviser to be equitable to
each. It is recognized that in some cases this system could have a
detrimental effect on the price or volume of the security as far as the
Fund is concerned. In other cases, however, the Fund believes that its
ability to participate in volume transactions will produce better
executions for the Fund.
(VIII) DETERMINATION OF NET ASSET VALUE
The net asset value per share of each class of the Fund is determined
each day during which the New York Stock Exchange is open for trading.
(As of the date of this SAI, the Exchange is open for trading every
weekday except for the following holidays (or the days on which they are
observed): New Year's Day; Martin Luther King Day; Presidents' Day; Good
Friday; Memorial Day; Independence Day; Labor Day; Thanksgiving Day and
Christmas Day.) This determination is made once each day as of the close
of regular trading on the Exchange by deducting the amount of the
liabilities attributable to the class from the value of the assets
attributable to the class and dividing the difference by the number of
shares of the class outstanding.
MONEY MARKET FUNDS
Portfolio securities of each MFS Fund that is a money market fund are
valued at amortized cost, which the Board of Trustees which oversees the
money market fund has determined in good faith constitutes fair value
for the purposes of complying with the 1940 Act. This valuation method
will continue to be used until such time as the Board of Trustees
determines that it does not constitute fair value for such purposes.
Each money market fund will limit its portfolio to those investments in
U.S. dollar-denominated instruments which its Board of Trustees
determines present minimal credit risks, and which are of high quality
as determined by any major rating service or, in the case of any
instrument that is not so rated, of comparable quality as determined by
the Board of Trustees. Each money market fund has also agreed to
maintain a dollar-weighted average maturity of 90 days or less and to
invest only in securities maturing in 13 months or less. The Board of
Trustees which oversee each money market fund has established procedures
designed to stabilize its net asset value per share, as computed for the
purposes of sales and redemptions, at $1.00 per share. If the Board
determines that a deviation from the $1.00 per share price may exist
which may result in a material dilution or other unfair result to
investors or existing shareholders, it will take corrective action it
regards as necessary and appropriate, which action could include the
sale of instruments prior to maturity (to realize capital gains or
losses); shortening average portfolio maturity; withholding dividends;
or using market quotations for valuation purposes.
OTHER FUNDS
The following valuation techniques apply to each MFS Fund that is not
a money market fund.
Equity securities in the Fund's portfolio are valued at the last sale
price on the exchange on which they are primarily traded or on the
Nasdaq stock market system for unlisted national market issues, or at
the last quoted bid price for listed securities in which there were no
sales during the day or for unlisted securities not reported on the
Nasdaq stock market system. Bonds and other fixed income securities
(other than short-term obligations) of U.S. issuers in the Fund's
portfolio are valued on the basis of valuations furnished by a pricing
service which utilizes both dealer-supplied valuations and electronic
data processing techniques which take into account appropriate factors
such as institutional-size trading in similar groups of securities,
yield, quality, coupon rate, maturity, type of issue, trading
characteristics and other market data without exclusive reliance upon
quoted prices or exchange or over-the-counter prices, since such
valuations are believed to reflect more accurately the fair value of
such securities. Forward Contracts will be valued using a pricing model
taking into consideration market data from an external pricing source.
Use of the pricing services has been approved by the Board of Trustees.
All other securities, futures contracts and options in the Fund's
portfolio (other than short-term obligations) for which the principal
market is one or more securities or commodities exchanges (whether
domestic or foreign) will be valued at the last reported sale price or
at the settlement price prior to the determination (or if there has been
no current sale, at the closing bid price) on the primary exchange on
which such securities, futures contracts or options are traded; but if a
securities exchange is not the principal market for securities, such
securities will, if market quotations are readily available, be valued
at current bid prices, unless such securities are reported on the Nasdaq
stock market system, in which case they are valued at the last sale
price or, if no sales occurred during the day, at the last quoted bid
price. Short-term obligations in the Fund's portfolio are valued at
amortized cost, which constitutes fair value as determined by the Board
of Trustees. Short-term obligations with a remaining maturity in excess
of 60 days will be valued upon dealer supplied valuations. Portfolio
investments for which there are no such quotations or valuations are
valued at fair value as determined in good faith by or at the direction
of the Board of Trustees.
Generally, trading in foreign securities is substantially completed
each day at various times prior to the close of regular trading on the
Exchange. Occasionally, events affecting the values of such securities
may occur between the times at which they are determined and the close
of regular trading on the Exchange which will not be reflected in the
computation of the Fund's net asset value unless the Trustees deem that
such event would materially affect the net asset value in which case an
adjustment would be made.
All investments and assets are expressed in U.S. dollars based upon
current currency exchange rates. A share's net asset value is effective
for orders received by the dealer prior to its calculation and received
by MFD prior to the close of that business day.
(IX) PERFORMANCE INFORMATION
MONEY MARKET FUNDS
Each MFS Fund that is a money market fund will provide current
annualized and effective annualized yield quotations based on the daily
dividends of shares of the money market fund. These quotations may from
time to time be used in advertisements, shareholder reports or other
communications to shareholders.
Any current yield quotation of a money market fund which is used in
such a manner as to be subject to the provisions of Rule 482(d) under
the 1933 Act shall consist of an annualized historical yield, carried at
least to the nearest hundredth of one percent based on a specific seven
calendar day period and shall be calculated by dividing the net change
in the value of an account having a balance of one share of that class
at the beginning of the period by the value of the account at the
beginning of the period and multiplying the quotient by 365/7. For this
purpose the net change in account value would reflect the value of
additional shares purchased with dividends declared on the original
share and dividends declared on both the original share and any such
additional shares, but would not reflect any realized gains or losses
from the sale of securities or any unrealized appreciation or
depreciation on portfolio securities. In addition, any effective yield
quotation of a money market fund so used shall be calculated by
compounding the current yield quotation for such period by multiplying
such quotation by 7/365, adding 1 to the product, raising the sum to a
power equal to 365/7, and subtracting 1 from the result. These yield
quotations should not be considered as representative of the yield of a
money market fund in the future since the yield will vary based on the
type, quality and maturities of the securities held in its portfolio,
fluctuations in short-term interest rates and changes in the money
market fund's expenses.
OTHER FUNDS
Each MFS Fund that is not a money market fund may quote the following
performance results.
TOTAL RATE OF RETURN -- The Fund will calculate its total rate of
return for each class of shares for certain periods by determining the
average annual compounded rates of return over those periods that would
cause an investment of $1,000 (made with all distributions reinvested
and reflecting the CDSC or the maximum public offering price) to reach
the value of that investment at the end of the periods. The Fund may
also calculate (i) a total rate of return, which is not reduced by any
applicable CDSC and therefore may result in a higher rate of return,
(ii) a total rate of return assuming an initial account value of $1,000,
which will result in a higher rate of return since the value of the
initial account will not be reduced by any applicable sales charge
and/or (iii) total rates of return which represent aggregate performance
over a period or year-by-year performance, and which may or may not
reflect the effect of the maximum or other sales charge or CDSC.
The Fund offers multiple classes of shares which were initially
offered for sale to, and purchased by, the public on different dates
(the class "inception date"). The calculation of total rate of return
for a class of shares which has a later class inception date than
another class of shares of the Fund is based both on (i) the performance
of the Fund's newer class from its inception date and (ii) the
performance of the Fund's oldest class from its inception date up to the
class inception date of the newer class.
As discussed in the Prospectus, the sales charges, expenses and
expense ratios, and therefore the performance, of the Fund's classes of
shares differ. In calculating total rate of return for a newer class of
shares in accordance with certain formulas required by the SEC, the
performance will be adjusted to take into account the fact that the
newer class is subject to a different sales charge than the oldest class
(e.g., if the newer class is Class A shares, the total rate of return
quoted will reflect the deduction of the initial sales charge applicable
to Class A shares; if the newer class is Class B shares, the total rate
of return quoted will reflect the deduction of the CDSC applicable to
Class B shares). However, the performance will not be adjusted to take
into account the fact that the newer class of shares bears different
class specific expenses than the oldest class of shares (e.g., Rule
12b-1 fees). Therefore, the total rate of return quoted for a newer
class of shares will differ from the return that would be quoted had the
newer class of shares been outstanding for the entire period over which
the calculation is based (i.e., the total rate of return quoted for the
newer class will be higher than the return that would have been quoted
had the newer class of shares been outstanding for the entire period
over which the calculation is based if the class specific expenses for
the newer class are higher than the class specific expenses of the
oldest class, and the total rate of return quoted for the newer class
will be lower than the return that would be quoted had the newer class
of shares been outstanding for this entire period if the class specific
expenses for the newer class are lower than the class specific expenses
of the oldest class).
Any total rate of return quotation provided by the Fund should not be
considered as representative of the performance of the Fund in the
future since the net asset value of shares of the Fund will vary based
not only on the type, quality and maturities of the securities held in
the Fund's portfolio, but also on changes in the current value of such
securities and on changes in the expenses of the Fund. These factors and
possible differences in the methods used to calculate total rates of
return should be considered when comparing the total rate of return of
the Fund to total rates of return published for other investment
companies or other investment vehicles. Total rate of return reflects
the performance of both principal and income. Current net asset value
and account balance information may be obtained by calling
1-800-MFS-TALK (637-8255).
YIELD -- Any yield quotation for a class of shares of the Fund is
based on the annualized net investment income per share of that class
for the 30-day period. The yield for each class of the Fund is
calculated by dividing the net investment income allocated to that class
earned during the period by the maximum offering price per share of that
class of the Fund on the last day of the period. The resulting figure is
then annualized. Net investment income per share of a class is
determined by dividing (i) the dividends and interest allocated to that
class during the period, minus accrued expense of that class for the
period by (ii) the average number of shares of the class entitled to
receive dividends during the period multiplied by the maximum offering
price per share on the last day of the period. The Fund's yield
calculations assume a maximum sales charge of 5.75% in the case of Class
A shares and no payment of any CDSC in the case of Class B and Class C
shares.
TAX-EQUIVALENT YIELD -- The tax-equivalent yield for a class of shares
of a Fund is calculated by determining the rate of return that would
have to be achieved on a fully taxable investment in such shares to
produce the after-tax equivalent of the yield of that class. In
calculating tax-equivalent yield, a Fund assumes certain federal tax
brackets for shareholders and does not take into account state taxes.
CURRENT DISTRIBUTION RATE -- Yield, which is calculated according to a
formula prescribed by the Securities and Exchange Commission, is not
indicative of the amounts which were or will be paid to the Fund's
shareholders. Amounts paid to shareholders of each class are reflected
in the quoted "current distribution rate" for that class. The current
distribution rate for a class is computed by (i) annualizing the
distributions (excluding short-term capital gains) of the class for a
stated period; (ii) adding any short-term capital gains paid within the
immediately preceding twelve-month period; and (iii) dividing the result
by the maximum offering price or net asset value per share on the last
day of the period. The current distribution rate differs from the yield
computation because it may include distributions to shareholders from
sources other than dividends and interest, such as premium income for
option writing, short-term capital gains and return of invested capital,
and may be calculated over a different period of time. The Fund's
current distribution rate calculation for Class B shares and Class C
shares assumes no CDSC is paid.
GENERAL
From time to time the Fund may, as appropriate, quote Fund rankings or
reprint all or a portion of evaluations of fund performance and
operations appearing in various independent publications, including but
not limited to the following: Money, Fortune, U.S. News and World
Report, Kiplinger's Personal Finance, The Wall Street Journal, Barron's,
Investors Business Daily, Newsweek, Financial World, Financial Planning,
Investment Advisor, USA Today, Pensions and Investments, SmartMoney,
Forbes, Global Finance, Registered Representative, Institutional
Investor, the Investment Company Institute, Johnson's Charts,
Morningstar, Lipper Analytical Securities Corporation, CDA Wiesenberger,
Shearson Lehman and Salomon Bros. Indices, Ibbotson, Business Week,
Lowry Associates, Media General, Investment Company Data, The New York
Times, Your Money, Strangers Investment Advisor, Financial Planning on
Wall Street, Standard and Poor's, Individual Investor, The 100 Best
Mutual Funds You Can Buy, by Gordon K. Williamson, Consumer Price Index,
and Sanford C. Bernstein & Co. Fund performance may also be compared to
the performance of other mutual funds tracked by financial or business
publications or periodicals. The Fund may also quote evaluations
mentioned in independent radio or television broadcasts and use charts
and graphs to illustrate the past performance of various indices such as
those mentioned above and illustrations using hypothetical rates of
return to illustrate the effects of compounding and tax-deferral. The
Fund may advertise examples of the effects of periodic investment plans,
including the principle of dollar cost averaging. In such a program, an
investor invests a fixed dollar amount in a fund at periodic intervals,
thereby purchasing fewer shares when prices are high and more shares
when prices are low. While such a strategy does not assure a profit or
guard against a loss in a declining market, the investor's average cost
per share can be lower than if fixed numbers of shares are purchased at
the same intervals.
From time to time, the Fund may discuss or quote its current portfolio
manager as well as other investment personnel, including such persons'
views on: the economy; securities markets; portfolio securities and
their issuers; investment philosophies, strategies, techniques and
criteria used in the selection of securities to be purchased or sold for
the Fund; the Fund's portfolio holdings; the investment research and
analysis process; the formulation and evaluation of investment
recommendations; and the assessment and evaluation of credit, interest
rate, market and economic risks, and similar or related matters.
The Fund may also use charts, graphs or other presentation formats to
illustrate the historical correlation of its performance to fund
categories established by Morningstar (or other nationally recognized
statistical ratings organizations) and to other MFS Funds.
From time to time the Fund may also discuss or quote the views of its
distributor, its investment adviser and other financial planning, legal,
tax, accounting, insurance, estate planning and other professionals, or
from surveys, regarding individual and family financial planning. Such
views may include information regarding: retirement planning; tax
management strategies; estate planning; general investment techniques
(e.g., asset allocation and disciplined saving and investing); business
succession; ideas and information provided through the MFS Heritage
Planning(SM) program, an intergenerational financial planning assistance
program; issues with respect to insurance (e.g., disability and life
insurance and Medicare supplemental insurance); issues regarding
financial and health care management for elderly family members; and
other similar or related matters.
From time to time, the Fund may also advertise annual returns showing
the cumulative value of an initial investment in the Fund in various
amounts over specified periods, with capital gain and dividend
distributions invested in additional shares or taken in cash, and with
no adjustment for any income taxes (if applicable) payable by
shareholders.
MFS FIRSTS
MFS has a long history of innovations.
o 1924 -- Massachusetts Investors Trust is established as the first
open-end mutual fund in America.
o 1924 -- Massachusetts Investors Trust is the first mutual fund to make
full public disclosure of its operations in shareholder reports.
o 1932 -- One of the first internal research departments is established
to provide in- house analytical capability for an investment
management firm.
o 1933 -- Massachusetts Investors Trust is the first mutual fund to
register under the Securities Act of 1933 ("Truth in Securities Act"
or "Full Disclosure Act").
o 1936 -- Massachusetts Investors Trust is the first mutual fund to
allow shareholders to take capital gain distributions either in
additional shares or in cash.
o 1976 -- MFS(R) Municipal Bond Fund is among the first municipal bond
funds established.
o 1979 -- Spectrum becomes the first combination fixed/ variable annuity
with no initial sales charge.
o 1981 -- MFS(R) Global Governments Fund is established as America's
first globally diversified fixed-income mutual fund.
o 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.
o 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual fund to
target and shift investments among industry sectors for shareholders.
o 1986 -- MFS(R) Municipal Income Trust is the first closed-end,
high-yield municipal bond fund traded on the New York Stock Exchange.
o 1987 -- MFS(R) Multimarket Income Trust is the first closed-end,
multimarket high income fund listed on the New York Stock Exchange.
o 1989 -- MFS(R) Regatta becomes America's first non-qualified market
value adjusted fixed/variable annuity.
o 1990 -- MFS(R) Global Total Return Fund is the first global balanced
fund.
o 1993 -- MFS(R) Global Growth Fund is the first global emerging markets
fund to offer the expertise of two sub-advisers.
o 1993 -- MFS(R) becomes money manager of MFS(R) Union Standard(R)
Equity Fund, the first fund to invest principally in companies deemed
to be union-friendly by an advisory board of senior labor officials,
senior managers of companies with significant labor contracts,
academics and other national labor leaders or experts.
(X) SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS
The Fund makes available the following programs designed to enable
shareholders to add to their investment or withdraw from it with a
minimum of paper work. These programs are described below and, in
certain cases, in the Prospectus. The programs involve no extra charge
to shareholders (other than a sales charge in the case of certain Class
A share purchases) and may be changed or discontinued at any time by a
shareholder or the Fund.
LETTER OF INTENT -- If a shareholder (other than a group purchaser
described below) anticipates purchasing $50,000 or more of Class A
shares of the Fund alone or in combination with shares of any class of
MFS Funds or MFS Fixed Fund (a bank collective investment fund) within a
13-month period (or 36-month period, in the case of purchases of $1
million or more), the shareholder may obtain Class A shares of the Fund
at the same reduced sales charge as though the total quantity were
invested in one lump sum by completing the Letter of Intent section of
the Account Application or filing a separate Letter of Intent
application (available from MFSC) within 90 days of the commencement of
purchases. Subject to acceptance by MFD and the conditions mentioned
below, each purchase will be made at a public offering price applicable
to a single transaction of the dollar amount specified in the Letter of
Intent application. The shareholder or his dealer must inform MFD that
the Letter of Intent is in effect each time shares are purchased. The
shareholder makes no commitment to purchase additional shares, but if
his purchases within 13 months (or 36 months in the case of purchases of
$1 million or more) plus the value of shares credited toward completion
of the Letter of Intent do not total the sum specified, he will pay the
increased amount of the sales charge as described below. Instructions
for issuance of shares in the name of a person other than the person
signing the Letter of Intent application must be accompanied by a
written statement from the dealer stating that the shares were paid for
by the person signing such Letter. Neither income dividends nor capital
gain distributions taken in additional shares will apply toward the
completion of the Letter of Intent. Dividends and distributions of other
MFS Funds automatically reinvested in shares of the Fund pursuant to the
Distribution Investment Program will also not apply toward completion of
the Letter of Intent.
Out of the shareholder's initial purchase (or subsequent purchases if
necessary), 5% of the dollar amount specified in the Letter of Intent
application shall be held in escrow by MFSC in the form of shares
registered in the shareholder's name. All income dividends and capital
gain distributions on escrowed shares will be paid to the shareholder or
to his order. When the minimum investment so specified is completed
(either prior to or by the end of the 13-month period or 36-month
period, as applicable), the shareholder will be notified and the
escrowed shares will be released.
If the intended investment is not completed, MFSC will redeem an
appropriate number of the escrowed shares in order to realize such
difference. Shares remaining after any such redemption will be released
by MFSC. By completing and signing the Account Application or separate
Letter of Intent application, the shareholder irrevocably appoints MFSC
his attorney to surrender for redemption any or all escrowed shares with
full power of substitution in the premises.
RIGHT OF ACCUMULATION -- A shareholder qualifies for cumulative
quantity discounts on the purchase of Class A shares when his new
investment, together with the current offering price value of all
holdings of Class A, Class B and Class C shares of that shareholder in
the MFS Funds or MFS Fixed Fund reaches a discount level. See
"Purchases" in the Prospectus for the sales charges on quantity
discounts. A shareholder must provide MFSC (or his investment dealer
must provide MFD) with information to verify that the quantity sales
charge discount is applicable at the time the investment is made.
SUBSEQUENT INVESTMENT BY TELEPHONE -- Each shareholder may purchase
additional shares of any MFS Fund by telephoning MFSC toll-free at (800)
225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this
telephone purchase privilege must so elect on their Account Application
and designate thereon a bank and account number from which purchases
will be made. If a telephone purchase request is received by MFSC on any
business day prior to the close of regular trading on the Exchange
(generally, 4:00 p.m., Eastern time), the purchase will occur at the
closing net asset value of the shares purchased on that day. MFSC may be
liable for any losses resulting from unauthorized telephone transactions
if it does not follow reasonable procedures designed to verify the
identity of the caller. MFSC will request personal or other information
from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after
their receipt.
DISTRIBUTION INVESTMENT PROGRAM -- Distributions of dividends and
capital gains made by the Fund with respect to a particular class of
shares may be automatically invested in shares of the same class of one
of the other MFS Funds, if shares of that fund are available for sale.
Such investments will be subject to additional purchase minimums.
Distributions will be invested at net asset value (exclusive of any
sales charge) and will not be subject to any CDSC. Distributions will be
invested at the close of business on the payable date for the
distribution. A shareholder considering the Distribution Investment
Program should obtain and read the prospectus of the other fund and
consider the differences in objectives and policies before making any
investment.
SYSTEMATIC WITHDRAWAL PLAN -- A shareholder may direct MFSC to send
him (or anyone he designates) regular periodic payments based upon the
value of his account. Each payment under a Systematic Withdrawal Plan
("SWP") must be at least $100, except in certain limited circumstances.
The aggregate withdrawals of Class B and Class C shares in any year
pursuant to a SWP generally are limited to 10% of the value of the
account at the time of establishment of the SWP. SWP payments are drawn
from the proceeds of share redemptions (which would be a return of
principal and, if reflecting a gain, would be taxable). Redemptions of
Class B and Class C shares will be made in the following order: (i)
shares representing reinvested distributions; (ii) shares representing
undistributed capital gains and income; and (iii) to the extent
necessary, shares representing direct investments subject to the lowest
CDSC. The CDSC will be waived in the case of redemptions of Class B and
Class C shares pursuant to a SWP, but will not be waived in the case of
SWP redemptions of Class A shares which are subject to a CDSC. To the
extent that redemptions for such periodic withdrawals exceed dividend
income reinvested in the account, such redemptions will reduce and may
eventually exhaust the number of shares in the shareholder's account.
All dividend and capital gain distributions for an account with a SWP
will be received in full and fractional shares of the Fund at the net
asset value in effect at the close of business on the record date for
such distributions. To initiate this service, shares having an aggregate
value of at least $5,000 either must be held on deposit by, or
certificates for such shares must be deposited with, MFSC. With respect
to Class A shares, maintaining a withdrawal plan concurrently with an
investment program would be disadvantageous because of the sales charges
included in share purchases and the imposition of a CDSC on certain
redemptions. The shareholder may deposit into the account additional
shares of the Fund, change the payee or change the dollar amount of each
payment. MFSC may charge the account for services rendered and expenses
incurred beyond those normally assumed by the Fund with respect to the
liquidation of shares. No charge is currently assessed against the
account, but one could be instituted by MFSC on 60 days' notice in
writing to the shareholder in the event that the Fund ceases to assume
the cost of these services. The Fund may terminate any SWP for an
account if the value of the account falls below $5,000 as a result of
share redemptions (other than as a result of a SWP) or an exchange of
shares of the Fund for shares of another MFS Fund. Any SWP may be
terminated at any time by either the shareholder or the Fund.
INVEST BY MAIL -- Additional investments of $50 or more may be made at
any time by mailing a check payable to the Fund directly to MFSC. The
shareholder's account number and the name of his investment dealer must
be included with each investment.
GROUP PURCHASES -- A bona fide group and all its members may be
treated as a single purchaser and, under the Right of Accumulation (but
not the Letter of Intent) obtain quantity sales charge discounts on the
purchase of Class A shares if the group (1) gives its endorsement or
authorization to the investment program so it may be used by the
investment dealer to facilitate solicitation of the membership, thus
effecting economies of sales effort; (2) has been in existence for at
least six months and has a legitimate purpose other than to purchase
mutual fund shares at a discount; (3) is not a group of individuals
whose sole organizational nexus is as credit cardholders of a company,
policyholders of an insurance company, customers of a bank or
broker-dealer, clients of an investment Adviser or other similar groups;
and (4) agrees to provide certification of membership of those members
investing money in the MFS Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN -- Shareholders having account balances of at
least $5,000 in any MFS Fund may participate in the Automatic Exchange
Plan. The Automatic Exchange Plan provides for automatic exchanges of
funds from the shareholder's account in an MFS Fund for investment in
the same class of shares of other MFS Funds selected by the shareholder
(if available for sale). Under the Automatic Exchange Plan, exchanges of
at least $50 each may be made to up to six different funds effective on
the seventh day of each month or of every third month, depending whether
monthly or quarterly exchanges are elected by the shareholder. If the
seventh day of the month is not a business day, the transaction will be
processed on the next business day. Generally, the initial transfer will
occur after receipt and processing by MFSC of an application in good
order. Exchanges will continue to be made from a shareholder's account
in any MFS Fund, as long as the balance of the account is sufficient to
complete the exchanges. Additional payments made to a shareholder's
account will extend the period that exchanges will continue to be made
under the Automatic Exchange Plan. However, if additional payments are
added to an account subject to the Automatic Exchange Plan shortly
before an exchange is scheduled, such funds may not be available for
exchanges until the following month; therefore, care should be used to
avoid inadvertently terminating the Automatic Exchange Plan through
exhaustion of the account balance.
No transaction fee for exchanges will be charged in connection with
the Automatic Exchange Plan. However, exchanges of shares of MFS Money
Market Fund, MFS Government Money Market Fund and Class A shares of MFS
Cash Reserve Fund will be subject to any applicable sales charge.
Changes in amounts to be exchanged to the Fund, the funds to which
exchanges are to be made and the timing of exchanges (monthly or
quarterly), or termination of a shareholder's participation in the
Automatic Exchange Plan will be made after instructions in writing or by
telephone (an "Exchange Change Request") are received by MFSC in proper
form (i.e., if in writing -- signed by the record owner(s) exactly as
shares are registered; if by telephone -- proper account identification
is given by the dealer or shareholder of record). Each Exchange Change
Request (other than termination of participation in the program) must
involve at least $50. Generally, if an Exchange Change Request is
received by telephone or in writing before the close of business on the
last business day of a month, the Exchange Change Request will be
effective for the following month's exchange.
A shareholder's right to make additional investments in any of the MFS
Funds, to make exchanges of shares from one MFS Fund to another and to
withdraw from an MFS Fund, as well as a shareholder's other rights and
privileges are not affected by a shareholder's participation in the
Automatic Exchange Plan. The Automatic Exchange Plan is part of the
Exchange Privilege. For additional information regarding the Automatic
Exchange Plan, including the treatment of any CDSC, see "Exchange
Privilege" below.
REINSTATEMENT PRIVILEGE -- Shareholders of the Fund and shareholders
of the other MFS Funds (except MFS Money Market Fund, MFS Government
Money Market Fund and holders of Class A shares of MFS Cash Reserve Fund
in the case where shares of such funds are acquired through direct
purchase or reinvested dividends) who have redeemed their shares have a
one-time right to reinvest the redemption proceeds in the same class of
shares of any of the MFS Funds (if shares of the fund are available for
sale) at net asset value (without a sales charge) and, if applicable,
with credit for any CDSC paid. In the case of proceeds reinvested in MFS
Money Market Fund, MFS Government Money Market Fund and Class A shares
of MFS Cash Reserve Fund, the shareholder has the right to exchange the
acquired shares for shares of another MFS Fund at net asset value
pursuant to the exchange privilege described below. Such a reinvestment
must be made within 90 days of the redemption and is limited to the
amount of the redemption proceeds. If the shares credited for any CDSC
paid are then redeemed within six years of the initial purchase in the
case of Class B shares or 12 months of the initial purchase in the case
of Class C shares and certain Class A shares, a CDSC will be imposed
upon redemption. Although redemptions and repurchases of shares are
taxable events, a reinvestment within a certain period of time in the
same fund may be considered a "wash sale" and may result in the
inability to recognize currently all or a portion of a loss realized on
the original redemption for federal income tax purposes. Please see your
tax adviser for further information.
EXCHANGE PRIVILEGE
Subject to the requirements set forth below, some or all of the shares
of the same class in an account with the Fund for which payment has been
received by the Fund (i.e., an established account) may be exchanged for
shares of the same class of any of the other MFS Funds (if available for
sale and if the purchaser is eligible to purchase the Class of shares)
at net asset value. Exchanges will be made only after instructions in
writing or by telephone (an "Exchange Request") are received for an
established account by MFSC.
EXCHANGES AMONG MFS FUNDS (excluding exchanges from MFS money market
funds) -- No initial sales charge or CDSC will be imposed in connection
with an exchange from shares of an MFS Fund to shares of any other MFS
Fund, except with respect to exchanges from an MFS money market fund to
another MFS Fund which is not an MFS money market fund (discussed
below). With respect to an exchange involving shares subject to a CDSC,
the CDSC will be unaffected by the exchange and the holding period for
purposes of calculating the CDSC will carry over to the acquired shares.
EXCHANGES FROM AN MFS MONEY MARKET FUND -- Special rules apply with
respect to the imposition of an initial sales charge or a CDSC for
exchanges from an MFS money market fund to another MFS Fund which is not
an MFS money market fund. These rules are described under the caption
"How to Purchase, Exchange and Redeem Shares" in the Prospectuses of
those MFS money market funds.
EXCHANGES INVOLVING THE MFS FIXED FUND -- Class A shares of any MFS
Fund held by certain qualified retirement plans may be exchanged for
units of participation of the MFS Fixed Fund (a bank collective
investment fund) (the "Units"), and Units may be exchanged for Class A
shares of any MFS Fund. With respect to exchanges between Class A shares
subject to a CDSC and Units, the CDSC will carry over to the acquired
shares or Units and will be deducted from the redemption proceeds when
such shares or Units are subsequently redeemed, assuming the CDSC is
then payable (the period during which the Class A shares and the Units
were held will be aggregated for purposes of calculating the applicable
CDSC). In the event that a shareholder initially purchases Units and
then exchanges into Class A shares subject to an initial sales charge of
an MFS Fund, the initial sales charge shall be due upon such exchange,
but will not be imposed with respect to any subsequent exchanges between
such Class A shares and Units with respect to shares on which the
initial sales charge has already been paid. In the event that a
shareholder initially purchases Units and then exchanges into Class A
shares subject to a CDSC of an MFS Fund, the CDSC period will commence
upon such exchange, and the applicability of the CDSC with respect to
subsequent exchanges shall be governed by the rules set forth above in
this paragraph.
GENERAL -- Each Exchange Request must be in proper form (i.e., if in
writing -- signed by the record owner(s) exactly as the shares are
registered; if by telephone -- proper account identification is given by
the dealer or shareholder of record), and each exchange must involve
either shares having an aggregate value of at least $1,000 ($50 in the
case of retirement plan participants whose sponsoring organizations
subscribe to MFS FUNDamental 401(k) Plan or another similar 401(k)
recordkeeping system made available by MFSC) or all the shares in the
account. Each exchange involves the redemption of the shares of the Fund
to be exchanged and the purchase of shares of the same class of the
other MFS Fund. Any gain or loss on the redemption of the shares
exchanged is reportable on the shareholder's federal income tax return,
unless both the shares received and the shares surrendered in the
exchange are held in a tax-deferred retirement plan or other tax-exempt
account. No more than five exchanges may be made in any one Exchange
Request by telephone. If the Exchange Request is received by MFSC prior
to the close of regular trading on the Exchange the exchange usually
will occur on that day if all the requirements set forth above have been
complied with at that time. However, payment of the redemption proceeds
by the Fund, and thus the purchase of shares of the other MFS Fund, may
be delayed for up to seven days if the Fund determines that such a delay
would be in the best interest of all its shareholders. Investment
dealers which have satisfied criteria established by MFD may also
communicate a shareholder's Exchange Request to MFD by facsimile subject
to the requirements set forth above.
Additional information with respect to any of the MFS Funds, including
a copy of its current prospectus, may be obtained from investment
dealers or MFSC. A shareholder considering an exchange should obtain and
read the prospectus of the other fund and consider the differences in
objectives and policies before making any exchange.
Any state income tax advantages for investment in shares of each
state-specific series of MFS Municipal Series Trust may only benefit
residents of such states. Investors should consult with their own tax
advisers to be sure this is an appropriate investment, based on their
residency and each state's income tax laws. The exchange privilege (or
any aspect of it) may be changed or discontinued and is subject to
certain limitations imposed from time to time at the discretion of the
Funds in order to protect the Funds.
TAX-DEFERRED RETIREMENT PLANS
Shares of the Fund may be purchased by all types of tax-deferred
retirement plans. MFD makes available, through investment dealers, plans
and/or custody agreements, the following:
o Traditional Individual Retirement Accounts (IRAs) (for individuals
who desire to make limited contributions to a Tax-deferred
retirement program and, if eligible, to receive a federal Income
tax deduction for amounts contributed);
o Roth Individual Retirement Accounts (Roth IRAs) (for individuals
who desire to make limited contributions to a tax-favored
retirement program);
o Simplified Employee Pension (SEP-IRA) Plans;
o Retirement Plans Qualified under Section 401(k) of the Internal
Revenue Code of 1986, as amended (the "Code");
o 403(b) Plans (deferred compensation arrangements for employees of
public School systems and certain non-profit organizations); and
o Certain other qualified pension and profit-sharing plans.
The plan documents provided by MFD designate a trustee or custodian
(unless another trustee or custodian is designated by the individual or
group establishing the plan) and contain specific information about the
plans. Each plan provides that dividends and distributions will be
reinvested automatically. For further details with respect to any plan,
including fees charged by the trustee, custodian or MFD, tax
consequences and redemption information, see the specific documents for
that plan. Plan documents other than those provided by MFD may be used
to establish any of the plans described above. Third party
administrative services, available for some corporate plans, may limit
or delay the processing of transactions.
An investor should consult with his tax adviser before establishing
any of the tax-deferred retirement plans described above.
Class C shares are not currently available for purchase by any
retirement plan qualified under Internal Revenue Code Section 401(a) or
403(b) if the retirement plan and/or the sponsoring organization
subscribe to the MFS FUNDamental 401(k) Plan or another similar Section
401(a) or 403(b) recordkeeping program made available by MFSC.
(XI) DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional Shares of Beneficial Interest (without par
value) of one or more separate series and to divide or combine the
shares of any series into a greater or lesser number of shares without
thereby changing the proportionate beneficial interests in that series.
The Declaration of Trust further authorizes the Trustees to classify or
reclassify any series of shares into one or more classes. Each share of
a class of the Fund represents an equal proportionate interest in the
assets of the Fund allocable to that class. Upon liquidation of the
Fund, shareholders of each class of the Fund are entitled to share pro
rata in the Fund's net assets allocable to such class available for
distribution to shareholders. The Trust reserves the right to create and
issue a number of series and additional classes of shares, in which case
the shares of each class of a series would participate equally in the
earnings, dividends and assets allocable to that class of the particular
series.
Shareholders are entitled to one vote for each share held and may vote
in the election of Trustees and on other matters submitted to meetings
of shareholders. To the extent a shareholder of the Fund owns a
controlling percentage of the Fund's shares, such shareholder may affect
the outcome of such matters to a greater extent than other Fund
shareholders. Although Trustees are not elected annually by the
shareholders, the Declaration of Trust provides that a Trustee may be
removed from office at a meeting of shareholders by a vote of two-thirds
of the outstanding shares of the Trust. A meeting of shareholders will
be called upon the request of shareholders of record holding in the
aggregate not less than 10% of the outstanding voting securities of the
Trust. No material amendment may be made to the Declaration of Trust
without the affirmative vote of a majority of the Trust's outstanding
shares (as defined in "Investment Restrictions" in Part I of this SAI).
The Trust or any series of the Trust may be terminated (i) upon the
merger or consolidation of the Trust or any series of the Trust with
another organization or upon the sale of all or substantially all of its
assets (or all or substantially all of the assets belonging to any
series of the Trust), if approved by the vote of the holders of
two-thirds of the Trust's or the affected series' outstanding shares
voting as a single class, or of the affected series of the Trust, except
that if the Trustees recommend such merger, consolidation or sale, the
approval by vote of the holders of a majority of the Trust's or the
affected series' outstanding shares will be sufficient, or (ii) upon
liquidation and distribution of the assets of a Fund, if approved by the
vote of the holders of two-thirds of its outstanding shares of the
Trust, or (iii) by the Trustees by written notice to its shareholders.
If not so terminated, the Trust will continue indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a trust
may, under certain circumstances, be held personally liable as partners
for its obligations. However, the Declaration of Trust contains an
express disclaimer of shareholder liability for acts or obligations of
the Trust and provides for indemnification and reimbursement of expenses
out of Trust property for any shareholder held personally liable for the
obligations of the Trust. The Declaration of Trust also provides that
the Trust shall maintain appropriate insurance (for example, fidelity
bonding and errors and omissions insurance) for the protection of the
Trust and its shareholders and the Trustees, officers, employees and
agents of the Trust covering possible tort and other liabilities. Thus,
the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which both
inadequate insurance existed and the Trust itself was unable to meet its
obligations.
The Declaration of Trust further provides that obligations of the
Trust are not binding upon the Trustees individually but only upon the
property of the Trust and that the Trustees will not be liable for any
action or failure to act, but nothing in the Declaration of Trust
protects a Trustee against any liability to which he would otherwise be
subject by reason of his willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct
of his office.
<PAGE>
PART II - APPENDIX A
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all
applicable sales charges are waived (Section I), the initial sales
charge and the CDSC for Class A shares are waived (Section II), and the
CDSC for Class B and Class C shares is waived (Section III). Some of the
following information will not apply to certain funds in the MFS Family
of Funds, depending on which classes of shares are offered by such fund.
As used in this Appendix, the term "dealer" includes any broker, dealer,
bank (including bank trust departments), registered investment adviser,
financial planner and any other financial institutions having a selling
agreement or other similar agreement with MFD.
(I) WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on
purchases of Class A shares and the CDSC imposed on certain redemptions
of Class A shares and on redemptions of Class B and Class C shares, as
applicable, are waived:
DIVIDEND REINVESTMENT
o Shares acquired through dividend or capital gain reinvestment; and
o Shares acquired by automatic reinvestment of distributions of
dividends and capital gains of any fund in the MFS Funds pursuant
to the Distribution Investment Program.
CERTAIN ACQUISITIONS/LIQUIDATIONS
o Shares acquired on account of the acquisition or liquidation of
assets of other investment companies or personal holding companies.
AFFILIATES OF AN MFS FUND/CERTAIN DEALERS.
Shares acquired by:
o Officers, eligible directors, employees (including retired
employees) and agents of MFS, Sun Life or any of their subsidiary
companies;
o Trustees and retired trustees of any investment company for which
MFD serves as distributor;
o Employees, directors, partners, officers and trustees of any
sub-adviser to any MFS Fund;
o Employees or registered representatives of dealers;
o Certain family members of any such individual and their spouses
identified above and certain trusts, pension, profit-sharing or
other retirement plans for the sole benefit of such persons,
provided the shares are not resold except to the MFS Fund which
issued the shares; and
o Institutional Clients of MFS or MFS Institutional Advisors, Inc.
INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
o Shares redeemed at an MFS Fund's direction due to the small size of
a shareholder's account. See "Redemptions and Repurchases --
General -- Involuntary Redemptions/Small Accounts" in the
Prospectus.
RETIREMENT PLANS (CDSC WAIVER ONLY).
Shares redeemed on account of distributions made under the following
circumstances:
o Individual Retirement Accounts ("IRAs")
> Death or disability of the IRA owner.
o Section 401(a) Plans ("401(a) Plans") and Section 403(b) Employer
Sponsored Plans ("ESP Plans")
> Death, disability or retirement of 401(a) or ESP Plan
participant;
> Loan from 401(a) or ESP Plan;
> Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
> Termination of employment of 401(a) or ESP Plan participant
(excluding, however, a partial or other termination of the
Plan);
> Tax-free return of excess 401(a) or ESP Plan contributions;
> To the extent that redemption proceeds are used to pay expenses
(or certain participant expenses) of the 401(a) or ESP Plan
(e.g., participant account fees), provided that the Plan sponsor
subscribes to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping system made available by MFSC (the "MFS
Participant Recordkeeping System"); and
> Distributions from a 401(a) or ESP Plan that has invested its
assets in one or more of the MFS Funds for more than 10 years
from the later to occur of: (i) January 1, 1993 or (ii) the date
such 401(a) or ESP Plan first invests its assets in one or more
of the MFS Funds. The sales charges will be waived in the case
of a redemption of all of the 401(a) or ESP Plan's shares in all
MFS Funds (i.e., all the assets of the 401(a) or ESP Plan
invested in the MFS Funds are withdrawn), unless immediately
prior to the redemption, the aggregate amount invested by the
401(a) or ESP Plan in shares of the MFS Funds (excluding the
reinvestment of distributions) during the prior four years
equals 50% or more of the total value of the 401(a) or ESP
Plan's assets in the MFS Funds, in which case the sales charges
will not be waived.
> Shares purchased by certain retirement plans or trust accounts
if: (i) the plan is currently a party to a retirement plan
recordkeeping or administration services agreement with MFD or
one of its affiliates and (ii) the shares purchased or redeemed
represent transfers from or transfers to plan investments other
than the MFS Funds for which retirement plan recordkeeping
services are provided under the terms of such agreement.
o Section 403(b) Salary Reduction Only Plans ("SRO Plans")
> Death or disability of SRO Plan participant.
CERTAIN TRANSFERS OF REGISTRATION
(CDSC WAIVER ONLY).
Shares transferred:
o To an IRA rollover account where any sales charges with respect to
the shares being reregistered would have been waived had they been
redeemed; and
o From a single account maintained for a 401(a) Plan to multiple
accounts maintained by MFSC on behalf of individual participants of
such Plan, provided that the Plan sponsor subscribes to the MFS
FUNDamental 401(k) Plan or another similar recordkeeping system
made available by MFSC.
LOAN REPAYMENTS
o Shares acquired pursuant to repayments by retirement plan
participants of loans from 401(a) or ESP Plans with respect to
which such Plan or its sponsoring organization subscribes to the
MFS FUNDamental 401(k) Program or the MFS Recordkeeper Plus Program
(but not the MFS Recordkeeper Program).
(II) WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the
following circumstances the initial sales charge imposed on purchases of
Class A shares and the CDSC imposed on certain redemptions of Class A
shares are waived:
WRAP ACCOUNT AND FUND "SUPERMARKET" INVESTMENTS
o Shares acquired by investments through certain dealers (including
registered investment advisers and financial planners) which have
established certain operational arrangements with MFD which include
a requirement that such shares be sold for the sole benefit of
clients participating in a "wrap" account, mutual fund
"supermarket" account or a similar program under which such clients
pay a fee to such dealer.
INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
o Shares acquired by insurance company separate accounts.
RETIREMENT PLANS
o Administrative Services Arrangements
> Shares acquired by retirement plans or trust accounts whose
third party administrators or dealers have entered into an
administrative services agreement with MFD or one of its
affiliates to perform certain administrative services, subject
to certain operational and minimum size requirements specified
from time to time by MFD or one or more of its affiliates.
o Reinvestment of Distributions from Qualified Retirement Plans
> Shares acquired through the automatic reinvestment in Class A
shares of Class A or Class B distributions which constitute
required withdrawals from qualified retirement plans.
SHARES REDEEMED ON ACCOUNT OF DISTRIBUTIONS
MADE UNDER THE FOLLOWING CIRCUMSTANCES:
o IRAs
> Distributions made on or after the IRA owner has attained the
age of 59 1/2 years old; and
> Tax-free returns of excess IRA contributions.
o 401(a) Plans
> Distributions made on or after the 401(a) Plan participant has
attained the age of 59 1/2 years old; and
> Certain involuntary redemptions and redemptions in connection
with certain automatic withdrawals from a 401(a) Plan.
o ESP Plans and SRO Plans
> Distributions made on or after the ESP or SRO Plan participant
has attained the age of 59 1/2 years old.
o 401(a) Plans and ESP Plans
> where the retirement plan and/or sponsoring organization does
not subscribe to the MFS Participant Recordkeeping System; and
> where the retirement plan and/or sponsoring organization
demonstrates to the satisfaction of, and certifies to, MFSC that
the retirement plan has, at the time of certification or will
have pursuant to a purchase order placed with the certification,
a market value of $500,000 or more invested in shares of any
class or classes of the MFS Family of Funds and aggregate assets
of at least $10 million;
provided, however, that the CDSC will not be waived (i.e., it will be
imposed) (a) with respect to plans which establish an account with MFSC
on or after November 1, 1997, in the event that the plan makes a
complete redemption of all of its shares in the MFS Family of Funds, or
(b) with respect to plans which establish an account with MFSC prior to
November 1, 1997, in the event that there is a change in law or
regulations which result in a material adverse change to the tax
advantaged nature of the plan, or in the event that the plan and/or
sponsoring organization: (i) becomes insolvent or bankrupt; (ii) is
terminated under ERISA or is liquidated or dissolved; or (iii) is
acquired by, merged into, or consolidated with any other entity.
PURCHASES OF AT LEAST $5 MILLION
(CDSC WAIVER ONLY)
o Shares acquired of Eligible Funds (as defined below) if the
shareholder's investment equals or exceeds $5 million in one or
more Eligible Funds (the "Initial Purchase") (this waiver applies
to the shares acquired from the Initial Purchase and all shares of
Eligible Funds subsequently acquired by the shareholder); provided
that the dealer through which the Initial Purchase is made enters
into an agreement with MFD to accept delayed payment of commissions
with respect to the Initial Purchase and all subsequent investments
by the shareholder in the Eligible Funds subject to such
requirements as may be established from time to time by MFD (for a
schedule of the amount of commissions paid by MFD to the dealer on
such investments, see "Purchases -- Class A Shares -- Purchases
subject to a CDSC" in the Prospectus). The Eligible Funds are all
funds included in the MFS Family of Funds, except for Massachusetts
Investors Trust, Massachusetts Investors Growth Stock Fund, MFS
Municipal Bond Fund, MFS Municipal Limited Maturity Fund, MFS Money
Market Fund, MFS Government Money Market Fund and MFS Cash Reserve
Fund.
BANK TRUST DEPARTMENTS AND LAW FIRMS
o Shares acquired by certain bank trust departments or law firms
acting as trustee or manager for trust accounts which have entered
into an administrative services agreement with MFD and are
acquiring such shares for the benefit of their trust account
clients.
INVESTMENT OF PROCEEDS FROM CERTAIN REDEMPTIONS OF CLASS I SHARES.
o The initial sales charge imposed on purchases of Class A shares,
and the contingent deferred sales charge imposed on certain
redemptions of Class A shares, are waived with respect to Class A
shares acquired of any of the MFS Funds through the immediate
reinvestment of the proceeds of a redemption of Class I shares of
any of the MFS Funds.
(III) WAIVERS OF CLASS B AND CLASS C SALES CHARGES
In addition to the waivers set forth in Section I above, in the
following circumstances the CDSC imposed on redemptions of Class B and
Class C shares is waived:
SYSTEMATIC WITHDRAWAL PLAN
o Systematic Withdrawal Plan redemptions with respect to up to 10%
per year (or 15% per year, in the case of accounts registered as
IRAs where the redemption is made pursuant to Section 72(t) of the
Internal Revenue Code of 1986, as amended) of the account value at
the time of establishment.
DEATH OF OWNER
o Shares redeemed on account of the death of the account owner if the
shares are held solely in the deceased individual's name or in a
living trust for the benefit of the deceased individual.
DISABILITY OF OWNER
o Shares redeemed on account of the disability of the account owner
if shares are held either solely or jointly in the disabled
individual's name or in a living trust for the benefit of the
disabled individual (in which case a disability certification form
is required to be submitted to MFSC.).
RETIREMENT PLANS.
Shares redeemed on account of distributions made under the following
circumstances:
o IRAs, 401(a) Plans, ESP Plans and SRO Plans
> Distributions made on or after the IRA owner or the 401(a), ESP
or SRO Plan participant, as applicable, has attained the age of
70 1/2 years old, but only with respect to the minimum
distribution under Code rules.
> Salary Reduction Simplified Employee Pension Plans ("SAR-SEP
Plans")
> Distributions made on or after the SAR-SEP Plan participant has
attained the age of 70 1/2 years old, but only with respect to
the minimum distribution under applicable Code rules; and
> Death or disability of a SAR-SEP Plan participant.
o 401(a) and ESP Plans Only (Class B CDSC Waiver Only)
> By a retirement plan whose sponsoring organization subscribes to
the MFS Participant Recordkeeping System and which established
an account with MFSC between July 1, 1996 and December 31, 1998;
provided, however, that the CDSC will not be waived (i.e., it
will be imposed) in the event that there is a change in law or
regulations which results in a material adverse change to the
tax advantaged nature of the plan, or in the event that the plan
and/or sponsoring organization: (i) becomes insolvent or
bankrupt; (ii) is terminated under ERISA or is liquidated or
dissolved; or (iii) is acquired by, merged into, or consolidated
with any other entity.
> By a retirement plan whose sponsoring organization subscribes to
the MFS Recordkeeper Plus product and which established its
account with MFSC on or after January 1, 1999 (provided that the
plan establishment paperwork is received by MFSC in good order
on or after November 15, 1998). A plan with a pre-existing
account(s) with any MFS Fund which switches to the MFS
Recordkeeper Plus product will not become eligible for this
waiver category.
<PAGE>
PART II - APPENDIX B
DEALER COMMISSIONS AND CONCESSIONS
This Appendix describes the various commissions paid and concessions
made to dealers by MFD in connection with the sale of Fund shares. As
used in this Appendix, the term "dealer" includes any broker, dealer,
bank (including bank trust departments), registered investment adviser,
financial planner and any other financial institutions having a selling
agreement or other similar agreement with MFD.
CLASS A SHARES
Purchases Subject to an Initial Sales Charge. For purchases of Class A
shares subject to an initial sales charge, MFD reallows a portion of the
initial sales charge to dealers (which are alike for all dealers), as
shown in Appendix D to Part I of this SAI. The difference between the
total amount invested and the sum of (a) the net proceeds to the Fund
and (b) the dealer reallowance, is the amount of the initial sales
charge retained by MFD (as shown in Appendix D to Part I of this SAI).
Because of rounding in the computation of offering price, the portion of
the sales charge retained by MFD may vary and the total sales charge may
be more or less than the sales charge calculated using the sales charge
expressed as a percentage of the offering price or as a percentage of
the net amount invested as listed in the Prospectus.
Purchases Subject to a CDSC (but not an Initial Sales Charge). For
purchases of Class A shares subject to a CDSC, MFD pays commissions to
dealers on new investments made through such dealers as follows:
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
purchases for each shareholder account (and certain other accounts for
which the shareholder is a record or beneficial holder) will be
aggregated over a 12-month period (commencing from the date of the first
such purchase).
CLASS B SHARES
For purchases of Class B shares, MFD will pay commissions to dealers of
3.75% of the purchase price of Class B shares purchased through dealers.
MFD will also advance to dealers the first year service fee payable
under the Fund's Distribution Plan at a rate equal to 0.25% of the
purchase price of such shares. Therefore, the total amount paid to a
dealer upon the sale of Class B shares is 4% of the purchase price of
the shares (commission rate of 3.75% plus a service fee equal to 0.25%
of the purchase price).
For purchases of Class B shares by a retirement plan whose sponsoring
organization subscribes to the MFS Participant Recordkeeping System and
which established its account with MFSC between July 1, 1996 and
December 31, 1998, MFD pays an amount to dealers equal to 3.00% of the
amount purchased through such dealers (rather than the 4.00% payment
described above), which is comprised of a commission of 2.75% plus the
advancement of the first year service fee equal to 0.25% of the purchase
price payable under the Fund's Distribution Plan.
For purchases of Class B shares by a retirement plan whose sponsoring
organization subscribes to the MFS Recordkeeper Plus product and which
has established its account with MFSC on or after January 1, 1999
(provided that the plan establishment paperwork is received by MFSC in
good order on or after November 15, 1998), MFD pays no up front
commissions to dealers, but instead pays an amount to dealers equal to
1% per annum of the average daily net assets of the Fund attributable to
plan assets, payable at the rate of 0.25% at the end of each calendar
quarter, in arrears. This commission structure is not available with
respect to a plan with a pre-existing account(s) with any MFS Fund
which seeks to switch to the MFS Recordkeeper Plus product.
CLASS C SHARES
For purchases of Class C shares, MFD will pay dealers 1.00% of the
purchase price of Class C shares purchased through dealers and, as
compensation therefor, MFD will retain the 1.00% per annum distribution
and service fee paid under the Fund's Distribution Plan to MFD for the
first year after purchase.
ADDITIONAL DEALER COMMISSIONS/CONCESSIONS
Dealers may receive different compensation with respect to sales of
Class A, Class B and Class C shares. In addition, from time to time, MFD
may pay dealers 100% of the applicable sales charge on sales of Class A
shares of certain specified Funds sold by such dealer during a specified
sales period. In addition, MFD or its affiliates may, from time to time,
pay dealers an additional commission equal to 0.50% of the net asset
value of all of the Class B and/or Class C shares of certain specified
Funds sold by such dealer during a specified sales period. In addition,
from time to time, MFD, at its expense, may provide additional
commissions, compensation or promotional incentives ("concessions") to
dealers which sell or arrange for the sale of shares of the Fund. Such
concessions provided by MFD may include financial assistance to dealers
in connection with preapproved conferences or seminars, sales or
training programs for invited registered representatives and other
employees, payment for travel expenses, including lodging, incurred by
registered representatives and other employees for such seminars or
training programs, seminars for the public, advertising and sales
campaigns regarding one or more Funds, and/ or other dealer-sponsored
events. From time to time, MFD may make expense reimbursements for
special training of a dealer's registered representatives and other
employees in group meetings or to help pay the expenses of sales
contests. Other concessions may be offered to the extent not prohibited
by state laws or any self-regulatory agency, such as the NASD.
<PAGE>
PART II - APPENDIX C
INVESTMENT TECHNIQUES, PRACTICES AND RISKS
Set forth below is a description of investment techniques and practices
which the MFS Funds may generally use in pursuing their investment
objectives and principal investment policies, and the associated risks
associated with these investment techniques and practices. The Fund will
engage only in certain of these investment techniques and practices, as
identified in Appendix A of the Fund's Prospectus. Investment practices
and techniques that are not identified in Appendix A of the Fund's
Prospectus do not apply to the Fund.
INVESTMENT TECHNIQUES AND PRACTICES
DEBT SECURITIES
To the extent the Fund invests in the following types of debt
securities, its net asset value may change as the general levels of
interest rates fluctuate. When interest rates decline, the value of debt
securities can be expected to rise. Conversely, when interest rates
rise, the value of debt securities can be expected to decline. The
Fund's investment in debt securities with longer terms to maturity are
subject to greater volatility than the Fund's shorter-term obligations.
Debt securities may have all types of interest rate payment and reset
terms, including fixed rate, adjustable rate, zero coupon, contingent,
deferred, payment in kind and auction rate features.
ASSET-BACKED SECURITIES: The Fund may purchase the following types of
asset-backed securities:
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH
SECURITIES: The Fund may invest a portion of its assets in
collateralized mortgage obligations or "CMOs," which are debt
obligations collateralized by mortgage loans or mortgage pass-through
securities (such collateral referred to collectively as "Mortgage
Assets"). Unless the context indicates otherwise, all references herein
to CMOs include multiclass pass-through securities.
Interest is paid or accrues on all classes of the CMOs on a monthly,
quarterly or semi-annual basis. The principal of and interest on the
Mortgage Assets may be allocated among the several classes of a CMO in
innumerable ways. In a common structure, payments of principal,
including any principal prepayments, on the Mortgage Assets are applied
to the classes of a CMO in the order of their respective stated
maturities or final distribution dates, so that no payment of principal
will be made on any class of CMOs until all other classes having an
earlier stated maturity or final distribution date have been paid in
full. Certain CMOs may be stripped (securities which provide only the
principal or interest factor of the underlying security). See "Stripped
Mortgage-Backed Securities" below for a discussion of the risks of
investing in these stripped securities and of investing in classes
consisting of interest payments or principal payments.
The Fund may also invest in parallel pay CMOs and Planned Amortization
Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to provide
payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated
maturity date or final distribution date of each class, which, as with
other CMO structures, must be retired by its stated maturity date or
final distribution date but may be retired earlier.
CORPORATE ASSET-BACKED SECURITIES: The Fund may invest in corporate
asset-backed securities. These securities, issued by trusts and special
purpose corporations, are backed by a pool of assets, such as credit
card and automobile loan receivables, representing the obligations of a
number of different parties. These securities present certain risks. For
instance, in the case of credit card receivables, these securities may
not have the benefit of any security interest in the related collateral.
Credit card receivables are generally unsecured and the debtors are
entitled to the protection of a number of state and federal consumer
credit laws, many of which give such debtors the right to set off
certain amounts owed on the credit cards, thereby reducing the balance
due. Most issuers of automobile receivables permit the servicers to
retain possession of the underlying obligations. If the servicer were to
sell these obligations to another party, there is a risk that the
purchaser would acquire an interest superior to that of the holders of
the related automobile receivables. In addition, because of the large
number of vehicles involved in a typical issuance and technical
requirements under state laws, the trustee for the holders of the
automobile receivables may not have a proper security interest in all of
the obligations backing such receivables. Therefore, there is the
possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities. The
underlying assets (e.g., loans) are also subject to prepayments which
shorten the securities weighted average life and may lower their return.
Corporate asset-backed securities are backed by a pool of assets
representing the obligations of a number of different parties. To lessen
the effect of failures by obligors on underlying assets to make
payments, the securities may contain elements of credit support which
fall into two categories: (i) liquidity protection and (ii) protection
against losses resulting from ultimate default by an obligor on the
underlying assets. Liquidity protection refers to the provision of
advances, generally by the entity administering the pool of assets, to
ensure that the receipt of payments on the underlying pool occurs in a
timely fashion. Protection against losses resulting from ultimate
default ensures payment through insurance policies or letters of credit
obtained by the issuer or sponsor from third parties. The Fund will not
pay any additional or separate fees for credit support. The degree of
credit support provided for each issue is generally based on historical
information respecting the level of credit risk associated with the
underlying assets. Delinquency or loss in excess of that anticipated or
failure of the credit support could adversely affect the return on an
investment in such a security.
MORTGAGE PASS-THROUGH SECURITIES: The Fund may invest in mortgage
pass-through securities. Mortgage pass-through securities are
securities representing interests in "pools" of mortgage loans. Monthly
payments of interest and principal by the individual borrowers on
mortgages are passed through to the holders of the securities (net of
fees paid to the issuer or guarantor of the securities) as the mortgages
in the underlying mortgage pools are paid off. The average lives of
mortgage pass-throughs are variable when issued because their average
lives depend on prepayment rates. The average life of these securities
is likely to be substantially shorter than their stated final maturity
as a result of unscheduled principal prepayment. Prepayments on
underlying mortgages result in a loss of anticipated interest, and all
or part of a premium if any has been paid, and the actual yield (or
total return) to the Fund may be different than the quoted yield on the
securities. Mortgage premiums generally increase with falling interest
rates and decrease with rising interest rates. Like other fixed income
securities, when interest rates rise the value of mortgage pass-through
security generally will decline; however, when interest rates are
declining, the value of mortgage pass-through securities with prepayment
features may not increase as much as that of other fixed-income
securities. In the event of an increase in interest rates which results
in a decline in mortgage prepayments, the anticipated maturity of
mortgage pass-through securities held by the Fund may increase,
effectively changing a security which was considered short or
intermediate-term at the time of purchase into a long-term security.
Long-term securities generally fluctuate more widely in response to
changes in interest rates than short or intermediate-term securities.
Payment of principal and interest on some mortgage pass-through
securities (but not the market value of the securities themselves) may
be guaranteed by the full faith and credit of the U.S. Government (in
the case of securities guaranteed by the Government National Mortgage
Association ("GNMA")); or guaranteed by agencies or instrumentalities of
the U.S. Government (such as the Federal National Mortgage Association
"FNMA") or the Federal Home Loan Mortgage Corporation, ("FHLMC") which
are supported only by the discretionary authority of the U.S. Government
to purchase the agency's obligations). Mortgage pass-through securities
may also be issued by non-governmental issuers (such as commercial
banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers). Some of
these mortgage pass-through securities may be supported by various forms
of insurance or guarantees.
Interests in pools of mortgage-related securities differ from other
forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or
specified call dates. Instead, these securities provide a monthly
payment which consists of both interest and principal payments. In
effect, these payments are a "pass-through" of the monthly payments made
by the individual borrowers on their mortgage loans, net of any fees
paid to the issuer or guarantor of such securities. Additional payments
are caused by prepayments of principal resulting from the sale,
refinancing or foreclosure of the underlying property, net of fees or
costs which may be incurred. Some mortgage pass-through securities (such
as securities issued by the GNMA) are described as "modified
pass-through." These securities entitle the holder to receive all
interests and principal payments owed on the mortgages in the mortgage
pool, net of certain fees, at the scheduled payment dates regardless of
whether the mortgagor actually makes the payment.
The principal governmental guarantor of mortgage pass-through
securities is GNMA. GNMA is a wholly owned U.S. Government corporation
within the Department of Housing and Urban Development. GNMA is
authorized to guarantee, with the full faith and credit of the U.S.
Government, the timely payment of principal and interest on securities
issued by institutions approved by GNMA (such as savings and loan
institutions, commercial banks and mortgage bankers) and backed by pools
of Federal Housing Administration ("FHA")-insured or Veterans
Administration ("VA")-guaranteed mortgages. These guarantees, however,
do not apply to the market value or yield of mortgage pass-through
securities. GNMA securities are often purchased at a premium over the
maturity value of the underlying mortgages. This premium is not
guaranteed and will be lost if prepayment occurs.
Government-related guarantors (i.e., whose guarantees are not backed
by the full faith and credit of the U.S. Government) include FNMA and
FHLMC. FNMA is a government-sponsored corporation owned entirely by
private stockholders. It is subject to general regulation by the
Secretary of Housing and Urban Development. FNMA purchases conventional
residential mortgages (i.e., mortgages not insured or guaranteed by any
governmental agency) from a list of approved seller/servicers which
include state and federally chartered savings and loan associations,
mutual savings banks, commercial banks, credit unions and mortgage
bankers. Pass-through securities issued by FNMA are guaranteed as to
timely payment by FNMA of principal and interest.
FHLMC is also a government-sponsored corporation owned by private
stockholders. FHLMC issues Participation Certificates ("PCs") which
represent interests in conventional mortgages (i.e., not federally
insured or guaranteed) for FHLMC's national portfolio. FHLMC guarantees
timely payment of interest and ultimate collection of principal
regardless of the status of the underlying mortgage loans.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers
also create pass through pools of mortgage loans. Such issuers may also
be the originators and/or servicers of the underlying mortgage-related
securities. Pools created by such non-governmental issuers generally
offer a higher rate of interest than government and government-related
pools because there are no direct or indirect government or agency
guarantees of payments in the former pools. However, timely payment of
interest and principal of mortgage loans in these pools may be supported
by various forms of insurance or guarantees, including individual loan,
title, pool and hazard insurance and letters of credit. The insurance
and guarantees are issued by governmental entities, private insurers and
the mortgage poolers. There can be no assurance that the private
insurers or guarantors can meet their obligations under the insurance
policies or guarantee arrangements. The Fund may also buy
mortgage-related securities without insurance or guarantees.
STRIPPED MORTGAGE-BACKED SECURITIES: The Fund may invest a portion of
its assets in stripped mortgage-backed securities ("SMBS") which are
derivative multiclass mortgage securities issued by agencies or
instrumentalities of the U.S. Government, or by private originators of,
or investors in, mortgage loans, including savings and loan
institutions, mortgage banks, commercial banks and investment banks.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions from a pool of
mortgage assets. A common type of SMBS will have one class receiving
some of the interest and most of the principal from the Mortgage Assets,
while the other class will receive most of the interest and the
remainder of the principal. In the most extreme case, one class will
receive all of the interest (the interest-only or "I0" class) while the
other class will receive all of the principal (the principal-only or
"P0" class). The yield to maturity on an I0 is extremely sensitive to
the rate of principal payments, including prepayments on the related
underlying Mortgage Assets, and a rapid rate of principal payments may
have a material adverse effect on such security's yield to maturity. If
the underlying Mortgage Assets experience greater than anticipated
prepayments of principal, the Fund may fail to fully recoup its initial
investment in these securities. The market value of the class consisting
primarily or entirely of principal payments generally is unusually
volatile in response to changes in interest rates. Because SMBS were
only recently introduced, established trading markets for these
securities have not yet developed, although the securities are traded
among institutional investors and investment banking firms.
CORPORATE SECURITIES: The Fund may invest in debt securities, such as
convertible and non-convertible bonds, notes and debentures, issued by
corporations, limited partnerships and other similar entities.
LOANS AND OTHER DIRECT INDEBTEDNESS: The Fund may purchase loans and
other direct indebtedness. In purchasing a loan, the Fund acquires some
or all of the interest of a bank or other lending institution in a loan
to a corporate, governmental or other borrower. Many such loans are
secured, although some may be unsecured. Such loans may be in default at
the time of purchase. Loans that are fully secured offer the Fund more
protection than an unsecured loan in the event of non-payment of
scheduled interest or principal. However, there is no assurance that the
liquidation of collateral from a secured loan would satisfy the
corporate borrowers obligation, or that the collateral can be
liquidated.
These loans are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans are typically made by a syndicate of lending
institutions, represented by an agent lending institution which has
negotiated and structured the loan and is responsible for collecting
interest, principal and other amounts due on its own behalf and on
behalf of the others in the syndicate, and for enforcing its and their
other rights against the borrower. Alternatively, such loans may be
structured as a novation, pursuant to which the Fund would assume all of
the rights of the lending institution in a loan or as an assignment,
pursuant to which the Fund would purchase an assignment of a portion of
a lenders interest in a loan either directly from the lender or through
an intermediary. The Fund may also purchase trade or other claims
against companies, which generally represent money owned by the company
to a supplier of goods or services. These claims may also be purchased
at a time when the company is in default.
Certain of the loans and the other direct indebtedness acquired by the
Fund may involve revolving credit facilities or other standby financing
commitments which obligate the Fund to pay additional cash on a certain
date or on demand. These commitments may have the effect of requiring
the Fund to increase its investment in a company at a time when the Fund
might not otherwise decide to do so (including at a time when the
company's financial condition makes it unlikely that such amounts will
be repaid). To the extent that the Fund is committed to advance
additional funds, it will at all times hold and maintain in a segregated
account cash or other high grade debt obligations in an amount
sufficient to meet such commitments.
The Fund's ability to receive payment of principal, interest and other
amounts due in connection with these investments will depend primarily
on the financial condition of the borrower. In selecting the loans and
other direct indebtedness which the Fund will purchase, the Adviser will
rely upon its own (and not the original lending institution's) credit
analysis of the borrower. As the Fund may be required to rely upon
another lending institution to collect and pass onto the Fund amounts
payable with respect to the loan and to enforce the Fund's rights under
the loan and other direct indebtedness, an insolvency, bankruptcy or
reorganization of the lending institution may delay or prevent the Fund
from receiving such amounts. In such cases, the Fund will evaluate as
well the creditworthiness of the lending institution and will treat both
the borrower and the lending institution as an "issuer" of the loan for
purposes of certain investment restrictions pertaining to the
diversification of the Fund's portfolio investments. The highly
leveraged nature of many such loans and other direct indebtedness may
make such loans and other direct indebtedness especially vulnerable to
adverse changes in economic or market conditions. Investments in such
loans and other direct indebtedness may involve additional risk to the
Fund.
LOWER RATED BONDS: The Fund may invest in fixed income securities
rated Ba or lower by Moody's or BB or lower by S&P, Fitch or Duff &
Phelps and comparable unrated securities (commonly known as "junk
bonds"). See Appendix D for a description of bond ratings. No minimum
rating standard is required by the Fund. These securities are considered
speculative and, while generally providing greater income than
investments in higher rated securities, will involve greater risk of
principal and income (including the possibility of default or bankruptcy
of the issuers of such securities) and may involve greater volatility of
price (especially during periods of economic uncertainty or change) than
securities in the higher rating categories and because yields vary over
time, no specific level of income can ever be assured. These lower rated
high yielding fixed income securities generally tend to reflect economic
changes (and the outlook for economic growth), short-term corporate and
industry developments and the market's perception of their credit
quality (especially during times of adverse publicity) to a greater
extent than higher rated securities which react primarily to
fluctuations in the general level of interest rates (although these
lower rated fixed income securities are also affected by changes in
interest rates). In the past, economic downturns or an increase in
interest rates have, under certain circumstances, caused a higher
incidence of default by the issuers of these securities and may do so in
the future, especially in the case of highly leveraged issuers. The
prices for these securities may be affected by legislative and
regulatory developments. The market for these lower rated fixed income
securities may be less liquid than the market for investment grade fixed
income securities. Furthermore, the liquidity of these lower rated
securities may be affected by the market's perception of their credit
quality. Therefore, the Adviser's judgment may at times play a greater
role in valuing these securities than in the case of investment grade
fixed income securities, and it also may be more difficult during times
of certain adverse market conditions to sell these lower rated
securities to meet redemption requests or to respond to changes in the
market.
While the Adviser may refer to ratings issued by established credit
rating agencies, it is not the Fund's policy to rely exclusively on
ratings issued by these rating agencies, but rather to supplement such
ratings with the Adviser's own independent and ongoing review of credit
quality. To the extent a Fund invests in these lower rated securities,
the achievement of its investment objectives may be a more dependent on
the Adviser's own credit analysis than in the case of a fund investing
in higher quality fixed income securities. These lower rated securities
may also include zero coupon bonds, deferred interest bonds and PIK
bonds.
MUNICIPAL BONDS: The Fund may invest in debt securities issued by or
on behalf of states, territories and possessions of the United States
and the District of Columbia and their political subdivisions, agencies
or instrumentalities, the interest on which is exempt from federal
income tax ("Municipal Bonds"). Municipal Bonds include debt securities
which pay interest income that is subject to the alternative minimum
tax. The Fund may invest in Municipal Bonds whose issuers pay interest
on the Bonds from revenues from projects such as multifamily housing,
nursing homes, electric utility systems, hospitals or life care
facilities.
If a revenue bond is secured by payments generated from a project, and
the revenue bond is also secured by a lien on the real estate comprising
the project, foreclosure by the indenture trustee on the lien for the
benefit of the bondholders creates additional risks associated with
owning real estate, including environmental risks.
Housing revenue bonds typically are issued by a state, county or local
housing authority and are secured only by the revenues of mortgages
originated by the authority using the proceeds of the bond issue.
Because of the impossibility of precisely predicting demand for
mortgages from the proceeds of such an issue, there is a risk that the
proceeds of the issue will be in excess of demand, which would result in
early retirement of the bonds by the issuer. Moreover, such housing
revenue bonds depend for their repayment upon the cash flow from the
underlying mortgages, which cannot be precisely predicted when the bonds
are issued. Any difference in the actual cash flow from such mortgages
from the assumed cash flow could have an adverse impact upon the ability
of the issuer to make scheduled payments of principal and interest on
the bonds, or could result in early retirement of the bonds.
Additionally, such bonds depend in part for scheduled payments of
principal and interest upon reserve funds established from the proceeds
of the bonds, assuming certain rates of return on investment of such
reserve funds. If the assumed rates of return are not realized because
of changes in interest rate levels or for other reasons, the actual cash
flow for scheduled payments of principal and interest on the bonds may
be inadequate. The financing of multi-family housing projects is
affected by a variety of factors, including satisfactory completion of
construction within cost constraints, the achievement and maintenance of
a sufficient level of occupancy, sound management of the developments,
timely and adequate increases in rents to cover increases in operating
expenses, including taxes, utility rates and maintenance costs, changes
in applicable laws and governmental regulations and social and economic
trends.
Electric utilities face problems in financing large construction
programs in inflationary periods, cost increases and delay occasioned by
environmental considerations (particularly with respect to nuclear
facilities), difficulty in obtaining fuel at reasonable prices, the cost
of competing fuel sources, difficulty in obtaining sufficient rate
increases and other regulatory problems, the effect of energy
conservation and difficulty of the capital market to absorb utility
debt.
Health care facilities include life care facilities, nursing homes and
hospitals. Life care facilities are alternative forms of long-term
housing for the elderly which offer residents the independence of
condominium life style and, if needed, the comprehensive care of nursing
home services. Bonds to finance these facilities have been issued by
various state industrial development authorities. Since the bonds are
secured only by the revenues of each facility and not by state or local
government tax payments, they are subject to a wide variety of risks.
Primarily, the projects must maintain adequate occupancy levels to be
able to provide revenues adequate to maintain debt service payments.
Moreover, in the case of life care facilities, since a portion of
housing, medical care and other services may be financed by an initial
deposit, there may be risk if the facility does not maintain adequate
financial reserves to secure estimated actuarial liabilities. The
ability of management to accurately forecast inflationary cost pressures
weighs importantly in this process. The facilities may also be affected
by regulatory cost restrictions applied to health care delivery in
general, particularly state regulations or changes in Medicare and
Medicaid payments or qualifications, or restrictions imposed by medical
insurance companies. They may also face competition from alternative
health care or conventional housing facilities in the private or public
sector. Hospital bond ratings are often based on feasibility studies
which contain projections of expenses, revenues and occupancy levels. A
hospital's gross receipts and net income available to service its debt
are influenced by demand for hospital services, the ability of the
hospital to provide the services required, management capabilities,
economic developments in the service area, efforts by insurers and
government agencies to limit rates and expenses, confidence in the
hospital, service area economic developments, competition, availability
and expense of malpractice insurance, Medicaid and Medicare funding, and
possible federal legislation limiting the rates of increase of hospital
charges.
The Fund may invest in municipal lease securities. These are undivided
interests in a portion of an obligation in the from of a lease or
installment purchase which is issued by state and local governments to
acquire equipment and facilities. Municipal leases frequently have
special risks not normally associated with general obligation or revenue
bonds. Leases and installment purchase or conditional sale contracts
(which normally provide for title to the leased asset to pass eventually
to the governmental issuer) have evolved as a means for governmental
issuers to acquire property and equipment without meeting the
constitutional and statutory requirements for the issuance of debt. The
debt-issuance limitations are deemed to be inapplicable because of the
inclusion in many leases or contracts of "non-appropriation" clauses
that provide that the governmental issuer has no obligation to make
future payments under the lease or contract unless money is appropriated
for such purpose by the appropriate legislative body on a yearly or
other periodic basis. Although the obligations will be secured by the
leased equipment or facilities, the disposition of the property in the
event of non-appropriation or foreclosure might, in some cases, prove
difficult. There are, of course, variations in the security of municipal
lease securities, both within a particular classification and between
classifications, depending on numerous factors.
The Fund may also invest in bonds for industrial and other projects,
such as sewage or solid waste disposal or hazardous waste treatment
facilities. Financing for such projects will be subject to inflation and
other general economic factors as well as construction risks including
labor problems, difficulties with construction sites and the ability of
contractors to meet specifications in a timely manner. Because some of
the materials, processes and wastes involved in these projects may
include hazardous components, there are risks associated with their
production, handling and disposal.
SPECULATIVE BONDS: The Fund may invest in fixed income and convertible
securities rated Baa by Moody's or BBB by S&P, Fitch or Duff & Phelps
and comparable unrated securities. See Appendix D for a description of
bond ratings. These securities, while normally exhibiting adequate
protection parameters, have speculative characteristics and changes in
economic conditions or other circumstances are more likely to lead to a
weakened capacity to make principal and interest payments than in the
case of higher grade securities.
U.S. GOVERNMENT SECURITIES: The Fund may invest in U.S. Government
Securities including (i) U.S. Treasury obligations, all of which are
backed by the full faith and credit of the U.S. Government and (ii) U.S.
Government Securities, some of which are backed by the full faith and
credit of the U.S. Treasury, e.g., direct pass-through certificates of
the Government National Mortgage Association ("GNMA"); some of which are
backed only by the credit of the issuer itself, e.g., obligations of the
Student Loan Marketing Association; and some of which are supported by
the discretionary authority of the U.S. Government to purchase the
agency's obligations, e.g., obligations of the Federal National Mortgage
Association ("FNMA").
U.S. Government Securities also include interest in trust or other
entities representing interests in obligations that are issued or
guaranteed by the U.S. Government, its agencies, authorities or
instrumentalities.
VARIABLE AND FLOATING RATE OBLIGATIONS: The Fund may invest in
floating or variable rate securities. Investments in floating or
variable rate securities normally will involve industrial development or
revenue bonds which provide that the rate of interest is set as a
specific percentage of a designated base rate, such as rates on Treasury
Bonds or Bills or the prime rate at a major commercial bank, and that a
bondholder can demand payment of the obligations on behalf of the Fund
on short notice at par plus accrued interest, which amount may be more
or less than the amount the bondholder paid for them. The maturity of
floating or variable rate obligations (including participation interests
therein) is deemed to be the longer of (i) the notice period required
before the Fund is entitled to receive payment of the obligation upon
demand or (ii) the period remaining until the obligation's next interest
rate adjustment. If not redeemed by the Fund through the demand feature,
the obligations mature on a specified date which may range up to thirty
years from the date of issuance.
ZERO COUPON BONDS, DEFERRED INTEREST BONDS AND PIK BONDS: The Fund may
invest in zero coupon bonds, deferred interest bonds and bonds on which
the interest is payable in kind ("PIK bonds"). Zero coupon and deferred
interest bonds are debt obligations which are issued at a significant
discount from face value. The discount approximates the total amount of
interest the bonds will accrue and compound over the period until
maturity or the first interest payment date at a rate of interest
reflecting the market rate of the security at the time of issuance.
While zero coupon bonds do not require the periodic payment of interest,
deferred interest bonds provide for a period of delay before the regular
payment of interest begins. PIK bonds are debt obligations which provide
that the issuer may, at its option, pay interest on such bonds in cash
or in the form of additional debt obligations. Such investments benefit
the issuer by mitigating its need for cash to meet debt service, but
also require a higher rate of return to attract investors who are
willing to defer receipt of such cash. Such investments may experience
greater volatility in market value than debt obligations which make
regular payments of interest. The Fund will accrue income on such
investments for tax and accounting purposes, which is distributable to
shareholders and which, because no cash is received at the time of
accrual, may require the liquidation of other portfolio securities to
satisfy the Fund's distribution obligations.
EQUITY SECURITIES
The Fund may invest in all types of equity securities, including the
following: common stocks, preferred stocks and preference stocks;
securities such as bonds, warrants or rights that are convertible into
stocks; and depositary receipts for those securities. These securities
may be listed on securities exchanges, traded in various
over-the-counter markets or have no organized market.
FOREIGN SECURITIES EXPOSURE
The Fund may invest in various types of foreign securities, or
securities which provide the Fund with exposure to foreign securities or
foreign currencies, as discussed below:
BRADY BONDS: The Fund may invest in Brady Bonds, which are securities
created through the exchange of existing commercial bank loans to public
and private entities in certain emerging markets for new bonds in
connection with debt restructurings under a debt restructuring plan
introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady
(the "Brady Plan"). Brady Plan debt restructurings have been implemented
to date in Argentina, Brazil, Bulgaria, Costa Rica, Croatia, Dominican
Republic, Ecuador, Jordan, Mexico, Morocco, Nigeria, Panama, Peru, the
Philippines, Poland, Slovenia, Uruguay and Venezuela. Brady Bonds have
been issued only recently, and for that reason do not have a long
payment history. Brady Bonds may be collateralized or uncollateralized,
are issued in various currencies (but primarily the U.S. dollar) and are
actively traded in over-the-counter secondary markets. U.S.
dollar-denominated, collateralized Brady Bonds, which may be fixed rate
bonds or floating-rate bonds, are generally collateralized in full as to
principal by U.S. Treasury zero coupon bonds having the same maturity as
the bonds. Brady Bonds are often viewed as having three or four
valuation components: the collateralized repayment of principal at final
maturity; the collateralized interest payments; the uncollateralized
interest payments; and any uncollateralized repayment of principal at
maturity (these uncollateralized amounts constituting the "residual
risk"). In light of the residual risk of Brady Bonds and the history of
defaults of countries issuing Brady Bonds with respect to commercial
bank loans by public and private entities, investments in Brady Bonds
may be viewed as speculative.
DEPOSITARY RECEIPTS: The Fund may invest in American Depositary
Receipts ("ADRs"), Global Depositary Receipts ("GDRs") and other types
of depositary receipts. ADRs are certificates by a U.S. depositary
(usually a bank) and represent a specified quantity of shares of an
underlying non-U.S. stock on deposit with a custodian bank as
collateral. GDRs and other types of depositary receipts are typically
issued by foreign banks or trust companies and evidence ownership of
underlying securities issued by either a foreign or a U.S. company.
Generally, ADRs are in registered form and are designed for use in U.S.
securities markets and GDRs are in bearer form and are designed for use
in foreign securities markets. For the purposes of the Fund's policy to
invest a certain percentage of its assets in foreign securities, the
investments of the Fund in ADRs, GDRs and other types of depositary
receipts are deemed to be investments in the underlying securities.
ADRs may be sponsored or unsponsored. A sponsored ADR is issued by a
depositary which has an exclusive relationship with the issuer of the
underlying security. An unsponsored ADR may be issued by any number of
U.S. depositories. Under the terms of most sponsored arrangements,
depositories agree to distribute notices of shareholder meetings and
voting instructions, and to provide shareholder communications and other
information to the ADR holders at the request of the issuer of the
deposited securities. The depository of an unsponsored ADR, on the other
hand, is under no obligation to distribute shareholder communications
received from the issuer of the deposited securities or to pass through
voting rights to ADR holders in respect of the deposited securities. The
Fund may invest in either type of ADR. Although the U.S. investor holds
a substitute receipt of ownership rather than direct stock certificates,
the use of the depositary receipts in the United States can reduce costs
and delays as well as potential currency exchange and other
difficulties. The Fund may purchase securities in local markets and
direct delivery of these ordinary shares to the local depositary of an
ADR agent bank in foreign country. Simultaneously, the ADR agents create
a certificate which settles at the Fund's custodian in five days. The
Fund may also execute trades on the U.S. markets using existing ADRs. A
foreign issuer of the security underlying an ADR is generally not
subject to the same reporting requirements in the United States as a
domestic issuer. Accordingly, information available to a U.S. investor
will be limited to the information the foreign issuer is required to
disclose in its country and the market value of an ADR may not reflect
undisclosed material information concerning the issuer of the underlying
security. ADRs may also be subject to exchange rate risks if the
underlying foreign securities are denominated in a foreign currency.
DOLLAR-DENOMINATED FOREIGN DEBT SECURITIES: The Fund may invest in
dollar-denominated foreign debt securities. Investing in
dollar-denominated foreign debt represents a greater degree of risk than
investing in domestic securities, due to less publicly available
information, less securities regulation, war or expropriation. Special
considerations may include higher brokerage costs and thinner trading
markets. Investments in foreign countries could be affected by other
factors including extended settlement periods.
EMERGING MARKETS: The Fund may invest in securities of government,
government-related, supranational and corporate issuers located in
emerging markets. Such investments entail significant risks as described
below.
o Company Debt -- Governments of many emerging market countries have
exercised and continue to exercise substantial influence over many
aspects of the private sector through the ownership or control of many
companies, including some of the largest in any given country. As a
result, government actions in the future could have a significant
effect on economic conditions in emerging markets, which in turn, may
adversely affect companies in the private sector, general market
conditions and prices and yields of certain of the securities in the
Fund's portfolio. Expropriation, confiscatory taxation,
nationalization, political, economic or social instability or other
similar developments have occurred frequently over the history of
certain emerging markets and could adversely affect the Fund's assets
should these conditions recur.
o Default; Legal Recourse -- The Fund may have limited legal recourse in
the event of a default with respect to certain debt obligations it may
hold. If the issuer of a fixed income security owned by the Fund
defaults, the Fund may incur additional expenses to seek recovery.
Debt obligations issued by emerging market governments differ from
debt obligations of private entities; remedies from defaults on debt
obligations issued by emerging market governments, unlike those on
private debt, must be pursued in the courts of the defaulting party
itself. The Fund's ability to enforce its rights against private
issuers may be limited. The ability to attach assets to enforce a
judgment may be limited. Legal recourse is therefore somewhat
diminished. Bankruptcy, moratorium and other similar laws applicable
to private issuers of debt obligations may be substantially different
from those of other countries. The political context, expressed as an
emerging market governmental issuer's willingness to meet the terms of
the debt obligation, for example, is of considerable importance. In
addition, no assurance can be given that the holders of commercial
bank debt may not contest payments to the holders of debt obligations
in the event of default under commercial bank loan agreements.
o Foreign Currencies -- The securities in which the Fund invests may be
denominated in foreign currencies and international currency units and
the Fund may invest a portion of its assets directly in foreign
currencies. Accordingly, the weakening of these currencies and units
against the U.S. dollar may result in a decline in the Fund's asset
value.
Some emerging market countries also may have managed currencies, which
are not free floating against the U.S. dollar. In addition, there is
risk that certain emerging market countries may restrict the free
conversion of their currencies into other currencies. Further, certain
emerging market currencies may not be internationally traded. Certain
of these currencies have experienced a steep devaluation relative to
the U.S. dollar. Any devaluations in the currencies in which a Fund's
portfolio securities are denominated may have a detrimental impact on
the Fund's net asset value.
o Inflation -- Many emerging markets have experienced substantial, and
in some periods extremely high, rates of inflation for many years.
Inflation and rapid fluctuations in inflation rates have had and may
continue to have adverse effects on the economies and securities
markets of certain emerging market countries. In an attempt to control
inflation, wage and price controls have been imposed in certain
countries. Of these countries, some, in recent years, have begun to
control inflation through prudent economic policies.
o Liquidity; Trading Volume; Regulatory Oversight -- The securities
markets of emerging market countries are substantially smaller, less
developed, less liquid and more volatile than the major securities
markets in the U.S. Disclosure and regulatory standards are in many
respects less stringent than U.S. standards. Furthermore, there is a
lower level of monitoring and regulation of the markets and the
activities of investors in such markets.
The limited size of many emerging market securities markets and
limited trading volume in the securities of emerging market issuers
compared to volume of trading in the securities of U.S. issuers could
cause prices to be erratic for reasons apart from factors that affect
the soundness and competitiveness of the securities issuers. For
example, limited market size may cause prices to be unduly influenced
by traders who control large positions. Adverse publicity and
investors' perceptions, whether or not based on in-depth fundamental
analysis, may decrease the value and liquidity of portfolio
securities.
The risk also exists that an emergency situation may arise in one or
more emerging markets, as a result of which trading of securities may
cease or may be substantially curtailed and prices for the Fund's
securities in such markets may not be readily available. The Fund may
suspend redemption of its shares for any period during which an
emergency exists, as determined by the Securities and Exchange
Commission (the "SEC"). Accordingly, if the Fund believes that
appropriate circumstances exist, it will promptly apply to the SEC for
a determination that an emergency is present. During the period
commencing from the Fund's identification of such condition until the
date of the SEC action, the Fund's securities in the affected markets
will be valued at fair value determined in good faith by or under the
direction of the Board of Trustees.
o Sovereign Debt -- Investment in sovereign debt can involve a high
degree of risk. The governmental entity that controls the repayment of
sovereign debt may not be able or willing to repay the principal
and/or interest when due in accordance with the terms of such debt. A
governmental entity's willingness or ability to repay principal and
interest due in a timely manner may be affected by, among other
factors, its cash flow situation, the extent of its foreign reserves,
the availability of sufficient foreign exchange on the date a payment
is due, the relative size of the debt service burden to the economy as
a whole, the governmental entity's policy towards the International
Monetary Fund and the political constraints to which a governmental
entity may be subject. Governmental entities may also be dependent on
expected disbursements from foreign governments, multilateral agencies
and others abroad to reduce principal and interest on their debt. The
commitment on the part of these governments, agencies and others to
make such disbursements may be conditioned on a governmental entity's
implementation of economic reforms and/or economic performance and the
timely service of such debtor's obligations. Failure to implement such
reforms, achieve such levels of economic performance or repay
principal or interest when due may result in the cancellation of such
third parties' commitments to lend funds to the governmental entity,
which may further impair such debtor's ability or willingness to
service its debts in a timely manner. Consequently, governmental
entities may default on their sovereign debt. Holders of sovereign
debt (including the Fund) may be requested to participate in the
rescheduling of such debt and to extend further loans to governmental
entities. There is no bankruptcy proceedings by which sovereign debt
on which governmental entities have defaulted may be collected in
whole or in part.
Emerging market governmental issuers are among the largest debtors to
commercial banks, foreign governments, international financial
organizations and other financial institutions. Certain emerging
market governmental issuers have not been able to make payments of
interest on or principal of debt obligations as those payments have
come due. Obligations arising from past restructuring agreements may
affect the economic performance and political and social stability of
those issuers.
The ability of emerging market governmental issuers to make timely
payments on their obligations is likely to be influenced strongly by
the issuer's balance of payments, including export performance, and
its access to international credits and investments. An emerging
market whose exports are concentrated in a few commodities could be
vulnerable to a decline in the international prices of one or more of
those commodities. Increased protectionism on the part of an emerging
market's trading partners could also adversely affect the country's
exports and tarnish its trade account surplus, if any. To the extent
that emerging markets receive payment for their exports in currencies
other than dollars or non-emerging market currencies, its ability to
make debt payments denominated in dollars or non-emerging market
currencies could be affected.
To the extent that an emerging market country cannot generate a trade
surplus, it must depend on continuing loans from foreign governments,
multilateral organizations or private commercial banks, aid payments
from foreign governments and on inflows of foreign investment. The
access of emerging markets to these forms of external funding may not
be certain, and a withdrawal of external funding could adversely
affect the capacity of emerging market country governmental issuers to
make payments on their obligations. In addition, the cost of servicing
emerging market debt obligations can be affected by a change in
international interest rates since the majority of these obligations
carry interest rates that are adjusted periodically based upon
international rates.
Another factor bearing on the ability of emerging market countries to
repay debt obligations is the level of international reserves of the
country. Fluctuations in the level of these reserves affect the amount
of foreign exchange readily available for external debt payments and
thus could have a bearing on the capacity of emerging market countries
to make payments on these debt obligations.
o Withholding -- Income from securities held by the Fund could be
reduced by a withholding tax on the source or other taxes imposed by
the emerging market countries in which the Fund makes its investments.
The Fund's net asset value may also be affected by changes in the
rates or methods of taxation applicable to the Fund or to entities in
which the Fund has invested. The Adviser will consider the cost of any
taxes in determining whether to acquire any particular investments,
but can provide no assurance that the taxes will not be subject to
change.
FOREIGN SECURITIES: The Fund may invest in dollar-denominated and non
dollar-denominated foreign securities. Investing in securities of
foreign issuers generally involves risks not ordinarily associated with
investing in securities of domestic issuers. These include changes in
currency rates, exchange control regulations, securities settlement
practices, governmental administration or economic or monetary policy
(in the United States or abroad) or circumstances in dealings between
nations. Costs may be incurred in connection with conversions between
various currencies. Special considerations may also include more limited
information about foreign issuers, higher brokerage costs, different
accounting standards and thinner trading markets. Foreign securities
markets may also be less liquid, more volatile and less subject to
government supervision than in the United States. Investments in foreign
countries could be affected by other factors including expropriation,
confiscatory taxation and potential difficulties in enforcing
contractual obligations and could be subject to extended settlement
periods. As a result of its investments in foreign securities, the Fund
may receive interest or dividend payments, or the proceeds of the sale
or redemption of such securities, in the foreign currencies in which
such securities are denominated. Under certain circumstances, such as
where the Adviser believes that the applicable exchange rate is
unfavorable at the time the currencies are received or the Adviser
anticipates, for any other reason, that the exchange rate will improve,
the Fund may hold such currencies for an indefinite period of time.
While the holding of currencies will permit the Fund to take advantage
of favorable movements in the applicable exchange rate, such strategy
also exposes the Fund to risk of loss if exchange rates move in a
direction adverse to the Fund's position. Such losses could reduce any
profits or increase any losses sustained by the Fund from the sale or
redemption of securities and could reduce the dollar value of interest
or dividend payments received.
FORWARD CONTRACTS
The Fund may enter into contracts for the purchase or sale of a specific
currency at a future date at a price set at the time the contract is
entered into (a "Forward Contract"), for hedging purposes (e.g., to
protect its current or intended investments from fluctuations in
currency exchange rates) as well as for non-hedging purposes.
A Forward Contract to sell a currency may be entered into where the
Fund seeks to protect against an anticipated increase in the exchange
rate for a specific currency which could reduce the dollar value of
portfolio securities denominated in such currency. Conversely, the Fund
may enter into a Forward Contract to purchase a given currency to
protect against a projected increase in the dollar value of securities
denominated in such currency which the Fund intends to acquire.
If a hedging transaction in Forward Contracts is successful, the
decline in the dollar value of portfolio securities or the increase in
the dollar cost of securities to be acquired may be offset, at least in
part, by profits on the Forward Contract. Nevertheless, by entering into
such Forward Contracts, the Fund may be required to forego all or a
portion of the benefits which otherwise could have been obtained from
favorable movements in exchange rates. The Fund does not presently
intend to hold Forward Contracts entered into until maturity, at which
time it would be required to deliver or accept delivery of the
underlying currency, but will seek in most instances to close out
positions in such Contracts by entering into offsetting transactions,
which will serve to fix the Fund's profit or loss based upon the value
of the Contracts at the time the offsetting transaction is executed.
The Fund will also enter into transactions in Forward Contracts for
other than hedging purposes, which presents greater profit potential but
also involves increased risk. For example, the Fund may purchase a given
foreign currency through a Forward Contract if, in the judgment of the
Adviser, the value of such currency is expected to rise relative to the
U.S. dollar. Conversely, the Fund may sell the currency through a
Forward Contract if the Adviser believes that its value will decline
relative to the dollar.
The Fund will profit if the anticipated movements in foreign currency
exchange rates occur, which will increase its gross income. Where
exchange rates do not move in the direction or to the extent
anticipated, however, the Fund may sustain losses which will reduce its
gross income. Such transactions, therefore, could be considered
speculative and could involve significant risk of loss.
The use by the Fund of Forward Contracts also involves the risks
described under the caption "Special Risk Factors -- Options, Futures,
Forwards, Swaps and Other Derivative Transactions" in this Appendix.
FUTURES CONTRACTS
The Fund may purchase and sell futures contracts ("Futures Contracts")
on stock indices, foreign currencies, interest rates or interest-rate
related instruments, indices of foreign currencies or commodities. The
Fund may also purchase and sell Futures Contracts on foreign or domestic
fixed income securities or indices of such securities including
municipal bond indices and any other indices of foreign or domestic
fixed income securities that may become available for trading. Such
investment strategies will be used for hedging purposes and for
non-hedging purposes, subject to applicable law.
A Futures Contract is a bilateral agreement providing for the purchase
and sale of a specified type and amount of a financial instrument,
foreign currency or commodity, or for the making and acceptance of a
cash settlement, at a stated time in the future for a fixed price. By
its terms, a Futures Contract provides for a specified settlement month
in which, in the case of the majority of commodities, interest rate and
foreign currency futures contracts, the underlying commodities, fixed
income securities or currency are delivered by the seller and paid for
by the purchaser, or on which, in the case of index futures contracts
and certain interest rate and foreign currency futures contracts, the
difference between the price at which the contract was entered into and
the contract's closing value is settled between the purchaser and seller
in cash. Futures Contracts differ from options in that they are
bilateral agreements, with both the purchaser and the seller equally
obligated to complete the transaction. Futures Contracts call for
settlement only on the expiration date and cannot be "exercised" at any
other time during their term.
The purchase or sale of a Futures Contract differs from the purchase
or sale of a security or the purchase of an option in that no purchase
price is paid or received. Instead, an amount of cash or cash
equivalents, which varies but may be as low as 5% or less of the value
of the contract, must be deposited with the broker as "initial margin."
Subsequent payments to and from the broker, referred to as "variation
margin," are made on a daily basis as the value of the index or
instrument underlying the Futures Contract fluctuates, making positions
in the Futures Contract more or less valuable -- a process known as
"mark-to-market."
Purchases or sales of stock index futures contracts are used to
attempt to protect the Fund's current or intended stock investments from
broad fluctuations in stock prices. For example, the Fund may sell stock
index futures contracts in anticipation of or during a market decline to
attempt to offset the decrease in market value of the Fund's securities
portfolio that might otherwise result. If such decline occurs, the loss
in value of portfolio securities may be offset, in whole or part, by
gains on the futures position. When the Fund is not fully invested in
the securities market and anticipates a significant market advance, it
may purchase stock index futures contracts in order to gain rapid market
exposure that may, in part or entirely, offset increases in the cost of
securities that the Fund intends to purchase. As such purchases are
made, the corresponding positions in stock index futures contracts will
be closed out. In a substantial majority of these transactions, the Fund
will purchase such securities upon termination of the futures position,
but under unusual market conditions, a long futures position may be
terminated without a related purchase of securities.
Interest rate Futures Contracts may be purchased or sold to attempt to
protect against the effects of interest rate changes on the Fund's
current or intended investments in fixed income securities. For example,
if the Fund owned long-term bonds and interest rates were expected to
increase, the Fund might enter into interest rate futures contracts for
the sale of debt securities. Such a sale would have much the same effect
as selling some of the long-term bonds in the Fund's portfolio. If
interest rates did increase, the value of the debt securities in the
portfolio would decline, but the value of the Fund's interest rate
futures contracts would increase at approximately the same rate, subject
to the correlation risks described below, thereby keeping the net asset
value of the Fund from declining as much as it otherwise would have.
Similarly, if interest rates were expected to decline, interest rate
futures contracts may be purchased to hedge in anticipation of
subsequent purchases of long-term bonds at higher prices. Since the
fluctuations in the value of the interest rate futures contracts should
be similar to that of long-term bonds, the Fund could protect itself
against the effects of the anticipated rise in the value of long-term
bonds without actually buying them until the necessary cash became
available or the market had stabilized. At that time, the interest rate
futures contracts could be liquidated and the Fund's cash reserves could
then be used to buy long-term bonds on the cash market. The Fund could
accomplish similar results by selling bonds with long maturities and
investing in bonds with short maturities when interest rates are
expected to increase. However, since the futures market may be more
liquid than the cash market in certain cases or at certain times, the
use of interest rate futures contracts as a hedging technique may allow
the Fund to hedge its interest rate risk without having to sell its
portfolio securities.
The Fund may purchase and sell foreign currency futures contracts for
hedging purposes, to attempt to protect its current or intended
investments from fluctuations in currency exchange rates. Such
fluctuations could reduce the dollar value of portfolio securities
denominated in foreign currencies, or increase the dollar cost of
foreign-denominated securities to be acquired, even if the value of
such securities in the currencies in which they are denominated remains
constant. The Fund may sell futures contracts on a foreign currency, for
example, where it holds securities denominated in such currency and it
anticipates a decline in the value of such currency relative to the
dollar. In the event such decline occurs, the resulting adverse effect
on the value of foreign-denominated securities may be offset, in whole
or in part, by gains on the futures contracts.
Conversely, the Fund could protect against a rise in the dollar cost
of foreign-denominated securities to be acquired by purchasing futures
contracts on the relevant currency, which could offset, in whole or in
part, the increased cost of such securities resulting from a rise in the
dollar value of the underlying currencies. Where the Fund purchases
futures contracts under such circumstances, however, and the prices of
securities to be acquired instead decline, the Fund will sustain losses
on its futures position which could reduce or eliminate the benefits of
the reduced cost of portfolio securities to be acquired.
The use by the Fund of Futures Contracts also involves the risks
described under the caption "Special Risk Factors -- Options, Futures,
Forwards, Swaps and Other Derivative Transactions" in this Appendix.
INDEXED SECURITIES
The Fund may purchase securities with principal and/or interest
payments whose prices are indexed to the prices of other securities,
securities indices, currencies, precious metals or other commodities, or
other financial indicators. Indexed securities typically, but not
always, are debt securities or deposits whose value at maturity or
coupon rate is determined by reference to a specific instrument or
statistic. The Fund may also purchase indexed deposits with similar
characteristics. Gold-indexed securities, for example, typically
provide for a maturity value that depends on the price of gold,
resulting in a security whose price tends to rise and fall together with
gold prices. Currency-indexed securities typically are short-term to
intermediate-term debt securities whose maturity values or interest
rates are determined by reference to the values of one or more specified
foreign currencies, and may offer higher yields than U.S. dollar
denominated securities of equivalent issuers. Currency-indexed
securities may be positively or negatively indexed; that is, their
maturity value may increase when the specified currency value increases,
resulting in a security that performs similarly to a foreign-denominated
instrument, or their maturity value may decline when foreign currencies
increase, resulting in a security whose price characteristics are
similar to a put on the underlying currency. Currency-indexed securities
may also have prices that depend on the values of a number of different
foreign currencies relative to each other. Certain indexed securities
may expose the Fund to the risk of loss of all or a portion of the
principal amount of its investment and/or the interest that might
otherwise have been earned on the amount invested.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they
are indexed, and may also be influenced by interest rate changes in the
U.S. and abroad. At the same time, indexed securities are subject to the
credit risks associated with the issuer of the security, and their
values may decline substantially if the issuer's creditworthiness
deteriorates. Recent issuers of indexed securities have included banks,
corporations, and certain U.S. Government-sponsored entities.
INVERSE FLOATING RATE OBLIGATIONS
The Fund may invest in so-called "inverse floating rate obligations"
or "residual interest bonds" or other obligations or certificates
relating thereto structured to have similar features. In creating such
an obligation, a municipality issues a certain amount of debt and pays a
fixed interest rate. Half of the debt is issued as variable rate short
term obligations, the interest rate of which is reset at short
intervals, typically 35 days. The other half of the debt is issued as
inverse floating rate obligations, the interest rate of which is
calculated based on the difference between a multiple of (approximately
two times) the interest paid by the issuer and the interest paid on the
short-term obligation. Under usual circumstances, the holder of the
inverse floating rate obligation can generally purchase an equal
principal amount of the short term obligation and link the two
obligations in order to create long-term fixed rate bonds. Because the
interest rate on the inverse floating rate obligation is determined by
subtracting the short-term rate from a fixed amount, the interest rate
will decrease as the short-term rate increases and will increase as the
short-term rate decreases. The magnitude of increases and decreases in
the market value of inverse floating rate obligations may be
approximately twice as large as the comparable change in the market
value of an equal principal amount of long-term bonds which bear
interest at the rate paid by the issuer and have similar credit quality,
redemption and maturity provisions.
INVESTMENT IN OTHER INVESTMENT COMPANIES
The Fund may invest in other investment companies. Such investment may
involve the payment of substantial premiums above the value of such
investment companies' portfolio securities, and the total return on such
investment will be reduced by the operating expenses and fees of such
other investment companies, including advisory fees.
LADDERING
As one way of managing the Fund's exposure to interest rate
fluctuations, the Adviser may engage in a portfolio management strategy
known as "laddering." Under this strategy, the Fund will allocate a
portion of its assets in securities with remaining maturities of less
than 1 year, a portion of its assets in securities with remaining
maturities of 1 to 2 years, a portion of its assets in securities with
remaining maturities of 2 to 3 years, a portion of its assets in
securities with remaining maturities of 3 to 4 years and a portion of
its assets in securities with remaining maturities of 4 to 5 years.
Under normal market conditions, approximately 50% or more of the assets
of the Fund will be devoted to this strategy. The Adviser will actively
manage securities within each rung of the "ladder." "Laddering" does not
require that individual bonds are held to maturity.
The Adviser believes that "laddering" provides additional stability to
the Fund's portfolio by allocating the Fund's assets across a range of
securities with shorter-term maturities. For example, in periods of
rising interest rates and falling bond prices, the bonds with one- and
two-year remaining maturities generally lose less of their value than
bonds with four- and five-year remaining maturities; conversely, in
periods of falling interest rates and corresponding rising bond prices,
the principal value of the bonds with four- and five-year remaining
maturities generally increase more than the bonds with one-and two-year
remaining maturities. Furthermore, with the passage of time, individual
bonds held in the Fund's portfolio tend to become less volatile as the
time of their remaining maturity decreases. In addition, bonds with
four- and five-year remaining maturities generally provide higher income
than bonds with one- and two- year remaining maturities.
"Laddering" does not assure profit and does not protect against loss
in a declining market.
LENDING OF PORTFOLIO SECURITIES
The Fund may seek to increase its income by lending portfolio
securities. Such loans will usually be made only to member firms of the
New York Stock Exchange (the "Exchange") (and subsidiaries thereof) and
member banks of the Federal Reserve System, and would be required to be
secured continuously by collateral in cash, an irrevocable letter of
credit or United States ("U.S.") Treasury securities maintained on a
current basis at an amount at least equal to the market value of the
securities loaned. The Fund would have the right to call a loan and
obtain the securities loaned at any time on customary industry
settlement notice (which will not usually exceed five business days).
For the duration of a loan, the Fund would continue to receive the
equivalent of the interest or dividends paid by the issuer on the
securities loaned. The Fund would also receive a fee from the borrower
or compensation from the investment of the collateral, less a fee paid
to the borrower (if the collateral is in the form of cash). The Fund
would not, however, have the right to vote any securities having voting
rights during the existence of the loan, but the Fund would call the
loan in anticipation of an important vote to be taken among holders of
the securities or of the giving or withholding of their consent on a
material matter affecting the investment. As with other extensions of
credit there are risks of delay in recovery or even loss of rights in
the collateral should the borrower of the securities fail financially.
However, the loans would be made only to firms deemed by the Adviser to
be of good standing, and when, in the judgment of the Adviser, the
consideration which can be earned currently from securities loans of
this type justifies the attendant risk.
LEVERAGING TRANSACTIONS
The Fund may engage in the types of transactions described below,
which involve "leverage" because in each case the Fund receives cash
which it can invest in portfolio securities and has a future obligation
to make a payment. The use of these transactions by the Fund will
generally cause its net asset value to increase or decrease at a greater
rate than would otherwise be the case. Any investment income or gains
earned from the portfolio securities purchased with the proceeds from
these transactions which is in excess of the expenses associated from
these transactions can be expected to cause the value of the Fund's
shares and distributions on the Fund's shares to rise more quickly than
would otherwise be the case. Conversely, if the investment income or
gains earned from the portfolio securities purchased with proceeds from
these transactions fail to cover the expenses associated with these
transactions, the value of the Fund's shares is likely to decrease more
quickly than otherwise would be the case and distributions thereon will
be reduced or eliminated. Hence, these transactions are speculative,
involve leverage and increase the risk of owning or investing in the
shares of the Fund. These transactions also increase the Fund's expenses
because of interest and similar payments and administrative expenses
associated with them. Unless the appreciation and income on assets
purchased with proceeds from these transactions exceed the costs
associated with them, the use of these transactions by a Fund would
diminish the investment performance of the Fund compared with what it
would have been without using these transactions.
BANK BORROWINGS: The Fund may borrow money for investment purposes
from banks and invest the proceeds in accordance with its investment
objectives and policies.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: The Fund may enter into mortgage
"dollar roll" transactions pursuant to which it sells mortgage-backed
securities for delivery in the future and simultaneously contracts to
repurchase substantially similar securities on a specified future date.
During the roll period, the Fund foregoes principal and interest paid on
the mortgage-backed securities. The Fund is compensated for the lost
interest by the difference between the current sales price and the lower
price for the future purchase (often referred to as the "drop") as well
as by the interest earned on, and gains from, the investment of the cash
proceeds of the initial sale. The Fund may also be compensated by
receipt of a commitment fee.
If the income and capital gains from the Fund's investment of the cash
from the initial sale do not exceed the income, capital appreciation and
gain or loss that would have been realized on the securities sold as
part of the dollar roll, the use of this technique will diminish the
investment performance of the Fund compared with what the performance
would have been without the use of the dollar rolls. Dollar roll
transactions involve the risk that the market value of the securities
the Fund is required to purchase may decline below the agreed upon
repurchase price of those securities. If the broker/dealer to whom the
Fund sells securities becomes insolvent, the Fund's right to purchase or
repurchase securities may be restricted. Successful use of mortgage
dollar rolls may depend upon the Adviser's ability to correctly predict
interest rates and prepayments. There is no assurance that dollar rolls
can be successfully employed.
REVERSE REPURCHASE AGREEMENTS: The Fund may enter into reverse
repurchase agreements. In a reverse repurchase agreement, the Fund will
sell securities and receive cash proceeds, subject to its agreement to
repurchase the securities at a later date for a fixed price reflecting a
market rate of interest. There is a risk that the counter party to a
reverse repurchase agreement will be unable or unwilling to complete the
transaction as scheduled, which may result in losses to the Fund. The
Fund will invest the proceeds received under a reverse repurchase
agreement in accordance with its investment objective and policies.
OPTIONS
The Fund may invest in the following types of options, which involves
the risks described under the caption "Special Risk Factors -- Option,
Futures, Forwards, Swaps and Other Derivative Transactions" in this
Appendix:
OPTIONS ON FOREIGN CURRENCIES: The Fund may purchase and write options
on foreign currencies for hedging and non-hedging purposes in a manner
similar to that in which Futures Contracts on foreign currencies, or
Forward Contracts, will be utilized. For example, a decline in the
dollar value of a foreign currency in which portfolio securities are
denominated will reduce the dollar value of such securities, even if
their value in the foreign currency remains constant. In order to
protect against such diminutions in the value of portfolio securities,
the Fund may purchase put options on the foreign currency. If the value
of the currency does decline, the Fund will have the right to sell such
currency for a fixed amount in dollars and will thereby offset, in whole
in part, the adverse effect on its portfolio which otherwise would have
resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby
increasing the cost of such securities, the Fund may purchase call
options thereon. The purchase of such options could offset, at least
partially, the effect of the adverse movements in exchange rates. As in
the case of other types of options, however, the benefit to the Fund
deriving from purchases of foreign currency options will be reduced by
the amount of the premium and related transaction costs. In addition,
where currency exchange rates do not move in the direction or to the
extent anticipated, the Fund could sustain losses on transactions in
foreign currency options which would require it to forego a portion or
all of the benefits of advantageous changes in such rates. The Fund may
write options on foreign currencies for the same types of hedging
purposes. For example, where the Fund anticipates a decline in the
dollar value of foreign-denominated securities due to adverse
fluctuations in exchange rates it could, instead of purchasing a put
option, write a call option on the relevant currency. If the expected
decline occurs, the option will most likely not be exercised, and the
diminution in value of portfolio securities will be offset by the amount
of the premium received less related transaction costs. As in the case
of other types of options, therefore, the writing of Options on Foreign
Currencies will constitute only a partial hedge.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired,
the Fund could write a put option on the relevant currency which, if
rates move in the manner projected, will expire unexercised and allow
the Fund to hedge such increased cost up to the amount of the premium.
Foreign currency options written by the Fund will generally be covered
in a manner similar to the covering of other types of options. As in the
case of other types of options, however, the writing of a foreign
currency option will constitute only a partial hedge up to the amount of
the premium, and only if rates move in the expected direction. If this
does not occur, the option may be exercised and the Fund would be
required to purchase or sell the underlying currency at a loss which may
not be offset by the amount of the premium. Through the writing of
options on foreign currencies, the Fund also may be required to forego
all or a portion of the benefits which might otherwise have been
obtained from favorable movements in exchange rates. The use of foreign
currency options for non-hedging purposes, like the use of other types
of derivatives for such purposes, presents greater profit potential but
also significant risk of loss and could be considered speculative.
OPTIONS ON FUTURES CONTRACTS: The Fund also may purchase and write
options to buy or sell those Futures Contracts in which it may invest
("Options on Futures Contracts") as described above under "Futures
Contracts." Such investment strategies will be used for hedging purposes
and for non-hedging purposes, subject to applicable law.
An Option on a Futures Contract provides the holder with the right to
enter into a "long" position in the underlying Futures Contract, in the
case of a call option, or a "short" position in the underlying Futures
Contract, in the case of a put option, at a fixed exercise price up to a
stated expiration date or, in the case of certain options, on such date.
Upon exercise of the option by the holder, the contract market
clearinghouse establishes a corresponding short position for the writer
of the option, in the case of a call option, or a corresponding long
position in the case of a put option. In the event that an option is
exercised, the parties will be subject to all the risks associated with
the trading of Futures Contracts, such as payment of initial and
variation margin deposits. In addition, the writer of an Option on a
Futures Contract, unlike the holder, is subject to initial and variation
margin requirements on the option position.
A position in an Option on a Futures Contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase
or sale transaction, subject to the availability of a liquid secondary
market, which is the purchase or sale of an option of the same type
(i.e., the same exercise price and expiration date) as the option
previously purchased or sold. The difference between the premiums paid
and received represents the trader's profit or loss on the transaction.
Options on Futures Contracts that are written or purchased by the Fund
on U.S. exchanges are traded on the same contract market as the
underlying Futures Contract, and, like Futures Contracts, are subject to
regulation by the Commodity Futures Trading Commission (the "CFTC") and
the performance guarantee of the exchange clearinghouse. In addition,
Options on Futures Contracts may be traded on foreign exchanges. The
Fund may cover the writing of call Options on Futures Contracts (a)
through purchases of the underlying Futures Contract, (b) through
ownership of the instrument, or instruments included in the index,
underlying the Futures Contract, or (c) through the holding of a call on
the same Futures Contract and in the same principal amount as the call
written where the exercise price of the call held (i) is equal to or
less than the exercise price of the call written or (ii) is greater than
the exercise price of the call written if the Fund owns liquid and
unencumbered assets equal to the difference. The Fund may cover the
writing of put Options on Futures Contracts (a) through sales of the
underlying Futures Contract, (b) through the ownership of liquid and
unencumbered assets equal to the value of the security or index
underlying the Futures Contract, or (c) through the holding of a put on
the same Futures Contract and in the same principal amount as the put
written where the exercise price of the put held (i) is equal to or
greater than the exercise price of the put written or where the exercise
price of the put held (ii) is less than the exercise price of the put
written if the Fund owns liquid and unencumbered assets equal to the
difference. Put and call Options on Futures Contracts may also be
covered in such other manner as may be in accordance with the rules of
the exchange on which the option is traded and applicable laws and
regulations. Upon the exercise of a call Option on a Futures Contract
written by the Fund, the Fund will be required to sell the underlying
Futures Contract which, if the Fund has covered its obligation through
the purchase of such Contract, will serve to liquidate its futures
position. Similarly, where a put Option on a Futures Contract written by
the Fund is exercised, the Fund will be required to purchase the
underlying Futures Contract which, if the Fund has covered its
obligation through the sale of such Contract, will close out its futures
position.
The writing of a call option on a Futures Contract for hedging
purposes constitutes a partial hedge against declining prices of the
securities or other instruments required to be delivered under the terms
of the Futures Contract. If the futures price at expiration of the
option is below the exercise price, the Fund will retain the full amount
of the option premium, less related transaction costs, which provides a
partial hedge against any decline that may have occurred in the Fund's
portfolio holdings. The writing of a put option on a Futures Contract
constitutes a partial hedge against increasing prices of the securities
or other instruments required to be delivered under the terms of the
Futures Contract. If the futures price at expiration of the option is
higher than the exercise price, the Fund will retain the full amount of
the option premium which provides a partial hedge against any increase
in the price of securities which the Fund intends to purchase. If a put
or call option the Fund has written is exercised, the Fund will incur a
loss which will be reduced by the amount of the premium it receives.
Depending on the degree of correlation between changes in the value of
its portfolio securities and the changes in the value of its futures
positions, the Fund's losses from existing Options on Futures Contracts
may to some extent be reduced or increased by changes in the value of
portfolio securities.
The Fund may purchase Options on Futures Contracts for hedging
purposes instead of purchasing or selling the underlying Futures
Contracts. For example, where a decrease in the value of portfolio
securities is anticipated as a result of a projected market-wide decline
or changes in interest or exchange rates, the Fund could, in lieu of
selling Futures Contracts, purchase put options thereon. In the event
that such decrease occurs, it may be offset, in whole or in part, by a
profit on the option. Conversely, where it is projected that the value
of securities to be acquired by the Fund will increase prior to
acquisition, due to a market advance or changes in interest or exchange
rates, the Fund could purchase call Options on Futures Contracts than
purchasing the underlying Futures Contracts.
OPTIONS ON SECURITIES: The Fund may write (sell) covered put and call
options, and purchase put and call options, on securities. Call and put
options written by the Fund may be covered in the manner set forth
below.
A call option written by the Fund is "covered" if the Fund owns the
security underlying the call or has an absolute and immediate right to
acquire that security without additional cash consideration (or for
additional cash consideration if the Fund owns liquid and unencumbered
assets equal to the amount of cash consideration) upon conversion or
exchange of other securities held in its portfolio. A call option is
also covered if the Fund holds a call on the same security and in the
same principal amount as the call written where the exercise price of
the call held (a) is equal to or less than the exercise price of the
call written or (b) is greater than the exercise price of the call
written if the Fund owns liquid and unencumbered assets equal to the
difference. A put option written by the Fund is "covered" if the Fund
owns liquid and unencumbered assets with a value equal to the exercise
price, or else holds a put on the same security and in the same
principal amount as the put written where the exercise price of the put
held is equal to or greater than the exercise price of the put written
or where the exercise price of the put held is less than the exercise
price of the put written if the Fund owns liquid and unencumbered assets
equal to the difference. Put and call options written by the Fund may
also be covered in such other manner as may be in accordance with the
requirements of the exchange on which, or the counterparty with which,
the option is traded, and applicable laws and regulations. If the
writer's obligation is not so covered, it is subject to the risk of the
full change in value of the underlying security from the time the option
is written until exercise.
Effecting a closing transaction in the case of a written call option
will permit the Fund to write another call option on the underlying
security with either a different exercise price or expiration date or
both, or in the case of a written put option will permit the Fund to
write another put option to the extent that the Fund owns liquid and
unencumbered assets. Such transactions permit the Fund to generate
additional premium income, which will partially offset declines in the
value of portfolio securities or increases in the cost of securities to
be acquired. Also, effecting a closing transaction will permit the cash
or proceeds from the concurrent sale of any securities subject to the
option to be used for other investments of the Fund, provided that
another option on such security is not written. If the Fund desires to
sell a particular security from its portfolio on which it has written a
call option, it will effect a closing transaction in connection with the
option prior to or concurrent with the sale of the security.
The Fund will realize a profit from a closing transaction if the
premium paid in connection with the closing of an option written by the
Fund is less than the premium received from writing the option, or if
the premium received in connection with the closing of an option
purchased by the Fund is more than the premium paid for the original
purchase. Conversely, the Fund will suffer a loss if the premium paid or
received in connection with a closing transaction is more or less,
respectively, than the premium received or paid in establishing the
option position. Because increases in the market price of a call option
will generally reflect increases in the market price of the underlying
security, any loss resulting from the repurchase of a call option
previously written by the Fund is likely to be offset in whole or in
part by appreciation of the underlying security owned by the Fund.
The Fund may write options in connection with buy-and-write
transactions; that is, the Fund may purchase a security and then write a
call option against that security. The exercise price of the call option
the Fund determines to write will depend upon the expected price
movement of the underlying security. The exercise price of a call option
may be below ("in-the-money"), equal to ("at-the-money") or above
("out-of-the-money") the current value of the underlying security at
the time the option is written. Buy-and-write transactions using
in-the-money call options may be used when it is expected that the price
of the underlying security will decline moderately during the option
period. Buy-and-write transactions using out-of-the-money call options
may be used when it is expected that the premiums received from writing
the call option plus the appreciation in the market price of the
underlying security up to the exercise price will be greater than the
appreciation in the price of the underlying security alone. If the call
options are exercised in such transactions, the Fund's maximum gain will
be the premium received by it for writing the option, adjusted upwards
or downwards by the difference between the Fund's purchase price of the
security and the exercise price, less related transaction costs. If the
options are not exercised and the price of the underlying security
declines, the amount of such decline will be offset in part, or
entirely, by the premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of
the underlying security rises or otherwise is above the exercise price,
the put option will expire worthless and the Fund's gain will be limited
to the premium received, less related transaction costs. If the market
price of the underlying security declines or otherwise is below the
exercise price, the Fund may elect to close the position or retain the
option until it is exercised, at which time the Fund will be required to
take delivery of the security at the exercise price; the Fund's return
will be the premium received from the put option minus the amount by
which the market price of the security is below the exercise price,
which could result in a loss. Out-of-the-money, at-the-money and
in-the-money put options may be used by the Fund in the same market
environments that call options are used in equivalent buy-and-write
transactions.
The Fund may also write combinations of put and call options on the
same security, known as "straddles" with the same exercise price and
expiration date. By writing a straddle, the Fund undertakes a
simultaneous obligation to sell and purchase the same security in the
event that one of the options is exercised. If the price of the security
subsequently rises sufficiently above the exercise price to cover the
amount of the premium and transaction costs, the call will likely be
exercised and the Fund will be required to sell the underlying security
at a below market price. This loss may be offset, however, in whole or
part, by the premiums received on the writing of the two options.
Conversely, if the price of the security declines by a sufficient
amount, the put will likely be exercised. The writing of straddles will
likely be effective, therefore, only where the price of the security
remains stable and neither the call nor the put is exercised. In those
instances where one of the options is exercised, the loss on the
purchase or sale of the underlying security may exceed the amount of the
premiums received.
By writing a call option, the Fund limits its opportunity to profit
from any increase in the market value of the underlying security above
the exercise price of the option. By writing a put option, the Fund
assumes the risk that it may be required to purchase the underlying
security for an exercise price above its then-current market value,
resulting in a capital loss unless the security subsequently appreciates
in value. The writing of options on securities will not be undertaken by
the Fund solely for hedging purposes, and could involve certain risks
which are not present in the case of hedging transactions. Moreover,
even where options are written for hedging purposes, such transactions
constitute only a partial hedge against declines in the value of
portfolio securities or against increases in the value of securities to
be acquired, up to the amount of the premium.
The Fund may also purchase options for hedging purposes or to increase
its return. Put options may be purchased to hedge against a decline in
the value of portfolio securities. If such decline occurs, the put
options will permit the Fund to sell the securities at the exercise
price, or to close out the options at a profit. By using put options in
this way, the Fund will reduce any profit it might otherwise have
realized in the underlying security by the amount of the premium paid
for the put option and by transaction costs.
The Fund may also purchase call options to hedge against an increase
in the price of securities that the Fund anticipates purchasing in the
future. If such increase occurs, the call option will permit the Fund to
purchase the securities at the exercise price, or to close out the
options at a profit. The premium paid for the call option plus any
transaction costs will reduce the benefit, if any, realized by the Fund
upon exercise of the option, and, unless the price of the underlying
security rises sufficiently, the option may expire worthless to the
Fund.
OPTIONS ON STOCK INDICES: The Fund may write (sell) covered call and
put options and purchase call and put options on stock indices. In
contrast to an option on a security, an option on a stock index provides
the holder with the right but not the obligation to make or receive a
cash settlement upon exercise of the option, rather than the right to
purchase or sell a security. The amount of this settlement is generally
equal to (i) the amount, if any, by which the fixed exercise price of
the option exceeds (in the case of a call) or is below (in the case of a
put) the closing value of the underlying index on the date of exercise,
multiplied by (ii) a fixed "index multiplier." The Fund may cover
written call options on stock indices by owning securities whose price
changes, in the opinion of the Adviser, are expected to be similar to
those of the underlying index, or by having an absolute and immediate
right to acquire such securities without additional cash consideration
(or for additional cash consideration if the Fund owns liquid and
unencumbered assets equal to the amount of cash consideration) upon
conversion or exchange of other securities in its portfolio. Where the
Fund covers a call option on a stock index through ownership of
securities, such securities may not match the composition of the index
and, in that event, the Fund will not be fully covered and could be
subject to risk of loss in the event of adverse changes in the value of
the index. The Fund may also cover call options on stock indices by
holding a call on the same index and in the same principal amount as the
call written where the exercise price of the call held (a) is equal to
or less than the exercise price of the call written or (b) is greater
than the exercise price of the call written if the Fund owns liquid and
unencumbered assets equal to the difference. The Fund may cover put
options on stock indices by owning liquid and unencumbered assets with a
value equal to the exercise price, or by holding a put on the same stock
index and in the same principal amount as the put written where the
exercise price of the put held (a) is equal to or greater than the
exercise price of the put written or (b) is less than the exercise price
of the put written if the Fund owns liquid and unencumbered assets equal
to the difference. Put and call options on stock indices may also be
covered in such other manner as may be in accordance with the rules of
the exchange on which, or the counterparty with which, the option is
traded and applicable laws and regulations.
The Fund will receive a premium from writing a put or call option,
which increases the Fund's gross income in the event the option expires
unexercised or is closed out at a profit. If the value of an index on
which the Fund has written a call option falls or remains the same, the
Fund will realize a profit in the form of the premium received (less
transaction costs) that could offset all or a portion of any decline in
the value of the securities it owns. If the value of the index rises,
however, the Fund will realize a loss in its call option position, which
will reduce the benefit of any unrealized appreciation in the Fund's
stock investments. By writing a put option, the Fund assumes the risk of
a decline in the index. To the extent that the price changes of
securities owned by the Fund correlate with changes in the value of the
index, writing covered put options on indices will increase the Fund's
losses in the event of a market decline, although such losses will be
offset in part by the premium received for writing the option.
The Fund may also purchase put options on stock indices to hedge its
investments against a decline in value. By purchasing a put option on a
stock index, the Fund will seek to offset a decline in the value of
securities it owns through appreciation of the put option. If the value
of the Fund's investments does not decline as anticipated, or if the
value of the option does not increase, the Fund's loss will be limited
to the premium paid for the option plus related transaction costs. The
success of this strategy will largely depend on the accuracy of the
correlation between the changes in value of the index and the changes in
value of the Fund's security holdings.
The purchase of call options on stock indices may be used by the Fund
to attempt to reduce the risk of missing a broad market advance, or an
advance in an industry or market segment, at a time when the Fund holds
uninvested cash or short-term debt securities awaiting investment. When
purchasing call options for this purpose, the Fund will also bear the
risk of losing all or a portion of the premium paid it the value of the
index does not rise. The purchase of call options on stock indices when
the Fund is substantially fully invested is a form of leverage, up to
the amount of the premium and related transaction costs, and involves
risks of loss and of increased volatility similar to those involved in
purchasing calls on securities the Fund owns.
The index underlying a stock index option may be a "broad-based"
index, such as the Standard & Poor's 500 Index or the New York Stock
Exchange Composite Index, the changes in value of which ordinarily will
reflect movements in the stock market in general. In contrast, certain
options may be based on narrower market indices, such as the Standard &
Poor's 100 Index, or on indices of securities of particular industry
groups, such as those of oil and gas or technology companies. A stock
index assigns relative values to the stocks included in the index and
the index fluctuates with changes in the market values of the stocks so
included. The composition of the index is changed periodically.
RESET OPTIONS:
In certain instances, the Fund may purchase or write options on U.S.
Treasury securities which provide for periodic adjustment of the strike
price and may also provide for the periodic adjustment of the premium
during the term of each such option. Like other types of options, these
transactions, which may be referred to as "reset" options or "adjustable
strike" options grant the purchaser the right to purchase (in the case
of a call) or sell (in the case of a put), a specified type of U.S.
Treasury security at any time up to a stated expiration date (or, in
certain instances, on such date). In contrast to other types of options,
however, the price at which the underlying security may be purchased or
sold under a "reset" option is determined at various intervals during
the term of the option, and such price fluctuates from interval to
interval based on changes in the market value of the underlying
security. As a result, the strike price of a "reset" option, at the time
of exercise, may be less advantageous than if the strike price had been
fixed at the initiation of the option. In addition, the premium paid for
the purchase of the option may be determined at the termination, rather
than the initiation, of the option. If the premium for a reset option
written by the Fund is paid at termination, the Fund assumes the risk
that (i) the premium may be less than the premium which would otherwise
have been received at the initiation of the option because of such
factors as the volatility in yield of the underlying Treasury security
over the term of the option and adjustments made to the strike price of
the option, and (ii) the option purchaser may default on its obligation
to pay the premium at the termination of the option. Conversely, where
the Fund purchases a reset option, it could be required to pay a higher
premium than would have been the case at the initiation of the option.
"YIELD CURVE" OPTIONS: The Fund may also enter into options on the
"spread," or yield differential, between two fixed income securities, in
transactions referred to as "yield curve" options. In contrast to other
types of options, a yield curve option is based on the difference
between the yields of designated securities, rather than the prices of
the individual securities, and is settled through cash payments.
Accordingly, a yield curve option is profitable to the holder if this
differential widens (in the case of a call) or narrows (in the case of a
put), regardless of whether the yields of the underlying securities
increase or decrease.
Yield curve options may be used for the same purposes as other options
on securities. Specifically, the Fund may purchase or write such options
for hedging purposes. For example, the Fund may purchase a call option
on the yield spread between two securities, if it owns one of the
securities and anticipates purchasing the other security and wants to
hedge against an adverse change in the yield spread between the two
securities. The Fund may also purchase or write yield curve options for
other than hedging purposes (i.e., in an effort to increase its current
income) if, in the judgment of the Adviser, the Fund will be able to
profit from movements in the spread between the yields of the underlying
securities. The trading of yield curve options is subject to all of the
risks associated with the trading of other types of options. In
addition, however, such options present risk of loss even if the yield
of one of the underlying securities remains constant, if the spread
moves in a direction or to an extent which was not anticipated. Yield
curve options written by the Fund will be "covered". A call (or put)
option is covered if the Fund holds another call (or put) option on the
spread between the same two securities and owns liquid and unencumbered
assets sufficient to cover the Fund's net liability under the two
options. Therefore, the Fund's liability for such a covered option is
generally limited to the difference between the amount of the Fund's
liability under the option written by the Fund less the value of the
option held by the Fund. Yield curve options may also be covered in such
other manner as may be in accordance with the requirements of the
counterparty with which the option is traded and applicable laws and
regulations. Yield curve options are traded over-the-counter and because
they have been only recently introduced, established trading markets for
these securities have not yet developed.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with sellers who are
member firms (or a subsidiary thereof) of the New York Stock Exchange or
members of the Federal Reserve System, recognized primary U.S.
Government securities dealers or institutions which the Adviser has
determined to be of comparable creditworthiness. The securities that the
Fund purchases and holds through its agent are U.S. Government
securities, the values of which are equal to or greater than the
repurchase price agreed to be paid by the seller. The repurchase price
may be higher than the purchase price, the difference being income to
the Fund, or the purchase and repurchase prices may be the same, with
interest at a standard rate due to the Fund together with the repurchase
price on repurchase. In either case, the income to the Fund is unrelated
to the interest rate on the Government securities.
The repurchase agreement provides that in the event the seller fails
to pay the amount agreed upon on the agreed upon delivery date or upon
demand, as the case may be, the Fund will have the right to liquidate
the securities. If at the time the Fund is contractually entitled to
exercise its right to liquidate the securities, the seller is subject to
a proceeding under the bankruptcy laws or its assets are otherwise
subject to a stay order, the Fund's exercise of its right to liquidate
the securities may be delayed and result in certain losses and costs to
the Fund. The Fund has adopted and follows procedures which are intended
to minimize the risks of repurchase agreements. For example, the Fund
only enters into repurchase agreements after the Adviser has determined
that the seller is creditworthy, and the Adviser monitors that seller's
creditworthiness on an ongoing basis. Moreover, under such agreements,
the value of the securities (which are marked to market every business
day) is required to be greater than the repurchase price, and the Fund
has the right to make margin calls at any time if the value of the
securities falls below the agreed upon collateral.
RESTRICTED SECURITIES
The Fund may purchase securities that are not registered under the
Securities Act of 1933, as amended ("1933 Act") ("restricted
securities"), including those that can be offered and sold to "qualified
institutional buyers" under Rule 144A under the 1933 Act ("Rule 144A
securities") and commercial paper issued under Section 4(2) of the 1933
Act ("4(2) Paper"). A determination is made, based upon a continuing
review of the trading markets for the Rule 144A security or 4(2) Paper,
whether such security is liquid and thus not subject to the Fund's
limitation on investing in illiquid investments. The Board of Trustees
has adopted guidelines and delegated to MFS the daily function of
determining and monitoring the liquidity of Rule 144A securities and
4(2) Paper. The Board, however, retains oversight of the liquidity
determinations focusing on factors such as valuation, liquidity and
availability of information. Investing in Rule 144A securities could
have the effect of decreasing the level of liquidity in the Fund to the
extent that qualified institutional buyers become for a time
uninterested in purchasing these Rule 144A securities held in the Fund's
portfolio. Subject to the Fund's limitation on investments in illiquid
investments, the Fund may also invest in restricted securities that may
not be sold under Rule 144A, which presents certain risks. As a result,
the Fund might not be able to sell these securities when the Adviser
wishes to do so, or might have to sell them at less than fair value. In
addition, market quotations are less readily available. Therefore,
judgment may at times play a greater role in valuing these securities
than in the case of unrestricted securities.
SHORT SALES
The Fund may seek to hedge investments or realize additional gains
through short sales. The Fund may make short sales, which are
transactions in which the Fund sells a security it does not own, in
anticipation of a decline in the market value of that security. To
complete such a transaction, the Fund must borrow the security to make
delivery to the buyer. The Fund then is obligated to replace the
security borrowed by purchasing it at the market price at the time of
replacement. The price at such time may be more or less than the price
at which the security was sold by the Fund. Until the security is
replaced, the Fund is required to repay the lender any dividends or
interest which accrue during the period of the loan. To borrow the
security, the Fund also may be required to pay a premium, which would
increase the cost of the security sold. The net proceeds of the short
sale will be retained by the broker, to the extent necessary to meet
margin requirements, until the short position is closed out. The Fund
also will incur transaction costs in effecting short sales.
The Fund will incur a loss as a result of the short sale if the price
of the security increases between the date of the short sale and the
date on which the Fund replaces the borrowed security. The Fund will
realize a gain if the price of the security declines between those
dates. The amount of any gain will be decreased, and the amount of any
loss increased, by the amount of the premium, dividends or interest the
Fund may be required to pay in connection with a short sale.
Whenever the Fund engages in short sales, it identifies liquid and
unencumbered assets in an amount that, when combined with the amount of
collateral deposited with the broker connection with the short sale,
equals the current market value of the security sold short.
SHORT SALES AGAINST THE BOX
The Fund may make short sales "against the box," i.e., when a security
identical to one owned by the Fund is borrowed and sold short. If the
Fund enters into a short sale against the box, it is required to
segregate securities equivalent in kind and amount to the securities
sold short (or securities convertible or exchangeable into such
securities) and is required to hold such securities while the short sale
is outstanding. The Fund will incur transaction costs, including
interest, in connection with opening, maintaining, and closing short
sales against the box.
SHORT TERM INSTRUMENTS
The Fund may hold cash and invest in cash equivalents, such as
short-term U.S. Government Securities, commercial paper and bank
instruments.
SWAPS AND RELATED DERIVATIVE INSTRUMENTS
The Fund may enter into interest rate swaps, currency swaps and other
types of available swap agreements, including swaps on securities,
commodities and indices, and related types of derivatives, such as caps,
collars and floors. A swap is an agreement between two parties pursuant
to which each party agrees to make one or more payments to the other on
regularly scheduled dates over a stated term, based on different
interest rates, currency exchange rates, security or commodity prices,
the prices or rates of other types of financial instruments or assets or
the levels of specified indices. Under a typical swap, one party may
agree to pay a fixed rate or a floating rate determined by reference to
a specified instrument, rate or index, multiplied in each case by a
specified amount (the "notional amount"), while the other party agrees
to pay an amount equal to a different floating rate multiplied by the
same notional amount. On each payment date, the obligations of parties
are netted, with only the net amount paid by one party to the other. All
swap agreements entered into by the Fund with the same counterparty are
generally governed by a single master agreement, which provides for the
netting of all amounts owed by the parties under the agreement upon the
occurrence of an event of default, thereby reducing the credit risk to
which such party is exposed.
Swap agreements are typically individually negotiated and structured
to provide exposure to a variety of different types of investments or
market factors. Swap agreements may be entered into for hedging or
non-hedging purposes and therefore may increase or decrease the Fund's
exposure to the underlying instrument, rate, asset or index. Swap
agreements can take many different forms and are known by a variety of
names. The Fund is not limited to any particular form or variety of swap
agreement if the Adviser determines it is consistent with the Fund's
investment objective and policies.
For example, the Fund may enter into an interest rate swap in order to
protect against declines in the value of fixed income securities held by
the Fund. In such an instance, the Fund would agree with a counterparty
to pay a fixed rate (multiplied by a notional amount) and the
counterparty would agree to pay a floating rate multiplied by the same
notional amount. If interest rates rise, resulting in a diminution in
the value of the Fund's portfolio, the Fund would receive payments under
the swap that would offset, in whole or part, such diminution in value.
The Fund may also enter into swaps to modify its exposure to particular
markets or instruments, such as a currency swap between the dollar and
another currency which would have the effect of increasing or decreasing
the Fund's exposure to each such currency. The Fund might also enter
into a swap on a particular security, or a basket or index of
securities, in order to gain exposure to the underlying security or
securities, as an alternative to purchasing such securities. Such
transactions could be more efficient or less costly in certain instances
than an actual purchase or sale of the securities.
The Fund may enter into other related types of over-the-counter
derivatives, such as "caps", "floors", "collars" and options on swaps,
or "swaptions", for the same types of hedging or non-hedging purposes.
Caps and floors are similar to swaps, except that one party pays a fee
at the time the transaction is entered into and has no further payment
obligations, while the other party is obligated to pay an amount equal
to the amount by which a specified fixed or floating rate exceeds or is
below another rate (multiplied by a notional amount). Caps and floors,
therefore, are also similar to options. A collar is in effect a
combination of a cap and a floor, with payments made only within or
outside a specified range of prices or rates. A swaption is an option to
enter into a swap agreement. Like other types of options, the buyer of a
swaption pays a non-refundable premium for the option and obtains the
right, but not the obligation, to enter into the underlying swap on the
agreed-upon terms.
The Fund will maintain liquid and unencumbered assets to cover its
current obligations under swap and other over-the-counter derivative
transactions. If the Fund enters into a swap agreement on a net basis
(i.e., the two payment streams are netted out, with the Fund receiving
or paying, as the case may be, only the net amount of the two payments),
the Fund will maintain liquid and unencumbered assets with a daily value
at least equal to the excess, if any, of the Fund's accrued obligations
under the swap agreement over the accrued amount the Fund is entitled to
receive under the agreement. If the Fund enters into a swap agreement on
other than a net basis, it will maintain liquid and unencumbered assets
with a value equal to the full amount of the Fund's accrued obligations
under the agreement.
The most significant factor in the performance of swaps, caps, floors
and collars is the change in the underlying price, rate or index level
that determines the amount of payments to be made under the arrangement.
If the Adviser is incorrect in its forecasts of such factors, the
investment performance of the Fund would be less than what it would have
been if these investment techniques had not been used. If a swap
agreement calls for payments by the Fund, the Fund must be prepared to
make such payments when due. In addition, if the counterparty's
creditworthiness would decline, the value of the swap agreement would be
likely to decline, potentially resulting in losses.
If the counterparty defaults, the Fund's risk of loss consists of the
net amount of payments that the Fund is contractually entitled to
receive. The Fund anticipates that it will be able to eliminate or
reduce its exposure under these arrangements by assignment or other
disposition or by entering into an offsetting agreement with the same or
another counterparty, but there can be no assurance that it will be able
to do so.
The uses by the Fund of Swaps and related derivative instruments also
involves the risks described under the caption "Special Risk Factors --
Options, Futures, Forwards, Swaps and Other Derivative Transactions" in
this Appendix.
TEMPORARY BORROWINGS
The Fund may borrow money for temporary purposes (e.g., to meet
redemption requests or settle outstanding purchases of portfolio
securities).
TEMPORARY DEFENSIVE POSITIONS
During periods of unusual market conditions when the Adviser believes
that investing for temporary defensive purposes is appropriate, or in
order to meet anticipated redemption requests, a large portion or all of
the assets of the Fund may be invested in cash (including foreign
currency) or cash equivalents, including, but not limited to,
obligations of banks (including certificates of deposit, bankers'
acceptances, time deposits and repurchase agreements), commercial paper,
short-term notes, U.S. Government Securities and related repurchase
agreements.
WARRANTS
The Fund may invest in warrants. Warrants are securities that give the
Fund the right to purchase equity securities from the issuer at a
specific price (the "strike price") for a limited period of time. The
strike price of warrants typically is much lower than the current market
price of the underlying securities, yet they are subject to similar
price fluctuations. As a result, warrants may be more volatile
investments than the underlying securities and may offer greater
potential for capital appreciation as well as capital loss. Warrants do
not entitle a holder to dividends or voting rights with respect to the
underlying securities and do not represent any rights in the assets of
the issuing company. Also, the value of the warrant does not necessarily
change with the value of the underlying securities and a warrant ceases
to have value if it is not exercised prior to the expiration date. These
factors can make warrants more speculative than other types of
investments.
"WHEN-ISSUED" SECURITIES
The Fund may purchase securities on a "when-issued" or on a "forward
delivery" basis which means that the securities will be delivered to the
Fund at a future date usually beyond customary settlement time. The
commitment to purchase a security for which payment will be made on a
future date may be deemed a separate security. In general, the Fund does
not pay for such securities until received, and does not start earning
interest on the securities until the contractual settlement date. While
awaiting delivery of securities purchased on such bases, a Fund will
identify liquid and unencumbered assets equal to its forward delivery
commitment.
SPECIAL RISK FACTORS -- OPTIONS, FUTURES, FORWARDS, SWAPS AND OTHER
DERIVATIVE TRANSACTIONS
RISK OF IMPERFECT CORRELATION OF HEDGING INSTRUMENTS WITH THE FUND'S
PORTFOLIO: The Fund's ability effectively to hedge all or a portion of
its portfolio through transactions in derivatives, including options,
Futures Contracts, Options on Futures Contracts, Forward Contracts,
swaps and other types of derivatives depends on the degree to which
price movements in the underlying index or instrument correlate with
price movements in the relevant portion of the Fund's portfolio. In the
case of derivative instruments based on an index, the portfolio will not
duplicate the components of the index, and in the case of derivative
instruments on fixed income securities, the portfolio securities which
are being hedged may not be the same type of obligation underlying such
derivatives. The use of derivatives for "cross hedging" purposes (such
as a transaction in a Forward Contract on one currency to hedge exposure
to a different currency) may involve greater correlation risks.
Consequently, the Fund bears the risk that the price of the portfolio
securities being hedged will not move in the same amount or direction as
the underlying index or obligation.
If the Fund purchases a put option on an index and the index decreases
less than the value of the hedged securities, the Fund would experience
a loss which is not completely offset by the put option. It is also
possible that there may be a negative correlation between the index or
obligation underlying an option or Futures Contract in which the Fund
has a position and the portfolio securities the Fund is attempting to
hedge, which could result in a loss on both the portfolio and the
hedging instrument. It should be noted that stock index futures
contracts or options based upon a narrower index of securities, such as
those of a particular industry group, may present greater risk than
options or futures based on a broad market index. This is due to the
fact that a narrower index is more susceptible to rapid and extreme
fluctuations as a result of changes in the value of a small number of
securities. Nevertheless, where the Fund enters into transactions in
options or futures on narrowly-based indices for hedging purposes,
movements in the value of the index should, if the hedge is successful,
correlate closely with the portion of the Fund's portfolio or the
intended acquisitions being hedged.
The trading of derivatives for hedging purposes entails the additional
risk of imperfect correlation between movements in the price of the
derivative and the price of the underlying index or obligation. The
anticipated spread between the prices may be distorted due to the
differences in the nature of the markets such as differences in margin
requirements, the liquidity of such markets and the participation of
speculators in the derivatives markets. In this regard, trading by
speculators in derivatives has in the past occasionally resulted in
market distortions, which may be difficult or impossible to predict,
particularly near the expiration of such instruments.
The trading of Options on Futures Contracts also entails the risk that
changes in the value of the underlying Futures Contracts will not be
fully reflected in the value of the option. The risk of imperfect
correlation, however, generally tends to diminish as the maturity date
of the Futures Contract or expiration date of the option approaches.
Further, with respect to options on securities, options on stock
indices, options on currencies and Options on Futures Contracts, the
Fund is subject to the risk of market movements between the time that
the option is exercised and the time of performance thereunder. This
could increase the extent of any loss suffered by the Fund in connection
with such transactions.
In writing a covered call option on a security, index or futures
contract, the Fund also incurs the risk that changes in the value of the
instruments used to cover the position will not correlate closely with
changes in the value of the option or underlying index or instrument.
For example, where the Fund covers a call option written on a stock
index through segregation of securities, such securities may not match
the composition of the index, and the Fund may not be fully covered. As
a result, the Fund could be subject to risk of loss in the event of
adverse market movements.
The writing of options on securities, options on stock indices or
Options on Futures Contracts constitutes only a partial hedge against
fluctuations in the value of the Fund's portfolio. When the Fund writes
an option, it will receive premium income in return for the holder's
purchase of the right to acquire or dispose of the underlying
obligation. In the event that the price of such obligation does not rise
sufficiently above the exercise price of the option, in the case of a
call, or fall below the exercise price, in the case of a put, the option
will not be exercised and the Fund will retain the amount of the
premium, less related transaction costs, which will constitute a partial
hedge against any decline that may have occurred in the Fund's portfolio
holdings or any increase in the cost of the instruments to be acquired.
Where the price of the underlying obligation moves sufficiently in
favor of the holder to warrant exercise of the option, however, and the
option is exercised, the Fund will incur a loss which may only be
partially offset by the amount of the premium it received. Moreover, by
writing an option, the Fund may be required to forego the benefits which
might otherwise have been obtained from an increase in the value of
portfolio securities or other assets or a decline in the value of
securities or assets to be acquired. In the event of the occurrence of
any of the foregoing adverse market events, the Fund's overall return
may be lower than if it had not engaged in the hedging transactions.
Furthermore, the cost of using these techniques may make it economically
infeasible for the Fund to engage in such transactions.
RISKS OF NON-HEDGING TRANSACTIONS: The Fund may enter transactions in
derivatives for non-hedging purposes as well as hedging purposes. Non-
hedging transactions in such instruments involve greater risks and may
result in losses which may not be offset by increases in the value of
portfolio securities or declines in the cost of securities to be
acquired. The Fund will only write covered options, such that liquid and
unencumbered assets necessary to satisfy an option exercise will be
identified, unless the option is covered in such other manner as may be
in accordance with the rules of the exchange on which, or the
counterparty with which, the option is traded and applicable laws and
regulations. Nevertheless, the method of covering an option employed by
the Fund may not fully protect it against risk of loss and, in any
event, the Fund could suffer losses on the option position which might
not be offset by corresponding portfolio gains. The Fund may also enter
into futures, Forward Contracts or swaps for non-hedging purposes. For
example, the Fund may enter into such a transaction as an alternative to
purchasing or selling the underlying instrument or to obtain desired
exposure to an index or market. In such instances, the Fund will be
exposed to the same economic risks incurred in purchasing or selling the
underlying instrument or instruments. However, transactions in futures,
Forward Contracts or swaps may be leveraged, which could expose the Fund
to greater risk of loss than such purchases or sales. Entering into
transactions in derivatives for other than hedging purposes, therefore,
could expose the Fund to significant risk of loss if the prices, rates
or values of the underlying instruments or indices do not move in the
direction or to the extent anticipated.
With respect to the writing of straddles on securities, the Fund
incurs the risk that the price of the underlying security will not
remain stable, that one of the options written will be exercised and
that the resulting loss will not be offset by the amount of the premiums
received. Such transactions, therefore, create an opportunity for
increased return by providing the Fund with two simultaneous premiums on
the same security, but involve additional risk, since the Fund may have
an option exercised against it regardless of whether the price of the
security increases or decreases.
RISK OF A POTENTIAL LACK OF A LIQUID SECONDARY MARKET: Prior to
exercise or expiration, a futures or option position can only be
terminated by entering into a closing purchase or sale transaction. This
requires a secondary market for such instruments on the exchange on
which the initial transaction was entered into. While the Fund will
enter into options or futures positions only if there appears to be a
liquid secondary market therefor, there can be no assurance that such a
market will exist for any particular contract at any specific time. In
that event, it may not be possible to close out a position held by the
Fund, and the Fund could be required to purchase or sell the instrument
underlying an option, make or receive a cash settlement or meet ongoing
variation margin requirements. Under such circumstances, if the Fund has
insufficient cash available to meet margin requirements, it will be
necessary to liquidate portfolio securities or other assets at a time
when it is disadvantageous to do so. The inability to close out options
and futures positions, therefore, could have an adverse impact on the
Fund's ability effectively to hedge its portfolio, and could result in
trading losses.
The liquidity of a secondary market in a Futures Contract or option
thereon may be adversely affected by "daily price fluctuation limits,"
established by exchanges, which limit the amount of fluctuation in the
price of a contract during a single trading day. Once the daily limit
has been reached in the contract, no trades may be entered into at a
price beyond the limit, thus preventing the liquidation of open futures
or option positions and requiring traders to make additional margin
deposits. Prices have in the past moved to the daily limit on a number
of consecutive trading days.
The trading of Futures Contracts and options is also subject to the
risk of trading halts, suspensions, exchange or clearinghouse equipment
failures, government intervention, insolvency of a brokerage firm or
clearinghouse or other disruptions of normal trading activity, which
could at times make it difficult or impossible to liquidate existing
positions or to recover excess variation margin payments.
MARGIN: Because of low initial margin deposits made upon the
establishment of a futures, forward or swap position (certain of which
may require no initial margin deposits) and the writing of an option,
such transactions involve substantial leverage. As a result, relatively
small movements in the price of the contract can result in substantial
unrealized gains or losses. Where the Fund enters into such transactions
for hedging purposes, any losses incurred in connection therewith
should, if the hedging strategy is successful, be offset, in whole or in
part, by increases in the value of securities or other assets held by
the Fund or decreases in the prices of securities or other assets the
Fund intends to acquire. Where the Fund enters into such transactions
for other than hedging purposes, the margin requirements associated with
such transactions could expose the Fund to greater risk.
POTENTIAL BANKRUPTCY OF A CLEARINGHOUSE OR BROKER: When the Fund
enters into transactions in exchange-traded futures or options, it is
exposed to the risk of the potential bankruptcy of the relevant exchange
clearinghouse or the broker through which the Fund has effected the
transaction. In that event, the Fund might not be able to recover
amounts deposited as margin, or amounts owed to the Fund in connection
with its transactions, for an indefinite period of time, and could
sustain losses of a portion or all of such amounts, Moreover, the
performance guarantee of an exchange clearinghouse generally extends
only to its members and the Fund could sustain losses, notwithstanding
such guarantee, in the event of the bankruptcy of its broker.
TRADING AND POSITION LIMITS: The exchanges on which futures and
options are traded may impose limitations governing the maximum number
of positions on the same side of the market and involving the same
underlying instrument which may be held by a single investor, whether
acting alone or in concert with others (regardless of whether such
contracts are held on the same or different exchanges or held or written
in one or more accounts or through one or more brokers). Further, the
CFTC and the various contract markets have established limits referred
to as "speculative position limits" on the maximum net long or net short
position which any person may hold or control in a particular futures or
option contract. An exchange may order the liquidation of positions
found to be in violation of these limits and it may impose other
sanctions or restrictions. The Adviser does not believe that these
trading and position limits will have any adverse impact on the
strategies for hedging the portfolios of the Fund.
RISKS OF OPTIONS ON FUTURES CONTRACTS: The amount of risk the Fund
assumes when it purchases an Option on a Futures Contract is the premium
paid for the option, plus related transaction costs. In order to profit
from an option purchased, however, it may be necessary to exercise the
option and to liquidate the underlying Futures Contract, subject to the
risks of the availability of a liquid offset market described herein.
The writer of an Option on a Futures Contract is subject to the risks of
commodity futures trading, including the requirement of initial and
variation margin payments, as well as the additional risk that movements
in the price of the option may not correlate with movements in the price
of the underlying security, index, currency or Futures Contract.
RISKS OF TRANSACTIONS IN FOREIGN CURRENCIES AND OVER-THE-COUNTER
DERIVATIVES AND OTHER TRANSACTIONS NOT CONDUCTED ON U.S. EXCHANGES:
Transactions in Forward Contracts on foreign currencies, as well as
futures and options on foreign currencies and transactions executed on
foreign exchanges, are subject to all of the correlation, liquidity and
other risks outlined above. In addition, however, such transactions are
subject to the risk of governmental actions affecting trading in or the
prices of currencies underlying such contracts, which could restrict or
eliminate trading and could have a substantial adverse effect on the
value of positions held by the Fund. Further, the value of such
positions could be adversely affected by a number of other complex
political and economic factors applicable to the countries issuing the
underlying currencies.
Further, unlike trading in most other types of instruments, there is
no systematic reporting of last sale information with respect to the
foreign currencies underlying contracts thereon. As a result, the
available information on which trading systems will be based may not be
as complete as the comparable data on which the Fund makes investment
and trading decisions in connection with other transactions. Moreover,
because the foreign currency market is a global, 24-hour market, events
could occur in that market which will not be reflected in the forward,
futures or options market until the following day, thereby making it
more difficult for the Fund to respond to such events in a timely
manner.
Settlements of exercises of over-the-counter Forward Contracts or
foreign currency options generally must occur within the country issuing
the underlying currency, which in turn requires traders to accept or
make delivery of such currencies in conformity with any U.S. or foreign
restrictions and regulations regarding the maintenance of foreign
banking relationships, fees, taxes or other charges.
Unlike transactions entered into by the Fund in Futures Contracts and
exchange-traded options, options on foreign currencies, Forward
Contracts, over-the-counter options on securities, swaps and other
over-the-counter derivatives are not traded on contract markets
regulated by the CFTC or (with the exception of certain foreign currency
options) the SEC. To the contrary, such instruments are traded through
financial institutions acting as market-makers, although foreign
currency options are also traded on certain national securities
exchanges, such as the Philadelphia Stock Exchange and the Chicago Board
Options Exchange, subject to SEC regulation. In an over-the-counter
trading environment, many of the protections afforded to exchange
participants will not be available. For example, there are no daily
price fluctuation limits, and adverse market movements could therefore
continue to an unlimited extent over a period of time. Although the
purchaser of an option cannot lose more than the amount of the premium
plus related transaction costs, this entire amount could be lost.
Moreover, the option writer and a trader of Forward Contracts could lose
amounts substantially in excess of their initial investments, due to the
margin and collateral requirements associated with such positions.
In addition, over-the-counter transactions can only be entered into
with a financial institution willing to take the opposite side, as
principal, of the Fund's position unless the institution acts as broker
and is able to find another counterparty willing to enter into the
transaction with the Fund. Where no such counterparty is available, it
will not be possible to enter into a desired transaction. There also may
be no liquid secondary market in the trading of over-the-counter
contracts, and the Fund could be required to retain options purchased or
written, or Forward Contracts or swaps entered into, until exercise,
expiration or maturity. This in turn could limit the Fund's ability to
profit from open positions or to reduce losses experienced, and could
result in greater losses.
Further, over-the-counter transactions are not subject to the
guarantee of an exchange clearinghouse, and the Fund will therefore be
subject to the risk of default by, or the bankruptcy of, the financial
institution serving as its counterparty. One or more of such
institutions also may decide to discontinue their role as market-makers
in a particular currency or security, thereby restricting the Fund's
ability to enter into desired hedging transactions. The Fund will enter
into an over-the-counter transaction only with parties whose
creditworthiness has been reviewed and found satisfactory by the
Adviser.
Options on securities, options on stock indices, Futures Contracts,
Options on Futures Contracts and options on foreign currencies may be
traded on exchanges located in foreign countries. Such transactions may
not be conducted in the same manner as those entered into on U.S.
exchanges, and may be subject to different margin, exercise, settlement
or expiration procedures. As a result, many of the risks of
over-the-counter trading may be present in connection with such
transactions.
Options on foreign currencies traded on national securities exchanges
are within the jurisdiction of the SEC, as are other securities traded
on such exchanges. As a result, many of the protections provided to
traders on organized exchanges will be available with respect to such
transactions. In particular, all foreign currency option positions
entered into on a national securities exchange are cleared and
guaranteed by the Options Clearing Corporation (the "OCC"), thereby
reducing the risk of counterparty default. Further, a liquid secondary
market in options traded on a national securities exchange may be more
readily available than in the over-the-counter market, potentially
permitting the Fund to liquidate open positions at a profit prior to
exercise or expiration, or to limit losses in the event of adverse
market movements.
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of the availability of a liquid
secondary market described above, as well as the risks regarding adverse
market movements, margining of options written, the nature of the
foreign currency market, possible intervention by governmental
authorities and the effects of other political and economic events. In
addition, exchange-traded options on foreign currencies involve certain
risks not presented by the over-the-counter market. For example,
exercise and settlement of such options must be made exclusively through
the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it
determines that foreign governmental restrictions or taxes would prevent
the orderly settlement of foreign currency option exercises, or would
result in undue burdens on the OCC or its clearing member, impose
special procedures on exercise and settlement, such as technical changes
in the mechanics of delivery of currency, the fixing of dollar
settlement prices or prohibitions on exercise.
POLICIES ON THE USE OF FUTURES AND OPTIONS ON FUTURES CONTRACTS: In
order to assure that the Fund will not be deemed to be a "commodity
pool" for purposes of the Commodity Exchange Act, regulations of the
CFTC require that the Fund enter into transactions in Futures Contracts,
Options on Futures Contracts and Options on Foreign Currencies traded on
a CFTC-regulated exchange only (i) for bona fide hedging purposes (as
defined in CFTC regulations), or (ii) for non-bona fide hedging
purposes, provided that the aggregate initial margin and premiums
required to establish such non-bona fide hedging positions does not
exceed 5% of the liquidation value of the Fund's assets, after taking
into account unrealized profits and unrealized losses on any such
contracts the Fund has entered into, and excluding, in computing such
5%, the in-the-money amount with respect to an option that is
in-the-money at the time of purchase.
<PAGE>
PART II - APPENDIX D
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the
quality of various debt instruments. It should be emphasized, however,
that ratings are not absolute standards of quality. Consequently, debt
instruments with the same maturity, coupon and rating may have different
yields while debt instruments of the same maturity and coupon with
different ratings may have the same yield.
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt edged." Interest payments are protected by a large
or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risk appear
somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
some time in the future.
Baa: Bonds which are rated Baa are considered as medium-grade
obligations, (i.e., they are neither highly protected nor poorly
secured). Interest payments and principal security appear adequate for
the present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds
lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection
of interest and principal payments may be very moderate, and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to
principal or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
ABSENCE OF RATING: Where no rating has been assigned or where a rating
has been suspended or withdrawn, it may be for reasons unrelated to the
quality of the issue. Should no rating be assigned, the reason may be
one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies
that are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or
issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances
arise, the effects of which preclude satisfactory analysis; if there is
no longer available reasonable up-to-date data to permit a judgment to
be formed; if a bond is called for redemption; or for other reasons.
STANDARD & POOR'S RATINGS SERVICES
AAA: An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
EXTREMELY STRONG.
AA: An obligation rated AA differs from the highest rated obligations
only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is VERY STRONG.
A: An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
obligations in higher rated categories. However, the obligor's capacity
to meet its financial commitment on the obligation is still STRONG.
BBB: An obligation rated BBB exhibits ADEQUATE protection parameters.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its
financial commitment on the obligation.
Obligations rated BB, B, CCC, CC, and C are regarded as having
significant speculative characteristics. BB indicates the least degree
of speculation and C the highest. While such obligations will likely
have some quality and protective characteristics, these may be
outweighed by large uncertainties or major exposures to adverse
conditions.
BB: An obligation rated BB is LESS VULNERABLE to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which
could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
B: An obligation rated B is MORE VULNERABLE to nonpayment than
obligations rated BB, but the obligor currently has the capacity to meet
its financial commitment on the obligation. Adverse business, financial,
or economic conditions will likely impair the obligor's capacity or
willingness to meet its financial commitment on the obligation.
CCC: An obligation rated CCC is CURRENTLY VULNERABLE to nonpayment, and
is dependent upon favorable business, financial, and economic conditions
for the obligor to meet its financial commitment on the obligation. In
the event of adverse business, financial, or economic conditions the
obligor is not likely to have the capacity to meet its financial
commitment on the obligation.
CC: An obligation rated CC is CURRENTLY HIGHLY VULNERABLE to nonpayment.
C: The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments
on this obligation are being continued.
D: An obligation rated D is in payment default. The D rating category is
used when payments on an obligation are not made on the date due even if
the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The D
rating also will be used upon the filing of a bankruptcy petition or the
taking of a similar action if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-) The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the
major rating categories.
R: This symbol is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or
volatility of expected returns which are not addressed in the credit
rating. Examples include: obligations linked or indexed to equities,
currencies, or commodities; obligations exposed to severe prepayment
risk -- such as interest-only or principal-only mortgage securities; and
obligations with unusually risky interest terms, such as inverse
floaters.
FITCH IBCA
AAA: Highest credit quality. AAA ratings denote the lowest expectation
of credit risk. They are assigned only in case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA: Very high credit quality. AA ratings denote a very low expectation
of credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A: High credit quality. A ratings denote a low expectation of credit
risk. The capacity for timely payment of financial commitments is
considered strong. This capacity may, nevertheless, be more vulnerable
to changes in circumstances or in economic conditions than is the case
for higher ratings.
BBB: Good credit quality. BBB ratings indicate that there is currently a
low expectation of credit risk. The capacity for timely payment of
financial commitments is considered adequate, but adverse changes in
circumstances and in economic conditions are more likely to impair this
capacity. This is the lowest investment-grade category.
Speculative Grade
BB: Speculative. BB ratings indicate that there is a possibility of
credit risk developing, particularly as the result of adverse economic
change over time; however, business or financial alternatives may be
available to allow financial commitments to be met. Securities rated in
this category are not investment grade.
B: Highly speculative. B ratings indicate that significant credit risk
is present, but a limited margin of safety remains. Financial
commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.
CCC, CC, C: High default risk. Default is a real possibility. Capacity
for meeting financial commitments is solely reliant upon sustained,
favorable business or economic developments. A CC rating indicates that
default of some kind appears probable. C ratings signal imminent
default.
DDD, DD, D: Default. Securities are not meeting current obligations and
are extremely speculative. DDD designates the highest potential for
recovery of amounts outstanding on any securities involved. For U.S.
corporates, for example, DD indicates expected recovery of 50% -- 90% of
such outstandings, and D the lowest recovery potential, i.e. below 50%.
DUFF & PHELPS CREDIT RATING CO.
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong. Risk
is modest but may vary slightly from time to time because of economic
conditions.
A+, A, A-: Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
BBB+, BBB, BBB-: Below-average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk
during economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet
obligations when due. Present or prospective financial protection
factors fluctuate according to industry conditions or company fortunes.
Overall quality may move up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that obligations
will not be met when due. Financial protection factors will fluctuate
widely according to economic cycles, industry conditions and/or company
fortunes. Potential exists for frequent changes in the rating within
this category or into a higher or lower rating grade.
CCC: Well below investment-grade securities. Considerable uncertainty
exists as to timely payment of principal, interest or preferred
dividends. Protection factors are narrow and risk can be substantial
with unfavorable economic/industry conditions, and/or with unfavorable
company developments.
DD: Defaulted debt-obligations. Issuer failed to meet scheduled
principal and/or interest payments.
DP: Preferred stock with dividend arrearages.
<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) GLOBAL EQUITY FUND
[Logo] M F S (R)
INVESTMENT MANAGEMENT
We invented the mutual fund(R)
500 Boylston Street, Boston, MA 02116
MGE-16-3/99
<PAGE>
MFS SERIES TRUST VI
MFS(R) Global Total Return Fund
MFS(R) Utilities Fund
MFS(R) Global Equity Fund
PART C
ITEM 23. FINANCIAL STATEMENTS AND EXHIBITS
MFS GLOBAL TOTAL RETURN FUND
(A) FINANCIAL STATEMENTS INCLUDED IN PART A: For the
five years ended October 31, 1998:
FINANCIAL STATEMENTS INCLUDED IN PART B:
At October 31, 1998:
Portfolio of Investments*
Statement of Assets and Liabilities*
For the two years ended October 31, 1998:
Statement of Changes in Net Assets*
For the year ended October 31, 1998:
Statement of Operations*
- ----------------
* Incorporated herein by reference to the Fund's Annual Report to
Shareholders dated October 31, 1998, to be filed with the Securities and
Exchange Commission ("SEC") on or before January 11, 1999.
MFS UTILITIES FUND
(A) FINANCIAL STATEMENTS INCLUDED IN PART A:
For the five years ended October 31, 1998:
Financial Highlights
FINANCIAL STATEMENTS INCLUDED IN PART B:
At October 31, 1998:
Portfolio of Investments*
Statement of Assets and Liabilities*
For the two years ended October 31, 1998:
Statement of Changes in Net Assets*
For the year ended October 31, 1998:
Statement of Operations*
- ----------------
* Incorporated herein by reference to the Fund's Annual Report to
Shareholders dated October 31, 1998, to be filed with the SEC on or before
January 11, 1999.
MFS GLOBAL EQUITY FUND
(A) FINANCIAL STATEMENTS INCLUDED IN PART A:
For the five years ended October 31, 1998:
Financial Highlights
FINANCIAL STATEMENTS INCLUDED IN PART B:
At October 31, 1998:
Portfolio of Investments*
Statement of Assets and Liabilities*
For the year ended October 31, 1998:
Statement of Operations*
For the two years ended October 31, 1998:
Statement of Changes in Net Assets*
- ----------------
* Incorporated herein by reference to the Fund's Annual Report to
Shareholders dated October 31, 1998, to be filed with the SEC on or before
January 11, 1999.
-------------------------
(B) EXHIBITS
1 (a) Amended and Restated Declaration of Trust of
the Registrant, dated February 2, 1995. (1)
(b) Amendment to Declaration of Trust, dated June 12,
1996. (5)
(c) Amendment to the Declaration of Trust redesignating
Class P shares as Class I Shares, dated December
19, 1996. (9)
(d) Amendment to the Declaration of Trust to change the
names of certain series of the Trust, dated August
24, 1998; filed herewith.
2 Amended and Restated By-Laws, dated December 14,
1994. (1)
3 Form of Certificate representing ownership of the
Registrant's Classes of Shares. (4)
4 (a) Investment Advisory Agreement between MFS
Worldwide Total Return Trust and Massachusetts
Financial Services Company, dated August 10, 1990.
(1)
(b) Investment Advisory Agreement between MFS Utilities
Fund and Massachusetts Financial Services Company,
dated September 1, 1993. (1)
(c) Investment Advisory Agreement between MFS World
Equity Fund and Massachusetts Financial Services
Company, dated September 1, 1993. (1)
(d) Amendment to the Investment Advisory Agreement
between MFS Global Equity Fund (formerly, MFS World
Equity Fund) and Massachusetts Financial Services
Company, dated as of July 1, 1998; filed herewith.
5 (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, as amended on April 11,
1997. (6)
(b) Distribution Agreement between the Trust and MFS
Fund Distributors, Inc., dated January 1, 1995. (1)
6 Retirement Plan for Non-Interested Person Trustees,
dated January 1, 1991. (1)
7 (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)
8 (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, 1998. (11)
(c) Exchange Privilege Agreement dated July 30, 1997 ,
1995. (3)
(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.
(2)
(f) Third Amendment dated February 14, 1997 to Loan
Agreement dated February 21, 1995 by and among the
Banks named therein and the First National Bank of
Boston. (7)
(g) Master Administrative Services Agreement, dated
March 1, 1997, as amended. (10)
9 Consent and Opinion of Counsel, dated February 25,
1998. (11)
10 (a) Consent of Ernst & Young LLP - MFS Global Total
Return Fund, MFS Utilities Fund and MFS Global
Equity Fund; filed herewith.
(b) Consent of Deloitte & Touche LLP - MFS Global
Equity Fund; filed herewith.
11 Not Applicable.
12 Not Applicable.
13 Master Distribution Plan pursuant to Rule 12b-1
under the Investment Company Act of 1940, effective
January 1, 1997, as amended and restated May 27,
1998. (8)
14 Financial Data Schedules for each Class of each
Series; filed herewith.
15 Plan pursuant to Rule 18f-3(d) under the Investment
Company Act of 1940, as amended and restated May
27, 1998. (8).
Power of Attorney, dated August 11, 1994. (1)
Power of Attorney, dated February 19, 1998. (11)
- ----------------
(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 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.
(3) Incorporated by reference to Massachusetts Investors Growth Stock Fund
(File Nos. 2-14677 and 811-859) Post-Effective Amendment No. 64 filed with
the SEC via EDGAR on October 29, 1997.
(4) 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.
(5) Incorporated by reference to Registrant's Post-Effective Amendment No. 10
filed with the SEC via EDGAR on August 28, 1996.
(6) Incorporated by reference to MFS Series Trust III (File Nos. 2-60491 and
811-2794) Post-Effective Amendment No. 24 filed with the SEC via EDGAR on
May 29, 1997.
(7) Incorporated by reference to MFS Series Trust I (File No. 33-7638 and
811-4777) Post-Effective Amendment No. 28 filed with the SEC via EDGAR on
June 26, 1997.
(8) Incorporated by reference to MFS Series Trust II (File Nos. 33-7637 and
811-4775) Post-Effective Amendment No. 27 filed with the SEC via EDGAR on
May 29, 1998.
(9) Incorporated by reference to the Registrant's Post-Effective Amendment No.
11 filed with the SEC via EDGAR on February 28, 1997.
(10) Incorporated by reference to Massachusetts Investors Growth Stock Fund
(File Nos. 2-14677 and 811-859) Post-Effective Amendment No. 65 filed with
the SEC via EDGAR on March 11, 1998.
(11) Incorporated by reference to the Registrant's Post-Effective Amendment No.
12 filed with the SEC via EDGAR on February 27, 1998.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not applicable.
ITEM 25. INDEMNIFICATION
Reference is hereby made to (a) Article V of the Registrant's Amended
and Restated Declaration of Trust 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 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
MFS serves as investment adviser to the following open-end Funds
comprising the MFS Family of Funds (except the Vertex Funds mentioned below):
Massachusetts Investors Trust, Massachusetts Investors Growth Stock Fund, MFS
Growth Opportunities Fund, MFS Government Securities Fund, MFS Government
Limited Maturity Fund, MFS Series Trust I (which has thirteen series: MFS
Managed Sectors Fund, MFS Cash Reserve Fund, MFS Global Asset Allocation Fund,
MFS Strategic Growth Fund, MFS Research Growth and Income Fund, MFS Core Growth
Fund, MFS Equity Income Fund, MFS Special Opportunities Fund, MFS Convertible
Securities Fund, MFS Blue Chip Fund, MFS New Discovery Fund, MFS Science and
Technology Fund and MFS Research International Fund), MFS Series Trust II (which
has four series: MFS Emerging Growth Fund, MFS Large Cap Growth Fund, MFS
Intermediate Income Fund and MFS Charter Income Fund), MFS Series Trust III
(which has three series: MFS High Income Fund, MFS Municipal High Income Fund
and MFS High Yield Opportunities Fund), MFS Series Trust IV (which has four
series: MFS Money Market Fund, MFS Government Money Market Fund, MFS Municipal
Bond Fund and MFS Mid Cap Growth Fund), MFS Series Trust V (which has five
series: MFS Total Return Fund, MFS Research Fund, MFS International
Opportunities Fund, MFS International Strategic Growth Fund and MFS
International Value Fund), MFS Series Trust VI (which has three series: MFS
Global Total Return Fund, MFS Utilities Fund and MFS Global Equity Fund), MFS
Series Trust VII (which has two series: MFS Global Governments Fund and MFS
Capital Opportunities Fund), MFS Series Trust VIII (which has two series: MFS
Strategic Income Fund and MFS Global Growth Fund), MFS Series Trust IX (which
has five series: MFS Bond Fund, MFS Limited Maturity Fund, MFS Municipal Limited
Maturity Fund, MFS Research Bond Fund and MFS Intermediate Investment Grade Bond
Fund), MFS Series Trust X (which has seven series: MFS Government Mortgage Fund,
MFS/Foreign & Colonial Emerging Markets Equity Fund, MFS International Growth
Fund, MFS International Growth and Income Fund, MFS Strategic Value Fund, MFS
Small Cap Value Fund and MFS Emerging Markets Debt Fund), MFS Series Trust XI
(which has four series: MFS Union Standard Equity Fund, Vertex All Cap Fund,
Vertex U.S. All Cap Fund and Vertex Contrarian Fund), and MFS Municipal Series
Trust (which has 16 series: MFS Alabama Municipal Bond Fund, MFS Arkansas
Municipal Bond Fund, MFS California Municipal Bond Fund, MFS Florida Municipal
Bond Fund, MFS Georgia Municipal Bond Fund, MFS Maryland Municipal Bond Fund,
MFS Massachusetts Municipal Bond Fund, MFS Mississippi Municipal Bond Fund, MFS
New York Municipal Bond Fund, MFS North Carolina Municipal Bond Fund, MFS
Pennsylvania Municipal Bond Fund, MFS South Carolina Municipal Bond Fund, MFS
Tennessee Municipal Bond Fund, MFS Virginia Municipal Bond Fund, MFS West
Virginia Municipal Bond Fund and MFS Municipal Income Fund) (the "MFS Funds").
The principal business address of each of the MFS Funds is 500 Boylston Street,
Boston, Massachusetts 02116.
MFS also serves as investment adviser of the following open-end Funds:
MFS Institutional Trust ("MFSIT") (which has ten series) and MFS Variable
Insurance Trust ("MVI") (which has thirteen series). The principal business
address of each of the aforementioned funds is 500 Boylston Street, Boston,
Massachusetts 02116.
In addition, MFS serves as investment adviser to the following
closed-end funds: MFS Municipal Income Trust, MFS Multimarket Income Trust, MFS
Government Markets Income Trust, MFS Intermediate Income Trust, MFS Charter
Income Trust and MFS Special Value Trust (the "MFS Closed-End Funds"). The
principal business address of each of the MFS Closed-End Funds is 500 Boylston
Street, Boston, Massachusetts 02116.
Lastly, MFS serves as investment adviser to MFS/Sun Life Series Trust
("MFS/SL") (which has 26 series), Money Market Variable Account, High Yield
Variable Account, Capital Appreciation Variable Account, Government Securities
Variable Account, World Governments Variable Account, Total Return Variable
Account and Managed Sectors Variable Account (collectively, the "Accounts"). The
principal business address of MFS/SL is 500 Boylston Street, Boston,
Massachusetts 02116. The principal business address of each of the
aforementioned Accounts is One Sun Life Executive Park, Wellesley Hills,
Massachusetts 02181.
Vertex Investment Management, Inc., a Delaware corporation and a wholly
owned subsidiary of MFS, whose principal business address is 500 Boylston
Street, Boston, Massachusetts 02116 ("Vertex"), serves as investment adviser to
Vertex All Cap Fund, Vertex U.S. All Cap Fund and Vertex Contrarian Fund, each a
series of MFS Series Trust XI. The principal business address of the
aforementioned Funds is 500 Boylston Street, Boston, Massachusetts 02116.
MFS International Ltd. ("MIL"), a limited liability company organized
under the laws of Bermuda and a subsidiary of MFS, whose principal business
address is Cedar House, 41 Cedar Avenue, Hamilton HM12 Bermuda, serves as
investment adviser to and distributor for MFS American Funds known as the MFS
Funds after January 1999 (which will have 11 portfolios as of January 1999):
U.S. Equity Fund, U.S. Emerging Growth Fund, U.S. High Yield Bond Fund, U.S.
Dollar Reserve Fund, Charter Income Fund, U.S. Research Fund, U.S. Strategic
Growth Fund, Global Equity Fund, European Equity Fund and European Corporate
Bond Fund) (the "MIL Funds"). The MIL Funds are organized in Luxembourg and
qualify as an undertaking for collective investments in transferable securities
(UCITS). The principal business address of the MIL Funds is 47, Boulevard Royal,
L-2449 Luxembourg.
MIL also serves as investment adviser to and distributor for MFS
Meridian U.S. Government Bond Fund, MFS Meridian Charter Income Fund, MFS
Meridian Global Governments Fund, MFS Meridian U.S. Emerging Growth Fund, MFS
Meridian Global Equity Fund, MFS Meridian Limited Maturity Fund, MFS Meridian
Global Growth Fund, MFS Meridian Money Market Fund, MFS Meridian Global Balanced
Fund, MFS Meridian U.S. Equity Fund, MFS Meridian Research Fund, MFS Meridian
U.S. High Yield Fund, MFS Meridian Emerging Markets Debt Fund, MFS Meridian
Strategic Growth Fund and MFS Meridian Global Asset Allocation Fund and the MFS
Meridian Research International Fund (collectively the "MFS Meridian Funds").
Each of the MFS Meridian Funds is organized as an exempt company under the laws
of the Cayman Islands. The principal business address of each of the MFS
Meridian Funds is P.O. Box 309, Grand Cayman, Cayman Islands, British West
Indies.
MFS International (U.K.) Ltd. ("MIL-UK"), a private limited company
registered with the Registrar of Companies for England and Wales whose current
address is Eversheds, Senator House, 85 Queen Victoria Street, London, England
EC4V 4JL, is involved primarily in marketing and investment research activities
with respect to private clients and the MIL Funds and the MFS Meridian Funds.
MFS Institutional Advisors (Australia) Ltd. ("MFSI-Australia"), a
private limited company organized under the Corporations Law of New South Wales,
Australia whose current address is Level 27, Australia Square, 264 George
Street, Sydney, NSW2000, Australia, is involved primarily in investment
management and distribution of Australian superannuation unit trusts and acts as
an investment adviser to institutional accounts.
MFS Holdings Australia Pty Ltd. ("MFS Holdings Australia"), a private
limited company organized pursuant to the Corporations Law of New South Wales,
Australia whose current address is Level 27, Australia Square, 264 George
Street, Sydney, NSW2000 Australia, and whose function is to serve primarily as a
holding company.
MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary of MFS,
serves as distributor for the MFS Funds, MVI and MFSIT.
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of MFS,
serves as shareholder servicing agent to the MFS Funds, the MFS Closed-End
Funds, MFSIT and MVI.
MFS Institutional Advisors, Inc. ("MFSI"), a wholly owned subsidiary of
MFS, provides investment advice to substantial private clients.
MFS Retirement Services, Inc. ("RSI"), a wholly owned subsidiary of
MFS, markets MFS products to retirement plans and provides administrative and
record keeping services for retirement plans.
Massachusetts Investment Management Co., Ltd. (MIMCO), a wholly owned
subsidiary of MFS, is a corporation incorporated in Japan. MIMCO, whose address
is Kamiyacho-Mori Building, 3-20, Tranomon 4-chome, Minato-ku, Tokyo, Japan, is
involved in investment management activities.
MIMCO
Jeffrey L. Shames, Arnold D. Scott and Mamoru Ogata are Directors,
Shaun Moran is the Representative Director, Joseph W. Dello Russo is the
Statutory Auditor, Robert DiBella is the President and Thomas B. Hastings is the
Assistant Statutory Auditor.
MFS
The Directors of MFS are Jeffrey L. Shames, Arnold D. Scott, John W.
Ballen, Kevin R. Parke, Thomas J. Cashman, Jr., Joseph W. Dello Russo, William
W. Scott, Donald A. Stewart and John D. McNeil. Mr. Shames is the Chairman and
Chief Executive Officer, Mr. Ballen is President and Chief Investment Officer,
Mr. Arnold Scott is a Senior Executive Vice President and Secretary, Mr. William
Scott, Mr. Cashman, Mr. Dello Russo and Mr. Parke are Executive Vice Presidents
(Mr. Parke is also Chief Equity Officer), Stephen E. Cavan is a Senior Vice
President, General Counsel and an Assistant Secretary, Robert T. Burns is a
Senior Vice President, Associate General Counsel and an Assistant Secretary of
MFS, and Thomas B. Hastings is a Vice President and Treasurer of MFS.
MASSACHUSETTS INVESTORS TRUST
MASSACHUSETTS INVESTORS GROWTH STOCK FUND
MFS GROWTH OPPORTUNITIES FUND
MFS GOVERNMENT SECURITIES FUND
MFS SERIES TRUST I
MFS SERIES TRUST V
MFS SERIES TRUST VI
MFS SERIES TRUST X
MFS GOVERNMENT LIMITED MATURITY FUND
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer,
James O. Yost, Ellen M. Moynihan and Mark E. Bradley, Vice Presidents of MFS,
are the Assistant Treasurers, James R. Bordewick, Jr., Senior Vice President and
Associate General Counsel of MFS, is the Assistant Secretary.
MFS SERIES TRUST II
Leslie J. Nanberg, Senior Vice President of MFS, is a Vice President,
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O.
Yost, Ellen M. Moynihan and Mark E. Bradley are the Assistant Treasurers, and
James R. Bordewick, Jr. is the Assistant Secretary.
MFS GOVERNMENT MARKETS INCOME TRUST
MFS INTERMEDIATE INCOME TRUST
Leslie J. Nanberg, Senior Vice President of MFS, is a Vice President,
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O.
Yost, Ellen M. Moynihan and Mark E. Bradley are the Assistant Treasurers, and
James R. Bordewick, Jr. is the Assistant Secretary.
MFS SERIES TRUST III
James T. Swanson, Robert J. Manning and Joan S. Batchelder, Senior Vice
Presidents of MFS, and Bernard Scozzafava, Vice President of MFS, are Vice
Presidents, Stephen E. Cavan is the Secretary, W. Thomas London is the
Treasurer, James O. Yost, Ellen M. Moynihan and Mark E. Bradley are the
Assistant Treasurers, and James R. Bordewick, Jr. is the Assistant Secretary.
MFS SERIES TRUST IV
MFS SERIES TRUST IX
Robert A. Dennis and Geoffrey L. Kurinsky, Senior Vice Presidents of
MFS, are Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas London is
the Treasurer, James O. Yost, Ellen M. Moynihan and Mark E. Bradley are the
Assistant Treasurers and James R. Bordewick, Jr. is the Assistant Secretary.
MFS SERIES TRUST VII
Leslie J. Nanberg and Stephen C. Bryant, Senior Vice Presidents of MFS,
are Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas London is the
Treasurer, James O. Yost, Ellen M. Moynihan and Mark E. Bradley are the
Assistant Treasurers and James R. Bordewick, Jr. is the Assistant Secretary.
MFS SERIES TRUST VIII
Jeffrey L. Shames, Leslie J. Nanberg and James T. Swanson and John D.
Laupheimer, Jr., a Senior Vice President of MFS, are Vice Presidents, Stephen E.
Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen
M. Moynihan and Mark E. Bradley are the Assistant Treasurers and James R.
Bordewick, Jr. is the Assistant Secretary.
MFS MUNICIPAL SERIES TRUST
Robert A. Dennis is Vice President, Geoffrey L. Schechter, Vice
President of MFS, is Vice President, Stephen E. Cavan is the Secretary, W.
Thomas London is the Treasurer, James O. Yost, Ellen M. Moynihan and Mark E.
Bradley are the Assistant Treasurers and James R. Bordewick, Jr. is the
Assistant Secretary.
MFS VARIABLE INSURANCE TRUST
MFS SERIES TRUST XI
MFS INSTITUTIONAL TRUST
Jeffrey L. Shames is the President and Chairman, Stephen E. Cavan is
the Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen M.
Moynihan and Mark E. Bradley are the Assistant Treasurers and James R.
Bordewick, Jr. is the Assistant Secretary.
MFS MUNICIPAL INCOME TRUST
Robert J. Manning is Vice President, Stephen E. Cavan is the Secretary,
W. Thomas London is the Treasurer, James O. Yost, Ellen M. Moynihan and Mark E.
Bradley are the Assistant Treasurers and James R. Bordewick, Jr. is the
Assistant Secretary.
MFS MULTIMARKET INCOME TRUST
MFS CHARTER INCOME TRUST
Leslie J. Nanberg and James T. Swanson are Vice Presidents, Stephen E.
Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen
M. Moynihan and Mark E. Bradley are the Assistant Treasurers and James R.
Bordewick, Jr. is the Assistant Secretary.
MFS SPECIAL VALUE TRUST
Robert J. Manning is Vice President, Stephen E. Cavan is the Secretary,
W. Thomas London is the Treasurer, James O. Yost, Ellen M. Moynihan and Mark E.
Bradley are the Assistant Treasurers and James R. Bordewick, Jr. is the
Assistant Secretary.
MFS/SUN LIFE SERIES TRUST
John D. McNeil, Chairman and Director of Sun Life Assurance Company of
Canada, is the Chairman, Stephen E. Cavan is the Secretary, W. Thomas London is
the Treasurer, James O. Yost, Ellen M. Moynihan and Mark E. Bradley are the
Assistant Treasurers and James R. Bordewick, Jr. is the Assistant Secretary.
MONEY MARKET VARIABLE ACCOUNT
HIGH YIELD VARIABLE ACCOUNT
CAPITAL APPRECIATION VARIABLE ACCOUNT
GOVERNMENT SECURITIES VARIABLE ACCOUNT
TOTAL RETURN VARIABLE ACCOUNT
WORLD GOVERNMENTS VARIABLE ACCOUNT
MANAGED SECTORS VARIABLE ACCOUNT
John D. McNeil is the Chairman, Stephen E. Cavan is the Secretary, and
James R. Bordewick, Jr. is the Assistant Secretary.
MIL FUNDS
Richard B. Bailey, John A. Brindle, Richard W. S. Baker, Arnold D.
Scott, Jeffrey L. Shames and William F. Waters are Directors, Stephen E. Cavan
is the Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen M.
Moynihan and Mark E. Bradley are the Assistant Treasurers and James R.
Bordewick, Jr. is the Assistant Secretary.
MFS MERIDIAN FUNDS
Richard B. Bailey, John A. Brindle, Richard W. S. Baker, Arnold D.
Scott, Jeffrey L. Shames and William F. Waters are Directors, Stephen E. Cavan
is the Secretary, W. Thomas London is the Treasurer, James R. Bordewick, Jr. is
the Assistant Secretary and James O. Yost, Ellen M. Moynihan and Mark E. Bradley
are the Assistant Treasurers.
VERTEX
Jeffrey L. Shames and Arnold D. Scott are the Directors, Jeffrey L.
Shames is the President, Kevin R. Parke and John W. Ballen are Executive Vice
Presidents, John F. Brennan, Jr., and John D. Laupheimer are Senior Vice
Presidents, Brian E. Stack is a Vice President, Joseph W. Dello Russo is the
Treasurer, Thomas B. Hastings is the Assistant Treasurer, Stephen E. Cavan is
the Secretary and Robert T. Burns is the Assistant Secretary.
MIL
Peter D. Laird is President and a Director, Arnold D. Scott, Jeffrey L.
Shames and Thomas J. Cashman, Jr. are Directors, Stephen E. Cavan is a Director,
Senior Vice President and the Clerk, Robert T. Burns is an Assistant Clerk,
Joseph W. Dello Russo, Executive Vice President and Chief Financial Officer of
MFS, is the Treasurer and Thomas B. Hastings is the Assistant Treasurer.
MIL-UK
Peter D. Laird is President and a Director, Thomas J. Cashman, Arnold
D. Scott and Jeffrey L. Shames are Directors, Stephen E. Cavan is a Director and
the Secretary, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer and Robert T. Burns is the Assistant Secretary.
MFSI - AUSTRALIA
Thomas J. Cashman, Jr. is President and a Director, Graham E. Lenzer,
John A. Gee and David Adiseshan are Directors, Stephen E. Cavan is the
Secretary, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer, and Robert T. Burns is the Assistant Secretary.
MFS HOLDINGS - AUSTRALIA
Jeffrey L. Shames is the President and a Director, Arnold D. Scott,
Thomas J. Cashman, Jr., and Graham E. Lenzer are Directors, Stephen E. Cavan is
the Secretary, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer, and Robert T. Burns is the Assistant Secretary.
MFD
Arnold D. Scott and Jeffrey L. Shames are Directors, William W. Scott,
Jr., an Executive Vice President of MFS, is the President, Stephen E. Cavan is
the Secretary, Robert T. Burns is the Assistant Secretary, Joseph W. Dello Russo
is the Treasurer, and Thomas B. Hastings is the Assistant Treasurer.
MFSC
Arnold D. Scott and Jeffrey L. Shames are Directors, Joseph A.
Recomendes, a Senior Vice President and Chief Information Officer of MFS, is
Vice Chairman and a Director, Janet A. Clifford is the President, Joseph W.
Dello Russo is the Treasurer, Thomas B. Hastings is the Assistant Treasurer,
Stephen E. Cavan is the Secretary, and Robert T. Burns is the Assistant
Secretary.
MFSI
Thomas J. Cashman, Jr., Jeffrey L. Shames, and Arnold D. Scott are
Directors, Joseph J. Trainor is the President and a Director, Leslie J. Nanberg
is a Senior Vice President, a Managing Director and a Director, Kevin R. Parke
is the Executive Vice President and a Managing Director, George F. Bennett, Jr.,
John A. Gee, Brianne Grady, Joseph A. Kosciuszek and Joseph J. Trainor are
Senior Vice Presidents and Managing Directors, Joseph W. Dello Russo is the
Treasurer, Thomas B. Hastings is the Assistant Treasurer and Robert T. Burns is
the Secretary.
RSI
Arnold D. Scott is the Chairman and a Director, Martin E. Beaulieu is
the President, William W. Scott, Jr. is a Director, Joseph W. Dello Russo is the
Treasurer, Thomas B. Hastings is the Assistant Treasurer, Stephen E. Cavan is
the Secretary and Robert T. Burns is the Assistant Secretary.
In addition, the following persons, Directors or officers of MFS, have
the affiliations indicated:
Donald A. Stewart President and a Director, Sun Life
Assurance Company of Canada, Sun Life
Centre, 150 King Street West, Toronto,
Ontario, Canada (Mr. Stewart is also an
officer and/or Director of various
subsidiaries and affiliates of Sun Life)
John D. McNeil Chairman, Sun Life Assurance Company of
Canada, Sun Life Centre, 150 King Street
West, Toronto, Ontario, Canada (Mr. McNeil
is also an officer and/or Director of
various subsidiaries and affiliates of Sun
Life)
Joseph W. Dello Russo Director of Mutual Fund Operations, The
Boston Company, Exchange Place, Boston,
Massachusetts (until August, 1994)
ITEM 27. DISTRIBUTORS
(a) Reference is hereby made to Item 26 above.
(b) Reference is hereby made to Item 26 above; the principal business
address of each of these persons is 500 Boylston Street, Boston, Massachusetts
02116.
(c) Not applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
The accounts and records of the Registrant are located, in whole or in
part, at the office of the Registrant and the following locations:
NAME ADDRESS
---- -------
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
ITEM 29. MANAGEMENT SERVICES
Not applicable.
ITEM 30. UNDERTAKINGS
Not applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of Boston and
The Commonwealth of Massachusetts on the 28th day of December, 1998.
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 December 28, 1998.
SIGNATURE TITLE
--------- -----
STEPHEN E. CAVAN* Principal Executive Officer
- -------------------------
Stephen E. Cavan
Treasurer (Principal Financial Officer and
W. THOMAS LONDON* 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.
<PAGE>
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 (i)
a Power of Attorney dated August 11, 1994,
incorporated by reference to the
Registrant's Post-Effective Amendment No.
8 filed with the Securities and Exchange
Commission via EDGAR on October 23, 1995;
and (ii) a Power of Attorney dated
February 19, 1998, incorporated by
reference to the Registrant's
Post-Effective Amendment No. 12 filed with
the Securities and Exchange Commission via
EDGAR on February 27, 1998.
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO.
- ----------- ---------------------- --------
1 (d) Amendment to the Declaration of Trust to change the
names of certain series of the Trust, dated
August 24, 1998.
4 (d) Amendment to the Investment Advisory Agreement
between MFS Global Equity Fund (formerly, MFS
World Equity Fund), and Massachusetts Financial
Services Company, dated as of July 1, 1998.
10 (a) Consent of Ernst & Young LLP - MFS Global Total
Return Fund, MFS Utilities Fund and MFS Global
Equity Fund.
(b) Consent of Deloitte & Touche LLP - MFS Global
Equity Fund.
14 Financial Data Schedules for each Class of each
Series.
<PAGE>
EXHIBIT NO. 99.1(d)
MFS SERIES TRUST VI
CERTIFICATION OF AMENDMENT
TO DECLARATION OF TRUST
REDESIGNATION
OF SERIES
Pursuant to Section 6.9 of the Amended and Restated Declaration of
Trust dated February 3, 1995 (the "Declaration"), of MFS Series Trust VI (the
"Trust"), the Trustees of the Trust hereby redesignate an existing series of
Shares (as defined in the Declaration):
1. The series designated as MFS World Total Return Fund shall
be redesignated as MFS Global Total Return Fund; and
2. The series designated as MFS World Equity Fund shall be
redesignated as MFS Global Equity Fund.
Pursuant to Section 6.9(i) of the Declaration, this redesignation of
series of Shares shall be effective upon the execution of a majority of the
Trustees of the Trust.
IN WITNESS WHEREOF, a majority of the Trustees of the Trust have
executed this amendment, in one or more counterparts, all constituting a single
instrument, as an instrument under seal in The Commonwealth of Massachusetts, as
of this 24th day of August, 1998 and further certify, as provided by the
provisions of Section 9.3(d) of the Declaration, that this amendment was duly
adopted by the undersigned in accordance with the second sentence of Section
9.3(a) of the Declaration.
RICHARD B. BAILEY WALTER E. ROBB, III
- -------------------------- --------------------------
Richard B. Bailey Walter E. Robb, III
63 Atlantic Avenue 35 Farm Road
Boston, MA 02110 Sherborn, MA 01770
MARSHALL N. COHAN ARNOLD D. SCOTT
- -------------------------- --------------------------
Marshall N. Cohan Arnold D. Scott
2524 Bedford Mews Drive 20 Rowes Wharf
Wellington, FL 33414 Boston, MA 02110
LAWRENCE H. COHN JEFFREY L. SHAMES
- -------------------------- --------------------------
Lawrence H. Cohn Jeffrey L. Shames
45 Singletree Road 38 Lake Avenue
Chestnut Hill, MA 02167 Newton, MA 02159
SIR J. DAVID GIBBONS J. DALE SHERRATT
- -------------------------- --------------------------
Sir J. David Gibbons J. Dale Sherratt
"Leeward" 86 Farm Road
5 Leeside Drive Sherborn, MA 01770
"Point Shares"
Pembroke, Bermuda HM 05
Abby M. O'Neill Ward Smith
- -------------------------- --------------------------
200 Sunset Road 36080 Shaker Blvd
Oyster Bay, NY 11771 Hunting Valley, OH 44022
<PAGE>
EXHIBIT NO. 99.4(d)
AMENDMENT TO INVESTMENT
ADVISORY AGREEMENT
AMENDMENT dated as of July 1, 1998 to the Investment Advisory Agreement dated
September1, 1993 by and between MFS Series Trust VI (the "Trust") on behalf of
the MFS World Equity Fund (the "Fund"), a series of the Trust, and Massachusetts
Financial Services Company, a Delaware corporation (the "Adviser") (the
"Agreement").
WITNESSETH
WHEREAS, the Trust on behalf of the Fund has entered into the Agreement with the
Adviser; and
WHEREAS, the Adviser has agreed to amend the Agreement as provided below;
NOW THEREFORE, in consideration of the mutual covenants and agreements of the
parties hereto as herein set forth, the parties covenant and agree as follows:
1. Amendment of the Agreement: Effective as of July 1, 1998, the first
sentence of Article 3 of the Agreement is deleted and replaced in its entirety
as follows:
"For the services to be rendered and the facilities
provided, the Fund shall pay to the Adviser an investment
advisory fee computed and paid monthly at an annual rate
equal to the sum of 1.00% of the first $1 billion of the
Fund's average daily net assets and 0.85% of the amount in
excess of $1 billion, in each case for its then current
fiscal year."
2. Miscellaneous: Except as set forth in this Amendment, the Agreement
shall remain in full force and effect, without amendment or modification.
3. Limitation of Liability of the Trustees and Shareholders: A copy of
the Trust's Declaration of Trust is on file with the Secretary of State of The
Commonwealth of Massachusetts. The parties hereto acknowledge that the
obligations of or arising out of this instrument are not binding upon any of the
Trust's trustees, officers, employees, agents or shareholders individually, but
are binding solely upon the assets and property of the Trust in accordance with
its proportionate interest hereunder. If this instrument is executed by the
Trust on behalf of one or more series of the Trust, the parties hereto
acknowledge that the assets and liabilities of each series of the Trust are
separate and distinct and that the obligations of or arising out of this
instrument are binding solely upon the assets or property of the series on whose
behalf the Trust has executed this instrument. If the Trust has executed this
instrument on behalf of more than one series of the Trust, the parties hereto
also agree that the obligations of each series hereunder shall be several and
not joint, in accordance with its proportionate interest hereunder, and the
parties hereto agree not to proceed against any series for the obligations of
another series.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment to the Agreement to
be executed and delivered in the names and on their behalf by the undersigned,
therewith duly authorized, all as of the day and year first above written.
MFS SERIES TRUST VI
on behalf of MFS World Equity Fund
By: JAMES R. BORDEWICK, JR.
-------------------------
James R. Bordewick, Jr.
Assistant Secretary
MASSACHUSETTS FINANCIAL SERVICES
COMPANY
By: ARNOLD D. SCOTT
-------------------------
Arnold D. Scott, Senior
Executive Vice President
<PAGE>
EXHIBIT NO. 99.10(a)
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference made to our firm under the captions
"Condensed Financial Information" in the Prospectus and "Independent Auditors
and Financial Statements" in the Statement of Additional Information and to the
incorporation by reference in this Post-Effective Amendment No. 13 to
Registration Statement No. 22-34502 on Form N-1A of our report dated December 9,
1998, on the financial statements and financial highlights of MFS Global Total
Return Fund, MFS Utilities Fund and MFS Global Equity Fund, each a series of MFS
Series Trust VI, included in each Fund's 1998 Annual Report to Shareholders.
ERNST & YOUNG LLP
---------------------
Ernst & Young LLP
Boston, Massachusetts
December 28, 1998
<PAGE>
EXHIBIT NO. 99.10(b)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Post-Effective Amendment
No. 13 to Registration Statement No. 33-34502 of MFS Series Trust VI, of our
report dated December 5, 1997, appearing in the annual report to shareholders
for the year ended October 31, 1997 of MFS Global Equity Fund (formerly MFS
World Equity Fund), a series of MFS Series Trust VI.
DELOITTE & TOUCHE LLP
- -------------------------
Deloitte & Touche LLP
Boston, Massachusetts
December 28, 1998
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<NAME> MFS SERIES TRUST VI
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<NAME> MFS SERIES TRUST VI
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<NAME> MFS SERIES TRUST VI
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