<PAGE>
- --------------------------
MFS(R) INSTITUTIONAL TRUST
- --------------------------
NOVEMBER 1, 1999
PROSPECTUS
- --------------------------------------------------------------------------------
This Prospectus describes each of the 10 funds of the MFS Institutional Trust
(referred to as the Trust):
1. MFS INSTITUTIONAL CORE FIXED INCOME FUND (referred to as the Core Fixed
Income Fund) seeks as a main objective as high a level of current income
as is believed to be consistent with prudent investment risk; its
secondary objective is to seek to protect shareholders' capital.
2. MFS INSTITUTIONAL GLOBAL FIXED INCOME FUND (referred to as the Global
Fund) seeks income and capital appreciation.
3. MFS INSTITUTIONAL HIGH YIELD FUND (referred to as the High Yield Fund)
seeks high current income.
4. MFS INSTITUTIONAL EMERGING MARKETS DEBT FUND (referred to as the Emerging
Markets Fund) seeks total return (high current income and long-term growth
of capital).
5. MFS INSTITUTIONAL CORE EQUITY FUND (referred to as the Core Equity Fund)
seeks long-term growth of capital generally consistent with that of a
diversified large cap portfolio and income equal to approximately 90% of
the dividend yield on the Standard & Poor's 500 Composite Stock Price
Index ("S&P 500").
6. MFS INSTITUTIONAL RESEARCH FUND (referred to as the Research Fund) seeks
long-term growth of capital.
7. MFS INSTITUTIONAL LARGE CAP GROWTH FUND (referred to as the Large Cap
Fund) seeks long-term growth of capital.
8. MFS INSTITUTIONAL MID CAP GROWTH FUND (referred to as the Mid Cap Fund)
seeks long-term growth of capital.
9. MFS INSTITUTIONAL EMERGING EQUITIES FUND (referred to as the Emerging
Equities Fund) seeks long-term growth of capital.
10. MFS INSTITUTIONAL INTERNATIONAL EQUITY FUND (referred to as the
International Equity Fund) seeks long-term growth of capital.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED THE FUNDS' 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 Expense Summary ................................................... 1
II Risk Return Summary ............................................... 2
1. Core Fixed Income Fund ........................................ 2
2. Global Fund ................................................... 5
3. High Yield Fund ............................................... 10
4. Emerging Markets Fund ......................................... 12
5. Core Equity Fund .............................................. 16
6. Research Fund ................................................. 18
7. Large Cap Fund ................................................ 20
8. Mid Cap Fund .................................................. 22
9. Emerging Equities Fund ........................................ 25
10. International Equity Fund ..................................... 27
III Certain Investment Strategies and Risks ........................... 30
IV Management of the Funds ........................................... 31
V Description of Shares ............................................. 33
VI How to Purchase, Exchange and Redeem Shares ....................... 33
VII Other Information ................................................. 35
VIII Financial Highlights .............................................. 37
Appendix A -- Investment Techniques and Practices ................. A-1
<PAGE>
- --------------------------
I EXPENSE SUMMARY
- --------------------------
o EXPENSE TABLE
This table describes the expenses that you may pay when you hold shares of
the funds.
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund assets):
.......................................................................................................
CORE
FIXED HIGH EMERGING CORE
INCOME GLOBAL YIELD MARKETS EQUITY
FUND FUND FUND FUND FUND
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Management Fee .......................... 0.45 % 0.65 % 0.50 % 0.85 % 0.60 %
Other Expenses .......................... 0.15 % 0.46 % 4.36 % 1.78 % 0.80 %
------ ------ ------ ------ ------
Total Annual Fund Operating Expenses .... 0.60 % 1.11 % 4.86 % 2.63 % 1.40 %
Fee Waiver/Expense Reimbursement ... (0.10)%(1) (0.44)%(1) (4.18)%(1) (1.32)%(2) (0.74)%(1)
------ ------ ------ ------ ------
Net Expenses(3) .......................... 0.50 % 0.67 % 0.68 % 1.31 % 0.66 %
<CAPTION>
EMERGING INTERNATIONAL
RESEARCH LARGE CAP MID CAP EQUITIES EQUITY
FUND FUND FUND FUND FUND
------ ------ ------ ------ ------
Management Fee ......................... 0.60 % 0.75 % 0.60 % 0.75 % 0.75 %
Other Expenses ......................... 0.17 % 0.10 % 0.20 % 0.08 % 0.79 %
------ ------ ------ ------ ------
Total Annual Fund Operating Expenses ... 0.77 % 0.85 % 0.80 % 0.83 % 1.54 %
Fee Waiver/Expense Reimbursement ... (0.11)%(1) (0.05)%(1) N/A N/A (0.67)%(1)
------ ------ ------ ------ ------
Net Expenses(3) .................... 0.66 % 0.80 % 0.80 % 0.83 % 0.87 %
------
(1) MFS has contractually agreed to bear these funds' expenses, such that "Other Expenses," after taking into
account the expense offset arrangement described below, do not exceed 0.15% for the High Yield Fund, 0.40% for
the Emerging Markets Fund, 0.10% for the International Equity Fund, 0.00% for the Global Fund and 0.05% for each
remaining fund. These contractual fee arrangements will continue until at least November 1, 2000, unless changed
with the consent of the board of trustees which oversees the funds.
(2) MFS has contractually agreed, subject to reimbursement, to bear the Emerging Markets Fund's expenses such that
"Other Expenses," after taking into account the expense offset arrangement described below, do not exceed 0.40%.
The reimbursement by the fund to MFS will be accomplished by the payment of an expense reimbursement fee to MFS
computed and paid monthly at a percentage of the fund's average daily net assets for its then current fiscal
year, with a limitation that immediately after such payment the fund's "Other Expenses" will not exceed 0.40%.
The obligation of MFS to bear the fund's "Other Expenses" pursuant to this arrangement, and the fund's
obligation to pay the reimbursement fee to MFS, terminates on the earlier of the date on which payments made by
the fund equal the prior payment of such reimbursable expenses by MFS, or December 31, 2005.
(3) Each fund has an expense offset arrangement which reduces the fund's custodian fee based upon the amount of cash
maintained by the fund with its custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the effect of reducing the fund's
expenses). Any such fee reductions are not reflected in the table. Had these fee reductions been taken into
account, "Net Expenses" would be lower for certain funds, and would equal: Global Fund, 0.65%, High Yield Fund,
0.65%, Emerging Markets Fund, 1.25%, Core Equity Fund, 0.65%, Research Fund, 0.65%, Mid Cap Fund, 0.78%,
Emerging Equities Fund, 0.82%, International Equity Fund, 0.85%.
</TABLE>
o EXAMPLE OF EXPENSES
These examples are intended to help you compare the cost of investing in a
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, except that the fund's
total operating expenses are assumed to be the fund's "Net Expenses" for
the first year, and the fund's "Total Annual Fund Operating Expenses" for
subsequent years (see the table above).
Although your actual costs may be higher or lower, under these assumptions
your costs would be:
PERIOD
------------------------------------------------
SERIES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------------------------------------------------------------------------
Core Fixed Income Fund $ 51 $ 182 N/A N/A
Global Fund 68 309 $ 569 $1,312
High Yield Fund 69 1,085 2,103 4,661
Emerging Markets Fund 133 692 1,277 2,866
Core Equity Fund 67 370 695 1,616
Research Fund 67 235 417 944
Large Cap Fund 82 266 N/A N/A
Mid Cap Fund 82 255 444 990
Emerging Equities Fund 85 265 460 1,025
International Equity Fund 89 421 776 1,777
<PAGE>
-----------------------
II RISK RETURN SUMMARY
-----------------------
INVESTMENT STRATEGIES WHICH ARE COMMON TO ALL FUNDS ARE DESCRIBED UNDER
THE CAPTION "CERTAIN INVESTMENT STRATEGIES AND RISKS."
1: CORE FIXED INCOME FUND
...........................................................................
o INVESTMENT OBJECTIVES
The fund's main investment objective is to provide as high a level of
current income as is believed to be consistent with prudent investment
risk. Its secondary objective is to protect shareholders' capital. The
fund's objectives may be changed without shareholder approval.
o PRINCIPAL INVESTMENT POLICIES
The fund invests, under normal market conditions, at least 90% of its
total assets in the following fixed income securities:
o Corporate bonds, which are bonds or other debt obligations issued by
domestic or foreign (including emerging market) corporations or other
similar entities;
o U.S. Government securities, which are bonds or other debt obligations
issued by, or whose principal and interest payments are guaranteed or
supported by, the U.S. Government or one of its agencies or
instrumentalities; 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.
While the fund may purchase corporate bonds which have been assigned
lower credit ratings by credit rating agencies (commonly known as junk
bonds), it focuses on investment grade bonds. These bonds are rated in the
higher rating categories by credit rating agencies or are unrated and
considered by Massachusetts Financial Services Company (referred to as MFS
or the adviser) to be comparable in quality.
The fund may also invest in foreign securities (including emerging
markets securities), through which it may have exposure to foreign
currencies.
In selecting fixed income investments for the fund, MFS considers the
views of its large group of fixed income portfolio managers and research
analysts. This group periodically assesses the three-month total return
outlook for various segments of the fixed income markets. This three-month
"horizon" outlook is used by the portfolio manager(s) of MFS' fixed income
oriented funds (including the fund) as a tool in making or adjusting a
fund's asset allocations to various segments of the fixed income markets.
In assessing the credit quality of fixed income securities, MFS does not
rely solely on the credit ratings assigned by credit rating agencies, but
rather performs its own independent credit analysis.
The fund may invest in derivative securities. Derivatives are securities
whose value may be based on other securities, currencies, interest rates,
or indices. Derivatives include:
o Futures and forward contracts;
o Options on futures contracts, foreign currencies, securities and bond
indices;
o Structured notes and indexed securities; and
o Swaps, caps, floors and collars.
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. The share price of the fund generally changes
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
objectives, that are not described here.
The principal risks of investing in the fund are:
o Allocation Risk: The fund will allocate its investments among various
segments of the fixed income markets based upon judgments made by MFS. The
fund could miss attractive investment opportunities by underweighting
markets where there are significant returns, or could lose value
overweighting markets where there are significant declines.
o Interest Rate Risk: When interest rates rise, the prices of fixed income
securities in the fund's portfolio will generally fall. Conversely, when
interest rates fall, the prices of fixed income securities in the fund's
portfolio will generally rise.
o Maturity Risk: Interest rate risk will generally 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 Liquidity Risk: The fixed income securities purchased by the fund may be
traded in the over-the-counter market rather than on an organized exchange
and are subject to liquidity risk. This means that they may be harder to
purchase or sell at a fair price. The inability to purchase or sell these
fixed income securities at a fair price could have a negative impact on
the fund's performance.
o Lower Rated Bonds Risk:
> Higher Credit Risk: Junk bonds are subject to a substantially higher
degree of credit risk than investment grade bonds. During recessions,
a high percentage of issuers of junk bonds may default on payments of
principal and interest. The price of a junk bond may therefore
fluctuate drastically due to bad news about the issuer or the economy
in general.
> Higher Liquidity Risk: During recessions and periods of broad market
declines, junk bonds could become less liquid, meaning that they will
be harder to value or sell at a fair price.
o Mortgage-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 as the fund may be
required to reinvest assets at a lower interest rate. 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 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 purposes of increasing return,
the fund may sustain losses which will reduce its gross income.
Forward foreign currency exchange contracts involve the risk that the
party with which the fund enters the contract may fail to perform its
obligations to the fund.
o Emerging Markets Risk: 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 significantly higher or lower rates of
return than developed markets, and significantly greater risks, to
investors.
o Derivatives Risk:
> Hedging Risk: When a derivative is used as a hedge against an opposite
position that the fund also holds, any loss generated by the
derivative should be substantially offset by gains on the hedged
investment, and vice versa. While hedging can reduce or eliminate
losses, it can also reduce or eliminate gains.
> Correlation Risk: When the fund uses derivatives to hedge, it takes
the risk that changes in the value of the derivative will not match
those of the asset being hedged. Incomplete correlation can result in
unanticipated losses.
> Investment Risk: When the fund uses derivatives as an investment
vehicle to gain market exposure, rather than for hedging purposes, any
loss on the derivative investment will not be offset by gains on
another hedged investment. The fund is therefore directly exposed to
the risks of that derivative. Gains or losses from derivative
investments may be substantially greater than the derivative's
original cost.
> Availability Risk: Derivatives may not be available to the fund upon
acceptable terms. As a result, the fund may be unable to use
derivatives for hedging or other purposes.
> Credit Risk: When the fund uses derivatives, it is subject to the risk
that the other party to the agreement will not be able to perform.
o 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 are not included because the fund had
not commenced operations as of June 30, 1999.
2: GLOBAL FUND
...........................................................................
o INVESTMENT OBJECTIVE
The fund's investment objective is to provide income and capital
appreciation. The fund's objective may be changed without shareholder
approval.
o PRINCIPAL INVESTMENT POLICIES
The fund invests, under normal market conditions, at least 80% of its
total assets in global fixed income securities. These may include:
o U.S. Government securities, which are bonds or other debt obligations
issued by, or whose principal and interest payments are guaranteed or
supported by, the U.S. Government or one of its agencies or
instrumentalities;
o Foreign government securities, which are bonds or other debt obligations
issued by foreign governments, including emerging market governments;
these foreign government securities are either:
> Issued, guaranteed or supported as to payment of principal and
interest by foreign governments, foreign government agencies, foreign
semi-governmental entities, or supra-national entities;
> Interests issued by entities organized and operated for the purpose of
restructuring the investment characteristics of foreign government
securities; or
> Brady Bonds, which are long-term bonds issued as part of a
restructuring of defaulted commercial loans to emerging market
countries;
o Corporate bonds, which are bonds or other debt obligations issued by
domestic or foreign (including emerging market) corporations or other
similar entities; the fund may invest in:
> Investment grade bonds, which are bonds assigned higher credit ratings
by credit rating agencies or which are unrated and considered by MFS
to be comparable to higher rated bonds;
> Lower rated bonds, commonly known as junk bonds, which are bonds
assigned low credit ratings by credit rating agencies or which are
unrated and considered by MFS to be comparable to lower rated bonds;
and
> Crossover bonds, which are junk bonds that MFS expects will appreciate
in value due to an anticipated upgrade in the issuer's credit rating
(thereby crossing over into investment grade bonds);
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.
A company's principal activities are determined to be located in a
particular country if the company (a) is organized under the laws of, and
maintains a principal office in a country, (b) has its principal
securities trading market in a country, (c) derives 50% of its total
revenues from goods or services performed in the country, or (d) has 50%
or more of its assets in the country. Under normal market conditions, the
fund invests in at least three countries, one of which may be the U.S.
The fund is non-diversified. This means that the fund may invest a
relatively high percentage of its assets in a small number of issuers. The
fund may invest a substantial amount of its assets (i.e., more than 25% of
its assets) in issuers located in a single country or a limited number of
countries.
In selecting fixed income investments for the fund, MFS considers the
views of its large group of fixed income portfolio managers and research
analysts. This group periodically assesses the three-month total return
outlook for various segments of the fixed income markets. This three-month
"horizon" outlook is used by the portfolio manager(s) of MFS' fixed income
oriented funds (including the fund) as a tool in making or adjusting a
fund's asset allocations to various segments of the fixed income markets.
In assessing the credit quality of fixed income securities, MFS does not
rely solely on the credit ratings assigned by credit rating agencies, but
rather performs its own independent credit analysis.
The fund may invest in derivative securities. Derivatives are securities
whose value may be based on other securities, currencies, interest rates
or indices. Derivatives include:
o Futures and forward contracts;
o Options on futures contracts, foreign currencies, securities and bond
indices;
o Structured notes and indexed securities; and
o Swaps, caps, floors and collars.
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. The share price of the fund generally changes
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 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. 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 purposes of increasing return,
the fund may sustain losses which will reduce its gross income.
Forward foreign currency exchange contracts involve the risk that the
party with which the fund enters the contract may fail to perform its
obligations to the fund.
o Emerging Markets Risk: 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 significantly higher or lower rates of
return than developed markets, and significantly greater risks, to
investors.
o Non-Diversified Status Risk: Because the fund may invest a higher
percentage of its assets in a small number of issuers, the fund is more
susceptible to any single economic, political or regulatory event
affecting those issuers than is a diversified fund.
o Concentration Risk: Because the fund may invest a substantial amount of
its assets in issuers located in a single country or a limited number of
countries, economic, political and social conditions in these countries
will have a significant impact on its investment performance.
o Allocation Risk: The fund will allocate its investments among various
segments of the fixed income markets based upon judgments made by MFS. The
fund could miss attractive investment opportunities by underweighting
markets where there are significant returns, and could lose value by
overweighting markets where there are significant declines.
o Interest Rate Risk: When interest rates rise, the prices of fixed income
securities in the fund's portfolio will generally fall. Conversely, when
interest rates fall, the prices of fixed income securities in the fund's
portfolio will generally rise.
o Maturity Risk: Interest rate risk will generally 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 Liquidity Risk: The fixed income securities purchased by the fund may be
traded in the over-the-counter market rather than on an organized exchange
and are subject to liquidity risk. This means that they may be harder to
purchase or sell at a fair price. The inability to purchase or sell these
fixed income securities at a fair price could have a negative impact on
the fund's performance.
o Junk Bond Risk:
> Higher Credit Risk: Junk bonds (including crossover bonds) are subject
to a substantially higher degree of credit risk than higher rated
bonds. During recessions, a high percentage of issuers of junk bonds
may default on payments of principal and interest. The price of a junk
bond may therefore fluctuate drastically due to bad news about the
issuer or the economy in general.
> Higher Liquidity Risk: During recessions and periods of broad market
declines, junk bonds could become less liquid, meaning that they will
be harder to value or sell at a fair price.
o Mortgage and Asset-Backed Securities:
> 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 as the fund may be
required to reinvest assets at a lower interest rate. 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 that the
issuer will default on principal and interest payments. It may be
difficult to enforce rights against the assets underlying
mortgage-backed and asset-backed securities in the case of
default. The U.S. Government or its agencies may guarantee the
payment of principal and interest on some mortgage-backed
securities. Mortgage- backed securities and asset-backed
securities issued by private lending institutions or other
financial intermediaries may be supported by insurance or other
forms of guarantees.
o Derivatives Risk:
> Hedging Risk: When a derivative is used as a hedge against an opposite
position that the fund also holds, any loss generated by the
derivative should be substantially offset by gains on the hedged
investment, and vice versa. While hedging can reduce or eliminate
losses, it can also reduce or eliminate gains.
> Correlation Risk: When the fund uses derivatives to hedge, it takes
the risk that changes in the value of the derivative will not match
those of the asset being hedged. Incomplete correlation can result in
unanticipated losses.
> Investment Risk: When the fund uses derivatives as an investment
vehicle to gain market exposure, rather than for hedging purposes, any
loss on the derivative investment will not be offset by gains on
another hedged investment. The fund is therefore directly exposed to
the risks of that derivative. Gains or losses from derivative
investments may be substantially greater than the derivative's
original cost.
> Availability Risk: Derivatives may not be available to the fund upon
acceptable terms. As a result, the fund may be unable to use
derivatives for hedging or other purposes.
> Credit Risk: When the fund uses derivatives, it is subject to the risk
that the other party to the agreement will not be able to perform.
o Active or Frequent Trading Risk: The fund has engaged and 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 could increase your tax liability. Frequent
trading also increases transaction costs, which could detract from the
fund's performance.
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 performance table also shows how the fund's
performance over time compares with that of one or more broad measures of
market performance. 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
shares for each calendar year since they were first offered, assuming the
reinvestment of distributions.
1993 16.99%
1994 -5.06%
1995 15.49%
1996 4.78%
1997 -0.40%
1998 15.94%
The total return for the year-to-date period ended June 30, 1999, was
(6.77)%. During the period shown in the bar chart the highest quarterly
return was 10.39% (for the calendar quarter ended September 30, 1998) and
the lowest quarterly return was (5.69)% (for the calendar quarter ended
March 31, 1994).
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.
PERFORMANCE TABLE
This table shows how the average annual total returns of the fund's shares
compares to a broad measure of market performance and assumes the
reinvestment of distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
...........................................................................
1 Year 5 Years Life
Global Fund 15.94% 5.82% 6.57%*
Salomon Brothers World Government
Bond Index+** 15.31% 7.85% 7.72%#
Average global income fund++ 6.35% 5.59% 6.81%*
------
* "Life" refers to the period from the commencement of the fund's
investment operations, September 30, 1992, through December 31, 1998.
# "Life" refers to the period from October 1, 1992, through December 31,
1998.
+ Source: Standard & Poor's Micropal, Inc.
++ Source: Lipper Analytical Services, Inc.
** The Salomon Brothers World Government Bond Index is a broad-based,
unmanaged index consisting of complete universes of government bonds
with remaining maturities of at least five years.
<PAGE>
3: HIGH YIELD FUND
...........................................................................
o INVESTMENT OBJECTIVE
The fund's investment objective is to seek high current income. The fund's
objective may be changed without shareholder approval.
o PRINCIPAL INVESTMENT POLICIES
The fund invests, under normal market conditions, at least 80% of its
total assets in a professionally managed portfolio of high income fixed
income securities. While the fund may invest in fixed income securities
with any credit rating, under normal conditions at least 65% of the fund's
total assets will be invested in lower rated bonds commonly known as junk
bonds. Lower rated bonds are assigned lower credit ratings by credit
rating agencies or are unrated and considered by MFS to be comparable to
lower rated bonds.
While the fund focuses its investments on bonds issued by corporations
or other similar entities, it may invest in all types of debt securities.
The fund may invest in foreign securities (including emerging markets
securities), through which it may have exposure to foreign currencies.
In selecting fixed income investments for the fund, MFS considers the
views of its large group of fixed income portfolio managers and research
analysts. This group periodically assesses the three-month total return
outlook for various segments of the fixed income markets. This three-month
"horizon" outlook is used by the portfolio manager(s) of MFS' fixed income
oriented funds (including the fund) as a tool in making or adjusting a
fund's asset allocations to various segments of the fixed income markets.
In assessing the credit quality of fixed income securities, MFS does not
rely solely on the credit ratings assigned by credit rating agencies, but
rather performs its own independent credit analysis.
Consistent with its objective and policies, the fund may also invest in
equity securities, including common stock and related securities, such as
preferred stock, convertible securities and depositary receipts.
Convertible securities are debt obligations or preferred stock that may be
converted within a specified period of time into a certain amount of
common stock of the same or a different issuer.
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. The share price of the fund generally changes
daily based on market conditions and other factors. Please note that there
are many circumstances which could cause the value of your investment in
the fund to decline, and which could prevent the fund from achieving its
objective, that are not described here.
The principal risks of investing in the fund are:
o Allocation Risk: The fund will allocate its investments among fixed income
markets based upon judgments made by MFS. The fund could miss attractive
investment opportunities by underweighting markets where there are
significant returns, and could lose value by overweighting markets where
there are significant declines.
o Interest Rate Risk: When interest rates rise, the prices of fixed income
securities in the fund's portfolio will generally fall. Conversely, when
interest rates fall, the prices of fixed income securities in the fund's
portfolio will generally rise.
o Maturity Risk: Interest rate risk will affect the price of a fixed income
security more if the security has a longer maturity because changes in
interest rates are increasingly difficult to predict over longer periods
of time. Fixed income securities with longer maturities will therefore be
more volatile than other fixed income securities with shorter maturities.
Conversely, fixed income securities with shorter maturities will be less
volatile but generally provide lower returns than fixed income securities
with longer maturities. The average maturity of the fund's fixed income
investments will affect the volatility of the fund's share price.
o Credit Risk: Credit risk is the risk that the issuer of a fixed income
security will not be able to pay principal and interest when due. Rating
agencies assign credit ratings to certain fixed income securities to
indicate their credit risk. The price of a fixed income security will
generally fall if the issuer defaults on its obligation to pay principal
or interest, the rating agencies downgrade the issuer's credit rating or
other news affects the market's perception of the issuer's credit risk.
o Liquidity Risk: The fixed income securities purchased by the fund may be
traded in the over-the-counter market rather than on an organized exchange
and are subject to liquidity risk. This means that they may be harder to
purchase or sell at a fair price. The inability to purchase or sell these
fixed income securities at a fair price could have a negative impact on
the fund's performance.
o Junk Bond Risk:
> Higher Credit Risk: Junk bonds are subject to a substantially higher
degree of credit risk than higher rated bonds. During recessions, a
high percentage of issuers of junk bonds may default on payments of
principal and interest. The price of a junk bond may therefore
fluctuate drastically due to bad news about the issuer or the economy
in general.
> Higher Liquidity Risk: During recessions and periods of broad market
declines, junk bonds could become less liquid, meaning that they will
be harder to value or sell at a fair price.
o 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. By entering into forward foreign
currency exchange contracts, the fund may be required to forego the
benefits of advantageous changes in exchange rates and, in the case of
forward contracts entered into for the purpose of increasing return,
the fund may sustain losses which will reduce its gross income.
Forward foreign currency exchange contracts involve the risk that the
party with which the fund enters the contract may fail to perform its
obligations to the fund.
o Emerging Markets Risk: 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 significantly higher or lower rates of
return than developed markets, and significantly greater risks, to
investors.
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 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 are not included because the fund did
not have a full calendar year of operations on December 31, 1998.
4: EMERGING MARKETS FUND
...........................................................................
o INVESTMENT OBJECTIVE
The fund's investment objective is total return (high current income and
long-term growth of capital). The fund's objective may be changed without
shareholder approval.
o PRINCIPAL INVESTMENT POLICIES
The fund invests, under normal market conditions, at least 65% of its
total assets in fixed income securities of government, government-related,
supranational and corporate issuers located, or primarily conducting their
business, in emerging market countries. Emerging market countries include
any country determined to have an emerging market economy, taking into
account a number of factors, including whether the country has a low-to-
middle-income economy according to the International Bank for
Reconstruction and Development (the World Bank), the country's foreign
currency debt rating, its political and economic stability and the
development of its financial and capital markets. These countries include
those located in Latin America, Asia, Africa, the Middle East and the
developing countries of Europe, primarily Eastern Europe. While the fund
may invest up to 25% of its assets in securities of a single issuer, the
fund expects to maintain investments, under normal market conditions, in
at least five countries outside of the U.S. The fund's investments may
include securities traded in the over-the-counter markets. The fund may
invest in fixed income securities that have stated maturities ranging from
overnight to 30 years.
A company's principal activities are determined to be located in a
particular country if the company (a) is organized under the laws of, and
maintains a principal office in a country, (b) has its principal
securities trading market in a country, (c) derives 50% of its total
revenues from goods or services performed in the country, or (d) has 50%
or more of its assets in the country.
The fund invests in the following types of foreign securities:
o Fixed income securities of foreign companies (primarily companies in
emerging market countries); and
o Fixed income securities issued by foreign governments, (primarily emerging
market governments); these foreign government securities 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;
> Debt obligations issued by supranational organizations such as the
Asian Development Bank and the Inter- American Development Bank, among
others; and
> Brady Bonds, which are long-term bonds issued as part of a
restructuring of defaulted commercial loans to emerging market
countries.
Emerging market fixed income securities generally are rated in the lower
rating categories of recognized rating agencies and are commonly known as
junk bonds. The fund may invest up to 100% of its net assets in these
lower rated securities.
Until such time as the net assets of the fund reach $10 million, the
fund intends to invest, under normal market conditions, at least 65% of
its total assets in the fixed income securities listed above, and in
forward foreign currency exchange contracts. The fund intends to enter
into forward contracts as an alternate method of gaining exposure to
certain emerging markets, and expects to achieve a similar benefit from
entering into a forward contract denominated in a country's currency as
from the purchase of an emerging market debt security.
The fund is a non-diversified mutual fund. This means that the fund may
invest a relatively high percentage of its assets in a small number of
issuers.
In selecting fixed income investments for the fund, MFS pursues a
disciplined, research-intensive investment process that seeks to limit
risk and enhance returns via superior country and security selection in
the context of a globally diversified portfolio. The investment process
includes: the evaluation of global financial and macroeconomic factors and
their impact on the asset class; assessments of economic, financial and
political developments; examination of the creditworthiness of various
regions and individual countries; and utilization of quantitative tools
and models to assist in relative value determinations, portfolio
construction, and forecasting. MFS does not rely on credit ratings or
outside research in making security selections, but rather performs its
own independent research and credit analysis.
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. The share price of the fund generally changes
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 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. By entering into forward foreign
currency exchange contracts, the fund may be required to forego the
benefits of advantageous changes in exchange rates and, in the case of
forward contracts entered into for the purpose of increasing return,
the fund may sustain losses which will reduce its gross income.
Forward foreign currency exchange contracts involve the risk that the
party with which the fund enters the contract may fail to perform its
obligations to the fund.
o Emerging Markets Risk: Investments in emerging markets securities involve
all of the risks of investments in foreign securities, and also have
additional risks:
> All of the risks of investing in foreign securities are heightened by
investing in emerging market countries.
> The markets of emerging market countries have been more volatile than
the markets of developed countries with more mature economies. These
markets often have provided significantly higher or lower rates of
return than developed markets, and significantly greater risks, to
investors.
o Concentration Risk: The fund may invest a substantial amount of its assets
in issuers located in a single country or a limited number of countries.
If the fund concentrates its investments in this manner, it assumes the
risk that economic, political and social conditions in those countries
will have a significant impact on its investment performance. The fund's
investment performance may also be more volatile if it concentrates its
investments in certain countries, especially emerging market countries.
o 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: Interest rate risk will generally 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 Liquidity Risk: The fixed income securities purchased by the fund may be
traded in the over-the-counter market rather than on an organized exchange
and are subject to liquidity risk. This means that they may be harder to
purchase or sell at a fair price. The inability to purchase or sell these
fixed income securities at a fair price could have a negative impact on
the fund's performance.
o Lower Rated Bonds Risk:
> Higher Credit Risk: Junk bonds are subject to a substantially higher
degree of credit risk than higher rated bonds. During recessions, a
high percentage of issuers of junk bonds may default on payments of
principal and interest. The price of a junk bond may therefore
fluctuate drastically due to bad news about the issuer or the economy
in general.
> Higher Liquidity Risk: During recessions and periods of broad market
declines, junk bonds could become less liquid, meaning that they will
be harder to value or sell at a fair price.
o Active or Frequent Trading Risk: The fund has engaged and 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.
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 performance table also shows how the fund's
performance over time compares with that of one or more broad measures of
market performance. 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 shares
for each calendar year since they were first offered, assuming the
reinvestment of distributions.
1996 20.43%
1997 9.52%
1998 -7.06%
The total return for the year-to-date period ended June 30, 1999, was
10.02%. During the period shown in the bar chart, the highest quarterly
return was 10.12% (for the calendar quarter ended December 31, 1998) and
the lowest quarterly return was (17.31)% (for the calendar quarter ended
September 30, 1998).
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.
PERFORMANCE TABLE
This table shows how the average annual total returns of the fund's shares
compares to one or more broad measures of market performance and assumes
the reinvestment of distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
..........................................................................
1 Year Life
Emerging Markets Fund (7.06)% 7.62%*
50% Morgan Emerging Local Markets Index/50%
Emerging Market Bond Index Plus+** 4.82% 11.10%#
J.P. Morgan Emerging Local Markets Index+** 24.30% 6.71%#
Average emerging markets debt fund++ (20.66)% 10.18%##
------
* "Life" refers to the period from the commencement of the fund's
investment operations, August 7, 1995, through December 31, 1998.
# "Life" refers to the period from August 1, 1995, through December 31,
1998.
##"Life" refers to the period from July 31, 1995, through December 31,
1998.
+ Source: Standard & Poor's Micropal, Inc.
++ Source: Lipper Analytical Services, Inc.
** The Morgan Emerging Local Markets Index is a broad-based, unmanaged
index consisting of local-currency and short-term instruments. The
Emerging Market Bond Index Plus is a broad-based, unmanaged index
consisting of Brady Bonds (U.S. dollar-denominated restructured bank
loans).
<PAGE>
5: CORE EQUITY FUND
...........................................................................
o INVESTMENT OBJECTIVES
The fund's investment objective is to provide long-term growth of capital
generally consistent with that of a diversified large cap portfolio and
income equal to approximately 90% of the dividend yield of the S&P 500.
The fund's objective may be changed without shareholder approval.
o PRINCIPAL INVESTMENT POLICIES
The fund invests at least 80% of its total assets in common stocks and
related securities, such as preferred stocks, convertible securities and
depositary receipts for those securities, of large well-established
companies similar to those found in the S&P 500. Equity securities may be
listed on a securities exchange or traded in the over-the-counter markets.
The fund focuses on companies that MFS believes have sustainable growth
prospects and 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 fund) it advises. This
means that securities are selected based upon fundamental analysis (such
as an analysis of earnings, cash flows, competitive position and
management's abilities) performed by the fund's portfolio manager and MFS'
large group of equity research analysts.
The fund may invest in foreign securities through which it may have
exposure to foreign currencies.
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. The share price of the fund generally changes
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
objectives, 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 Large Cap Companies Risk: Large cap companies tend to go in and out of
favor based on market and economic conditions. Large cap companies tend to
be less volatile than companies with smaller market capitalizations. In
exchange for this potentially lower risk, the fund's value may not rise as
much as the value of funds that emphasize smaller cap companies.
o Foreign Securities 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.
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 are not included because the fund did
not have a full calendar year of operations on December 31, 1998.
<PAGE>
6: RESEARCH FUND
...........................................................................
o INVESTMENT OBJECTIVE
The fund's investment objective is long-term growth of capital. The fund's
objective may be changed without shareholder approval.
o PRINCIPAL INVESTMENT POLICIES
The fund invests, under normal market conditions, at least 80% of its
total assets in common stocks and related securities, such as preferred
stocks, convertible securities and depositary receipts. The fund focuses
on companies that MFS believes have favorable prospects for long-term
growth, attractive valuations based on current and expected earnings or
cash flow, dominant or growing market share and superior management. The
fund may invest in companies of any size. The fund's investments may
include securities traded on securities exchanges or in the over-the-
counter markets.
A committee of investment research analysts selects portfolio securities
for the fund. This committee includes investment analysts employed not
only by MFS, but also by MFS' foreign advisory affiliates. The committee
allocates the fund's assets among various industries. Individual analysts
then select what they view as the securities best suited to achieve the
fund's investment objective within their assigned industry responsibility.
The fund may also invest in foreign securities, through which it may
have exposure to foreign currencies.
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. The share price of the fund generally changes
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 incurred by 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 purchasing or selling these securities at a fair price.
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.
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 performance table also shows how the fund's
performance over time compares with that of one or more broad measures of
market performance. 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 shares
for each calendar year since they were first offered, assuming the
reinvestment of distributions.
1997 20.78%
1998 23.98%
The total return for the year-to-date period ended June 30, 1999, was
9.13%. During the period shown in the bar chart, the highest quarterly
return was 22.50% (for the calendar quarter ended December 31, 1998) and
the lowest quarterly return was (14.63)% (for the calendar quarter ended
September 30, 1998).
PERFORMANCE TABLE
This table shows how the average annual total returns of the fund's shares
compares to a broad measure of market performance and assumes the
reinvestment of distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
...........................................................................
1 Year Life
Research Fund 23.98% 19.97%*
S&P 500**+ 28.58% 28.79%#
Average growth fund++ 23.42% 21.29%##
------
* "Life" refers to the period from the commencement of the fund's
investment operations, May 20, 1996, through December 31, 1998.
# "Life" refers to the period June 1, 1996, through December 31, 1998.
## "Life" refers to the period May 31, 1996, through December 31, 1998.
+ Source: Standard & Poor's Micropal, Inc.
++ Source: Lipper Analytical Services, Inc.
** The S&P 500 is a broad-based, popular, unmanaged index commonly used to
measure common stock total return performance. It is composed of 500
widely held common stocks listed on the New York Stock Exchange
("NYSE"), American Stock Exchange ("AMEX") and Over-the-Counter ("OTC")
market.
<PAGE>
7: LARGE CAP FUND
...........................................................................
o INVESTMENT OBJECTIVE
The fund's investment objective is long-term growth of capital. The fund's
objective may be changed without shareholder approval.
o PRINCIPAL INVESTMENT POLICIES
The fund invests, under normal market conditions, at least 80% of its
total assets in common stocks and related securities, such as preferred
stocks, convertible securities and depositary receipts, of companies with
large market capitalizations which MFS believes have above-average growth
potential. Large market capitalization companies are defined by the fund
as companies with market capitalizations equaling or exceeding $5 billion
at the time of the fund's investment. Companies whose market
capitalization falls below $5 billion after purchase continue to be
considered large-capitalization companies for purposes of the fund's 80%
investment policy. The fund's investments may include securities listed on
a securities exchange or traded in the over-the-counter markets.
MFS looks particularly for companies which demonstrate:
o A strong franchise, strong cash flows and a recurring revenue stream;
o A solid industry position, where there is:
> Potential for high profit margins;
> Substantial barriers to new entry in the industry;
o A strong management team with a clearly defined strategy; and
o A catalyst that may accelerate growth.
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 (such
as an analysis of earnings, cash flows, competitive position and
management's abilities) performed by the fund's portfolio manager and MFS'
large group of equity research analysts.
The fund may invest in foreign securities (including emerging market
securities) through which it may have exposure to foreign currencies.
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. The share price of the fund generally changes
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 Large Cap Companies Risk: Large cap companies tend to go in and out of
favor based on market and economic conditions. Large cap companies tend to
be less volatile than companies with smaller market capitalizations. In
exchange for this potentially lower risk, the fund's value may not rise as
much as the value of funds that emphasize smaller cap companies.
o Growth Companies Risk: Prices of growth company securities held by the
fund may fall to a greater extent than the overall equity markets (e.g.,
as represented by the S&P 500) due to changing economic, political or
market conditions or disappointing growth company earnings results.
o Over-the-Counter Risk: OTC transactions involve risks in addition to those
incurred by 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
purchasing or selling these securities at a fair price.
o Foreign Securities 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.
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 significantly higher or lower rates of
return than developed markets, and significantly greater risks, to
investors.
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 are not included because the fund had
not commenced operations as of June 30, 1999.
<PAGE>
8: MID CAP FUND
...........................................................................
o INVESTMENT OBJECTIVE
The fund's investment objective is long-term growth of capital. The fund's
objective may be changed without shareholder approval.
o PRINCIPAL INVESTMENT POLICIES
The fund invests, under normal market conditions, at least 80% of its
total assets in common stocks and related securities, such as preferred
stocks, convertible securities and depositary receipts for those
securities, of companies with medium market capitalizations which MFS
believes have above-average growth potential.
Medium market capitalization companies are defined by the fund as
companies with market capitalizations falling within the range of the
Russell Midcap(TM) Growth Index at the time of the fund's investment. This
Index is a widely recognized, unmanaged index of mid-cap common stock
prices. As of August 31, 1999, the capitalization range of the Russell
Midcap Growth Index was between $550 million and $21 billion. Companies
whose market capitalizations fall outside the range of the Russell Midcap
Growth Index after purchase continue to be considered medium-
capitalization companies for purposes of the fund's 80% investment policy.
The fund's investments may include securities listed on a securities
exchange or 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 (such
as an analysis of earnings, cash flows, competitive position and
management's abilities) performed by the fund's portfolio manager and MFS'
large group of equity research analysts.
The fund may invest in foreign securities (including emerging markets
securities) through which it may have exposure to foreign currencies.
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. The share price of the fund generally changes
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 Mid-Cap Growth Company Risk: Prices of growth company securities held by
the fund may decline due to changing economic, political or market
conditions, or due to the financial condition of the company which issued
the security, and may decline to a greater extent than the overall equity
markets (e.g., as represented by the S&P 500). Investments in medium
capitalization companies can be riskier and more volatile than investments
in companies with larger market capitalizations.
o Over-the-Counter Risk: 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: 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.
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 significantly higher or lower rates of
return than developed markets, and significantly greater risks, to
investors.
o Active or Frequent Trading Risk: The fund has engaged and 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 could increase your tax liability. Frequent
trading also increases transaction costs, which could detract from the
Fund's performance.
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 performance table also shows how the fund's
performance over time compares with that of one or more broad measures of
market performance. 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
shares for each calendar year since they were first offered, assuming the
reinvestment of distributions.
1996 10.42%
1997 24.69%
1998 20.74%
The total return for the year-to-date period ended June 30, 1999, was
18.31%. During the period shown in the bar chart the highest quarterly
return was 25.02% (for the calendar quarter ended December 31, 1998) and
the lowest quarterly return was (17.49)% (for the calendar quarter ended
September 30, 1998).
PERFORMANCE TABLE
This table shows how the average annual total returns of the fund shares
compares to one or more broad measures of market performance and assumes
the reinvestment of distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
...........................................................................
1 Year Life
Mid Cap Fund 20.74% 18.68%*
Russell Mid-Cap Growth Index+** 17.86% 19.27%#
Average mid cap fund++ 12.39% 16.51%##
------
* "Life" refers to the period from the commencement of the fund's
investment operations, December 28, 1995, through December 31, 1998.
# "Life" refers to the period from January 1, 1996, through December 31,
1998.
## "Life" refers to the period from December 31, 1995, through December
31, 1998.
+ Source: Standard & Poor's Micropal, Inc.
++ Source: Lipper Analytical Services, Inc.
** The Russell Mid-Cap Growth Index is a broad-based, unmanaged index
consisting of performance of the 800 smallest companies in the Russell
1000 Index.
<PAGE>
9: EMERGING EQUITIES FUND
...........................................................................
o INVESTMENT OBJECTIVE
The fund's investment objective is long-term growth of capital. The fund's
objective may be changed without shareholder approval.
o PRINCIPAL INVESTMENT POLICIES
The fund invests, under normal market conditions, at least 80% of its
total assets in equity securities of emerging growth companies with small
or medium sized market capitalizations. Equity securities include common
stocks and related securities, such as preferred stocks, convertible
securities and depositary receipts for those securities. Emerging growth
companies are companies that MFS believes offer superior prospects for
growth and are early in their life cycle but have the potential to become
major enterprises. MFS would expect these companies to have products,
technologies, management, markets and opportunities which will facilitate
earnings growth over time that is well above the growth rate of the
overall economy and the rate of inflation. The fund's investments in
emerging growth companies may include securities listed on a securities
exchange or traded in the over-the-counter markets.
The fund has adopted the following policy which may not be changed
without shareholder approval: while the Fund will invest primarily in
common stocks, the Fund may, to a limited extent, seek appreciation in
other types of securities such as foreign or convertible securities and
warrants when relative values make such purchases appear attractive either
as individual issues or as types of securities in certain economic
environments.
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 (such
as an analysis of earnings, cash flows, competitive position and
management's abilities) performed by the fund's portfolio manager and MFS'
large group of equity research analysts.
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. The share price of the fund generally changes
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 Emerging Growth Companies Risk: Investments in emerging growth companies
may be subject to more abrupt or erratic market movements and may involve
greater risks than investments in other companies. Emerging growth
companies often:
> Have limited product lines, markets and financial resources.
> Are dependent on management by one or a few key individuals.
> Have shares which suffer steeper than average price declines after
disappointing earnings reports and are more difficult to sell at
satisfactory prices.
o Over-the-Counter Risk: 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
purchasing or selling these securities at a fair price.
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 performance table also shows how the fund's
performance over time compares with that of one or more broad measures of
market performance. 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 shares
for each calendar year since they were first offered, assuming the
reinvestment of distributions.
1994 14.16%
1995 43.77%
1996 19.52%
1997 22.95%
1998 13.69%
The total return for the year-to-date period ended June 30, 1999, was
6.68%. During the period shown in the bar chart the highest quarterly
return was 22.67% (for the calendar quarter ended December 31, 1998) and
the lowest quarterly return was (20.00)% (for the calendar quarter ended
September 30, 1998).
PERFORMANCE TABLE
This table shows how the average annual total returns of the fund shares
compares to one or more broad measures of market performance and assumes
the reinvestment of distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
...........................................................................
1 Year 5 Years Life
Emerging Equities Fund 13.69% 22.35% 25.20%*
Russell 2000 Total Return Index+** (2.55)% 11.87% 12.96%##
Russell 2000 Growth Index+*** 1.23% 10.22% 11.56%##
Average small cap fund++ (0.23)% 13.12% 13.95%#
------
* "Life" refers to the period from the commencement of the fund's
investment operations, June 16, 1993, through December 31, 1998.
# "Life" refers to the period from June 30, 1993, through December 31,
1998.
## "Life" refers to the period from July 1, 1993, through December 31,
1998.
+ Source: Standard & Poor's Micropal, Inc.
++ Source: Lipper Analytical Services, Inc.
** The Russell 2000 Total Return Index is a broad-based, unmanaged index
comprised of 2,000 of the smallest U.S.-domiciled company common
stocks (on the basis of capitalization) that are traded in the United
States on the NYSE, AMEX, and the National Association of Securities
Dealers Automated Quotations system.
*** The Russell 2000 Growth Index is a broad-based, unmanaged index
consisting of securities within the Russell 2000 Total Return Index
with a greater-than-average growth orientation.
<PAGE>
10: INTERNATIONAL EQUITY FUND
...........................................................................
o INVESTMENT OBJECTIVE
The fund's investment objective is long-term growth of capital. The fund's
objective may be changed without shareholder approval.
o PRINCIPAL INVESTMENT POLICIES
The fund invests, under normal market conditions, at least 80% of its
total assets in common stocks and related securities, such as preferred
stock, convertible securities and depositary receipts, of foreign
(including emerging market) issuers. Under normal market conditions, the
fund invests in at least three different countries.
A company's principal activities are determined to be located in a
particular country if the company (a) is organized under the laws of, and
maintains a principal office in a country, (b) has its principal
securities trading market in a country, (c) derives 50% of its total
revenues from goods or services performed in the country, or (d) has 50%
or more of its assets in the country.
The fund focuses on foreign companies that MFS believes have above
average growth potential. MFS looks particularly for companies which
demonstrate:
o A strong franchise, strong cash flows and a recurring revenue stream.
o A solid industry position, where there is:
> Potential for high profit margins; and
> Substantial barriers to new entry in the industry;
o A strong management team with a clearly defined strategy; and
o A catalyst that may accelerate growth.
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 (such
as an analysis of earnings, cash flows, competitive position and
management's abilities) performed by the fund's portfolio manager and MFS'
large group of equity research analysts.
o PRINCIPAL RISKS OF AN INVESTMENT
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. The share price of the fund generally changes
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 Foreign Securities 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.
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 significantly higher or lower rates of
return than developed markets, and significantly greater risks, to
investors.
o Concentration: The fund may invest a substantial amount of its assets in
issuers located in a single country or a limited number of countries. If
the fund concentrates its investments in this manner, it assumes the risk
that economic, political and social conditions in those countries will
have a significant impact on its investment performance. The fund's
investment performance may also be more volatile if it concentrates its
investments in certain countries, especially emerging market countries.
o Growth Companies Risk: This is the risk that the prices of growth company
securities held by the fund will fall to a greater extent than the overall
equity markets (e.g., as represented by the Morgan Stanley Capital
International (MSCI) Europe, Australia, Far East (EAFE) Index) due to
changing economic, political or market conditions or disappointing growth
company earnings results.
o Over-the-Counter Risk: 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
purchasing or selling these securities at a fair price.
o Active or Frequent Trading Risk: The fund has engaged and 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 could increase your tax liability. Frequent
trading also increases transaction costs, which could detract from the
Fund's performance.
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 performance table also shows how the fund's
performance over time compares with that of a broad measure of market
performance. 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 shares
for each calendar year since they were first offered, assuming the
reinvestment of distributions.
1997 10.82%
1998 9.28%
The total return for the year-to-date period ended June 30, 1999, was
4.79%. During the period shown in the bar chart, the highest quarterly
return was 15.97% (for the calendar quarter ended March 31, 1998) and the
lowest quarterly return was (16.28)% (for the calendar quarter ended
September 30, 1998).
PERFORMANCE TABLE
This table shows how the average annual total returns of the fund shares
compares to a broad measure of market performance and assumes the
reinvestment of distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
...........................................................................
1 Year Life
International Equity Fund 9.28% 12.94%*
Morgan Stanley Capital International (MSCI)
Europe, Australia, Far East (EAFE) Index+** 20.33% 9.43%#
Average international fund++ 12.99% 9.43%##
------
* "Life" refers to the period from the commencement of the fund's
investment operations, January 30, 1996, through December 31, 1998.
# "Life" refers to the period from February 1, 1996, through December 31,
1998.
## "Life" refers to the period from January 31, 1996, through, December
31, 1998.
+ Source: Standard & Poor's Micropal, Inc.
++ Source: Lipper Analytical Services, Inc.
** The Morgan Stanley Capital International (MSCI) EAFE (Europe,
Australia, Far East) Index is a broad-based, unmanaged, market-
capitalization-weighted total return index which measures the
performance of 20 developed-country global stock markets.
<PAGE>
--------------------------------------------
III CERTAIN INVESTMENT STRATEGIES AND RISKS
--------------------------------------------
o FURTHER INFORMATION ON INVESTMENT STRATEGIES AND RISKS
Each 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 a fund may
engage, including the principal investment techniques and practices
described above, 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. (please see back cover for address and
telephone number).
o TEMPORARY DEFENSIVE POLICIES
In addition, each fund may depart from its principal investment strategies
by temporarily investing for defensive purposes when adverse market,
economic or political conditions exist. While a 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.
o ACTIVE OR FREQUENT TRADING
The Global Fund, the Emerging Markets Fund, the Mid Cap Fund and the
International Equity Fund have engaged in, and each 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.
<PAGE>
---------------------------
IV MANAGEMENT OF THE FUNDS
---------------------------
o INVESTMENT ADVISER
MFS is the funds' 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 $112.6 billion on behalf of
approximately 4.4 million investor accounts as of September 30, 1999. As
of such date, the MFS organization managed approximately $91.0 billion of
net assets in equity funds and equity portfolios and $21.6 billion of net
assets in fixed income funds and fixed income portfolios. Approximately
$4.2 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 investment management and related administrative services
and facilities to each fund, including portfolio management and trade
execution. For these services, each fund pays MFS an annual management
fee. The effective rate of the management fee paid by each fund to MFS is
reflected in the "Expense Table."
o PORTFOLIO MANAGERS
<TABLE>
<CAPTION>
FUND PORTFOLIO MANAGERS
<S> <C>
Core Fixed Income Fund Geoffrey L. Kurinsky, a Senior Vice President of the adviser, has been
employed as a portfolio manager by the adviser since 1987. Peter C. Vaream, a
Vice President of the adviser, has been employed as a portfolio manager by
the adviser since 1992. The fund had not commenced investment operations as
of the date of the prospectus.
Global Fund Steven C. Bryant, a Senior Vice President of the adviser, has been the fund's
portfolio manager since December, 1997. Mr. Bryant has been employed as a
portfolio manager by the adviser since 1987.
High Yield Fund Bernard Scozzafava, a Vice President of the adviser, has been the fund's
portfolio manager since March, 1999. Mr. Scozzafava has been employed as a
portfolio manager by the adviser since 1989.
Emerging Markets Fund Matthew W. Ryan, a Vice President of the adviser, has been the fund's
portfolio manager since July, 1998. Mr. Ryan has been employed as a portfolio
manager with the adviser since 1997. From 1993 to 1997, he worked as an
economist with the U.S. Executive Director's Office of the International
Monetary Fund.
Core Equity Fund John D. Laupheimer, Jr., a Senior Vice President of the adviser, has been the
fund's portfolio manager since November, 1998. Mr. Laupheimer has been
employed as a portfolio manager by the adviser since 1981.
Research Fund Various equity research analysts employed by the adviser comprise a committee
that manages the fund under the supervision of Alec D. Murray, the MFS
Associate Director of Equity Research. Mr. Murray has been employed as a
portfolio manager by the adviser since 1993.
Large Cap Fund Stephen Pesek, a Senior Vice President of the adviser, has been employed as a
portfolio manager by the adviser since 1994. S. Irfan Ali, a Vice President
of the adviser, has been employed as portfolio manager by the adviser since
1993. The fund had not commenced investment operations as of the date of the
prospectus.
Mid Cap Fund Mark Regan, a Senior Vice President of the adviser, has been the fund's
portfolio manager since December, 1995. Mr. Regan has been employed as a
portfolio manager by the adviser since 1989. John W. Ballen, the President
and Chief Investment Officer of the adviser, has provided oversight of the
fund's management since December, 1995. Mr. Ballen has been employed as a
portfolio manager by the adviser since 1984.
Emerging Equities Fund Brian E. Stack, a Senior Vice President of the adviser, has been the fund's
portfolio manager since January, 1996. Mr. Stack has been employed as a
portfolio manager by the adviser since 1993. John W. Ballen, the President
and Chief Investment Officer of the adviser, has provided oversight of the
fund's management since June, 1993. Mr. Ballen has been employed as a
portfolio manager by the adviser since 1984.
International Equity Fund David R. Mannheim, a Senior Vice President of the adviser, has been the
fund's portfolio manager since January, 1996. Mr. Mannheim has been employed
as a portfolio manager by the adviser since 1988.
</TABLE>
o ADMINISTRATOR
MFS provides the funds with certain financial, legal, compliance,
shareholder communications and other administrative services. MFS is
reimbursed by the funds for a portion of the costs it incurs in providing
these services.
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 funds,
for which it is entitled to receive compensation from the funds.
<PAGE>
------------------------
V DESCRIPTION OF SHARES
------------------------
Each fund is designed for sale to institutional investor clients of MFS
and MFS Institutional Advisors, Inc. and other similar investors. Each
fund offers a single class of shares, which are not subject to a sales
charge or any Rule 12b-1 distribution and service fees.
-----------------------------------------------
VI HOW TO PURCHASE, EXCHANGE AND REDEEM SHARES
-----------------------------------------------
You may purchase, exchange and redeem shares of a fund in the manner
described below.
o HOW TO PURCHASE SHARES
Shares may be purchased through MFD in cash or in-kind without a sales
charge at their net asset value next computed after acceptance of the
purchase order. The minimum initial investment is generally $3 million
(generally $1 million in the case of purchases by bank trust departments
for their clients). There is no minimum on additional investments.
OPENING AN ACCOUNT: Payments by check should be made to the order of
[insert name of fund] and sent to that particular fund as follows: MFS
Service Center, Inc., P.O. Box 1400, Boston, MA 02107-9906. Payments of
federal funds should be sent by wire to the custodian of the fund as
follows: State Street Bank and Trust Company, Attn: Mutual Funds Division,
for the account of: [Shareholder's name], Re: [insert name of fund]
(Account No. 99034795) and Wire Number: [Assigned by telephone].
Information on how to wire federal funds is available at any national
bank or any state bank which is a member of the Federal Reserve System.
Shareholders should also mail the completed Account Application to the
MFSC.
A shareholder must first telephone MFSC (see back cover for telephone
number) to advise of its intended action and, if funds are to be wired, to
obtain a wire order number.
IN-KIND PURCHASES: Shares of each fund may be purchased with securities
acceptable to that particular fund. A fund need not accept any security
offered for an in-kind purchase unless it is consistent with that fund's
investment objective, policies and restrictions and is otherwise
acceptable to the fund. Securities accepted in-kind for shares will be
valued in accordance with the fund's usual valuation procedures (see "Net
Asset Value" below). Investors interested in making an in-kind purchase of
fund shares must first telephone MFSC (see back cover for telephone
number) to advise of its intended action and obtain instructions for an
in-kind purchase.
o HOW TO EXCHANGE SHARES
You can exchange your shares for shares of any of the other funds
described in this prospectus at net asset value by contacting MFSC (see
back cover for telephone number). Exchanges will be made only after
instructions in writing or by telephone (an "Exchange Request") are
received for an established account by MFSC in proper form (see
"Redemptions" below). If you use an Exchange Request to open a new account
with one of the other funds described in this prospectus, the exchange
must involve shares having an aggregate value of at least $3 million
(generally $1 million in the case of purchases by bank trust departments
for their clients).
Exchanges may be subject to certain limitations and are subject to the
MFS funds' policies concerning excessive trading practices, which are
policies designed to protect the funds and their shareholders from the
harmful effect of frequent exchanges. These limitations and market timing
policies are described below under the captions "Right to Reject or
Restrict Purchase and Exchange Orders" and "Excessive Trading Practices."
You should read the description of the 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 by contacting the MFSC. Redemptions may be in
cash or, at the fund's discretion, by distribution in-kind of securities
from a fund's portfolio. The securities distributed are selected by MFS in
light of the fund's objective and may not represent a pro rata
distribution of each security held in the fund's portfolio. In the event
that a fund makes an in-kind distribution, you could incur the brokerage
and transaction charges when converting the securities to cash. 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,
a fund may suspend redemptions or postpone payment. If you purchased the
shares you are redeeming by check, a fund may delay the payment of the
redemption proceeds until the check has cleared, which may take up to 15
days from the purchase date.
Each fund reserves the right to redeem shares in your account for their
then-current value (which you will be promptly paid) if at any time the
total investment in the account drops below $500,000 because of
redemptions and exchanges. You will be notified when the value of the
account is less than the minimum investment requirement and allowed 60
days to make an additional investment before the redemption is processed.
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.
SIGNATURE GUARANTEE/ADDITIONAL DOCUMENTATION. In order to protect against
fraud, each 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 OR RESTRICT PURCHASE AND EXCHANGE ORDERS. Purchases and
exchanges should be made for investment purposes only. Each fund reserves
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 funds consider the
underlying redemption and purchase requests conditioned upon the
acceptance of each of these underlying requests. Therefore, in the event
that the funds reject an exchange request, neither the redemption nor the
purchase side of the exchange will be processed. When a fund determines
that the level of exchanges on any day may be harmful to its remaining
shareholders, the fund may delay the payment of exchange proceeds for up
to seven days to permit cash to be raised through the orderly liquidation
of its portfolio securities to pay the redemption proceeds. In this case,
the purchase side of the exchange will be delayed until the exchange
proceeds are paid by the redeeming fund.
EXCESSIVE TRADING PRACTICES. The funds do not permit market-timing or
other excessive trading practices. Excessive, short-term (market-timing)
trading practices may disrupt portfolio management strategies and harm
fund performance. As noted above, each fund reserves the right to reject
or restrict any purchase order (including exchanges) from any investor. To
minimize harm to a fund and its shareholders, a fund will exercise these
rights if an investor has a history of excessive trading or if an
investor's trading, in the judgment of the fund, has been or may be
disruptive to a fund. In making this judgment, a fund may consider trading
done in multiple accounts under common ownership or control.
<PAGE>
----------------------
VII OTHER INFORMATION
----------------------
o PRICING OF FUND SHARES
The price of each fund's shares is based on its net asset value. The net
asset value of each fund's shares is determined at the close of regular
trading each day that the New York Stock Exchange ("NYSE") is open for
trading (generally, 4:00 p.m., Eastern time) (referred to as the valuation
time). The NYSE is closed for business on most national holidays and Good
Friday. To determine net asset value, each fund values its assets at
current market values, or, if current market values are unavailable, at
fair value as determined by the adviser under the direction of the Board
of Trustees that oversees the fund. Fair value pricing may be used by a
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 a 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.
Certain of the funds invest in 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 series'
shares.
o DISTRIBUTIONS
Each fund except the Core Fixed Income Fund and the High Yield Fund
intends to declare and pay substantially all of its net investment income
to its shareholders as dividends on an annual basis. The Core Fixed Income
Fund and the High Yield Fund intends to declare daily and pay to its
shareholders substantially all of its net investment income as dividends
on a monthly basis. Any realized net capital gains are distributed at
least annually.
o TAX CONSIDERATIONS
The following discussion is very general. You are urged to consult your
tax adviser regarding the effect that an investment in a fund may have on
your particular tax situation.
TAXABILITY OF DISTRIBUTIONS. As long as a fund qualifies for treatment as
a regulated investment company (which each fund has in the past (where
applicable), and each fund intends to do in the future), it pays no
federal income tax on the earnings and gains it distributes to its
shareholders.
You will normally have to pay federal income tax, and any state or local
income taxes, on the distributions you receive from a 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. Distributions derived from interest on U.S. Government securities
(but not distributions of gain from the sale of such securities) may be
exempt from state and local income taxes. 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 income tax purposes.
Distributions of capital gains by the High Yield Fund will reduce its
net asset value per share, while all distributions from each other fund
will reduce its 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 United States, a fund
will withhold U.S. federal income tax at the rate of 30% on income
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.
Each fund is also required in certain circumstances to apply backup
withholding at the rate of 31% on dividends and redemption proceeds paid
to any shareholder (including a shareholder who is nether a citizen nor a
resident of the United States) who does not furnish to the fund certain
information and certifications or, in the case of dividends, 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 each 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 considered a taxable event for you. Depending on the purchase price and
the redemption 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 SERIES
MFS may serve as the investment adviser to other funds which have similar
investment goals and principal investment policies and risks as the funds,
and which may be managed by a fund's portfolio manager(s). While a 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 a fund and these similar products,
including differences in sales charges, expense ratios and cash flows.
o YEAR 2000 READINESS DISCLOSURE
A 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 readiness, created a
separately funded Year 2000 Program Management Office in 1996 comprised of
a specialized staff reporting directly to MFS senior management. The
Office, with the help of external consultants, is responsible for overall
coordination, strategy formulation, communications and issue resolution
with respect to Year 2000 Issues. While MFS systems will be tested for
Year 2000 readiness 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 a fund
operate and in MFS' own business environment. MFS has been working with
the funds' other service providers to identify and respond to potential
problems with respect to Year 2000 readiness and to develop contingency
plans. Year 2000 readiness is also one of the factors considered by MFS in
its ongoing assessment of companies in which a fund invests. There can be
no assurance, however, that these steps will be sufficient to avoid any
adverse impact on the funds.
<PAGE>
--------------------------
VIII FINANCIAL HIGHLIGHTS
--------------------------
The financial highlights table is intended to help you understand a fund's
financial performance for the past five years, or, if a fund has not been
in operation that long, since the time it commenced investment operations.
The total returns in the table represent the rate by which an investor
would have earned (or lost) on an investment in a fund (assuming
reinvestment of all distributions). This information has been audited by
each fund's independent auditors, whose report, together with the fund's
financial statements, are included in the fund's annual report to
shareholders. A fund's annual report is available upon request by
contacting MFSC (see back cover for address and phone number). These
financial statements are incorporated by reference into the SAI. The
fund's independent auditors are Deloitte & Touche LLP.
<TABLE>
GLOBAL FUND
.............................................................................................................................
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value - beginning of period ...... $ 8.18 $ 9.07 $ 9.28 $10.13 $ 9.64
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) ................. $ 0.43 $ 0.48 $ 0.58 $ 0.64 $ 0.65
Net realized and unrealized gain (loss) on
investments and foreign currency ....... 0.08 (0.16) (0.25) (0.48) 0.70
------ ------ ------ ------ ------
Total from investment operations ..... $ 0.51 $ 0.32 $ 0.33 $ 0.16 $ 1.35
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income ............... $ -- $(1.10) $(0.54) $(0.48) $(0.23)
From net realized gain on investments and
foreign currency transactions .......... -- -- -- (0.31) (0.63)
In excess of net realized gain on
investments and foreign currency
transactions ........................... -- -- -- (0.22) --
From paid-in capital ..................... -- (0.11) -- -- --
------ ------ ------ ------ ------
Total distributions declared to
shareholders ....................... $ -- $(1.21) $(0.54) $(1.01) $(0.86)
------ ------ ------ ------ ------
Net asset value - end of period ............ $ 8.69 $ 8.18 $ 9.07 $ 9.28 $10.13
====== ====== ====== ====== ======
Total return ............................... 6.11% 3.70% 3.40% 1.51% 15.10%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA(S):
Expenses## ............................... 0.67% 0.65% 0.65% 0.65% 0.72%
Net investment income .................... 4.86% 5.51% 6.09% 6.52% 6.66%
PORTFOLIO TURNOVER ......................... 275% 413% 365% 425% 279%
NET ASSETS AT END OF PERIOD (000 OMITTED) .. $14,907 $26,016 $53,517 $62,807 $76,078
(S) The investment adviser voluntarily agreed to maintain the expenses of the fund, excluding management fee, at not more
than 0% of average daily net assets. To the extent that actual expenses were over this limitation, the net investment
income per share and the ratios would have been:
Net investment income .............. $ 0.39 $ 0.45 $ 0.55 $ 0.61 $ 0.61
RATIOS (TO AVERAGE NET ASSETS):
Expenses## ....................... 1.11% 1.01% 0.97% 0.95% 1.14%
Net investment income ............ 4.42% 5.17% 5.78% 6.22% 6.23%
# 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>
HIGH YIELD FUND
...........................................................................
PERIOD ENDED
JUNE 30, 1999*
---------------------------------------------------------------------------
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD):
Net asset value - beginning of period ........................... $10.00
------
Income from investment operations# -
Net investment income(S) ...................................... $ 0.50
Net realized and unrealized loss on investments and foreign
currency .................................................... (0.16)
------
Total from investment operations .......................... $ 0.34
------
Less distributions declared to shareholders from net investment
income ........................................................ $(0.41)
------
Net asset value - end of period ................................. $ 9.93
======
Total return .................................................... 3.41%++
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA(S):
Expenses## .................................................... 0.67%+
Net investment income ......................................... 8.43%+
PORTFOLIO TURNOVER .............................................. 24%
NET ASSETS AT END OF PERIOD (000 OMITTED) ....................... $2,067
(S) The investment adviser agreed to maintain the expenses of the fund,
exclusive of management fee, at not more than 0.15% of average daily net
assets. To the extent actual expenses were over this limitation, the net
investment income per share and the ratios would have been:
Net investment income ....................................... $ 0.25
RATIOS (TO AVERAGE NET ASSETS)
Expenses## ................................................ 4.86%+
Net investment income ..................................... 4.24%+
* For the period from the commencement of the fund's investment operations,
December 31, 1998, through June 30, 1999.
+ 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.
<PAGE>
<TABLE>
EMERGING MARKETS FUND
<CAPTION>
....................................................................................................................
YEAR ENDED JUNE 30,
---------------------------------------------------------
1999 1998 1997 1996*
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value - beginning of period .............. $10.86 $11.94 $10.88 $10.00
------ ------ ------ ------
Income from investment operations# -
Net investment income(S) ......................... $ 0.84 $ 0.73 $ 0.94 $ 0.70
Net realized and unrealized gain (loss) on
investments and foreign currency ............... (0.93) (0.56) 1.41 0.56
------ ------ ------ ------
Total from investment operations ............. $(0.09) $ 0.17 $ 2.35 $ 1.26
------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income ....................... $(0.75) $(0.40) $(0.83) $(0.38)
From net realized gain on investments and foreign
currency transactions .......................... -- (0.83) (0.46) --
In excess of net realized gain on investments and
foreign currency transactions .................. (0.06) (0.02) -- --
------ ------ ------ ------
Total distributions declared to shareholders . $(0.81) $(1.25) $(1.29) $(0.38)
------ ------ ------ ------
Net asset value - end of period .................... $ 9.96 $10.86 $11.94 $10.88
====== ====== ====== ======
Total return ....................................... 0.18% 1.67% 22.79% 12.93%++
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA(S):
Expenses## ....................................... 1.31% 1.30% 1.29% 1.25%+
Net investment income ............................ 8.88% 6.46% 8.30% 7.59%+
PORTFOLIO TURNOVER ................................. 399% 159% 473% 285%
NET ASSETS AT END OF PERIOD (000 OMITTED) .......... $3,570 $5,327 $5,326 $4,160
(S) Subject to reimbursement by the fund, the investment adviser agreed to maintain the expenses of the fund,
exclusive of management fees, at not more than 0.40% of average daily net assets. To the extent actual expenses
were over this limitation, the net investment income per share and the ratios would have been:
Net investment income ...................... $ 0.71 $ 0.66 $ 0.85 $ 0.43
RATIOS (TO AVERAGE NET ASSETS):
Expenses## ............................... 2.63% 1.91% 2.07% 4.21%+
Net investment income .................... 7.56% 5.86% 7.48% 4.63%+
* For the period from the commencement of the fund's investment operations, August 7, 1995, through June 30, 1996.
+ 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.
</TABLE>
<PAGE>
CORE EQUITY FUND
...........................................................................
PERIOD ENDED
JUNE 30, 1999*
---------------------------------------------------------------------------
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD):
Net asset value - beginning of period .......................... $10.00
-----
Income from investment operations# -
Net investment income(S) ..................................... $ 0.04
Net realized and unrealized gain on investments and foreign
currency ................................................... 0.66
-----
Total from investment operations ......................... $ 0.70
-----
Net asset value - end of period ................................ $10.70
-----
-----
Total return ................................................... 7.00%++
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA(S):
Expenses## ................................................... 0.66%+
Net investment income ........................................ 0.68%+
PORTFOLIO TURNOVER ............................................. 36%
NET ASSETS AT END OF PERIOD (000 OMITTED) ...................... $12,781
(S) The investment adviser voluntarily agreed to maintain the other
expenses, exclusive of management fees, at not more than 0.05% of
average daily net assets. To the extent actual expenses were over this
limitation, the net investment loss per share and the ratios would have
been:
Net investment loss .................................... $(0.01)
RATIOS (TO AVERAGE NET ASSETS)
Expenses## ........................................... 1.40%+
Net investment loss .................................. (0.06)%+
* For the period from the commencement of the fund's investment
operations, December 31, 1998, through June 30, 1999.
+ 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.
<PAGE>
<TABLE>
RESEARCH FUND
<CAPTION>
......................................................................................................................
YEAR ENDED JUNE 30,
--------------------------------------------- PERIOD ENDED
1999 1998 1997 JUNE 30, 1996*
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value - beginning of period .......... $14.76 $12.10 $ 9.78 $10.00
------ ------ ------ ------
Income from investment operations# -
Net investment income(S) ..................... $ 0.05 $ 0.07 $ 0.06 $ 0.02
Net realized and unrealized gain (loss) on
investments and foreign currency ........... 1.99 3.07 2.29 (0.24)
------ ------ ------ ------
Total from investment operations ......... $ 2.04 $ 3.14 $ 2.35 $(0.22)
------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income ................... $(0.03) $(0.05) $(0.03) $ --
From net realized gain on investments and
foreign currency transactions .............. (0.50) (0.43) -- --
------ ------ ------ ------
Total distributions declared to
shareholders ........................... $(0.53) $(0.48) $(0.03) $ --
------ ------ ------ ------
Net asset value - end of period ................ $16.27 $14.76 $12.10 $ 9.78
====== ====== ====== ======
Total return ................................... 14.12% 26.86% 24.12% (2.20)%++
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA(S):
Expenses## ................................... 0.66% 0.65% 0.65% 0.65%+
Net investment income ........................ 0.37% 0.49% 0.56% 1.52%+
PORTFOLIO TURNOVER ............................. 99% 73% 84% 6%
NET ASSETS AT END OF PERIOD (000 OMITTED) ...... $61,467 $100,377 $42,292 $22,779
(S) The investment adviser voluntarily agreed to maintain the expenses of the fund, exclusive of management fee, at
not more than 0.05% of average daily net assets. To the extent actual expenses were over this limitation, the net
investment income per share and the ratios would have been:
Net investment income .................. $ 0.04 $ 0.05 $ 0.03 $ --
RATIOS (TO AVERAGE NET ASSETS):
Expenses## ........................... 0.77% 0.76% 0.90% 2.03%+
Net investment income ................ 0.26% 0.38% 0.31% 0.14%+
* For the period from the commencement of the fund's investment operations, May 20, 1996, through June 30, 1996.
+ 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.
</TABLE>
<PAGE>
<TABLE>
MID CAP FUND
<CAPTION>
......................................................................................................................
YEAR ENDED JUNE 30,
-------------------------------------------- PERIOD ENDED
1999 1998 1997 JUNE 30, 1996*
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value - beginning of period ........... $15.04 $12.25 $11.13 $10.00
------ ------ ------ ------
Income from investment operations# -
Net investment loss(S) ........................ $(0.01) $(0.02) $(0.00)** $(0.01)
Net realized and unrealized gain on investments
and foreign currency ........................ 2.96 3.45 1.40 1.14
------ ------ ------ ------
Total from investment operations .......... $ 2.95 $ 3.43 $ 1.40 $ 1.13
------ ------ ------ ------
Less distributions declared to shareholders
from net realized gain on investments and
foreign currency transactions ............... $(1.71) $(0.64) $(0.28) $ --
------ ------ ------ ------
Net asset value - end of period ................. $16.28 $15.04 $12.25 $11.13
====== ====== ====== ======
Total return .................................... 22.05% 29.15% 12.80% 11.30%++
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA(S):
Expenses## .................................... 0.66% 0.66% 0.66% 0.70%+
Net investment loss ........................... (0.07)% (0.17)% (0.01)% (0.25)%+
PORTFOLIO TURNOVER .............................. 147% 143% 136% 33%
NET ASSETS AT END OF PERIOD (000 OMITTED) ....... $61,902 $48,936 $25,007 $8,149
(S) The investment adviser voluntarily agreed to maintain the expenses of the fund, excluding management fees, at no
more than 0.05% of average daily net assets effective May 3, 1996. During the period December 28, 1995, through
May 2, 1996, the investment adviser agreed to maintain the expenses of the fund at no more than 0.75% of average
daily net assets. To the extent actual expenses were over these limitations, the net investment loss per share and
the ratios would have been:
Net investment loss ..................... $(0.03) $(0.04) $(0.04) $(0.09)
RATIOS (TO AVERAGE NET ASSETS):
Expenses## ............................ 0.80% 0.83% 0.99% 2.59%+
Net investment loss ................... (0.21)% (0.35)% (0.34)% (2.14)%+
* For the period from the commencement of the fund's investment operations, December 28, 1995, through June 30,
1996.
** The per share amount was less than $0.01.
+ 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 arrangment.
</TABLE>
<PAGE>
<TABLE>
EMERGING EQUITIES FUND
<CAPTION>
.............................................................................................................................
YEAR ENDED JUNE 30,
----------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value - beginning of period . $22.95 $21.45 $21.17 $16.42 $11.75
------ ------ ------ ------ ------
Income from investment operations# -
Net investment loss(S) .............. $(0.08) $(0.08) $(0.04) $(0.04) $(0.03)
Net realized and unrealized gain on
investments and foreign currency .. 0.98 4.54 3.42 6.55 5.04
------ ------ ------ ------ ------
Total from investment operations $ 0.90 $ 4.46 $ 3.38 $ 6.51 $ 5.01
------ ------ ------ ------ ------
Less distributions declared to
shareholders from net realized gain
on investments and foreign currency
transactions ........................ $(1.65) $(2.96) $(3.10) $(1.76) $(0.34)
------ ------ ------ ------ ------
Net asset value - end of period ....... $22.20 $22.95 $21.45 $21.17 $16.42
====== ====== ====== ====== ======
Total return .......................... 4.69% 23.51% 18.49% 41.37% 43.21%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA(S):
Expenses## .......................... 0.79% 0.76% 0.75% 0.75% 0.75%
Net investment loss ................. (0.41)% (0.36)% (0.22)% (0.22)% (0.19)%
PORTFOLIO TURNOVER .................... 78% 80% 96% 97% 86%
NET ASSETS AT END OF PERIOD
(000 OMITTED) ....................... $444,822 $502,393 $383,637 $259,362 $107,019
(S) The investment adviser voluntarily agreed to maintain the expenses of the fund at not more than 0.75% of average
daily net assets. To the extent actual expenses were over this limitation, the net investment loss per share and
the ratios would have been:
Net investment loss ........... $(0.09) $(0.10) $(0.06) $(0.06) $(0.07)
RATIOS (TO AVERAGE NET ASSETS):
Expenses## .................. 0.83% 0.83% 0.84% 0.87% 0.98%
Net investment loss ......... (0.45)% (0.44)% (0.31)% (0.34)% (0.42)%
# Per share data are based on average shares outstanding.
## Through December 31, 1998, 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.
</TABLE>
<PAGE>
<TABLE>
INTERNATIONAL EQUITY FUND
<CAPTION>
......................................................................................................................
YEAR ENDED JUNE 30,
-------------------------------------------- PERIOD ENDED
1999 1998 1997 JUNE 30, 1996*
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value - beginning of period ........... $13.88 $13.04 $10.96 $10.00
------ ------ ------ ------
Income from investment operations# -
Net investment income(S) ...................... $ 0.15 $ 0.14 $ 0.23 $ 0.13
Net realized and unrealized gain (loss) on
investments and foreign currency ............ (0.10) 1.12 2.23 0.83
------ ------ ------ ------
Total from investment operations .......... $ 0.05 $ 1.26 $ 2.46 $ 0.96
------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income .................... $(0.22) $(0.08) $(0.13) $ --
From net realized gain on investments and
foreign currency transactions ............... (0.80) (0.34) (0.25) --
------ ------ ------ ------
Total distributions declared to
shareholders ............................ $(1.02) $(0.42) $(0.38) $ --
------ ------ ------ ------
Net asset value - end of period ................. $12.91 $13.88 $13.04 $10.96
------ ------ ------ ------
------ ------ ------ ------
Total return .................................... 0.74% 10.13% 22.97% 9.60%++
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA(S):
Expenses## .................................... 0.87% 0.86% 0.87% 0.94%+
Net investment income ......................... 1.18% 1.08% 1.98% 2.46%+
PORTFOLIO TURNOVER .............................. 109% 64% 76% 19%
NET ASSETS AT END OF PERIOD (000 OMITTED) ....... $7,667 $12,477 $10,688 $2,498
(S) Effective May 3, 1996, the investment adviser voluntarily agreed to maintain the expenses of the fund, exclusive
of management fee, at not more than 0.10% of average daily net assets. During the period January 30, 1996, through
May 2, 1996, the investment adviser voluntarily agreed to maintain the expenses of the fund, exclusive of
management fees, at not more than 0.20% of average daily net assets. To the extent actual expenses were over these
limitations, the net investment income (loss) per share and the ratios would have been:
Net investment income (loss) ............ $ 0.06 $ 0.07 $ 0.10 $(0.08)
RATIOS (TO AVERAGE NET ASSETS):
Expenses## ............................ 1.54% 1.39% 2.01% 4.91%+
Net investment income (loss) .......... 0.51% 0.55% 0.84% (1.51)%+
* For the period from the commencement of the fund's investment operations, January 30, 1996, through June 30, 1996.
+ 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.
</TABLE>
<PAGE>
----------
APPENDIX A
----------
o INVESTMENT TECHNIQUES AND PRACTICES
In pursuing its investment objective, each fund may engage in the
following principal and non-principal investment techniques and practices.
Investment techniques and practices which are the principal focus of a
fund are described, together with their risks, in the Risk Return Summary
of the Prospectus. Both principal and non-principal investment techniques
and practices are described, together with their risks, in the SAI.
INVESTMENT TECHNIQUES/PRACTICES
.......................................................................
SYMBOLS x permitted -- not permitted
-----------------------------------------------------------------------
CORE
FIXED HIGH EMERGING
INCOME GLOBAL YIELD MARKETS
FUND FUND FUND FUND
------ ------ ------ ------
Debt Securities
Asset-Backed Securities
Collateralized Mortgage
Obligations and Multiclass
Pass-Through Securities x x x --
Corporate Asset-Backed Securities x x x --
Mortgage Pass-Through Securities x x x x
Stripped Mortgage-Backed
Securities x -- -- --
Corporate Securities x x x x
Loans and Other Direct Indebtedness x -- x x
Lower Rated Bonds x x x x
Municipal Bonds x -- -- --
Speculative Bonds x x x x
U.S. Government Securities x x x x
Variable and Floating Rate
Obligations x x x x
Zero Coupon Bonds, Deferred
Interest Bonds and PIK Bonds x x x x
Equity Securities -- x x --
Foreign Securities Exposure
Brady Bonds x x x x
Depositary Receipts -- x -- x
Dollar-Denominated Foreign Debt
Securities x x -- x
Emerging Markets x x x x
Foreign Securities x x x x
Forward Contracts x x x x
Futures Contracts x x x x
Indexed Securities/Structured
Products x x x x
Inverse Floating Rate Obligations -- -- -- --
Investment in Other Investment Companies
Open-End Funds x --* x x
Closed-End Funds x x x x
Lending of Portfolio Securities x x x x
Leveraging Transactions
Bank Borrowings -- --* -- --
Mortgage "Dollar-Roll" Transactions x --* -- --
Reverse Repurchase Agreements -- --* -- --
Options
Options on Foreign Currencies x x -- x
Options on Futures Contracts x x -- x
Options on Securities -- x x x
Options on Stock Indices -- x x x
Reset Options x x -- x
"Yield Curve" Options x x -- x
Repurchase Agreements x x x x
Restricted Securities x x x x
Short Sales -- --* x --
Short Sales Against the Box -- --* x --
Short Term Instruments x x x x
Swaps and Related Derivative
Instruments x x x x
Temporary Borrowings x x x x
Temporary Defensive Positions x x x x
Warrants x x x x
"When-Issued" Securities x x x x
----------
* May only be changed with shareholder approval.
<PAGE>
INVESTMENT TECHNIQUES/PRACTICES (Continued)
...........................................................................
SYMBOLS x permitted -- not permitted
---------------------------------------------------------------------------
CORE
EQUITY RESEARCH LARGE CAP MID CAP
FUND FUND FUND FUND
------ ------ ------ ------
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 x x x x
Loans and Other Direct Indebtedness -- -- -- --
Lower Rated Bonds -- x x x
Municipal Bonds -- -- -- --
Speculative Bonds -- x x x
U.S. Government Securities -- x x x
Variable and Floating Rate
Obligations x x x x
Zero Coupon Bonds, Deferred
Interest Bonds and PIK Bonds x -- x x
Equity Securities x x x x
Foreign Securities Exposure
Brady Bonds -- -- -- --
Depositary Receipts x x x x
Dollar-Denominated Foreign Debt
Securities -- x -- --
Emerging Markets x x x x
Foreign Securities x x x x
Forward Contracts x x x x
Futures Contracts x -- x x
Indexed Securities/Structured
Products -- x -- --
Inverse Floating Rate Obligations -- -- -- --
Investment in Other Investment Companies
Open-End Funds x x x x
Closed-End Funds x x x x
Lending of Portfolio Securities x x x x
Leveraging Transactions
Bank Borrowings -- -- -- --
Mortgage "Dollar-Roll" Transactions -- -- -- --
Reverse Repurchase Agreements -- -- -- --
Options
Options on Foreign Currencies x -- x x
Options on Futures Contracts x -- x x
Options on Securities x -- x x
Options on Stock Indices x -- x x
Reset Options -- -- -- --
"Yield Curve" Options -- -- -- --
Repurchase Agreements x x x x
Restricted Securities x x x x
Short Sales -- -- x x
Short Sales Against the Box -- -- x x
Short Term Instruments x x x x
Swaps and Related Derivative
Instruments -- -- -- --
Temporary Borrowings x x x x
Temporary Defensive Positions x x x x
Warrants x x x x
"When-Issued" Securities x -- x x
----------
*May only be changed with shareholder approval.
<PAGE>
INVESTMENT TECHNIQUES/PRACTICES
..........................................................................
SYMBOLS x permitted -- not permitted
--------------------------------------------------------------------------
INTERNATI
EMERGING ONAL
EQUITIES EQUITY
FUND FUND
------ ------
Debt Securities
Asset-Backed Securities
Collateralized Mortgage
Obligations and Multiclass
Pass-Through Securities -- --
Corporate Asset-Backed
Securities -- x
Mortgage Pass-Through
Securities -- --
Stripped Mortgage-Backed
Securities -- --
Corporate Securities x x
Loans and Other Direct
Indebtedness -- x
Lower Rated Bonds -- --
Municipal Bonds -- --
Speculative Bonds x x
U.S. Government Securities x x
Variable and Floating Rate
Obligations x x
Zero Coupon Bonds, Deferred
Interest Bonds and PIK Bonds -- --
Equity Securities x x
Foreign Securities Exposure
Brady Bonds -- --
Depositary Receipts x x
Dollar-Denominated Foreign Debt
Securities x --
Emerging Markets x x
Foreign Securities x x
Forward Contracts x x
Futures Contracts x x
Indexed Securities/Structured Products -- --
Inverse Floating Rate Obligations -- --
Investment in Other Investment Companies
Open-End Funds --* x
Closed-End Funds x x
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 x
Options on Securities x x
Options on Stock Indices x x
Reset Options -- --
"Yield Curve" Options -- --
Repurchase Agreements x x
Restricted Securities x x
Short Sales -- --
Short Sales Against the Box x x
Short Term Instruments x x
Swaps and Related Derivative
Instruments -- --
Temporary Borrowings x x
Temporary Defensive Positions x x
Warrants x x
"When-Issued" Securities -- x
----------
*May only be changed with shareholder approval.
<PAGE>
MFS(R) INSTITUTIONAL TRUST
If you want more information about the funds, the following documents are
available free upon request:
ANNUAL/SEMIANNUAL REPORTS. These reports contain information about the
funds' actual investments. Annual reports discuss the effect of recent
market conditions and the funds' investment strategy on the funds'
performance during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI). The SAI, dated November 1,
1999, provides more detailed information about the funds 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 FUNDS, AND MAKE INQUIRIES ABOUT THE FUNDS, BY
CONTACTING:
MFS Service Center, Inc.
2 Avenue de Lafayette
Boston, MA 02111-1738
Telephone: 1-800-637-2262
Internet: http://www.mfs.com
Information about the funds (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 funds 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 Trust's Investment Company Act file number is 811-6174.
<PAGE>
- --------------------------
MFS(R) INSTITUTIONAL TRUST
- --------------------------
NOVEMBER 1, 1999
[logo] M F S (R) STATEMENT OF ADDITIONAL
INVESTMENT MANAGEMENT INFORMATION
75 YEARS
WE INVENTED THE MUTUAL FUND(R)
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 Funds' Prospectus dated
November 1, 1999, as supplemented from time to time. This SAI should be read in
conjunction with the Prospectus, a copy of which may be obtained without charge
by contacting the Shareholder Servicing Agent (see back cover for address and
phone number).
This SAI relates to the 10 Funds identified on page three hereof. Shares of
these Funds are designed for sale to institutional investor clients of MFS and
MFS Institutional Advisors, Inc., a wholly owned subsidiary of MFS, and other
similar investors.
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE
INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
MFSI-13 10/99 500
<PAGE>
-----------------
TABLE OF CONTENTS
-----------------
Page
I Definitions ................................................... 3
II Investment Techniques, Practices and Risks .................... 3
III Investment Restrictions ....................................... 3
IV Management of the Funds ....................................... 7
Trustees .................................................. 8
Officers .................................................. 8
Trustees Compensation Table ............................... 10
Investment Adviser ........................................ 10
Investment Advisory Agreement ............................. 10
Administrator ............................................. 11
Custodian ................................................. 11
Shareholder Servicing Agent ............................... 11
Distributor ............................................... 12
V Portfolio Transactions and Brokerage Commissions .............. 12
VI Tax Considerations ............................................ 14
VII Net Income and Distributions .................................. 16
VIII Determination of Net Asset Value .............................. 16
IX Performance Information ....................................... 16
X Descriptions of Shares, Voting Rights and Liabilities ......... 18
XI Independent Auditors and Financial Statements ................. 19
Appendix A -- Investment Techniques, Practices and Risks ...... A-1
Appendix B -- Description of Bond Ratings ..................... B-1
Appendix C -- Performance Quotation ........................... C-1
<PAGE>
I DEFINITIONS
"Trust" - MFS Institutional Trust, a Massachusetts business trust
organized on September 13, 1990.
"Core Fixed Income Fund" - MFS Institutional Core Fixed Income Fund,
formerly known as MFS Institutional Core Plus Fixed Income Fund until its
name was changed on October 16, 1997, a diversified series of the Trust.
"Global Fund" - MFS Institutional Global Fixed Income Fund, formerly known
as MFS Institutional Worldwide Fixed Income Fund until its name was
changed on October 16, 1997, a non-diversified series of the Trust.
"High Yield Fund" - MFS Institutional High Yield Fund, a diversified
series of the Trust.
"Emerging Markets Fund" - MFS Institutional Emerging Markets Debt Fund,
formerly known as MFS Institutional Emerging Markets Income Fund until its
name was changed on October 16, 1997, a non-diversified series of the
Trust.
"Core Equity Fund" - MFS Institutional Core Equity Fund, a diversified
series of the Trust.
"Research Fund" - MFS Institutional Research Fund, a diversified series of
the Trust.
"Large Cap Fund" - MFS Institutional Large Cap Growth Fund, a diversified
series of the Trust.
"Mid Cap Fund" - MFS Institutional Mid Cap Growth Fund, formerly known as
MFS Institutional Mid-Cap Growth Equity Fund until its name was changed on
October 16, 1997, a diversified series of the Trust.
"Emerging Equities Fund" - MFS Institutional Emerging Equities Fund, a
diversified series of the Trust.
"International Equity Fund" - MFS Institutional International Equity Fund,
a diversified series of the Trust.
"Funds" - Core Fixed Income Fund, Global Fund, High Yield Fund, Emerging
Markets Fund, Core Equity Fund, Research Fund, Large Cap Fund, Mid Cap
Fund, Emerging Equities Fund and International Equity Fund.
"MFS" or the "Adviser" - Massachusetts Financial Services Company, a
Delaware corporation.
"MFD" - MFS Fund Distributors, Inc., a Delaware Corporation.
"Prospectus" - The Prospectus of the Funds, dated November 1, 1999, as
amended or supplemented from time to time.
II INVESTMENT TECHNIQUES, PRACTICES AND RISKS
The investment objective and principal investment policies of each Fund
are described in the Prospectus. In pursuing its investment objective and
principal investment policies, a 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 Appendix A to this SAI. The following percentage limitations (as
a percentage of net assets) apply to these investment techniques and
practices:
PERCENTAGE LIMITATION
INVESTMENT POLICY (BASED ON NET ASSETS)
1. CORE FIXED INCOME FUND
Non-Dollar Denominated
Non-Canadian up to (but not
Foreign Securities: .......... including) 20%
Emerging Markets: ............ 5%
Lower Rated Bonds: ........... up to (but not
including) 20%
Securities Lending: .......... 30%
2. GLOBAL FUND
Foreign Securities: .......... 100%
Emerging Market Securities: .. 25%
Lower Rated Bonds: ........... 25%
Securities Lending: .......... 30%
3. HIGH YIELD FUND
Foreign Securities, including
emerging markets: ............ 50%
Lower Rated Bonds: ........... 100%
Securities Lending: .......... 30%
4. EMERGING MARKETS FUND
Emerging Market Securities: .. 100%
Lower Rated Bonds: ........... 100%
Securities Lending: .......... 30%
5. CORE EQUITY FUND
Foreign Securities: .......... 10%
Securities Lending: .......... 30%
6. RESEARCH FUND
Foreign Securities: .......... up to (but not
including) 20%
Lower Rated Bonds: ........... 10%
Securities Lending: .......... 30%
7. LARGE CAP FUND
Foreign Securities: .......... 25%
Securities Lending: .......... up to (but not
including) 20%
8. MID CAP FUND
Foreign Securities: .......... up to (but not
including) 20%
Lower Rated Bonds: ........... 10%
Securities Lending: .......... 30%
9. EMERGING EQUITIES FUND
Foreign Securities: .......... up to (but not
including) 20%
10. INTERNATIONAL EQUITY FUND
Foreign Securities: .......... 100%
Emerging Market Securities: .. 25%
Securities Lending: .......... 30%
III INVESTMENT RESTRICTIONS
INVESTMENT RESTRICTIONS. The Trust on behalf of each Fund has adopted the
following fundamental and non-fundamental investment restrictions.
Fundamental restrictions cannot be changed without the approval of the
holders of a majority of that Fund's shares (which, as used in this SAI,
means the lesser of (i) more than 50% of its outstanding shares, or (ii)
67% or more of its outstanding shares present at a meeting at which
holders of more than 50% of its outstanding shares are represented in
person or by proxy). Except for Investment Restriction (1) and each Funds'
non-fundamental investment policy regarding investing in illiquid
securities, 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.
As fundamental policies, the Core Fixed Income Fund, the Emerging Markets
Fund, the Research Fund, the Mid Cap Fund and the International Equity
Fund each may not:
(1) Borrow amounts in excess of 33 1/3% of its assets including
amounts borrowed.
(2) Underwrite securities issued by other persons except insofar as
the Fund may technically be deemed an underwriter under the Securities
Act of 1933 in selling a portfolio security.
(3) Purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or interests
therein and securities of companies, such as real estate investment
trusts, which deal in real estate or interests therein), interests in
oil, gas or mineral leases, commodities or commodity contracts
(excluding Options, Options on Futures Contracts, Options on Stock
Indices, Options on Foreign Currencies and any other type of option, and
Futures Contracts) in the ordinary course of its business, each Fund
reserves the freedom of action to hold and to sell real estate, mineral
leases, commodities or commodity contracts (including Options, Options
on Futures Contracts, Options on Stock Indices, Options on Foreign
Currencies and any other type of option, and Futures Contracts) acquired
as a result of the ownership of securities.
(4) Issue any senior securities except as permitted by the Securities
Act of 1940 ("1940 Act"). For purposes of this restriction, collateral
arrangements with respect to any type of option (including Options,
Options on Futures Contracts, Options on Stock Indices, Options on
Foreign Currencies), Forward Contracts, Futures Contracts and swap and
collateral arrangements with respect to initial and variation margin are
not deemed to be the issuance of a senior security.
(5) Make loans to other persons. For these purposes, the purchase of
short-term commercial paper, the purchase of a portion or all of an
issue of debt securities, the lending of portfolio securities, or the
investment of a Fund's assets in repurchase agreements, shall not be
considered the making of a loan.
(6) Purchase any securities of an issuer of a particular industry if,
as a result, 25% or more of its gross assets would be invested in
securities of issuers whose principal business activities are in the
same industry (except obligations issued or guaranteed by the U.S.
Government or its agencies and instrumentalities and repurchase
agreements collateralized by such obligations).
In addition, the Core Fixed Income Fund, the Emerging Markets Fund, the
Research Fund, the Mid Cap Fund and the International Equity Fund have
adopted the following non-fundamental policies which may be changed
without shareholder approval. Each such Fund will not:
(1) Invest in illiquid investments, including securities subject to
legal or contractual restrictions on resale or for which there is no
readily available market (e.g., trading in the security is suspended,
or, in the case of unlisted securities, where no market exists) if more
than 15% of the Fund's net 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 a 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.
(2) Pledge, mortgage or hypothecate in excess of 33 1/3% of its gross
assets. For purposes of this restriction, collateral arrangements with
respect to any type of option (including Options on Futures Contracts,
Options, Options on Foreign Currencies and Options on Stock Indices),
Futures Contracts and payments of initial and variation margin in
connection therewith, are not considered a pledge of assets.
(3) Invest for the purpose of exercising control or management.
The Core Fixed Income Fund, the Research Fund, the Mid Cap Fund and the
International Equity Fund will not:
(4) With respect to 75% of its total assets, (i) purchase more than
10% of the outstanding voting securities of any one issuer; or (ii)
purchase securities of any issuer if as a result more than 5% of the
Funds total assets would be invested in that issuer's securities. This
limitation does not apply to obligations of the U.S. Government or its
agencies or instrumentalities.
As fundamental policies, the Emerging Equities Fund may not:
(1) borrow amounts in excess of 5% of its gross assets, and then only
as a temporary measure for extraordinary purposes, or pledge, mortgage
or hypothecate an amount of its assets taken at market value which would
exceed 15% of its gross 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 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 investments in any particular industry, but if it is
deemed appropriate for the attainment of the Fund's investment
objective, up to 25% of the Fund's assets, at market value at the time
of each investment, may be invested 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) or
mineral leases, commodities or commodity contracts (except for Options,
Futures Contracts, Options on Futures Contracts and Forward 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.
The Fund will not purchase securities for the purpose of acquiring real
estate or mineral leases, commodities or commodity contracts (except for
Options, Futures Contracts, Options on Futures Contracts and Forward
Contracts).
(5) Make loans to other persons except that the Fund may enter into
repurchase agreements. Not more than 15% of the Fund's total assets will
be invested in repurchase agreements maturing in more than seven days.
Subject to the limitation set forth in the policies below, the Fund may
purchase a portion of an issue of debt securities of types commonly
distributed to financial institutions. For these purposes the purchase
of short-term commercial paper or a portion 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 the Fund's 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.
(8) Invest for the purpose of exercising control or management.
(9) Purchase securities issued by any other registered investment
company or registered 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 shall
not purchase the securities of any investment company or investment
trust if such purchase at the time thereof would cause more than 10% of
the Fund's total assets, taken at market value, to be invested in the
securities of such issuer; and provided, further, that the Fund shall
not purchase securities issued by any open-end investment company.
(10) Purchase or retain any securities of an issuer any of whose
officers, directors, trustees or security holders is an officer or
Trustee of the Trust, or is a member, 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.
(11) 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
except that the Fund may make margin deposits in connection with
Options, Futures Contracts, Options on Futures Contracts and Forward
Contracts.
(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) Issue any senior securities except as permitted by the 1940 Act.
In addition, the Emerging Equities Fund has adopted the following non-
fundamental investment policies which may be changed without shareholder
approval. The Fund will not:
(1) Invest in 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, or repurchase agreements maturing in more than seven days, if
more than 15% of the Fund's net assets (taken at market value) would be
invested in such securities or such repurchase agreements.
(2) Invest more than 20% of its total assets in foreign securities
(excluding American Depositary Receipts);
(3) Invest 25% or more of the market value of its total assets in
securities of issuers in any one industry.
(4) With respect to 75% of its total assets, (i) purchase more than
10% of the outstanding voting securities of any one issuer; or (ii)
purchase securities of any issuer if as a result more than 5% of the
Funds total assets would be invested in that issuer's securities. This
limitation does not apply to obligations of the U.S. Government or its
agencies or instrumentalities.
As fundamental policies, the Global 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).
(2) Underwrite securities issued by other persons except insofar as
the Trust may technically be deemed an underwriter under the Securities
Act of 1933 in selling a portfolio security.
(3) Invest more than 25% 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 (except
gold, and then subject to a limit of 10% of its gross assets) or
commodity contracts (except gold futures/forward contracts, 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
acquired as a result of the ownership of securities.
(5) Make loans to other persons except through the lending of its
portfolio securities in accordance with, and to the extent permitted by,
its investment objective and policies and except through repurchase
agreements. Not more than 15% 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 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 securities issued or guaranteed by the U.S. Government, any foreign
government or any of their agencies or instrumentalities.
(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 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;
(10) Invest more than 5% of its assets in companies which, including
predecessors, have a record of less than three years' continuous
operation.
(11) 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.
(12) 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.
(13) 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.
In addition, the Global Fund has adopted the following non-fundamental
investment policy which may be changed without shareholder approval. The
Fund will not:
(1) Invest in 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 a specific
security, if more than 15% of the Fund's net assets (taken at market
value) would be invested in such securities.
As fundamental policies, the High Yield Fund, the Core Equity Fund and the
Large Cap Fund each may not:
(1) Borrow amounts from banks in excess of 33 1/3% of its total
assets, including amounts borrowed.
(2) Underwrite securities issued by other persons except insofar as a
Fund may technically be deemed an underwriter under the Securities Act
of 1933 in selling a portfolio security.
(3) Purchase or sell real estate (excluding securities secured by real
estate or interests therein and securities of companies, such as real
estate investment trusts, which deal in real estate or interests
therein), interests in oil, gas or mineral leases, commodities or
commodity contracts (excluding Options, Options on Futures Contracts,
Options on Stock Indices, Options on Foreign Currency and any other type
of option, Futures Contracts, any other type of futures contract, and
Forward Contracts) in the ordinary course of its business. Each Fund
reserves the freedom of action to hold and to sell real estate, mineral
leases, commodities or commodity contracts (including Options, Options
on Futures Contracts, Options on Stock Indices, Options on Foreign
Currency and any other type of option, Futures Contracts, any other type
of futures contract, and Forward Contracts) acquired as a result of the
ownership of securities.
(4) Issue any senior securities except as permitted by the 1940 Act.
For purposes of this restriction, collateral arrangements with respect
to any type of option (including Options on Futures Contracts, Options,
Options on Stock Indices and Options on Foreign Currencies), short sale,
Forward Contracts, Futures Contracts, any other type of futures
contracts, and collateral arrangements with respect to initial and
variation margin, are not deemed to be the issuance of a senior
security.
(5) Make loans to other persons. For these purposes, the purchase of
short-term commercial paper, the purchase of a portion or all of an
issue of debt securities, the lending of portfolio securities, or the
investment of a Fund's assets in repurchase agreements, shall not be
considered the making of a loan.
(6) Purchase any securities of an issuer of a particular industry, if
as a result, 25% or more of its total assets would be invested in
securities of issuers whose principal business activities are in the
same industry (except obligations issued or guaranteed by the U.S.
Government or its agencies and instrumentalities and repurchase
agreements collateralized by such obligations).
In addition, the High Yield Fund, the Core Equity Fund and the Large Cap
Fund each has the following non-fundamental policies which may be changed
without shareholder approval. Each such Fund will not:
(1) Invest in illiquid investments, including securities subject to
legal or contractual restrictions on resale or for which there is no
readily available market (e.g., trading in the security is suspended,
or, in the case of unlisted securities, where no market exists), if more
than 15% of a Fund's net 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 a Fund's
limitation on investment in illiquid securities. Securities that are not
registered under the 1933 Act 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.
(2) Invest for the purpose of exercising control or management.
(3) Pledge, mortgage or hypothecate in excess of 33 1/3% of its total
assets. For purposes of this restriction, collateral arrangements with
respect to any type of option (including Options on Futures Contracts,
Options, Options on Stock Indices and Options on Foreign Currencies),
any short sale, any type of futures contract (including Futures
Contracts), Forward Contracts and payments of initial and variation
margin in connection therewith, are not considered a pledge of assets.
(4) With respect to 75% of its total assets, (i) purchase more than
10% of the outstanding voting securities of any one issuer; or (ii)
purchase securities of any issuer if as a result more than 5% of the
Funds total assets would be invested in that issuer's securities. This
limitation does not apply to obligations of the U.S. Government or its
agencies or instrumentalities.
IV MANAGEMENT OF THE FUNDS
The Board of Trustees of the Trust provided broad supervision over the
affairs of each Fund. MFS is responsible for the investment management of
each Fund's assets and the officers of the Trust are responsible for its
operations. The Trustees and officers are listed below, together with
their principal occupations during the past five years (their titles may
have varied during that period).
TRUSTEES
JEFFREY L. SHAMES,* Chairman and President (born 6/2/55)
Massachusetts Financial Services Company, Chairman and Chief Executive
Officer
NELSON J. DARLING, JR. (born 12/27/20)
Private Investor and Trustee
Address: 27 School Street, Boston, Massachusetts
WILLIAM R. GUTOW (born 9/27/41)
Private Investor and Real Estate Consultant; Capitol Entertainment
Management Company (video franchise), Vice Chairman
Address: 3102 Maple Avenue, #100, Dallas, Texas
OFFICERS
W. THOMAS LONDON,* Treasurer (born 3/1/44)
Massachusetts Financial Services Company, Senior Vice
President
STEPHEN E. CAVAN,* Secretary and Clerk (born 11/6/53)
Massachusetts Financial Services Company, Senior Vice President, General
Counsel and Assistant Secretary
JAMES R. BORDEWICK, JR.,* Assistant Secretary (born 3/6/59)
Massachusetts Financial Services Company, Senior Vice President and
Associate General Counsel
JAMES O. YOST,* Assistant Treasurer (born 6/12/60)
Massachusetts Financial Services Company, Senior Vice
President
ELLEN MOYNIHAN,* Assistant Treasurer (born 11/13/57)
Massachusetts Financial Services Company, Vice President (since September
1996); Deloitte & Touche LLP, Senior Manager (until September 1996)
MARK E. BRADLEY,* Assistant Treasurer (born 11/23/59)
Massachusetts Financial Services Company, Vice President (since March
1997); Putnam Investments, Vice President (Prior to March 1997)
----------------
*"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, he Secretary of MFD, hold similar
positions with certain other MFS affiliates.
As of July 29, 1999, the Trustees and officers as a group owned less
than 1% of any Fund's shares, not including the following shares of the
following funds, representing the following percentage of the outstanding
shares of such Fund, owned by certain employee benefit plans of MFS of
which Mr. Shames is a Trustee.
APPROXIMATE APPROXIMATE
NUMBER OF % OF
FUND SHARES OUTSTANDING SHARES
------------ ----------- ------------------
Emerging Markets Fund 137,845.20 38%
International Equity Fund 280,007.25 13%
The following table identifies those investors who own 25% or more of a
Fund's shares as of July 29, 1999, and are therefore presumed to control
that Fund:
25% OR GREATER OWNERSHIP
<TABLE>
<CAPTION>
APPROXIMATE
NUMBER APPROXIMATE %
NAME AND ADDRESS OF SHARES OF OUTSTANDING
FUND OF SHAREHOLDER OWNED SHARES OWNED
---------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
Core Fixed MFS Service Center Inc., 5.00 45%
Income Fund Audit Account Reinvest,
Corporate Actions,
20th Floor,
Attn: Harry Thompson,
500 Boylston,
Boston, MA 02116-3740
MFS Service Center, Inc., 5.00 45%
Audit Account Corporate Actions,
20th Floor,
Attn: Harry Thompson,
500 Boylston,
Boston, MA 02116-3740
Global Fund Common Balanced Fund of the 1,708,176.32 99%
Joint Investment Trust of
Christian Church Foundation, Inc.,
P.O. Box 1986,
Indianapolis, IN 46206-1986
High Yield Angus A. MacNaughton, 104,094.07 49%
Fund Genstar Investment Corp.,
555 California St., Ste. 4850,
San Francisco, CA 94104-1502
MFS Fund Distributors, Inc., 104,105.42 50%
c/o Mass Financial Services Co.,
Attn: Thomas B. Hastings,
500 Boylston St., 15th Floor,
Boston, MA 02116-3740
Emerging Trustees of the MFS Pension Plan, 118,614.47 33%
Markets Fund c/o Mark Leary, MFS,
500 Boylston St.,
Boston, MA 02116-3740
MFD, Attn: Thomas Hastings, 221,165.41 61%
500 Boylston St.,
Boston, MA 02116-3740
Core Equity Mount Auburn Hospital, 303,637.56 25%
Fund Directors' Account,
330 Mount Auburn St.,
Cambridge, MA 02138-5597
College of Saint Benedict, 592,880.69 49%
37 S. College Ave.,
St. Joseph, MN 56374-2099
Research Fund Boston Safe Deposit & Trust Co., 2,230,974.00 58%
Trustee for the
TWA Pilots DAP 401K Plan,
Attn: Lisa Bove,
135 Santilli Hwy.,
Everett, MA 02149-1906
Large Cap Massachusetts 10.00 100%
Fund Financial Services Co.,
c/o Robert Blake,
500 Boylston St., 15th Floor,
Boston, MA 02116-3740
Mid Cap Depauw University, 1,121,222.16 29%
Fund 313 S. Locust St.,
Greencastle, IN 46135-1736
The Carnegie Foundation 1,008,513.02 26%
for the Advancement of Teaching,
555 Middlefield Road,
Menlo Park, CA 94025-3443
International Foster Wheeler Corporation, 1,569,678.41 73%
Equity Fund Salaried Employees Pension Plan,
Perryville Corporate Park,
Clinton, NJ 08809-4000
</TABLE>
5% OR GREATER OWNERSHIP
The following table identifies those investors who own 5% or more (but
less than 25%) of a Fund's shares as of July 29, 1999:
<TABLE>
<CAPTION>
APPROXIMATE APPROXIMATE %
NUMBER OF OUTSTANDING
NAME AND ADDRESS OF SHARES SHARES OWNED
FUND OF SHAREHOLDER OWNED
-----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
Core Fixed MFS Attn: Robert Blake, 1.00 9%
Income Fund 20th Floor,
500 Boylston St.,
Boston, MA 02116-3740
Emerging Trustees of the 19,230.73 5%
Markets Fund MFS Defined Contribution Plan,
c/o Mark Leary, MFS,
500 Boylston Street,
Boston, MA 02116-3740
Core MFS Fund Distributors, Inc., 100,000.00 8%
Equity Fund c/o Mass Financial Services Co.,
Attn: Thomas B. Hastings,
500 Boylston St.,
15th Floor,
Boston, MA 02116-3740
Light & Co., 197,682.26 16%
c/o FMB Trust Co. NA,
Securities Processing 109-911,
P.O. Box 1596,
Baltimore, MD 21203-1596
Research Fund Boston Safe Deposit & Trust Co., 821,706.98 21%
Trustee of the Eastman Kodak
Employees Savings &
Retirement Plan,
1 Cabot Road,
Medford, MA 02155-5159
Colonial Gas Company 298,941.53 7%
Pension Plan,
40 Market St.,
Lowell, MA 01852-1890
Mid Cap Woodberry Forest School, 524,820.15 13%
Fund Attn: Treasurer,
One Walker Drive,
10 Woodberry Station,
Woodberry Forest, VA 22989-8000
University of Redlands 262,549.23 6%
Endowment Fund,
1200 E Colton Avenue,
P.O. Box 3080,
Redlands, CA 92373-0999
MAC & Co., 444,342.00 11%
A/C HPZF8615042,
Mutual Fund Operations,
P.O. Box 3198,
Pittsburgh, PA 15230-3198
Emerging University of Louisville 1,019,305.81 5%
Equities Foundation, Inc.,
Fund 108 Grawemeyer Building,
2301 S. Third St.,
Louisville, KY 40292-2001
Northern Trust Co., 3,065,804.18 15%
Trustee, FBO Fortune Brands, Inc.,
P.O. Box 92956 (22-33386),
Chicago, IL 60675-2956
Northeastern University 2,110,910.47 10%
Endowment Fund,
360 Huntington Avenue,
Richards Hall,
Boston, MA 02115-5000
American Express Trust Co., 1,347,200.43 6%
TTEE Dakota Clinic Retirement Plans,
733 Marquette Ave.,
Minneapolis, MN 55402-2309
Federal-Mogul Corporation, 2,772,732.47 13%
26555 Northwestern Hwy.,
Southfield, MI 48034-2146
Boston Safe Deposit and Trust Co., 1,041,558.18 5%
as TTEE for the
TWA Pilots DAP/401K Plan,
Attn: Lisa Bove,
135 Santilli Hwy.,
Everett, MA 02149-1906
Nothern Trust Co., 1,545,411.37 7%
TTEE FBO Rosemount Inc.,
P.O. Box 92956,
Chicago, IL 60675-2956
International Trustees of the MFS Pension Plan, 231,643.16 18%
Equity Fund c/o Mark Leary, MFS,
500 Boylston St.,
Boston, MA 02116-3740
</TABLE>
Each Fund pays the compensation of non-interested Trustees and of Trustees
who are not officers of the Trust, who currently receive a fee of $1,300
per year plus $150 per meeting and $150 per committee meeting attended,
together with such Trustee's out-of-pocket expenses.
TRUSTEE COMPENSATION TABLE
TRUSTEE FEES FROM
EACH OF THE GLOBAL
FUND, HIGH YIELD
FUND, EMERGING
MARKETS FUND, CORE
EQUITY FUND,
RESEARCH FUND, MID TRUSTEE FEES FROM
CAP FUND, EMERGING EACH OF THE TOTAL TRUSTEE
EQUITIES FUND AND CORE FIXED INCOME FEES FROM TRUST
INTERNATIONAL FUND AND THE AND FUND
TRUSTEE EQUITY FUND(1) LARGE CAP FUND(1) COMPLEX(2)
--------------------------------------------------------------------------
Jeffrey L. Shames $ 0 $ 0 $ 0
Nelson J. Darling, Jr. 2,650 $ 0 35,200
William R. Gutow 2,650 $ 0 71,200
----------------
(1) For the fiscal year ended June 30, 1999.
(2) Information provided is provided for calendar year 1998. Mr. Darling
served as Trustee of 25 Funds within the MFS Fund complex (having
aggregate net assets at December 31, 1998, of approximately $2.9
billion) and Mr. Gutow served as Trustee of 58 Funds within the MFS
complex (having aggregate net assets at December 31, 1998 of
approximately $14.7 billion).
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 each 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).
INVESTMENT ADVISORY AGREEMENT -- The Adviser manages each Fund pursuant to
an Investment Advisory Agreement (the "Advisory Agreement"). Under the
Advisory Agreement, the Adviser provides each Fund with overall investment
advisory services. Subject to such policies as the Trustees may determine,
the Adviser makes investment decisions for each 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 Funds."
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 Fund paid compensation to its affiliated service providers over the
specified periods as follows:
NET AMOUNT
PAID TO MFS
FOR AMOUNT
ADVISORY WAIVED
FISCAL YEAR ENDED SERVICES BY MFS
------------------------------------------------------------------------
Global Fund
June 30, 1999 $ 119,575 $0
June 30, 1998 259,872 0
June 30, 1997 426,406 0
High Yield Fund
June 30, 1999 $ 4,938 $0
June 30, 1998 0 0
June 30, 1997 0 0
Emerging Markets Fund
June 30, 1999 $ 36,786 $0
June 30, 1998 45,250 0
June 30, 1997 39,957 0
Core Equity Fund
June 30, 1999 $ 23,388 $0
June 30, 1998 0 0
June 30, 1997 0 0
Research Fund
June 30, 1999 $ 494,374 $0
June 30, 1998 367,149 0
June 30, 1997 156,892 0
Mid Cap Fund
June 30, 1999 $ 278,378 $0
June 30, 1998 184,339 0
June 30, 1997 91,314 0
Emerging Equities Fund
June 30, 1999 $3,376,859 $0
June 30, 1998 3,305,598 0
June 30, 1997 2,289,483 0
International Equity Fund
June 30, 1999 $ 66,626 $0
June 30, 1998 86,245 0
June 30, 1997 31,898 0
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.
Each 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" 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" 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.
NET AMOUNT
PAID TO MFS FOR
ADMINISTRATIVE
FISCAL YEAR ENDED SERVICES
------------------------------------------------------------------------
Global Fund
June 30, 1999 $ 0
June 30, 1998 0
June 30, 1997 0*
High Yield Fund
June 30, 1999 $ 147
June 30, 1998 0
June 30, 1997 0*
Emerging Markets Fund
June 30, 1999 $ 534
June 30, 1998 759
June 30, 1997 250*
Core Equity Fund
June 30, 1999 $ 585
June 30, 1998 0
June 30, 1997 0*
Research Fund
June 30, 1999 $ 9,977
June 30, 1998 8,829
June 30, 1997 1,531*
Mid Cap Fund
June 30, 1999 $ 5,851
June 30, 1998 4,372
June 30, 1997 684*
Emerging Equities Fund
June 30, 1999 $ 55,248
June 30, 1998 0
June 30, 1997 0*
International Equity Fund
June 30, 1999 $ 1,090
June 30, 1998 1,644
June 30, 1997 27*
* From March 1, 1997, the commencement of the Master Administrative
Service Agreement
CUSTODIAN
State Street Bank and Trust Company (the "Custodian") is the custodian of
the Fund's assets. The Custodian's responsibilities include safekeeping
and controlling the Fund's cash and securities, handling the receipt and
delivery of securities, determining income and collecting interest and
dividends on the Fund's investments, maintaining books of original entry
for portfolio and fund accounting and other required books and accounts,
and calculating the daily net asset value of each class of shares of the
Fund. The Custodian does not determine the investment policies of the Fund
or decide which securities the Fund will buy or sell. The Fund may,
however, invest in securities of the Custodian and may deal with the
Custodian as principal in securities transactions. The 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 0.0075%. 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.
NET AMOUNT
PAID TO MFSC
FOR TRANSFER
AGENCY
FISCAL YEAR ENDED SERVICES
-----------------------------------------------------------------------
Global Fund
June 30, 1999 $ 0
June 30, 1998 0
June 30, 1997 0
High Yield Fund
June 30, 1999 $ 745
June 30, 1998 0
June 30, 1997 0
Emerging Markets Fund
June 30, 1999 $ 325
June 30, 1998 402
June 30, 1997 352
Core Equity Fund
June 30, 1999 $ 294
June 30, 1998 0
June 30, 1997 0
Research Fund
June 30, 1999 $ 6,180
June 30, 1998 4,613
June 30, 1997 1,773
Mid Cap Fund
June 30, 1999 $ 3,481
June 30, 1998 2,317
June 30, 1997 1,128
Emerging Equities Fund
June 30, 1999 $ 33,764
June 30, 1998 0
June 30, 1997 0
International Equity Fund
June 30, 1999 $ 670
June 30, 1998 870
June 30, 1997 314
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" 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.
V PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the Funds 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 Funds and of the other investment company clients
of MFD as a factor in the selection of broker-dealers to execute the
Funds' portfolio transactions.
Under the Advisory Agreement and as permitted by Section 28(e) of the
Securities Exchange Act of 1934, the Adviser may cause a 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 a 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 certain
other MFS Funds) have directed the Adviser to allocate a total of $72,150
of commission business from certain MFS Funds (including the 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 Funds 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.
Brokerage commissions paid by each Fund for certain specified periods,
and information concerning purchases by the Funds of securities issued by
their regular broker-dealers for the Funds' most recent fiscal year, is
set forth below.
BROKERAGE COMMISSIONS
..........................................................................
The following brokerage commissions were paid by certain Funds for the
fiscal year ended June 30, 1999:
BROKERAGE
COMMISSIONS
FUND PAID BY FUND
--------------------------------------------------------------------
High Yield Fund $ 6
Core Equity Fund 10,075
Research Fund 221,150
Mid Cap Fund 140,429
Emerging Equities Fund 450,014
International Equity Fund 42,036
SECURITIES ISSUED BY REGULAR BROKER-DEALERS
..........................................................................
During the fiscal year ended June 30, 1999, certain Funds purchased
securities issued by the following regular broker-dealer of such Fund,
which had the following value as of June 30, 1999:
VALUE OF SECURITIES
FUND/BROKER-DEALER AS OF JUNE 30, 1999
----------------------------------------------------------------------
Core Equity Fund/
Goldman Sachs Group, Inc. $ 1,000
Research Fund/
Goldman Sachs Group, Inc. $ 36,000
Research Fund/
Morgan Stanley Dean Witter $318,000
VI TAX CONSIDERATIONS
The following discussion is a brief summary of some of the important
federal (and, where noted, state) income tax consequences affecting each
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 Funds may have on their own tax situations.
TAXATION OF THE FUNDS
FEDERAL TAXES -- Each Fund is treated as a separate entity for federal
tax purposes under the Internal Revenue Code of 1986, as amended (the
"Code"). Each 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 its overall income), and the composition of its portfolio
assets. As a regulated investment company, a 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. A Fund's foreign-source
income, if any, may be subject to foreign withholding taxes. If any Fund
failed to qualify as a "regulated investment company" in any year, it
would incur federal corporate income tax on all of its taxable income for
that year, whether or not distributed, and Fund distributions would
generally be taxable as ordinary dividend income to its shareholders.
MASSACHUSETTS TAXES -- As long as it qualifies as a regulated investment
company under the Code, a Fund will not be required to pay Massachusetts
income or excise taxes.
TAXATION OF SHAREHOLDERS
TAX TREATMENT OF DISTRIBUTIONS -- Shareholders of a Fund that are not
tax- exempt entities 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 dividends from ordinary
income and 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 or other distribution 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 distribution is declared. Each Fund will notify
its 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 such 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 a 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 federal 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 -- A 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.
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%. Each Fund intends to withhold at that rate on dividends and other
payments to Non-U.S. Persons that are subject to such withholding. A 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 -- Each 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
a Fund by persons who are not citizens or residents of the United States
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 a 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. Each
Fund generally intends to advise shareholders of the extent, if any, 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 a 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 a
Fund, it 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 for the
Fund that has state or local governments or other tax-exempt organizations
as shareholders.
OPTIONS, FUTURES CONTRACTS, AND FORWARD CONTRACTS -- Any 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 a 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 a 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. Each 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.
If a Fund enters into a "constructive sale" of certain appreciated
financial positions, the Fund will generally recognize gain at that time,
even through the Fund has not actually sold the position. A constructive
sale generally consists of a short sale against the box, an offsetting
notional principal contract, or a futures or forward contract entered into
by a Fund or a related person with respect to the same or substantially
identical property.
FOREIGN INVESTMENTS -- Special tax considerations apply with respect to
foreign investments by a Fund. Foreign exchange gains and losses realized
by a Fund may be treated as ordinary income and loss. Use of foreign
currencies for non-hedging purposes and investment by a Fund in certain
"passive foreign investment companies" may be limited in order to avoid a
tax on the Fund. A 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, it 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.
FOREIGN INCOME TAXES -- Investment income received by a Fund and gains
with respect to foreign securities realized by a Fund 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 a Fund to a
reduced rate of tax or an exemption from tax on such income; each Fund
intends to qualify for treaty reduced rates where available. It is not
possible, however, to determine any Fund's effective rate of foreign tax
in advance, since the amount of each Fund's assets to be invested within
various countries is not known.
If a Fund holds more than 50% of its assets in stock and securities of
foreign corporations at the close of its taxable year, it may elect to
"pass through" to its shareholders foreign income taxes paid by it. If a
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 a 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.
VII NET INCOME AND DISTRIBUTIONS
Each Fund 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.
VIII DETERMINATION OF NET ASSET VALUE
The net asset value per share of each 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 Fund from the value of the assets attributable to the Fund and
dividing the difference by the number of shares of the Fund outstanding.
Equity securities in a 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 a 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 a 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 MFD prior to the close of that business day.
IX PERFORMANCE INFORMATION
FUNDS
Each Fund may quote the following performance results.
TOTAL RATE OF RETURN -- Each Fund will calculate its total rate of
return for 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 maximum public offering price) to reach the value of that
investment at the end of the periods. Each Fund may also calculate total
rates of return which represent aggregate performance over a period or
year-by-year performance.
Any total rate of return quotation provided by a 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. Total rate of return quotations for each Fund are
presented in Appendix C attached hereto.
YIELD -- Any yield quotation for a Fund is based on the annualized net
investment income per share of a Fund for the 30-day period. The yield for
a Fund is calculated by dividing the net investment income per share of a
Fund earned during the period by the maximum offering price per share of a
Fund on the last day of the period. The resulting figure is then
annualized. Net investment income per share is determined by dividing (i)
the dividends and interest earned by a Fund during the period, minus
accrued expenses for the period by (ii) the average number of Fund shares
entitled to receive dividends during the period multiplied by the maximum
offering price per share on the last day of the period. Yield quotations
for each Fund are presented in Appendix C attached hereto.
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 Fund are reflected in
the quoted "current distribution rate" for that Fund. The current
distribution rate for a Fund is computed by (i) annualizing the
distributions (excluding short-term capital gains) of the Fund 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 current distribution rate quotation for the Emerging Markets Fund is
presented in Appendix C hereto.
GENERAL
From time to time each Fund may, as appropriate, quote Fund rankings or
reprint all or a portion of evaluations of fund performance and operations
appearing in various independent publications, including but not limited
to the following: Money, Fortune, U.S. News and World Report, Kiplinger's
Personal Finance, The Wall Street Journal, Barron's, Investors Business
Daily, Newsweek, Financial World, Financial Planning, Investment Advisor,
USA Today, Pensions and Investments, SmartMoney, Forbes, Global Finance,
Registered Representative, Institutional Investor, the Investment Company
Institute, Johnson's Charts, Morningstar, Lipper Analytical 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, each 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.
Each 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 each 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; the history of the
mutual fund industry; investor behavior; and other similar or related
matters.
From time to time, each 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.
1924 -- Massachusetts Investors Trust is established as the first open-
end mutual fund in America.
1924 -- Massachusetts Investors Trust is the first mutual fund to make
full public disclosure of its operations in shareholder reports.
1932 -- One of the first internal research departments is established to
provide in-house analytical capability for an investment management firm.
1933 -- Massachusetts Investors Trust is the first mutual fund to
register under the Securities Act of 1933 ("Truth in Securities Act" or
"Full Disclosure Act").
1936 -- Massachusetts Investors Trust is the first mutual fund to allow
shareholders to take capital gain distributions either in additional
shares or in cash.
1976 -- MFS(R) Municipal Bond Fund is among the first municipal bond
funds established.
1979 -- Spectrum becomes the first combination fixed/ variable annuity
with no initial sales charge.
1981 -- MFS(R) Global Governments Fund is established as America's first
globally diversified fixed-income mutual fund.
1984 -- MFS(R) Municipal High Income Fund is the first open-end mutual
fund to seek high tax-free income from lower-rated municipal securities.
1986 -- MFS(R) Managed Sectors Fund becomes the first mutual fund to
target and shift investments among industry sectors for shareholders.
1986 -- MFS(R) Municipal Income Trust is the first closed-end, high-
yield municipal bond fund traded on the New York Stock Exchange.
1987 -- MFS(R) Multimarket Income Trust is the first closed-end,
multimarket high income fund listed on the New York Stock Exchange.
1989 -- MFS(R) Regatta becomes America's first non-qualified market
value adjusted fixed/variable annuity.
1990 -- MFS(R) Global Total Return Fund is the first global balanced
fund.
1993 -- MFS(R) Global Growth Fund is the first global emerging markets
fund to offer the expertise of two sub-advisers.
1993 -- MFS becomes money manager of MFS(R) Union Standard(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. Performance information, as
quoted by the Funds in sales literature and marketing materials, is set
forth below.
X 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. Upon
liquidation of the Fund, shareholders of each Fund are entitled to share
pro rata in the Fund's net assets available for distribution to
shareholders. The Trust reserves the right to create and issue a number of
series and additional shares, in which case the shares of a series would
participate equally in the earnings, dividends and assets allocable to
that 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" 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.
XI INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS
Deloitte & Touche LLP are the Funds' independent auditors, providing
audit services, tax services, and assistance and consultation with respect
to the preparation of filings with the Securities and Exchange Commission.
With the exception of Core Fixed Income Fund and Large Cap Fund, the
Portfolio of Investments and the Statement of Assets and Liabilities at
June 30, 1999, the Statement of Operations for the year ended June 30,
1999, the Statement of Changes in Net Assets for the two years ended June
30, 1999, 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 Funds, are incorporated by reference into this SAI in
reliance upon the report of Deloitte & Touche LLP, independent auditors,
given upon their authority as experts in accounting and auditing. A copy
of the Annual Report accompanies this SAI.
<PAGE>
CORE FIXED INCOME FUND
...............................................................................
STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 1999
- -------------------------------------------------------------------------------
ASSETS:
Cash .................................................................. $110
----
Total assets .................................................... $110
----
LIABILITIES
Accrued expenses ...................................................... --
----
Total liabilities ............................................... $ --
----
Net assets for 11 shares of beneficial interest outstanding ........... $110
====
Net Asset Value, Redemption Price and Offering Price Per Share ........ $ 10
====
NOTES TO STATEMENT OF ASSETS AND LIABILITIES
(1) BUSINESS AND ORGANIZATION
The Core Fixed Income Fund (the "fund") was organized as a series of a business
trust under the laws of the Commonwealth of Massachusetts. The fund is a part of
the MFS Institutional Trust (the "Trust") which consists of ten series of shares
or funds. The fund has been inactive except for matters relating to its
organization and registration as a series of an investment company under the
Investment Company Act of 1940 and the sale of 11 shares of beneficial interest
(initial shares) to Massachusetts Financial Services Company, the fund's
investment adviser.
LARGE CAP FUND
...............................................................................
STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 1999
- -------------------------------------------------------------------------------
ASSETS:
Cash .................................................................. $100
----
Total assets .................................................... $100
----
LIABILITIES
Accrued expenses ...................................................... --
Total liabilities ............................................... $ --
----
Net assets for 10 shares of beneficial interest outstanding ........... $100
====
Net Asset Value, Redemption Price and Offering Price Per Share ........ $ 10
====
NOTES TO STATEMENT OF ASSETS AND LIABILITIES
(1) BUSINESS AND ORGANIZATION
The Large Cap Fund (the "fund") was organized as a series of a business trust
under the laws of the Commonwealth of Massachusetts. The fund is a part of the
MFS Institutional Trust (the "Trust") which consists of ten series of shares or
funds. The fund has been inactive except for matters relating to its
organization and registration as a series of an investment company under the
Investment Company Act of 1940 and the sale of 10 shares of beneficial interest
(initial shares) to Massachusetts Financial Services Company, the fund's
investment adviser.
<PAGE>
----------
APPENDIX A
----------
INVESTMENT TECHNIQUES, PRACTICES
AND RISKS
Set forth below is a description of investment techniques and practices
which a Funds may generally use in pursuing their investment objectives
and principal investment policies, and the risks associated with these
investment techniques and practices. Each Fund will engage only in certain
of these investment techniques and practices, as identified in Appendix A
of a Funds" Prospectus. Investment practices and techniques that are not
identified in Appendix A of a Funds" Prospectus do not apply to a Fund.
INVESTMENT TECHNIQUES AND PRACTICES
DEBT SECURITIES
To the extent a 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. A Fund's investment in debt
securities with longer terms to maturity are subject to greater volatility
than a 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: A Fund may purchase the following types of
asset-backed securities:
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH
SECURITIES: A 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.
A 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: A 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. A 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: A 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 a 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 a mortgage pass-through security generally will decline; however,
when interest rates are declining, the value of mortgage pass-through
securities with prepayment features may not increase as much as that of
other fixed-income securities. 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 a 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. A Fund may also buy mortgage-related securities without
insurance or guarantees.
STRIPPED MORTGAGE-BACKED SECURITIES: A 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, a 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: A 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: A Fund may purchase loans and other
direct indebtedness. In purchasing a loan, a Fund acquires some or all of
the interest of a bank or other lending institution in a loan to a
corporate, governmental or other borrower. Many such loans are secured,
although some may be unsecured. Such loans may be in default at the time
of purchase. Loans that are fully secured offer a Fund more protection
than an unsecured loan in the event of non-payment of scheduled interest
or principal. However, there is no assurance that the liquidation of
collateral from a secured loan would satisfy the corporate 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 a Fund would assume all of the rights of
the lending institution in a loan or as an assignment, pursuant to which a
Fund would purchase an assignment of a portion of a lenders interest in a
loan either directly from the lender or through an intermediary. A 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 a
Fund may involve revolving credit facilities or other standby financing
commitments which obligate a Fund to pay additional cash on a certain date
or on demand. These commitments may have the effect of requiring a Fund to
increase its investment in a company at a time when a 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 a 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.
A 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 a Fund will purchase, the Adviser will rely upon
its own (and not the original lending institution's) credit analysis of
the borrower. As a Fund may be required to rely upon another lending
institution to collect and pass onto a Fund amounts payable with respect
to the loan and to enforce a Fund's rights under the loan and other direct
indebtedness, an insolvency, bankruptcy or reorganization of the lending
institution may delay or prevent a Fund from receiving such amounts. In
such cases, a 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 a 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 a Fund.
LOWER RATED BONDS: A 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 a 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 a 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: A 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. A 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.
A 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.
A 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: A 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: A 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
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 FNMA.
U.S. Government Securities also include interests 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: A 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 a 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 a 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 a
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: A 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. A 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 a Fund's distribution
obligations.
EQUITY SECURITIES
A 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
A Fund may invest in various types of foreign securities, or securities
which provide a Fund with exposure to foreign securities or foreign
currencies, as discussed below:
BRADY BONDS: A 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: A 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 a Fund's policy to invest a certain percentage of its assets
in foreign securities, the investments of a 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. A
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. A
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 a Fund's custodian in five days. A 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: A 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: A Fund may invest in securities of government,
government-related, supranational and corporate issuers located in
emerging markets. Emerging markets include any country determined by the
Adviser to have an emerging market economy, taking into account a number
of factors, including whether the country has a low- to middle-income
economy according to the International Bank for Reconstruction and
Development, the country's foreign currency debt rating, its political and
economic stability and the development of its financial and capital
markets. The Adviser determines whether an issuer's principal activities
are located in an emerging market country by considering such factors as
its country of organization, the principal trading market for its
securities, the source of its revenues and location of its assets. 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 a 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 a Fund's assets should these conditions recur.
o Default; Legal Recourse -- A 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 a Fund defaults, a 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. A 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 a Fund invests may be
denominated in foreign currencies and international currency units and a
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 a 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 a 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 a Fund's securities in such
markets may not be readily available. A 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 a 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 a Fund's identification of such condition until the
date of the SEC action, a 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 a 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 a Fund could be reduced by a
withholding tax on the source or other taxes imposed by the emerging
market countries in which a Fund makes its investments. A Fund's net asset
value may also be affected by changes in the rates or methods of taxation
applicable to a Fund or to entities in which a 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: A Fund may invest in dollar-denominated and non
dollar-denominated foreign securities. The issuer's principal activities
generally are deemed to be located in a particular country if: (a) the
security is issued or guaranteed by the government of that country or any
of its agencies, authorities or instrumentalities; (b) the issuer is
organized under the laws of, and maintains a principal office in, that
country; (c) the issuer has its principal securities trading market in
that country; (d) the issuer derives 50% or more of its total revenues
from goods sold or services performed in that country; or (e) the issuer
has 50 or more of its assets in that country.
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,
a 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, a
Fund may hold such currencies for an indefinite period of time. While the
holding of currencies will permit a Fund to take advantage of favorable
movements in the applicable exchange rate, such strategy also exposes a
Fund to risk of loss if exchange rates move in a direction adverse to a
Fund's position. Such losses could reduce any profits or increase any
losses sustained by a Fund from the sale or redemption of securities and
could reduce the dollar value of interest or dividend payments received.
The Fund's investments in foreign securities may also include
"privatizations". Privatizations are situations where the government in a
given country, including emerging market countries, sells part or all of
its stakes in government owned or controlled enterprises. In certain
countries, the ability of foreign entities to participate in
privatizations may be limited by local law and the terms on which the
foreign entities may be permitted to participate may be less advantageous
than those afforded local investors.
FORWARD CONTRACTS
A 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 a 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, a 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 a 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, a 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. A Fund does not presently intend to hold
Forward Contracts entered into until the value date, 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 a Fund's profit or loss based upon the value of the Contracts at the
time the offsetting transaction is executed.
A 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, a 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, a Fund may sell the currency through a Forward
Contract if the Adviser believes that its value will decline relative to
the dollar.
A 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,
a 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 a 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
A 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. A 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 a Fund's current or intended stock investments from broad
fluctuations in stock prices. For example, a 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 a 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 a 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 a
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, a 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 a Fund's current
or intended investments in fixed income securities. For example, if a Fund
owned long-term bonds and interest rates were expected to increase, a 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 a Fund's portfolio. If interest rates did increase,
the value of the debt securities in the portfolio would decline, but the
value of a 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 a 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, a 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 a Fund's cash reserves could then be used to buy long-term
bonds on the cash market. A 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 a Fund to hedge its interest rate risk without
having to sell its portfolio securities.
A 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. A 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, a 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 a Fund purchases futures
contracts under such circumstances, however, and the prices of securities
to be acquired instead decline, a 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 a 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
A 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. A 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 a 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
A 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
A Fund may invest in other investment companies. The total return on such
investment will be reduced by the operating expenses and fees of such
other investment companies, including advisory fees.
OPEN-END FUNDS. A Fund may invest in open-end investment companies.
CLOSED-END FUNDS. A Fund may invest in closed-end investment companies.
Such investment may involve the payment of substantial premiums above the
value of such investment companies' portfolio securities.
LENDING OF PORTFOLIO SECURITIES
A 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.
A 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, a Fund
would continue to receive the equivalent of the interest or dividends paid
by the issuer on the securities loaned. A 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). A Fund would not, however, have the right to vote any securities
having voting rights during the existence of the loan, but a 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
A Fund may engage in the types of transactions described below, which
involve "leverage" because in each case a 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 a 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 a Fund's shares and distributions on a
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 a 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 a Fund. These transactions also
increase a 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 a Fund compared with what it
would have been without using these transactions.
BANK BORROWINGS: A 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: A 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, a Fund foregoes principal and interest paid on the
mortgage-backed securities. A 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. A Fund may also be compensated by receipt of a
commitment fee.
If the income and capital gains from a 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 a 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 a Fund is required to
purchase may decline below the agreed upon repurchase price of those
securities. If the broker/dealer to whom a Fund sells securities becomes
insolvent, a 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: A Fund may enter into reverse repurchase
agreements. In a reverse repurchase agreement, a 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 a Fund. A Fund will invest the
proceeds received under a reverse repurchase agreement in accordance with
its investment objective and policies.
OPTIONS
A Fund may invest in the following types of options, which involve the
risks described under the caption "Special Risk Factors -- Options,
Futures, Forwards, Swaps and Other Derivative Transactions" in this
Appendix:
OPTIONS ON FOREIGN CURRENCIES: A 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, a Fund may purchase put
options on the foreign currency. If the value of the currency does
decline, a 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, a 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 a 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, a 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. A Fund may write options on foreign currencies for the same types
of hedging purposes. For example, where a 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, a
Fund could write a put option on the relevant currency which, if rates
move in the manner projected, will expire unexercised and allow a Fund to
hedge such increased cost up to the amount of the premium. Foreign
currency options written by a 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 a 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, a 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: A 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 a Fund's profit or loss on the transaction.
Options on Futures Contracts that are written or purchased by a 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. A 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
a Fund owns liquid and unencumbered assets equal to the difference. A 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 a 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 a Fund, a Fund will be required to sell the underlying Futures
Contract which, if a 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 a Fund is exercised, a
Fund will be required to purchase the underlying Futures Contract which,
if a 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, a 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 a 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, a Fund will
retain the full amount of the option premium which provides a partial
hedge against any increase in the price of securities which a Fund intends
to purchase. If a put or call option a Fund has written is exercised, a
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, a 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.
A 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, a 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 a Fund will increase prior to acquisition, due to a market
advance or changes in interest or exchange rates, a Fund could purchase
call Options on Futures Contracts rather than purchasing the underlying
Futures Contracts.
OPTIONS ON SECURITIES: A Fund may write (sell) covered put and call
options, and purchase put and call options, on securities. Call and put
options written by a Fund may be covered in the manner set forth below.
A call option written by a Fund is "covered" if a 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 a 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 a 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 a Fund owns liquid and
unencumbered assets equal to the difference. A put option written by a
Fund is "covered" if a 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 a Fund owns liquid and
unencumbered assets equal to the difference. Put and call options written
by a 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 a 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 a Fund to write another put
option to the extent that a Fund owns liquid and unencumbered assets. Such
transactions permit a 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 a Fund, provided that another option on such security is
not written. If a 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.
A Fund will realize a profit from a closing transaction if the premium
paid in connection with the closing of an option written by a 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 a Fund
is more than the premium paid for the original purchase. Conversely, a
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 a Fund is likely to be
offset in whole or in part by appreciation of the underlying security
owned by a Fund.
A Fund may write options in connection with buy-and-write transactions;
that is, a Fund may purchase a security and then write a call option
against that security. The exercise price of the call option a 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, a
Fund's maximum gain will be the premium received by it for writing the
option, adjusted upwards or downwards by the difference between a 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 a 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,
a Fund may elect to close the position or retain the option until it is
exercised, at which time a Fund will be required to take delivery of the
security at the exercise price; a 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
a Fund in the same market environments that call options are used in
equivalent buy-and-write transactions.
A 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, a 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 a 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, a 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, a 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 a 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.
A 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 a 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, a
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.
A Fund may also purchase call options to hedge against an increase in
the price of securities that a Fund anticipates purchasing in the future.
If such increase occurs, the call option will permit a 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 a Fund upon exercise of the
option, and, unless the price of the underlying security rises
sufficiently, the option may expire worthless to a Fund.
OPTIONS ON STOCK INDICES: A 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." A 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 a Fund owns liquid and unencumbered assets equal to the
amount of cash consideration) upon conversion or exchange of other
securities in its portfolio. Where a 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, a Fund will not be fully
covered and could be subject to risk of loss in the event of adverse
changes in the value of the index. A Fund may also cover call options on
stock indices by holding a call on the same index and in the same
principal amount as the call written where the exercise price of the call
held (a) is equal to or less than the exercise price of the call written
or (b) is greater than the exercise price of the call written if a Fund
owns liquid and unencumbered assets equal to the difference. A 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 a 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.
A Fund will receive a premium from writing a put or call option, which
increases a 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 a Fund has written a call option falls or remains the same, a 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, a Fund will realize a loss in its call option position, which
will reduce the benefit of any unrealized appreciation in a Fund's stock
investments. By writing a put option, a Fund assumes the risk of a decline
in the index. To the extent that the price changes of securities owned by
a Fund correlate with changes in the value of the index, writing covered
put options on indices will increase a 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.
A 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, a Fund will seek to offset a decline in the value of
securities it owns through appreciation of the put option. If the value of
a Fund's investments does not decline as anticipated, or if the value of
the option does not increase, a 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 a Fund's
security holdings.
The purchase of call options on stock indices may be used by a 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 a Fund holds
uninvested cash or short-term debt securities awaiting investment. When
purchasing call options for this purpose, a Fund will also bear the risk
of losing all or a portion of the premium paid if the value of the index
does not rise. The purchase of call options on stock indices when a 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 a 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, a 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 a Fund is paid at
termination, a 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 a 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: A 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, a Fund may purchase or write such options for
hedging purposes. For example, a 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. A 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, a 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 a Fund will be "covered". A
call (or put) option is covered if a Fund holds another call (or put)
option on the spread between the same two securities and owns liquid and
unencumbered assets sufficient to cover a Fund's net liability under the
two options. Therefore, a Fund's liability for such a covered option is
generally limited to the difference between the amount of a Fund's
liability under the option written by a Fund less the value of the option
held by a 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
A 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 a 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 a Fund, or the purchase and repurchase
prices may be the same, with interest at a standard rate due to a Fund
together with the repurchase price on repurchase. In either case, the
income to a 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, a Fund will have the right to liquidate the
securities. If at the time a 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, a Fund's exercise of its right to liquidate the
securities may be delayed and result in certain losses and costs to a
Fund. A Fund has adopted and follows procedures which are intended to
minimize the risks of repurchase agreements. For example, a 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 a 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
A 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 a 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 a Fund to the extent that qualified institutional buyers become for a
time uninterested in purchasing these Rule 144A securities held in a
Fund's portfolio. Subject to a Fund's limitation on investments in
illiquid investments, a Fund may also invest in restricted securities that
may not be sold under Rule 144A, which presents certain risks. As a
result, a 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
A Fund may seek to hedge investments or realize additional gains through
short sales. A Fund may make short sales, which are transactions in which
a 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, a Fund
must borrow the security to make delivery to the buyer. A 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 a Fund. Until the
security is replaced, a Fund is required to repay the lender any dividends
or interest which accrue during the period of the loan. To borrow the
security, a 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. A Fund also will
incur transaction costs in effecting short sales.
A 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 a Fund replaces the borrowed security. A 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 a Fund may be required to pay
in connection with a short sale.
Whenever a 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
A Fund may make short sales "against the box," i.e., when a security
identical to one owned by a Fund is borrowed and sold short. If a 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. A
Fund will incur transaction costs, including interest, in connection with
opening, maintaining, and closing short sales against the box.
SHORT TERM INSTRUMENTS
A 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
A 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 a 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 a 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. A Fund is not limited
to any particular form or variety of swap agreement if the Adviser
determines it is consistent with a Fund's investment objective and
policies.
For example, a Fund may enter into an interest rate swap in order to
protect against declines in the value of fixed income securities held by a
Fund. In such an instance, a 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 a Fund's
portfolio, a Fund would receive payments under the swap that would offset,
in whole or part, such diminution in value. A Fund may also enter into
swaps to modify its exposure to particular markets or instruments, such as
a currency swap between the U.S. dollar and another currency which would
have the effect of increasing or decreasing a Fund's exposure to each such
currency. A 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.
A 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.
A Fund will maintain liquid and unencumbered assets to cover its current
obligations under swap and other over-the-counter derivative transactions.
If a Fund enters into a swap agreement on a net basis (i.e., the two
payment streams are netted out, with a Fund receiving or paying, as the
case may be, only the net amount of the two payments), a Fund will
maintain liquid and unencumbered assets with a daily value at least equal
to the excess, if any, of a Fund's accrued obligations under the swap
agreement over the accrued amount a Fund is entitled to receive under the
agreement. If a 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 a 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 a 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 a Fund, a 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, a Fund's risk of loss consists of the net
amount of payments that a Fund is contractually entitled to receive. A
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 a 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
A 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 a 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
A Fund may invest in warrants. Warrants are securities that give a 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
A Fund may purchase securities on a "when-issued" or on a "forward
delivery" basis which means that the securities will be delivered to a
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, a 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 A FUND'S
PORTFOLIO: A 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 a 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, a 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 a Fund purchases a put option on an index and the index decreases
less than the value of the hedged securities, a 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 a Fund has a position
and the portfolio securities a 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 a 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 a 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, a 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 a Fund in connection with such
transactions.
In writing a covered call option on a security, index or futures
contract, a 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 a 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 a Fund may not be fully covered. As a
result, a 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 a Fund's portfolio. When a 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
a 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 a 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, a Fund will incur a loss which may only be partially offset
by the amount of the premium it received. Moreover, by writing an option,
a 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, a 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 a Fund to engage in
such transactions.
RISKS OF NON-HEDGING TRANSACTIONS: A 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.
A 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 a Fund may not fully protect it
against risk of loss and, in any event, a Fund could suffer losses on the
option position which might not be offset by corresponding portfolio
gains. A Fund may also enter into futures, Forward Contracts or swaps for
non-hedging purposes. For example, a 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, a 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 a Fund to greater risk of loss than such purchases or
sales. Entering into transactions in derivatives for other than hedging
purposes, therefore, could expose a 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, a 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 a Fund with two simultaneous premiums on the same security, but
involve additional risk, since a 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 a 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 a Fund, and a 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 a 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 a 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 a 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 a Fund or decreases in the
prices of securities or other assets a Fund intends to acquire. Where a
Fund enters into such transactions for other than hedging purposes, the
margin requirements associated with such transactions could expose a Fund
to greater risk.
POTENTIAL BANKRUPTCY OF A CLEARINGHOUSE OR BROKER: When a 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 a Fund has effected the transaction. In that
event, a Fund might not be able to recover amounts deposited as margin, or
amounts owed to a 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 a 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 a Fund.
RISKS OF OPTIONS ON FUTURES CONTRACTS: The amount of risk a 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 a 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 a 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 a
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 a 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 a Fund's position unless the institution acts as broker and is able to
find another counterparty willing to enter into the transaction with a
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 a 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 a 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 a 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 a Fund's ability to enter into desired
hedging transactions. A 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 a 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 a Fund will not be deemed to be a "commodity pool" for
purposes of the Commodity Exchange Act, regulations of the CFTC require
that a 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 a Fund's assets, after taking into account unrealized profits and
unrealized losses on any such contracts a 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>
----------
APPENDIX B
----------
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the
quality of various debt instruments. It should be emphasized, however,
that ratings are not absolute standards of quality. Consequently, debt
instruments with the same maturity, coupon and rating may have different
yields while debt instruments of the same maturity and coupon with
different ratings may have the same yield.
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt 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.
STANDARD & POOR'S RATINGS SERVICES
AAA: An obligation rated AAA has the highest rating assigned by Standard &
Poor's. 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: Subordinated debt or preferred stock obligation rated C is currently
highly vulnerable to nonpayment. 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. A C
rating will also be assigned to a preferred stock issue in arrears on
dividends or sinking fund payments, but that is currently paying.
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. The ratings of obligations in this category are based
on their prospects for achieving partial or full recovery in a
reorganization or liquidation of the obligor. While expected recovery
values are highly speculative and cannot be estimated with any precision,
the following serve as general guidelines. DDD obligations have the
highest potential for recovery around 90% -- 100% of outstanding amounts
and accrued interest. For U.S. corporates, for example, DD indicates
expected recoveries of 50% -- 90%, 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>
----------
APPENDIX C
----------
All performance quotations are as of June 30, 1999.
<TABLE>
<CAPTION>
ACTUAL
30-DAY 30-DAY
AVERAGE ANNUAL TOTAL RETURNS YIELD YIELD CURRENT
------------------------------------------- (INCLUDING (WITHOUT DISTRIBUTION
1 YEAR 5 YEARS LIFE OF FUND* ANY WAIVERS) ANY WAIVERS) RATE+
---------- ---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Shares, at net asset value
Global Fund 6.11% 5.86% 4.98% 4.52% 4.15% N/A
High Yield Fund N/A N/A 3.41% 7.38% 3.09% N/A
Emerging Markets Fund 0.18% N/A 9.26% 8.54% 7.87% 8.07%
Core Equity Fund N/A N/A 7.00% N/A N/A N/A
Research Fund 14.12% N/A 19.86% N/A N/A N/A
Mid Cap Fund 22.05% N/A 21.52% N/A N/A N/A
Emerging Equities Fund 4.69% 25.41% 24.23% N/A N/A N/A
International Equity Fund 0.74% N/A 12.50% N/A N/A N/A
----------------
*From the commencement of the Fund's investment operations on:
Global Fund September 30, 1992
High Yield Fund December 31, 1998
Emerging Markets Fund August 7, 1995
Core Equity Fund December 31, 1998
Research Fund May 20, 1996
Mid Cap Fund December 28, 1995
Emerging Equities Fund June 16, 1993
International Equity Fund January 30, 1996
+Annualized, based upon the last distribution.
</TABLE>
<PAGE>
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617) 954-5000
(800) 637-2262
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.
2 Avenue de Lafayette, Boston, MA 02111-1738
Toll free: (800) 637-2262
MAILING ADDRESS:
P.O. Box 1400, Boston, MA 02104-9985
INDEPENDENT AUDITORS
Deloitte & Touche LLP
125 Summer Street, Boston MA 02110
MFS(R) INSTITUTIONAL TRUST
500 BOYLSTON STREET
BOSTON, MA 02116
[logo] M F S (R)
INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND(R)