As filed with the Securities and Exchange Commission on February 12, 1998
1933 Act File No. 33-68310
1940 Act File No. 811-7992
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 8
AND
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 9
MFS SERIES TRUST XI
(formerly known as MFS UNION STANDARD TRUST)
(Exact Name of Registrant as Specified in Charter)
500 Boylston Street, Boston, Massachusetts 02116
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: 617-954-5000
Stephen E. Cavan, Massachusetts Financial Services Company,
500 Boylston Street, Boston, Massachusetts 02116
(Name and Address of Agent for Service)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
It is proposed that this filing will become effective (check appropriate box)
|_| immediately upon filing pursuant to paragraph (b)
|_| on [date] pursuant to paragraph (b)
|_| 60 days after filing pursuant to paragraph (a)(i)
|_| on [date] pursuant to paragraph (a)(i)
|_| 75 days after filing pursuant to paragraph (a)(ii)
|X| on April 28, 1998 pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
|_| this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
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<PAGE>
MFS SERIES TRUST XI
on Behalf of Vertex All Cap Fund
Vertex Contrarian Fund
Vertex Research All Cap Fund
Vertex Growth Fund
Vertex Discovery Fund
Cross Reference Sheet
(Pursuant to Rule 404 showing location in Prospectus and/or Statement of
Additional Information of the responses to the Items in Parts A and B of Form
N-1A)
<TABLE>
<CAPTION>
ITEM NUMBER STATEMENT OF
FORM N-1A, PART A PROSPECTUS CAPTION ADDITIONAL INFORMATION
<S> <C> <C>
1 (a), (b) Front Cover Page *
2 (a) Expense Summary *
(b), (c) * *
3 (a), (b) * *
(c), (d) Information Concerning Shares *
of the Funds - Performance
Information
4 (a) The Trust and the Funds; *
Investment Objective and
Policies; Certain Securities and
Investment Techniques
(b), (c) Investment Objective and *
Policies; Certain Securities and
Investment Techniques;
Additional Risk Factors
5 (a) The Trust and the Funds; *
Management of the Funds -
Investment Adviser
(b) Front Cover Page; Management *
of the Funds - Investment Adviser;
Back Cover Page
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM NUMBER STATEMENT OF
FORM N-1A, PART A PROSPECTUS CAPTION ADDITIONAL INFORMATION
<S> <C> <C>
(c) Management of the Funds - *
Investment Adviser
(d) Management of the Funds - *
Administrator
(e) Management of the Funds - *
Shareholder Servicing Agent;
Back Cover Page
(f) Information Concerning the *
Funds - Expenses; Expense
Summary
(g) Investment Techniques - *
Portfolio Trading
5A (a), (b), (c) * *
6 (a) Information Concerning Shares *
of the Funds - Description of
Shares, Voting Rights and
Liabilities; Information
Concerning Shares of the Funds -
Redemptions and Repurchases;
Information Concerning Shares
of the Funds - Purchases;
Information Concerning Shares
of the Funds - Exchanges
(b), (c), (d) * *
(e) Shareholder Services *
(f) Information Concerning Shares *
of the Funds - Distributions;
Shareholder Services -
Distribution Options
(g) Information Concerning Shares *
of the Funds - Tax Status;
Information Concerning Shares
of the Funds - Distributions
(h) The Funds *
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM NUMBER STATEMENT OF
FORM N-1A, PART A PROSPECTUS CAPTION ADDITIONAL INFORMATION
<S> <C> <C>
7 (a) Front Cover Page; Management *
of the Funds - Distributor; Back
Cover Page
(b) Information Concerning Shares *
of the Funds - Purchases;
Information Concerning Shares
of the Funds - Net Asset Value
(c) Information Concerning Shares *
of the Funds - Purchases;
Information Concerning Shares
of the Funds - Exchanges;
Shareholder Services
(d) Front Cover Page; Information *
Concerning Shares of the Funds -
Purchases; Shareholder Services
(e) Information Concerning Shares *
of the Funds - Distribution Plan;
Expense Summary
(f) Information Concerning Shares *
of the Funds - Distribution Plan
(g) Expense Summary; Information *
Concerning Shares of the
Funds - Purchases; Information
Concerning Shares of the
Funds - Exchanges; Information
Concerning Shares of the Funds -
Redemptions and Repurchases;
Information Concerning Shares
of the Funds - Distribution Plan;
Information Concerning Shares
of the Funds - Distributions;
Information Concerning Shares
of the Funds - Performance
Information; Shareholder
Services
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM NUMBER STATEMENT OF
FORM N-1A, PART A PROSPECTUS CAPTION ADDITIONAL INFORMATION
<S> <C> <C>
8 (a), (b), (c), (d) Information Concerning Shares *
of the Funds - Redemptions and
Repurchases; Shareholder
Services
9 * *
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM NUMBER STATEMENT OF
FORM N-1A, PART B PROSPECTUS CAPTION ADDITIONAL INFORMATION
<S> <C> <C>
10 (a), (b) * Front Cover Page
11 * Front Cover Page
12 * Definitions
13 (a) * Investment Objective,
Policies and Restrictions
(b), (c) * Investment Objective,
Policies and Restrictions
(d) * *
14 (a), (b) * Management of the
Funds - Trustees;
Management of the
Funds -Officers
(c) * Management of the
Funds - Trustees;
Management of the
Funds - Officers;
Trustee Compensation
Table
15 (a), (b), (c) * *
16 (a) Management of the Funds - Management of the
Investment Adviser Funds - Investment
Adviser; Management
of the Funds - Trustees;
Management of the
Funds - Officers
(b) Management of the Funds - Management of the
Investment Adviser Funds - Investment
Adviser
(c) * *
(d) * Management of the
Funds - Administrator
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM NUMBER STATEMENT OF
FORM N-1A, PART B PROSPECTUS CAPTION ADDITIONAL INFORMATION
<S> <C> <C>
(e) * Portfolio Transactions
and Brokerage
Commissions
(f) Information Concerning Shares Distribution Plan
of the Funds - Distribution Plan
(g) * *
(h) * Management of the
Funds - Custodian;
Independent Auditors;
Back Cover Page
(i) * Management of the
Funds - Shareholder
Servicing Agent
17 (a), (c), (d) * Portfolio Transactions
and Brokerage
Commissions
(b), (e) * *
18 (a) Information Concerning Shares Description of Shares,
of the Funds - Description of Voting Rights and
Shares, Voting Rights and Liabilities
Liabilities
(b) * *
19 (a) Information Concerning Shares Shareholder Services
of the Funds - Purchases;
Shareholder Services
(b) Information Concerning Shares Management of the
of the Funds - Net Asset Value; Funds - Distributor;
Information Concerning Shares Determination of Net
of the Funds - Purchases Asset Value and Performance
(c) Information Concerning Shares *
of the Funds - Redemptions and
Repurchases
20 * Tax Status
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM NUMBER STATEMENT OF
FORM N-1A, PART B PROSPECTUS CAPTION ADDITIONAL INFORMATION
<S> <C> <C>
21 (a), (b) * Management of the
Funds - Distributor;
Distribution Plan
(c) * *
22 (a) * *
(b) * Determination of Net
Asset Value and
Performance
23 * Independent Auditors
and Financial
Statements
</TABLE>
- -----------------------------
* Not Applicable
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS
DATED APRIL 1, 1998
Vertex All Cap Fund
Vertex Research All Cap Fund PROSPECTUS
Vertex Growth Fund May 1, 1998
Vertex Discovery Fund
Vertex Contrarian Fund
Class A Shares of Beneficial Interest
Class B Shares of Beneficial Interest
Class C Shares of Beneficial Interest
(Members of the MFS Family of Funds[RegTM])
Each a series of MFS Series Trust XI
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This Prospectus describes five open-end funds, each of which seeks capital
appreciation by principally investing in equity securities. Each of these funds
is non-diversified and has the ability, up to the maximum amount permitted by
applicable law, to borrow money for investment purposes and to engage to a
significant degree in short sales. These practices entail significant risks, as
described under "Additional Risk Factors--Bank Borrowings" and "Certain
Securities and Investment Techniques--Short Sales."
Vertex All Cap Fund (the "All Cap Fund")--The investment objective of the All
Cap Fund is capital appreciation. The Fund is flexibly managed and invests,
under normal market conditions, at least 65% of its total assets in all types
of equity securities.
Vertex Research All Cap Fund (the "Research All Cap Fund")--The investment
objective of the Research All Cap Fund is capital appreciation. The Fund
invests, under normal market conditions, at least 65% of its total assets in
all types of equity securities and is distinguishable from the All Cap Fund in
terms of the involvement of the Fund's investment adviser's research analysts
in the portfolio selection process.
Vertex Growth Fund (the "Growth Fund")--The investment objective of the Growth
Fund is capital appreciation. The Fund invests, under normal market conditions,
at least 65% of its total assets in equity securities of companies of any size
that the Adviser believes would be expected to show earnings growth over time
that is well above the growth rate of the overall economy and the rate of
inflation.
Vertex Discovery Fund (the "Discovery Fund")--The investment objective of the
Discovery Fund is capital appreciation. The Fund invests, under normal market
conditions, at least 65% of its total assets in equity securities of companies
of any size that the Adviser believes are early in their life cycle but which
have the potential to become major enterprises (emerging growth companies).
Vertex Contrarian Fund (the "Contrarian Fund")--The investment objective of the
Contrarian Fund is capital appreciation. The Fund invests, under normal market
conditions, at least 65% of its total assets in equity securities of companies
which the Adviser believes are undervalued in the marketplace relative to their
long term potential.
Each Fund's investment adviser and distributor are Vertex Investment
Management, Inc. (the "Adviser" or "Vertex") and MFS Fund Distributors, Inc.
("MFD"), respectively, both of which are located at 500 Boylston Street,
Boston, Massachusetts 02116. Each Fund is a series of MFS Series Trust XI (the
"Trust").
Each Fund may invest up to 35% of its total assets in lower rated bonds,
commonly known as "junk bonds," that entail greater risks than those found in
higher rated securities. In addition, each Fund may invest up to 100% of its
total assets in foreign securities, including emerging market securities, that
may involve greater risk than domestic securities. Investors should carefully
consider these risks before investing (see "Additional Risk Factors--Lower
Rated Bonds," "--Foreign Securities" and "--Emerging Market Securities").
While three classes of shares of each Fund are described in this Prospectus,
the Funds do not currently offer Class B and Class C Shares. Class A shares are
available for purchase at net asset value only by employees of Vertex and its
affiliates and certain of their family members who are residents of The
Commonwealth of Massachusetts, and members of the governing boards of the
various funds sponsored by Vertex or its affiliates.
This Prospectus sets forth concisely the information concerning each Fund and
the Trust that a prospective investor ought to know before investing. The
Trust, on behalf of each Fund, has filed with the Securities and Exchange
Commission (the "SEC") a Statement of Additional Information, dated May 1,
1998, as amended or supplemented from time to time (the "SAI"), which contains
more detailed information about the Trust and each Fund. See page 29 for a
further description of the information set forth in the SAI. A copy of the SAI
may be obtained without charge by contacting the Shareholder Servicing Agent
(see back cover for address and phone number). The SAI is incorporated by
reference into this Prospectus. The SEC maintains an Internet World Wide Web
site (http://www.sec.gov) that contains the SAI, materials that are
incorporated by reference into this Prospectus and SAI, and other information
regarding the Funds.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Investors should read this Prospectus and retain it for future reference.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MUST NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section Page
- ---------------------------------------------------------------------------- -----
<S> <C> <C>
1. Expense Summary ..................................................... 3
2. The Funds ........................................................... 5
3. Investment Objectives and Policies .................................. 5
Investment Objective and Policies Applicable to Each Fund .......... 5
All Cap Fund ...................................................... 6
Research All Cap Fund ............................................. 6
Growth Fund ....................................................... 6
Discovery Fund .................................................... 7
Contrarian Fund ................................................... 7
4. Certain Securities and Investment Techniques ........................ 7
5. Additional Risk Factors ............................................. 12
6. Management of the Funds ............................................. 15
7. Information Concerning Shares of the Funds .......................... 17
Purchases ......................................................... 17
Exchanges ......................................................... 21
Redemptions and Repurchases ....................................... 22
Distribution Plan ................................................. 24
Distributions ..................................................... 25
Tax Status ........................................................ 26
Net Asset Value ................................................... 26
Expenses .......................................................... 26
Description of Shares, Voting Rights and Liabilities .............. 27
Performance Information ........................................... 27
8. Shareholder Services ................................................ 28
Appendix A--Waivers of Sales Charges ................................ A-1
Appendix B--Description of Bond Ratings ............................. B-1
</TABLE>
2
<PAGE>
1. EXPENSE SUMMARY
<TABLE>
<CAPTION>
Class A Class B Class C
-------------- --------- ----------
<S> <C> <C> <C>
Shareholder Transaction Expenses:
Maximum Initial Sales Charge Imposed on Purchases of Fund Shares
(as a percentage of offering price) ............................... 5.75% 0.00% 0.00%
Maximum Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable) ............. See Below(1) 4.00% 1.00%
</TABLE>
Annual Operating Expenses (as a percentage of average daily net assets):
CLASS A SHARES
<TABLE>
<CAPTION>
Research
All Cap All Cap Growth Discovery Contrarian
Fund Fund Fund Fund Fund
--------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Management Fees (after fee reduction)(2) .................. 0.00% 0.00% 0.00% 0.00% 0.00%
Rule 12b-1 Fees (after fee reduction)(3) .................. 0.00% 0.00% 0.00% 0.00% 0.00%
Other Expenses (after fee reduction)(6) ................... 1.80% 1.80% 1.80% 1.80% 1.80%
---- ---- ---- ---- ----
Total Operating Expenses (after fee reduction)(5) ......... 1.80% 1.80% 1.80% 1.80% 1.80%
</TABLE>
CLASS B SHARES
<TABLE>
<CAPTION>
Research
All Cap All Cap Growth Discovery Contrarian
Fund Fund Fund Fund Fund
--------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Management Fees (after fee reduction)(2) .................. 0.00% 0.00% 0.00% 0.00% 0.00%
Rule 12b-1 Fees(4) ........................................ 1.00% 1.00% 1.00% 1.00% 1.00%
Other Expenses (after fee reduction)(6) ................... 1.80% 1.80% 1.80% 1.80% 1.80%
---- ---- ---- ---- ----
Total Operating Expenses (after fee reduction)(5) ......... 2.80% 2.80% 2.80% 2.80% 2.80%
</TABLE>
CLASS C SHARES
<TABLE>
<CAPTION>
Research
All Cap All Cap Growth Discovery Contrarian
Fund Fund Fund Fund Fund
--------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Management Fees (after fee reduction)(2) .................. 0.00% 0.00% 0.00% 0.00% 0.00%
Rule 12b-1 Fees(4) ........................................ 1.00% 1.00% 1.00% 1.00% 1.00%
Other Expenses (after fee reduction)(6) ................... 1.80% 1.80% 1.80% 1.80% 1.80%
---- ---- ---- ---- ----
Total Operating Expenses (after fee reduction)(5) ......... 2.80% 2.80% 2.80% 2.80% 2.80%
</TABLE>
- -----------
(1) Purchases of $1 million or more and certain purchases by retirement plans
are not subject to an initial sales charge; however, a contingent deferred
sales charge ("CDSC") of 1% will be imposed on such purchases in the event
of certain redemption transactions within 12 months following such
purchases (see "Purchases" below).
(2) The Adviser is currently waiving its right to receive management fees from
each Fund. Absent this waiver, "Management Fees" would be as follows:
<TABLE>
<CAPTION>
Research
All Cap All Cap Growth Discovery Contrarian
Fund Fund Fund Fund Fund
- ------------ --------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
1.50% 1.50% 1.50% 1.50% 1.50%
</TABLE>
Commencing May 1, 1999, the management fee will be subject to performance
adjustments as described under "Management of the Funds--Investment
Adviser" below.
(3) Each Fund has adopted a distribution plan for its shares in accordance with
Rule 12b-1 under the Investment Company Act of 1940, as amended (the "1940
Act") (the "Distribution Plan"), which provides that it will pay
distribution/service fees aggregating up to (but not necessarily all of)
0.35% per annum of the average daily net assets attributable to Class A
shares. Distribution and service fees under the Class A Distribution Plan
are currently being waived on a voluntary basis and, while they may be
imposed at the discretion of MFD at any time, MFD currently intends to
waive these fees during the Funds' current fiscal year. Distribution
expenses paid under the Plan, together with the initial sales charge, may
cause long-term shareholders to pay more than the maximum sales charge
that would have been permissible if imposed entirely as an initial sales
charge. See "Distribution Plan" below.
3
<PAGE>
(4) Each Fund's Distribution Plan provides that it will pay
distribution/service fees aggregating up to (but not necessarily all of)
1.00% per annum of the average daily net assets attributable to Class B
shares and Class C shares, respectively. Distribution expenses paid under
the Distribution Plan with respect to Class B or Class C shares, together
with any CDSC payable upon redemption of Class B and Class C shares, may
cause long-term shareholders to pay more than the maximum sales charge
that would have been permissible if imposed entirely as an initial sales
charge. See "Distribution Plan" below.
(5) Absent any fee waivers and expense reductions, "Total Operating Expenses,"
expressed as a percentage of average daily net assets, would be estimated
to be as follows:
<TABLE>
<CAPTION>
Research
All Cap All Cap Growth Discovery Contrarian
Fund Fund Fund Fund Fund
--------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Class A ......... 3.65% 3.65% 3.65% 3.65% 3.65%
Class B ......... 4.30% 4.30% 4.30% 4.30% 4.30%
Class C ......... 4.30% 4.30% 4.30% 4.30% 4.30%
</TABLE>
(6) 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 under "Other Expenses."
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a $1,000
investment in each Fund, assuming (a) a 5% annual return and, unless otherwise
noted, (b) redemption at the end of each of the time periods indicated:
CLASS A SHARES
<TABLE>
<CAPTION>
Research
All Cap All Cap Growth Discovery Contrarian
Fund Fund Fund Fund Fund
--------- --------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1 year .......... $ 75 $ 75 $ 75 $ 75 $ 75
3 years ......... 111 111 111 111 111
</TABLE>
CLASS B SHARES
(ASSUMES REDEMPTION)
<TABLE>
<CAPTION>
Research
All Cap All Cap Growth Discovery Contrarian
Fund Fund Fund Fund Fund
--------- --------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1 year .......... $ 68 $ 68 $ 68 $ 68 $ 68
3 years ......... 117 117 117 117 117
</TABLE>
CLASS B SHARES
(ASSUMES NO REDEMPTION)
<TABLE>
<CAPTION>
Research
All Cap All Cap Growth Discovery Contrarian
Fund Fund Fund Fund Fund
--------- --------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1 year .......... $28 $28 $28 $28 $28
3 years ......... 87 87 87 87 87
</TABLE>
CLASS C SHARES
(ASSUMES REDEMPTION)
<TABLE>
<CAPTION>
Research
All Cap All Cap Growth Discovery Contrarian
Fund Fund Fund Fund Fund
--------- --------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1 year .......... $38 $38 $38 $38 $38
3 years ......... 87 87 87 87 87
</TABLE>
4
<PAGE>
CLASS C SHARES
(ASSUMES NO REDEMPTION)
<TABLE>
<CAPTION>
Research
All Cap All Cap Growth Discovery Contrarian
Fund Fund Fund Fund Fund
--------- --------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1 year .......... $28 $28 $28 $28 $28
3 years ......... 87 87 87 87 87
</TABLE>
The purpose of the expense table above is to assist investors in understanding
the various costs and expenses that a shareholder of each Fund will bear
directly or indirectly. More complete descriptions of the following Fund
expenses are set forth in the following sections: (i) varying sales charges on
share purchases--"Purchases"; (ii) varying CDSCs--"Purchases"; (iii) management
fees--"Investment Adviser"; and (iv) Rule 12b-1 (i.e., distribution plan)
fees--"Distribution Plan."
The "Example" set forth above should not be considered a representation of past
or future expenses of a Fund; actual expenses may be greater or less than those
shown.
2. THE FUNDS
Each Fund is a series of the Trust, an open-end management investment company
which was organized as a business trust under the laws of The Commonwealth of
Massachusetts on September 1, 1993. Each Fund is a non-diversified fund. The
Trust presently consists of six series, the five Funds offered for sale
pursuant to this Prospectus and one series offered for sale pursuant to a
separate prospectus. Each series represents a portfolio with separate
investment objective and policies. Shares of each Fund are sold continuously to
the public and each Fund then uses the proceeds to buy securities for its
portfolio. While each Fund has three classes of shares designed for sale
generally to the public, Class A shares are the only class presently available
for sale. Class A shares are offered at net asset value plus an initial sales
charge up to a maximum of 5.75% of the offering price (or a CDSC of 1.00% upon
redemption during the first year in the case of certain purchases of $1 million
or more and certain purchases by retirement plans) and are subject to an annual
distribution fee and service fee up to a maximum of 0.35% per annum. Class B
shares are offered at net asset value without an initial sales charge but are
subject to a CDSC upon redemption (declining from 4.00% during the first year
to 0% after six years) and an annual distribution fee and service fee up to a
maximum of 1.00% per annum; Class B shares will convert to Class A shares
approximately eight years after purchase. Class C shares are offered at net
asset value without an initial sales charge but are subject to a CDSC of 1.00%
upon redemption during the first year and an annual distribution fee and
service fee up to a maximum of 1.00% per annum. Class C shares do not convert
to any other class of shares of a Fund. In addition, the Funds offer an
additional class of shares, Class I shares, exclusively to certain
institutional investors. Class I shares are made available by means of a
separate Prospectus supplement provided to institutional investors eligible to
purchase Class I shares and are offered at net asset value without an initial
sales charge or CDSC upon redemption and without an annual distribution and
service fee.
The Trust's Board of Trustees provides broad supervision over the affairs of
each Fund. Vertex is each Fund's investment adviser and is responsible for the
management of each Fund's assets. The officers of the Trust are responsible for
its operations. The Adviser manages each Fund's portfolio from day to day in
accordance with each Fund's investment objective and policies. A majority of
the Trustees are not affiliated with the Adviser. The Trust offers to buy back
(redeem) shares of each Fund from shareholders at any time at net asset value,
less any applicable CDSC.
3. INVESTMENT OBJECTIVES AND POLICIES
Each Fund has the same investment objective which it pursues through separate
investment policies, as described below. The differences in policies among the
Funds can be expected to affect the market and financial risk to which each
Fund is subject and the performance of each Fund. The investment objective and
policies of each Fund, unless otherwise specifically stated, may be changed by
the Trustees of the Trust without a vote of the shareholders. A change in a
Fund's objective may result in the Fund having an investment objective
different from the objective which shareholders considered appropriate at the
time of investment in the Fund. Any investment involves risk and there is no
assurance that the investment objective of any Fund will be achieved.
INVESTMENT OBJECTIVE AND POLICIES APPLICABLE TO EACH FUND--Each Fund shares the
same investment objective and certain investment policies, which are described
below.
Each Fund's investment objective is capital appreciation.
Under normal market conditions, each Fund invests at least 65% of its total
assets in equity securities (see "Certain Securities and Investment
Techniques--Equity Securities" below). Each Fund may invest up to 35% of its
total assets in fixed income
5
<PAGE>
securities, including fixed income securities rated BB or lower by Standard &
Poor's Rating Service ("S&P"), Fitch Investors Service, Inc. ("Fitch") or Duff
& Phelps Credit Rating Co. ("Duff & Phelps") or Ba or lower by Moody's
Investors Service, Inc. ("Moody's") or, if unrated, determined to be of
equivalent quality by the Adviser (commonly referred to as "junk bonds") (see
"Additional Risk Factors--Lower Rated Fixed Income Securities" below). Each
Fund may invest up to 100% of its total assets in foreign securities, including
emerging market securities, which are not traded on a U.S. securities exchange
(see "Additional Risk Factors--Foreign Securities" and "--Emerging Market
Securities" below).
Each Fund may engage in a variety of investment techniques designed to
capitalize on declines in the price of securities. For example, each Fund may
establish "short" positions in specific securities or stock indices through
short sales or investments in a variety of derivative instruments, including
options, futures contracts and options on futures. Up to 100% of each Fund's
net assets may be devoted to short positions. Each Fund may also establish
"long" positions in specific securities or stock indices through options,
futures contracts and options on futures. These investment techniques involve
special risks, described below under "Certain Securities and Investment
Techniques" and "Additional Risk Factors."
Each Fund may borrow up to 50% of its net assets to invest in portfolio
securities (leveraging) or for liquidity or defensive purposes. Leveraging by
means of borrowing will exaggerate the effect of any increase or decrease in
the value of the securities or other investments in the Fund's portfolio
relative to its net assets, and, therefore, may increase the Fund's volatility
(see "Additional Risk Factors--Bank Borrowings" below).
Each Fund is "non-diversified" and will therefore generally hold the securities
of a smaller number of issues than if it were "diversified," which may increase
the risk of loss and each Fund's volatility (see "Additional Risk Factors--Non-
diversification below").
Each Fund may engage in certain investment techniques as described under the
caption "Certain Securities and Investment Techniques" below and in the SAI.
Each Fund's investments are subject to certain risks, as described in the above
referenced sections of this Prospectus and the SAI and as described below under
the caption "Additional Risk Factors."
The manner in which the Funds' engage in the policies discussed above, and
their unique characteristics, are described below.
ALL CAP FUND
The All Cap Fund is flexibly managed, with the ability to maintain exposure to
issuers of all market capitalizations and industry focus. The Fund may at times
devote all of its net assets to long or short positions or may maintain any
combination of long and short positions. The Fund may invest in all markets,
domestic and foreign, may invest in securities listed on securities exchanges
or not so listed, and may at times maintain large weightings of securities of
companies located in a particular country or region. The Fund may pursue a
"growth strategy," by investing in companies which the Adviser believes offer
superior prospects for growth, or a "value strategy," by investing in companies
which the Adviser believes are undervalued.
RESEARCH ALL CAP FUND
The Research All Cap Fund, like the All Cap Fund, is flexibly managed (see "All
Cap Fund" above). However, the Fund is distinguishable from the All Cap Fund in
terms of the involvement of the Adviser's investment research analysts in the
portfolio securities selection process. The Fund is managed by the Adviser's
Director of Equity Research, who oversees a committee of investment research
analysts. This committee includes investment analysts employed not only by the
Adviser, but also by MFS International (U.K.) Limited, a wholly owned
subsidiary of the parent of the Adviser. The analysts are assigned to follow
distinct industries, and recommend to the Director of Equity Research those
securities within their assigned industries which they view as best suited to
meet the Fund's investment objective. The Director of Equity Research makes
investment decisions for the Fund based upon these recommendations. Because of
this "best ideas" approach, the Fund does not have a distinct "growth" or
"value" strategy.
GROWTH FUND
The Growth Fund, like the All Cap Fund, is flexibly managed (see "All Cap Fund"
above). However, unlike the All Cap Fund, the Fund will invest, under normal
market conditions, at least 65% of its total assets in equity securities of
companies of any size that the Adviser believes would be expected to show
earnings growth over time that is well above the growth rate of the overall
economy and the rate of inflation.
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DISCOVERY FUND
The Discovery Fund, like the All Cap Fund, is flexibly managed (see "All Cap
Fund" above). However, unlike the All Cap Fund, the Fund will invest, under
normal market conditions, at least 65% of its total assets in equity securities
of companies of any size that the Adviser believes are early in their life
cycle but which have the potential to become major enterprises (emerging growth
companies). Such companies generally would be expected to show earnings growth
over time that is well above the growth rate of the overall economy and the
rate of inflation, and would have the products, technologies, management and
market and other opportunities which are usually necessary to become more
widely recognized as growth companies. Emerging growth companies can be of any
size, and the Fund may invest in larger or more established companies whose
rates of earnings growth are expected to accelerate because of special factors,
such as rejuvenated management, new products, changes in consumer demand, or
basic changes in the economic environment.
CONTRARIAN FUND
The Contrarian Fund, like the All Cap Fund, is flexibly managed (see "All Cap
Fund" above). However, unlike the All Cap Fund, the Fund will invest, under
normal market conditions, at least 65% of its total assets in equity securities
of companies which the Adviser believes are undervalued in the marketplace
relative to their long term potential. Securities in which the Fund may invest
may be undervalued because they are temporarily out of favor in the market due
to market decline, poor economic conditions, or actual or anticipated
unfavorable developments affecting the issuer of the security or its industry,
or because the market has overlooked them.
4. CERTAIN SECURITIES AND INVESTMENT TECHNIQUES
The securities and investment techniques described below are applicable to each
Fund. Additional information about certain of these securities and investment
techniques can be found under the caption "Certain Securities and Investment
Techniques" in the SAI.
Bank Borrowings: Each Fund may borrow money for investment purposes from
banks and invest the proceeds in accordance with its investment objective and
policies. Bank borrowings by a Fund will not exceed 50% of its net assets. See
"Additional Risk Factors--Bank Borrowings" for a description of the risks
involved in this practice.
Short Sales: If a Fund anticipates that the price of a security will
decline, it may sell the security short and borrow the same type of security
from a broker or other institution to complete the sale. A Fund may make a
profit or loss depending upon whether the market price of the security
decreases or increases between the date of the short sale and the date on which
the Fund must replace the borrowed security. Possible losses from short sales
differ from losses that could be incurred from a purchase of a security,
because losses from short sales may be unlimited, whereas losses from purchases
of a security can equal only the total amount invested. A Fund will segregate
liquid assets sufficient to cover its short sale commitments. A Fund will not
sell short securities whose underlying value (minus any amounts deposited as
margin) exceeds 100% of its net assets.
Equity Securities: Each Fund may invest in all types of equity securities
including the following: common stocks, preferred stocks and preference stocks;
securities such as bonds, warrants or rights that are convertible into stocks;
and depository receipts for those securities. These securities may be listed on
securities exchanges, traded in various over-the-counter markets or have no
organized market.
Emerging Growth Companies: Each Fund may invest in securities of U.S. and
foreign companies that are early in their life cycle but which have the
potential to become major enterprises (emerging growth companies). Such
companies may be of any size, would be expected to show earnings growth over
time that is well above the growth rate of the overall economy and the rate of
inflation, and would have the products, management, and market opportunities
which are usually necessary to become more widely recognized as growth
companies. Each Fund may also invest in more established companies whose rates
of earnings growth are expected to accelerate because of special factors, such
as rejuvenated management, new products, changes in consumer demand, or basic
changes in the economic environment or which otherwise represent opportunities
for long-term growth. See "Additional Risk Factors--Emerging Growth Companies"
below. Each Fund may also invest to a limited extent in restricted securities
of companies which the Adviser believes have significant growth potential.
These securities may be considered speculative and may not be readily
marketable. See "Restricted Securities" below.
Foreign Growth Securities: Each Fund may invest in securities of foreign
growth companies, including established foreign companies, whose rates of
earnings growth are expected to accelerate because of special factors, such as
rejuvenated
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management, new products, changes in consumer demand, or basic changes in the
economic environment or which otherwise represent opportunities for long-term
growth. See "Additional Risk Factors--Foreign Securities" below. It is
anticipated that these companies will primarily be in nations with more
developed securities markets, such as Japan, Australia, Canada, New Zealand,
Hong Kong and most Western European countries, including Great Britain. Each
Fund may also invest in emerging market securities, as described below.
Fixed Income Securities: Fixed income securities in which each Fund may
invest include bonds, debentures, mortgage securities, notes, bills, commercial
paper, U.S. Government Securities and certificates of deposit.
Corporate Debt Securities: Corporate debt securities of both domestic and
foreign issuers in which each Fund may invest include all types of long- or
short-term debt obligations, such as bonds, debentures, notes, equipment lease
certificates, equipment trust certificates, conditional sales contracts and
commercial paper. Corporate fixed income securities may involve equity features
(and may be characterized by the Funds as equity securities), such as
conversion or exchange rights or warrants for the acquisition of stock of the
same or a different issuer; participations based on revenues, sales or profits;
or the purchase of common stock in a unit transaction (where corporate debt
securities and common stock are offered as a unit).
Restricted Securities: Each Fund may purchase securities that are not
registered under the Securities Act of 1933 (the "1933 Act") ("restricted
securities"), including those that can be offered and sold to "qualified
institutional buyers" under Rule 144A under the 1933 Act ("Rule 144A
securities"). A determination is made based upon a continuing review of the
trading markets for a specific Rule 144A security, whether such security is
liquid and thus not subject to a Fund's limitation on investing not more than
15% of its net assets in illiquid investments. The Board of Trustees has
adopted guidelines and delegated to the Adviser the daily function of
determining and monitoring the liquidity of Rule 144A securities. 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 Rule 144A securities held in the Fund's portfolio.
Subject to each Fund's 15% 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.
Lending of Portfolio Securities: Each Fund may seek to increase its income
by lending portfolio securities. Such loans will usually be made to member
firms (and subsidiaries thereof) of the New York Stock Exchange (the
"Exchange") and to member banks of the Federal Reserve System, and would be
required to be secured continuously by collateral in cash, irrevocable letters
of credit or U.S. Treasury securities maintained on a current basis at an
amount at least equal to the market value of the securities loaned. The value
of the securities loaned, as represented by the collateral received by the Fund
in connection with such loans, will not exceed 50% of the value of the net
assets of the Fund making the loans.
Repurchase Agreements: Each Fund may enter into repurchase agreements in
order to earn income on available cash or as a temporary defensive measure.
Under a repurchase agreement, a Fund acquires securities subject to the
seller's agreement to repurchase at a specified time and price. If the seller
becomes subject to a proceeding under the bankruptcy laws or its assets are
otherwise subject to a stay order, the Fund's right to liquidate the securities
may be restricted (during which time the value of the securities could
decline). Each Fund has adopted certain procedures intended to minimize the
risks of such transactions.
"When-Issued" Securities: Each 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 segregate
liquid assets sufficient to cover its commitments. Purchases of securities on
such bases may involve more risks than other types of purchases.
U.S. Government Securities: Each Fund may invest in U.S. Government
securities, including: (1) U.S. Treasury obligations, which differ only in
their interest rates, maturities and times of issuance: U.S. Treasury bills
(maturities of one year or less); U.S. Treasury notes (maturities of one to ten
years); and U.S. Treasury bonds (generally maturities of greater than ten
years); all of which are backed by the full faith and credit of the U.S.
Government; and (2) obligations issued or guaranteed by U.S. Government
agencies, authorities or instrumentalities, some of which are backed by the
full faith and credit of the U.S. Treasury, e.g., direct pass-through
certificates of the Government National Mortgage Association ("GNMA");
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some of which are supported by the right of the issuer to borrow from the U.S.
Government, e.g., obligations of Federal Home Loan Banks; and some of which are
backed only by the credit of the issuer itself, e.g., obligations of the
Student Loan Marketing Association (collectively, "U.S. Government
Securities"). The term "U.S. Government Securities" also includes interests in
trusts or other entities issuing interests in obligations that are backed by
the full faith and credit of the U.S. Government or are issued or guaranteed by
the U.S. Government, its agencies, authorities or instrumentalities.
Investments for Temporary Defensive Purposes: During periods of unusual
market conditions when the Adviser believes that investing for temporary
defensive purposes is appropriate, or in order to meet anticipated redemption
requests, a large portion or all of the assets of 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.
Emerging Markets Securities: Consistent with each Fund's respective
objectives and policies, each Fund may invest in securities of issuers whose
principal activities are located in emerging market countries (which may
include foreign governments and their subdivisions, agencies or
instrumentalities). 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 and the source of its revenues and
the location of its assets. The issuer's principal activities generally are
deemed to be located in a particular country if: (a) the security is issued or
guaranteed by the government of that country or any of its agencies,
authorities or instrumentalities; (b) the issuer is organized under the laws
of, and maintains a principal office in, that country; (c) the issuer has its
principal securities trading market in that country; (d) the issuer derives 50%
or more of its total revenues from goods sold or services performed in that
country; or (e) the issuer has 50% or more of its assets in that country. See
"Additional Risk Factors--Emerging Market Securities" below.
Brady Bonds: Each 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.
Real Estate Investment Trusts: Each Fund may invest in real estate
investment trusts ("REITs"). REITs pool investors' funds for investment
primarily in income producing real estate or real estate related loans or
interests. A REIT is not taxed on income distributed to shareholders if it
complies with various requirements relating to its organization, ownership,
assets and income and with the requirement that it distribute to its
shareholders at least 95% of its taxable income (other than net capital gains)
for each taxable year. REITs can generally be classified as equity REITs,
mortgage REITs and hybrid REITs. Equity REITs invest the majority of their
assets directly in real property and derive their income primarily from rents.
Equity REITs can also realize capital gains by selling property that has
appreciated in value. Mortgage REITs invest the majority of their assets in
real estate mortgages and derive their income primarily from interest payments.
Hybrid REITs combine the characteristics of both equity REITs and mortgage
REITs.
Zero Coupon Bonds, Deferred Interest Bonds and PIK Bonds: Each Fund may
invest in zero coupon bonds, deferred interest bonds and payment-in-kind
("PIK") bonds. Zero coupon and deferred interest bonds are debt obligations
which are issued or purchased at a significant discount from face value. The
discount approximates the total amount of interest the bonds will accrue and
compound over the period until maturity 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
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obligations which provide that the issuer thereof 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 due to changes in interest rates than debt
obligations which make regular payments of interest. A Fund will accrue income
on such investments for tax and accounting purposes, as required, which is
distributable to shareholders and which, because no cash is received at the
time of accrual, may require the liquidation of other portfolio securities to
satisfy the Fund's distribution obligations.
Indexed Securities: Each Fund may invest in indexed securities whose value
is linked to foreign currencies, interest rates, commodities, indices or other
financial indicators. Most indexed securities are short to intermediate term
fixed income securities whose values at maturity (i.e., principal value) and/or
interest rates rise or fall according to changes in the value of one or more
specified underlying instruments. Indexed securities may be positively or
negatively indexed (i.e., their principal value or interest rates may increase
or decrease if the underlying instrument appreciates), and may have return
characteristics similar to direct investments in the underlying instrument or
to one or more options on the underlying instrument. Indexed securities may be
more volatile than the underlying instrument itself and could involve the loss
of all or a portion of or interest on the principal amount of the investment.
Swaps and Related Transactions: As one way of managing its exposure to
different types of investments, each Fund may enter into interest rate swaps,
currency swaps and other types of available swap agreements, such as caps,
collars and floors. Swaps involve the exchange by a Fund with another party of
cash payments based upon different interest rate indices, currencies, and other
prices or rates, such as the value of mortgage prepayment rates. For example,
in the typical interest rate swap, a Fund might exchange a sequence of cash
payments based on a floating rate index for cash payments based on a fixed
rate. Payments made by both parties to a swap transaction are based on a
notional principal amount determined by the parties.
Each Fund may also purchase and sell caps, floors and collars. In a typical cap
or floor agreement, one party agrees to make payments only under specified
circumstances, usually in return for payment of a fee by the counterparty. For
example, the purchase of an interest rate cap entitles the buyer, to the extent
that a specified index exceeds a predetermined interest rate, to receive
payments of interest on a contractually-based principal amount from the
counterparty selling such interest rate cap. The sale of an interest rate floor
obligates the seller to make payments to the extent that a specified interest
rate falls below an agreed-upon level. A collar arrangement combines elements
of buying a cap and selling a floor.
Swap agreements could be used to shift a Fund's investment exposure from one
type of investment to another. For example, if a Fund agreed to exchange
payments in dollars for payments in foreign currency, in each case based on a
fixed rate, the swap agreement would tend to decrease the Fund's exposure to
U.S. interest rates and increase its exposure to foreign currency and interest
rates. Caps and floors have an effect similar to buying or writing options.
Depending on how they are used, swap agreements may increase or decrease the
overall volatility of a Fund's investments and its share price and yield.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risk assumed, or no
investment of cash. As a result, swaps can be highly volatile and may have a
considerable impact on a Fund's performance. Swap agreements are subject to
risks related to the counterparty's ability to perform, and may decline in
value if the counterparty's creditworthiness deteriorates. A Fund may also
suffer losses if it is unable to terminate outstanding swap agreements or
reduce its exposure through offsetting transactions. Swaps, caps, floors and
collars are highly specialized activities which involve certain risks as
described in the SAI.
Options on Securities: Each Fund may write (sell) covered put and call
options and purchase put and call options on securities. Each Fund will write
options on securities for the purpose of increasing its return and/or to
protect the value of its portfolio. In particular, where a Fund writes an
option that expires unexercised or is closed out by the Fund at a profit, it
will retain the premium paid for the option which will increase its gross
income and will offset in part the reduced value of the portfolio security
underlying the option, or the increased cost of portfolio securities to be
acquired. However, the writing of options constitutes only a partial hedge, up
to the amount of the premium less any transaction costs. In contrast, if the
price of the underlying security moves adversely to the Fund's position, the
option may be exercised and the Fund will be required to purchase or sell the
underlying security at a disadvantageous price, which may only be partially
offset by the amount of the premium. Each Fund may also write combinations of
put and call options on the same security, known as "straddles." Such
transactions can generate additional premium income but also present increased
risk.
By writing a call option on a security, a Fund limits its opportunity to profit
from any increase in the market value of the underlying security, since the
holder will usually exercise the call option when the market value of the
underlying security exceeds the exercise price of the call. However, the Fund
retains the risk of depreciation in value of securities on which it has written
call options.
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Each Fund may also purchase put or call options in anticipation of market
fluctuations which may adversely affect the value of its portfolio or the
prices of securities that a Fund wants to purchase at a later date. In the
event that the expected market fluctuations occur, a Fund may be able to offset
the resulting adverse effect on its portfolio, in whole or in part, through the
options purchased. The premium paid for a put or call option plus any
transaction costs will reduce the benefit, if any, realized by the Fund upon
exercise or liquidation of the option, and, unless the price of the underlying
security changes sufficiently, the option may expire without value to the Fund.
In certain instances, a Fund may enter into options on Treasury securities that
are "reset" options or "adjustable strike" options. These options provide for
periodic adjustment of the strike price and may also provide for the periodic
adjustment of the premium during the term of the option.
Options on Indices: Consistent with each Fund's respective investment
objective and policies, each Fund may write (sell) covered call and put options
and purchase call and put options on indices. Each Fund may write options on
indices for the purpose of increasing its gross income and to protect its
portfolio against declines in the value of securities it owns or increases in
the value of securities to be acquired. When a Fund writes an option on an
index, and the value of the index moves adversely to the holder's position, the
option will not be exercised, and the Fund will either close out the option at
a profit or allow it to expire unexercised. A Fund will thereby retain the
amount of the premium, less related transaction costs, which will increase its
gross income and offset part of the reduced value of portfolio securities or
the increased cost of securities to be acquired. Such transactions, however,
will constitute only partial hedges against adverse price fluctuations, since
any such fluctuations will be offset only to the extent of the premium received
by a Fund for the writing of the option, less related transaction costs. In
addition, if the value of an underlying index moves adversely to a Fund's
option position, the option may be exercised, and the Fund will experience a
loss which may only be partially offset by the amount of the premium received.
Each Fund may also purchase put or call options on indices in order,
respectively, to hedge its investments against a decline in value or to attempt
to reduce the risk of missing a market or industry segment advance. A Fund's
possible loss in either case will be limited to the premium paid for the
option, plus related transaction costs.
"Yield Curve" Options: Each Fund may enter into options on the yield
"spread," or yield differential, between two securities, a transaction referred
to as a "yield curve" option, for hedging and non-hedging (an effort to
increase current income) purposes. In contrast to other types of options, a
yield curve option is based on the difference between the yields of designated
securities rather than the actual prices of the individual securities, and is
settled through cash payments. Accordingly, a yield curve option is profitable
to the holder if this differential widens (in the case of a call) or narrows
(in the case of a put), regardless of whether the yields of the underlying
securities increase or decrease. Yield curve options written by a Fund will be
covered as described in the SAI. The trading of yield curve options is subject
to all the risks associated with trading other types of options, as discussed
below under "Additional Risk Factors" and in the SAI. In addition, such options
present risks of loss even if the yield on one of the underlying securities
remains constant, if the spread moves in a direction or to an extent which was
not anticipated.
Futures Contracts and Options on Futures Contracts: Each Fund may purchase
and sell futures contracts on stock indices and commodities, and may purchase
and sell Futures Contracts on foreign currencies or indices of foreign
currencies ("Futures Contracts"). Each Fund may also purchase and write options
on such Futures Contracts. Consistent with each Fund's respective investment
objective and policies, each may 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. These Funds may also
purchase and write options on such Futures Contracts. All above-referenced
options on Futures Contracts are referred to as "Options on Futures Contracts."
Such transactions will be entered into for hedging purposes or for non-hedging
purposes to the extent permitted by applicable law. Each Fund will incur
brokerage fees when it purchases and sells Futures Contracts, and will be
required to maintain margin deposits. In addition, Futures Contracts entail
risks. Although the Adviser believes that use of such contracts will benefit
the Funds, if its investment judgment about the general direction of exchange
rates or the stock market is incorrect, a Fund's overall performance may be
poorer than if it had not entered into any such contract and the Fund may
realize a loss.
Purchases of Options on Futures Contracts may present less risk in hedging a
Fund's portfolio than the purchase or sale of the underlying Futures Contracts
since the potential loss is limited to the amount of the premium plus related
transaction costs, although it may be necessary to exercise the option to
realize any profit, which results in the establishment of a futures position.
The writing of Options on Futures Contracts, however, does not present less
risk than the trading of Futures Contracts and will constitute only a partial
hedge, up to the amount of the premium received. In addition, if an option is
exercised, a Fund may suffer a loss on the transaction.
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Futures Contracts and Options on Futures Contracts that are entered into by a
Fund will be traded on U.S. and foreign exchanges.
Forward Contracts: Each Fund may enter into forward foreign currency
exchange contracts for the purchase or sale of a fixed quantity of a foreign
currency at a future date at a price set at the time of the contract ("Forward
Contracts"). Each Fund may enter into Forward Contracts for hedging purposes
and for non-hedging purposes of increasing the Fund's current income. By
entering into transactions in Forward Contracts for hedging purposes, a Fund
may be required to forego the benefits of advantageous changes in exchange
rates and, in the case of Forward Contracts entered into for non-hedging
purposes, a Fund may sustain losses which will reduce its gross income. Such
transactions, therefore, could be considered speculative. Forward Contracts are
traded over-the-counter and not on organized commodities or securities
exchanges. As a result, Forward Contracts operate in a manner distinct from
exchange-traded instruments, and their use involves certain risks beyond those
associated with transactions in Futures Contracts or options traded on
exchanges. A Fund may choose to, or be required to, receive delivery of the
foreign currencies underlying Forward Contracts it has entered into. Under
certain circumstances, such as where the Adviser believes that the applicable
exchange rate is unfavorable at the time the currencies are received or the
Adviser anticipates, for any other reason, that the exchange rate will improve,
a Fund may hold such currencies for an indefinite period of time. A Fund may
also enter into a Forward Contract on one currency to hedge against risk of
loss arising from fluctuations in the value of a second currency (referred to
as a "cross hedge") if, in the judgment of the Adviser, a reasonable degree of
correlation can be expected between movements in the values of the two
currencies. Each Fund has established procedures, which require use of
segregated assets or "cover" in connection with the purchase and sale of such
contracts.
Options on Foreign Currencies: Each Fund may also purchase and write
options on foreign currencies ("Options on Foreign Currencies") for the purpose
of protecting against declines in the dollar value of portfolio securities and
against increases in the dollar cost of securities to be acquired. As in the
case of other types of options, however, the writing of an Option on Foreign
Currency will constitute only a partial hedge, up to the amount of the premium
received, and a Fund may be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The purchase of an
Option on Foreign Currency may constitute an effective hedge against
fluctuations in exchange rates although, in the event of rate movements adverse
to a Fund's position, it may forfeit the entire amount of the premium paid for
the option plus related transaction costs. A Fund may also choose, or be
required to receive delivery of the foreign currencies underlying Options on
Foreign Currencies into which it has entered. 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.
5. ADDITIONAL RISK FACTORS
The following discussion of additional risk factors supplements the risk
factors described above. Additional information concerning risk factors can be
found under the caption "Certain Securities and Investment Techniques" in the
SAI.
Bank Borrowings: To the extent that portfolio securities are purchased by
a Fund with proceeds from bank borrowings, the net asset value of the Fund's
shares generally will 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 these proceeds which is in excess of the expenses
associated therewith can be expected to cause the value of the Fund's shares
and distributions on the Fund's shares to rise more quickly than would
otherwise be the case. Conversely, if the investment income or gains earned
from the portfolio securities purchased with proceeds from bank borrowings
fails to cover the expenses associated therewith, the value of the Fund's
shares is likely to decrease more quickly than otherwise would be the case and
distributions thereon will be reduced or eliminated. Hence, bank borrowing
(leverage) is speculative and increases the risk of owning or investing in the
shares of the Fund. Bank borrowings also increase each Fund's expenses because
of interest payments and administrative expenses associated with the borrowing
of money. Unless the appreciation and income on assets purchased with proceeds
from bank borrowings exceed the costs associated with the bank borrowings, the
use of leverage by a Fund would diminish the investment performance of the Fund
compared with what it would have been without leverage.
Non-diversification: Each Fund is "non-diversified," as that term is
defined in the 1940 Act, but intends to qualify as a "regulated investment
company" ("RIC") for federal income tax purposes. This means, in general, that
although more than 5% of the Fund's total assets may be invested in the
securities of one issuer (including a foreign government), at the close of each
quarter of its taxable year, the aggregate amount of such holdings may not
exceed 50% of the value of its total assets, and no more than 25% of the value
of its total assets may be invested in the securities of a single issuer. To
the extent that a non-diversified Fund at times may hold the securities of a
smaller number of issuers than if it were "diversified" (as defined in the 1940
Act), the Fund will at such times be subject to greater risk with respect to
its portfolio securities than a fund that invests in a broader range of
securities, because changes in the financial condition or market assessment of
a single issuer may cause greater fluctuations in the Fund's total return and
the net asset value of its shares.
12
<PAGE>
Emerging Growth Companies: Investing in emerging growth companies involves
greater risk than is customarily associated with investing in more established
companies. Emerging growth companies often have limited product lines, markets
or financial resources, and they may be dependent on one-person management. The
securities of emerging growth companies may be subject to more abrupt or
erratic market movements than securities of larger, more established companies
or the market averages in general. Similarly, many of the securities offering
the capital appreciation sought by the Funds will involve a higher degree of
risk than would established growth stocks.
Fixed Income Securities: To the extent a Fund invests in fixed income
securities, the net asset value of the Fund may change as the general levels of
interest rates fluctuate. When interest rates decline, the value of fixed
income securities can be expected to rise. Conversely, when interest rates
rise, the value of fixed income securities can be expected to decline. The
Funds are not subject to restrictions on the maturities of the fixed income
securities they hold. A Fund's investments in fixed income securities with
longer terms to maturity are subject to greater volatility than the Fund's
shorter-term obligations.
REITs: Equity REITs may be affected by changes in the value of the
underlying property owned by the trusts, while mortgage REITs may be affected
by default or payment problems relating to underlying mortgages, the quality of
credit extended and self-liquidation provisions by which mortgages held may be
paid in full and distributions of capital returns may be made at any time.
Equity and mortgage REITs are dependent upon the skill of their individual
management personnel and generally are not diversified. In addition, equity and
mortgage REITs could be adversely affected by failure to qualify for tax-free
pass-through of income under the Internal Revenue Code of 1986, as amended, or
to maintain their exemptions from registration under the 1940 Act. By investing
in REITs indirectly through the Fund, a shareholder will bear not only a a
proportionate share of the expenses of the Fund, but also indirectly, similar
expenses of the REITs, including compensation of management.
To the extent the fund is invested in debt securities (including
asset-backed securities) or mortgage REITs, it will be subject to credit risk
and interest rate risk. Credit risk relates to the ability of the issuer to
meet interest and principal payments when due. Interest rate risk refers to the
fluctuations in the net asset value of any portfolio of fixed income securities
resulting solely from the inverse relationship between the price and yield of
fixed income securities; that is, when interest rates rise, bond prices
generally fall and, conversely, when interest rates fall, bond prices generally
rise. In general, bonds with longer maturities are more sensitive to interest
rate changes than bonds with shorter maturities.
Options, Futures Contracts and Forward Contracts: Although each Fund may
enter into transactions in options, Futures Contracts, Options on Futures
Contracts, Forward Contracts and Options on Foreign Currencies for hedging
purposes, such transactions nevertheless involve certain risks. For example, a
lack of correlation between the instrument underlying an option or Futures
Contract and the assets being hedged, or unexpected adverse price movements,
could render a Fund's hedging strategy unsuccessful and could result in losses.
The Funds also may enter into transactions in options, Futures Contracts,
Options on Futures Contracts and Forward Contracts for other than hedging
purposes, which involves greater risk. In particular, such transactions may
result in losses for a Fund which are not offset by gains on other portfolio
positions, thereby reducing gross income. In addition, foreign currency markets
may be extremely volatile from time to time. There can be no assurance that a
liquid secondary market will exist for any contract purchased or sold, and a
Fund may be required to maintain a position until exercise or expiration, which
could result in losses. The SAI contains a description of the nature and
trading mechanics of options, Futures Contracts, Options on Futures Contracts,
Forward Contracts and Options on Foreign Currencies, and includes a discussion
of the risks related to transactions therein.
Transactions in Forward Contracts may be entered into only in the
over-the-counter market. Futures Contracts and Options on Futures Contracts may
be entered into on U.S. exchanges regulated by the Commodity Futures Trading
Commission and on foreign exchanges. In addition, the securities and indices
underlying options, Futures Contracts and Options on Futures Contracts traded
by the Fund will include both domestic and foreign securities.
Lower Rated Bonds: Each Fund may invest in fixed income securities rated
Baa by Moody's or BBB by S&P, Fitch or Duff & Phelps and comparable unrated
securities. These securities, while normally exhibiting adequate protection
parameters, have speculative characteristics and changes in economic conditions
or other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than in the case of higher grade securities.
Each Fund may also invest up to 35% of its total assets in 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"). 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
13
<PAGE>
categories. However, since yields vary over time, no specific level of income
can ever be assured. These lower rated high yielding fixed income securities
generally tend to reflect economic changes and short-term corporate and
industry developments to a greater extent than higher rated securities which
react primarily to fluctuations in the general level of interest rates
(although these lower rated fixed income securities are also affected by
changes in interest rates, the market's perception of their credit quality, and
the outlook for economic growth). In the past, economic downturns or an
increase in interest rates have, under certain circumstances, caused a higher
incidence of default by the issuers of these securities and may do so in the
future, especially in the case of highly leveraged issuers. During certain
periods, the higher yields on a Fund's lower rated high yielding fixed income
securities are paid primarily because of the increased risk of loss of
principal and income, arising from such factors as the heightened possibility
of default or bankruptcy of the issuers of such securities. Due to the fixed
income payments of these securities, a Fund may continue to earn the same level
of interest income while its net asset value declines due to portfolio losses,
which could result in an increase in the Fund's yield despite the actual loss
of principal. The market for these lower rated fixed income securities may be
less liquid than the market for investment grade fixed income securities, and
judgment may at times play a greater role in valuing these securities than in
the case of investment grade fixed income securities. Changes in the value of
securities subsequent to their acquisition will not affect cash income or yield
to maturity to a Fund but will be reflected in the net asset value of shares of
the Fund.
Foreign Securities: Each Fund may invest in dollar denominated and non-dollar
denominated foreign securities. Investing in securities of foreign issuers
generally involves risks not ordinarily associated with investing in securities
of domestic issuers. These include changes in currency rates, exchange control
regulations, securities settlement practices, governmental administration or
economic or monetary policy (in the United States or abroad) or circumstances
in dealings between nations. Costs may be incurred in connection with
conversions between various currencies. Special considerations may also include
more limited information about foreign issuers, higher brokerage costs,
different accounting standards and thinner trading markets. Foreign securities
markets may also be less liquid, more volatile and less subject to government
supervision than in the United States. Investments in foreign countries could
be affected by other factors including expropriation, confiscatory taxation and
potential difficulties in enforcing contractual obligations and could be
subject to extended settlement periods. Each Fund may hold foreign currency
received in connection with investments in foreign securities when, in the
judgment of the Adviser, it would be beneficial to convert such currency into
U.S. dollars at a later date, based on anticipated changes in the relevant
exchange rate. Each Fund may also hold foreign currency in anticipation of
purchasing foreign securities.
Depository Receipts: Each Fund may invest in American Depositary Receipts
("ADRs"), Global Depositary Receipts ("GDRs") and other types of depository
receipts. ADRs are certificates issued by a U.S. depository (usually a bank)
and represent a specified quantity of shares of an underlying non-U.S. stock on
deposit with a custodian bank as collateral. 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.
Emerging Market Securities: Each Fund may invest in emerging markets. In
addition to the general risks of investing in foreign securities, investments
in emerging markets involve special risks. Securities of many issuers in
emerging markets may be less liquid and more volatile than securities of
comparable domestic issuers. These securities may be considered speculative
and, while generally offering higher income and the potential for capital
appreciation, may present significantly greater risk. Emerging markets may have
different clearance and settlement procedures, and in certain markets there
have been times when settlements have been unable to keep pace with the volume
of securities transactions, making it difficult to conduct such transactions.
Delays in settlement could result in temporary periods when a portion of the
assets of a Fund is uninvested and no return is earned thereon. The inability
of a Fund to make intended securities purchases due to settlement problems
could cause a Fund to miss attractive investment opportunities. Inability to
dispose of portfolio securities due to settlement problems could result in
losses to a Fund due to subsequent declines in value of the portfolio security,
a decrease in the level of liquidity in the Fund's portfolio, or, if the Fund
has entered into a contract to sell the security, possible liability to the
purchaser. Certain markets may require payment for securities before delivery,
and in such markets a Fund bears the risk that the securities will not be
delivered and that the Fund's payments will not be returned. Securities prices
in emerging markets can be significantly more volatile than in the more
developed nations of the world, reflecting the greater uncertainties of
investing in less established markets and economies. In particular, countries
with emerging markets may have relatively unstable governments, present the
risk of nationalization of businesses, restrictions on foreign ownership, or
prohibitions on repatriation of assets, and may have less protection of
property rights than more developed countries. The economies of countries with
emerging markets may be predominantly based on only a few industries, may be
highly vulnerable to changes in local or global trade conditions, and may
suffer from extreme and volatile debt burdens or inflation rates. Local
securities markets may trade a small number of securities and may be unable to
respond effectively to increases in trading volume, potentially making prompt
liquidation of substantial holdings difficult or impossible at times.
Securities of issuers located in countries with emerging markets may have
limited marketability and may be subject to more abrupt or erratic movements in
price.
14
<PAGE>
Certain emerging markets may require governmental approval for the repatriation
of investment income, capital or the proceeds of sales of securities by foreign
investors. In addition, if a deterioration occurs in an emerging market's
balance of payments or for other reasons, a country could impose temporary
restrictions on foreign capital remittances. A Fund could be adversely affected
by delays in, or a refusal to grant, any required governmental approval for
repatriation of capital, as well as by the application to the Fund of any
restrictions on investments.
Investment in certain foreign emerging market debt obligations may be
restricted or controlled to varying degrees. These restrictions or controls may
at times preclude investment in certain foreign emerging market debt
obligations and increase the expenses of a Fund.
Portfolio Trading: Each Fund intends to manage its portfolio by buying and
selling securities, as well as holding securities to maturity, to help attain
its investment objective and policies.
Each Fund will engage in portfolio trading if it believes a transaction, net of
costs (including custodian charges), will help in attaining its investment
objective. In trading portfolio securities, a Fund seeks to take advantage of
market developments, yield disparities and variations in the creditworthiness
of issuers. For a description of the strategies which may be used by the Funds
in trading portfolio securities, see "Portfolio Transactions and Brokerage
Commissions" in the SAI. Because each Fund is expected to have a portfolio
turnover rate of approximately 200% during its current fiscal year, transaction
costs incurred by each Fund and the realized capital gains and losses of each
Fund may be greater than that of a fund with a lower portfolio turnover rate.
The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain, and maintain the availability of,
execution at the most favorable prices and in the most effective manner
possible. Consistent with the foregoing primary consideration, the Conduct
Rules of the National Association of Securities Dealers, Inc. (the "NASD") and
such other policies as the Trustees of the Trust may determine, the Adviser may
consider sales of shares of other investment company clients of MFD, the
distributor of shares of the Trust and of the MFS Family of Funds (the "MFS
Funds"), as a factor in the selection of broker-dealers to execute each Fund's
portfolio transactions. From time to time the Adviser may direct certain
portfolio transactions to broker-dealer firms which, in turn, have agreed to
pay a portion of a Fund's operating expenses (e.g., fees charged by the
custodian of the Fund's assets).
-------------------
The SAI includes a discussion of other investment policies and a listing of
specific investment restrictions which govern the investment policies of each
Fund. The specific investment restrictions listed in the SAI may be changed
without shareholder approval unless indicated otherwise (see the SAI). Except
with respect to a Fund's policy on borrowing and investing in illiquid
securities, a Fund's investment limitations, policies and rating standards are
adhered to at the time of purchase or utilization of assets; a subsequent
change in circumstances will not be considered to result in a violation of
policy.
6. MANAGEMENT OF THE FUNDS
Investment Adviser--The Adviser manages each Fund pursuant to separate
Investment Advisory Agreements, each dated April __, 1998 (the "Advisory
Agreements"). Under the Advisory Agreements, 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.
As compensation for its services, each Fund pays the Adviser a management fee
that is comprised of two components. The first component is a basic fee equal
to 1.50% per annum of each Fund's average daily net assets (the "Basic Fee").
The second component is a performance fee adjustment. Only the Basic Fee
applies during the Fund's first year of investment operations (May 1, 1998
through April 30, 1999); however, MFS is currently waiving its right to receive
this fee.
Commencing May 1, 1999, each Fund will pay the Adviser, at the end of each
month, the Basic Fee of 1.50% (pro rated for the month based upon the number of
days in the month) of such Fund's average daily net assets (computed over the
course of that month), adjusted upward or downward by 0.10% (pro rated for the
month based upon the number of days in the month) of such Fund's average daily
net assets (computed over the course of the Performance Period, defined below)
for each full percentage point that the Fund's performance during the prior 12
months (the "Performance Period") exceeds or lags the performance of the
Standard & Poor's 500 Stock Index (the "S&P 500 Index") for the All Cap Fund,
the Research All Cap Fund, the Growth Fund and the Contrarian Fund, and the
Russell 2000 Index for the Discovery Fund. The maximum adjustment (up or down)
for a Fund's fiscal year shall not exceed 1.50%, so that the minimum and
maximum management fee paid by a Fund during any fiscal year will be 0% and 3%,
respectively. The S&P 500 Index is a market value weighted benchmark of common
stock performance, and consists of the 500 largest stocks (in terms of market
capitalization) in the United States. The Russell 2000 Index is an unmanaged
index comprised of 2,000 of the smallest U.S.-domiciled company stocks (on the
basis of capitalization) that are traded in the U.S. on the New York Stock
Exchange, the American Stock Exchange or NASDAQ.
15
<PAGE>
Each Fund's performance is calculated based on the net asset value per share of
the Fund's Class A shares. For purposes of calculating the performance
adjustment, any dividends or capital gains distributions paid by the Fund are
treated as if reinvested in Class A shares at the net asset value per share as
of the record date for payment. The performance of the S&P 500 Index and the
Russell 2000 Index is based on changes in its value over the Performance Period
and is adjusted to include as if reinvested any cash distributions from the
companies whose securities comprise the Index.
Because the adjustment to the Basic Fee is based on the comparative performance
of each Fund and the record of the S&P 500 Index or the Russell 2000 Index, the
controlling factor is not whether the Fund performance is up or down, but
whether it is up or down more or less than the record of the Index. The
comparative investment record of the Funds is based solely on the relevant
Performance Period without regard to cumulative performance over a longer or
shorter period of time.
From time to time, the Trustees, without shareholder approval, may determine
that another securities index is a more appropriate benchmark than the S&P 500
Index or the Russell 2000 Index for purposes of evaluating the performance of a
Fund. In such event, a successor index may be substituted for the Index.
However, the calculation of the performance adjustment for any portion of the
Performance Period prior to the adoption of the successor index would still be
based upon the Fund's performance compared to the S&P 500 Index or the Russell
2000 Index.
The Basic Fee is computed daily, the performance fee adjustment is calculated
once per month and the entire management fee, allocated to each Class of shares
proportionate to its average net assets, is normally paid monthly.
Vertex was incorporated in the state of Delaware on , 1998, and therefore
has no prior investment management history. However, Vertex is a wholly owned
subsidiary of MFS which, as described below, has extensive investment
management experience. 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 Assurance Company of Canada ("Sun Life"). The Directors of the
Adviser are Jeffrey L. Shames and Arnold D. Scott. The Directors of MFS are
Jeffrey L. Shames, Arnold D. Scott, John W. Ballen, Donald A. Stewart and John
D. McNeil. Mr. Shames is the Chairman, Chief Executive Officer and President of
the Adviser and of MFS. Mr. Scott is the Secretary and a Senior Executive Vice
President of MFS. Mr. Stewart is the President and Mr. McNeil is the Chairman
of Sun Life. Sun Life, a mutual life insurance company, is one of the largest
international life insurance companies and has been operating in the U.S. since
1895, establishing a headquarters office here in 1973. The executive officers
of the Adviser and MFS report to the Chairman of Sun Life.
MFS also serves as investment adviser to each of the other funds in the MFS
Funds and to MFS[RegTM] Municipal Income Trust, MFS Multimarket Income Trust,
MFS Government Markets Income Trust, MFS Intermediate Income Trust, MFS Charter
Income Trust, MFS Special Value Trust, MFS Institutional Trust, MFS Variable
Insurance Trust, MFS/Sun Life Series Trust and seven variable accounts, each of
which is a registered investment company established by Sun Life Assurance
Company of Canada (U.S.), a subsidiary of Sun Life, in connection with the sale
of various fixed/variable annuity contracts. MFS and its wholly owned
subsidiary, MFS Institutional Advisors, Inc., provide investment advice to
substantial private clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the U.S., Massachusetts Investors Trust.
Net assets under the management of the MFS organization were approximately
$ billion on behalf of approximately million investor accounts as of
March 31, 1998. As of such date, the MFS organization managed approximately
$ billion of assets invested in fixed income funds and fixed income
portfolios, approximately $ billion of assets invested in foreign
securities, and approximately $ billion of assets invested in equity
securities.
The identity and background of the portfolio manager for each Fund is set forth
below. Each portfolio manager has acted in that capacity since the commencement
of investment operations of each Fund.
<TABLE>
<CAPTION>
Fund Portfolio Manager
- ----------------------- -----------------------------------------------------------------------------------
<S> <C>
All Cap Fund John F. Brennan, Jr., a Senior Vice President of the Adviser and MFS, has been
employed as a portfolio manager by MFS since 1985.
Research All Cap Fund Kevin R. Parke, an Executive Vice President and Director of Equity Research of the
Adviser and MFS, has been employed as a portfolio manager by MFS since 1985.
Growth Fund John W. Ballen, an Executive Vice President, a Director and Chief Equity Officer
of the Adviser and MFS, has been employed as a portfolio manager by MFS since
1984.
Discovery Fund Brian E. Stack, a Vice President of the Adviser and MFS, has been employed as a
portfolio manager by MFS since 1993. Prior to 1993, Mr. Stack was a securities
analyst with Robertson, Stephens & Co.
Contrarian Fund John D. Laupheimer, Jr., a Senior Vice President of the Adviser and MFS, has been
employed as a portfolio manager by MFS since 1981.
</TABLE>
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<PAGE>
Stephen E. Cavan, Secretary of the Adviser and an officer of MFS, is also an
officer of the Trust. W. Thomas London, James O. Yost, Mark E. Bradley, Ellen
M. Moynihan and James R. Bordewick, Jr., all of whom are officers of MFS, are
officers of the Trust.
In certain instances there may be securities which are suitable for a Fund's
portfolio as well as for portfolios of other clients of the Adviser or MFS.
Some simultaneous transactions are inevitable when several clients receive
investment advice from the Adviser or MFS, particularly when the same security
is suitable for more than one client. While in some cases this arrangement
could have a detrimental effect on the price or availability of the security as
far as a Fund is concerned, in other cases, however, it may produce increased
investment opportunities for the Funds.
Administrator--MFS provides each Fund with certain financial, legal,
compliance, shareholder communications and other administrative services
pursuant to a Master Administrative Services Agreement dated March 1, 1997, as
amended. Under this Agreement, the Fund pays MFS an administrative fee of 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.
Distributor--MFD, a wholly owned subsidiary of MFS, is the distributor of
shares of each Fund and also serves as distributor of each of the other MFS
Funds.
Shareholder Servicing Agent--MFS Service Center, Inc. (the "Shareholder
Servicing Agent"), a wholly owned subsidiary of MFS, performs transfer agency
and certain other services for each Fund.
7. INFORMATION CONCERNING SHARES OF THE FUNDS
PURCHASES
Class A, Class B and Class C shares of each Fund may be purchased at the public
offering price through any dealer. Dealers may also charge their customers fees
relating to investments in each Fund. As used in the Prospectus and any
appendices thereto, the term "dealer" includes any broker, dealer, bank
(including bank trust departments), registered investment adviser, financial
planner and any other financial institutions having a selling agreement or
other similar agreement with MFD.
This Prospectus offers Class A, Class B and Class C shares which bear sales
charges and distribution fees in different forms and amounts, as described
below (currently, only Class A shares are available for sale):
CLASS A SHARES: Class A shares are generally offered at net asset value plus an
initial sales charge, but in certain cases are offered at net asset value
without an initial sales charge but subject to a CDSC.
Purchases Subject to Initial Sales Charge. Class A shares are offered at
net asset value plus an initial sales charge as follows:
<TABLE>
<CAPTION>
Sales Charge* As
Percentage Of:
-----------------------
Dealer Allowance
Offering Net Amount as a Percentage of
Amount of Purchase Price Invested Offering Price
- --------------------------------------- ---------- ------------ -------------------
<S> <C> <C> <C>
Less than $50,000 ..................... 5.75% 6.10% 5.00%
$50,000 but less than $100,000 ........ 4.75 4.99 4.00
$100,000 but less than $250,000 ....... 4.00 4.17 3.20
$250,000 but less than $500,000 ....... 2.95 3.04 2.25
$500,000 but less than $1,000,000 ..... 2.20 2.25 1.70
$1,000,000 or more .................... None** None** See Below**
</TABLE>
- -----------
* Because of rounding in the calculation of offering price, actual sales
charges may be more or less than those calculated using the percentages
above.
** A CDSC will apply to such purchases, as discussed below.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price, as shown in the above table. In the case of
the maximum sales charge, the dealer retains 5% and MFD retains approximately
3/4 of 1% of the public offering price. The sales charge may vary depending on
the number of shares of each Fund as well as certain other MFS Funds owned or
being purchased, the existence of an agreement to purchase additional shares
during a 13-month period (or 36-month period for purchases of $1 million or
more) or other special purchase programs. A description of the Right of
Accumulation, Letter of Intent and Group Purchase privileges by which the sales
charge may be reduced is set forth in the SAI.
17
<PAGE>
Purchases Subject to a CDSC (but not an initial sales charge). In the following
five circumstances, Class A shares of each Fund are also offered at net asset
value without an initial sales charge but subject to a CDSC, equal to 1% of the
lesser of the value of the shares redeemed (exclusive of reinvested dividend
and capital gain distributions) or the total cost of such shares, in the event
of a share redemption within 12 months following the purchase:
(i) on investments of $1 million or more in Class A shares;
(ii) on investments in Class A shares by certain retirement plans subject to
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
if: (a) the plan had established an account with the Shareholder Servicing
Agent prior to July 1, 1996 and (b) the sponsoring organization
demonstrates to the satisfaction of MFD that either (i) the employer has
at least 25 employees or (ii) the aggregate purchases by the retirement
plan of Class A shares of the Funds in the MFS Funds will be in an
aggregate amount of at least $250,000 within a reasonable period of time,
as determined by MFD in its sole discretion;
(iii) on investments in Class A shares by certain retirement plans subject to
ERISA, if: (a) the retirement plan and/or sponsoring organization
subscribes to the MFS FUNDamental 401(k) Program or any similar
recordkeeping system made available by the Shareholder Servicing Agent
(the "MFS Participant Recordkeeping System"); (b) the plan establishes an
account with the Shareholder Servicing Agent on or after July 1, 1996;
and (c) the aggregate purchases by the retirement plan of Class A shares
of the MFS Funds will be in an aggregate amount of at least $500,000
within a reasonable period of time, as determined by MFD in its sole
discretion;
(iv) on investments in Class A shares by certain retirement plans subject to
ERISA, if: (a) the plan establishes an account with the Shareholder
Servicing Agent on or after July 1, 1996 and (b) the plan has, at the time
of purchase, a market value of $500,000 or more invested in shares of any
class or classes of the MFS Funds; the retirement plan will qualify under
this category only if the plan or its sponsoring organization informs the
Shareholder Servicing Agent prior to the purchases that the plan has a
market value of $500,000 or more invested in shares of any class or
classes of the MFS Funds; the Shareholder Servicing Agent has no
obligation independently to determine whether such a plan qualifies under
this category; and
(v) on investments in Class A shares by certain retirement plans subject to
ERISA, if: (a) the plan establishes an account with the Shareholder
Servicing Agent on or after July 1, 1997; (b) such plan's records are
maintained on a pooled basis by the Shareholder Servicing Agent; and (c)
the sponsoring organization demonstrates to the satisfaction of MFD that,
at the time of purchase, the employer has at least 200 eligible employees
and the plan has aggregate assets of at least $2,000,000.
In the case of such purchases, MFD will pay commissions to dealers on new
investments in Class A shares made through such dealers, as follows:
<TABLE>
<CAPTION>
Commission Paid by MFD to Dealers Cumulative Purchase Amount
- --------------------------------- -------------------------------------
<S> <C>
1.00% ........................... On the first $2,000,000, plus
0.80% ........................... Over $2,000,000 to $3,000,000, plus
0.50% ........................... Over $3,000,000 to $50,000,000, plus
0.25% ........................... Over $50,000,000
</TABLE>
For purposes of determining the level of commissions to be paid to dealers with
respect to a shareholder's new investment in Class A purchases for each
shareholder account (and certain other accounts for which the shareholder is a
record or beneficial holder) will be aggregated over a 12-month period
(commencing from the date of the first such purchase).
See "Redemptions and Repurchases--Contingent Deferred Sales Charge" below for
further discussion of the CDSC.
Waivers of Initial Sales Charge and CDSC. In certain circumstances, the
initial sales charge imposed upon purchases of Class A shares and the CDSC
imposed upon redemptions of Class A shares are waived. These circumstances are
described in Appendix A to this Prospectus. In addition to these circumstances,
the CDSC imposed upon the redemption of Class A shares is waived with respect
to shares held by certain retirement plans qualified under Section 401(a) or
403(b) of the Code, and subject to ERISA, where:
(i) the retirement plan and/or sponsoring organization does not subscribe
to the MFS Participant Recordkeeping System; and
(ii) the retirement plan and/or sponsoring organization demonstrates to the
satisfaction of, and certifies to, the Shareholder Servicing Agent that
the retirement plan has, at the time of certification, or will have
pursuant to a
18
<PAGE>
purchase order placed with the certification, a market value of
$500,000 or more invested in shares of any class or classes of the MFS
Funds and aggregate assets of at least $10 million;
provided, however, that the CDSC will not be waived (i.e., it will be imposed)
(a) with respect to plans which establish an account with the Shareholder
Servicing Agent on or after November 1, 1997, in the event that the plan makes
a complete redemption of all of its shares in the MFS Funds, or (b) with
respect to plans which established an account with the Shareholder Servicing
Agent prior to November 1, 1997, in the event that there is a change in law or
regulations which results in a material adverse change to the tax advantaged
nature of the plan, or in the event that the plan and/or sponsoring
organization: (i) becomes insolvent or bankrupt; (ii) is terminated under ERISA
or is liquidated or dissolved; or (iii) is acquired by, merged into, or
consolidated with any other entity.
CLASS B SHARES: Class B shares are offered at net asset value without an
initial sales charge but subject to a CDSC as follows:
<TABLE>
<CAPTION>
Contingent
Year of Redemption Deferred Sales
After Purchase Charge
- --------------------------------------- ---------------
<S> <C>
First ......................... 4%
Second ........................ 4%
Third ......................... 3%
Fourth ........................ 3%
Fifth ......................... 2%
Sixth ......................... 1%
Seventh and following ......... 0%
</TABLE>
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividends or capital gain distributions.
See "Redemptions and Repurchases--Contingent Deferred Sales Charge" below for
further discussion of the CDSC.
Except as described below, MFD will pay commissions to dealers of 3.75% of the
purchase price of Class B shares purchased through dealers. MFD will also
advance to dealers the first year service fee payable under each Fund's
Distribution Plan (see "Distribution Plan" below) at a rate equal to 0.25% of
the purchase price of such shares. Therefore, the total amount paid to a dealer
upon the sale of Class B shares is 4% of the purchase price of the shares
(commission rate of 3.75% plus a service fee equal to 0.25% of the purchase
price).
Class B shares purchased by a retirement plan whose sponsoring organization
subscribes to the MFS Participant Recordkeeping System and which has
established its account with the Shareholder Servicing Agent on or after July
1, 1996, will be subject to the CDSC described above, only under limited
circumstances, as explained below under "Waivers of CDSC." With respect to such
purchases, MFD pays an amount to dealers equal to 3.00% of the amount purchased
through such dealers (rather than the 4.00% payment described above), which is
comprised of a commission of 2.75% plus the advancement of the first year
service fee equal to 0.25% of the purchase price payable under each Fund's
Distribution Plan. As discussed above, such retirement plans are eligible to
purchase Class A shares of the Fund at net asset value without an initial sales
charge but subject to a 1% CDSC if the plan has, at the time of purchase, a
market value of $500,000 or more invested in shares of any class or classes of
the MFS Funds. In this event, the plan or its sponsoring organization should
inform the Shareholder Servicing Agent that the plan is eligible to purchase
Class A shares under this category; the Shareholder Servicing Agent has no
obligation independently to determine whether such a plan qualifies under this
category for the purchase of Class A shares.
Waivers of CDSC. In certain circumstances, the CDSC imposed upon
redemption of Class B shares is waived. These circumstances are described in
Appendix A to this Prospectus. In addition to these circumstances, the CDSC
imposed upon the redemption of Class B shares is waived with respect to shares
held by a retirement plan whose sponsoring organization subscribes to the MFS
Participant Recordkeeping System and which has established an account with the
Shareholder Servicing Agent on or after July 1, 1996; provided, however, that
the CDSC will not be waived (i.e., it will be imposed) in the event that there
is a change in law or regulations which results in a material adverse change to
the tax advantaged nature of the plan, or in the event that the plan and/or
sponsoring organization: (i) becomes insolvent or bankrupt; (ii) is terminated
under ERISA or is liquidated or dissolved; or (iii) is acquired by, merged
into, or consolidated with any other entity.
Conversion of Class B Shares. Class B shares of each Fund that remain
outstanding for approximately eight years will convert to Class A shares of the
same Fund. Shares purchased through the reinvestment of distributions paid in
respect
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<PAGE>
of Class B shares will be treated as Class B shares for purposes of the payment
of the distribution and service fees under each Fund's Distribution Plan. See
"Distribution Plan" below. However, for purposes of conversion to Class A
shares, all shares in a shareholder's account that were purchased through the
reinvestment of dividends and distributions paid in respect of Class B shares
(and which have not converted to Class A shares as provided in the following
sentence) will be held in a separate sub-account. Each time any Class B shares
in the shareholder's account (other than those in the sub-account) convert to
Class A shares, a portion of the Class B shares then in the sub-account will
also convert to Class A shares. The portion will be determined by the ratio
that the shareholder's Class B shares not acquired through reinvestment of
dividends and distributions that are converting to Class A shares bear to the
shareholder's total Class B shares not acquired through reinvestment. The
conversion of Class B shares to Class A shares is subject to the continuing
availability of a ruling from the Internal Revenue Service or an opinion of
counsel that such conversion will not constitute a taxable event for federal
tax purposes. There can be no assurance that such ruling or opinion will be
available, and the conversion of Class B shares to Class A shares will not
occur if such ruling or opinion is not available. In such event, Class B shares
would continue to be subject to higher expenses than Class A shares for an
indefinite period.
CLASS C SHARES: Class C shares are offered at net asset value without an
initial sales charge but are subject to a CDSC of 1.00% upon redemption during
the first year. Class C shares do not convert to any other class of shares. The
maximum investment in Class C shares is up to $1,000,000 per transaction.
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividend and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividend or capital gain distributions.
See "Redemptions and Repurchases--Contingent Deferred Sales Charge" below for
further discussion of the CDSC.
MFD will pay dealers 1.00% of the purchase price of Class C shares purchased
through dealers and, as compensation therefor, MFD will retain the 1.00% per
annum distribution and service fee paid under each Fund's Distribution Plan to
MFD for the first year after purchase (see "Distribution Plan" below).
Class C shares are not currently available for purchase by any retirement plan
qualified under Sections 401(a) or 403(b) of the Code, if the retirement plan
and/or the sponsoring organization subscribe to the MFS FUNDamental 401(k) Plan
or another similar recordkeeping program made available by the Shareholder
Servicing Agent.
Waivers of CDSC: In certain circumstances, the CDSC imposed upon
redemption of Class C shares is waived. These circumstances are described in
Appendix A to this Prospectus.
GENERAL: The following information applies to purchases of all classes of each
Fund's shares.
Minimum Investment. Except as described below, the minimum initial
investment is $1,000 per account and the minimum additional investment is $50
per account. Accounts being established for monthly automatic investments and
under payroll savings programs and tax-deferred retirement programs (other than
Individual Retirement Accounts ("IRAs")) involving the submission of
investments by means of group remittal statements are subject to a $50 minimum
on initial and additional investments per account. The minimum initial
investment for IRAs is $250 per account and the minimum additional investment
is $50 per account. Accounts being established for participation in the
Automatic Exchange Plan are subject to a $50 minimum on initial and additional
investments per account. There are also other limited exceptions to these
minimums for certain tax-deferred retirement programs. Any minimums may be
changed at any time at the discretion of MFD. Each Fund reserves the right to
cease offering its shares at any time.
Subsequent Investment by Telephone. Each shareholder may purchase
additional shares of any MFS Fund by telephoning the Shareholder Servicing
agent toll-free at (800) 225-2606. The minimum purchase amount is $50 and the
maximum purchase amount is $100,000. Shareholders wishing to avail themselves
of this telephone purchase privilege must so elect on their Account Application
and designate thereon a bank and account number from which purchases will be
made. If a telephone purchase request is received by the Shareholder Servicing
Agent on any business day prior to the close of regular trading on the Exchange
(generally, 4.00 p.m., Eastern time), the purchase will occur at the closing
net asset value of the shares purchased on that day. The Shareholder Servicing
Agent may be liable for any losses resulting from unauthorized telephone
transactions if it does not follow reasonable procedures designed to verify the
identity of the caller. The Shareholder Servicing agent will request personal
or other information from the caller, and will normally also record calls.
Shareholders should verify the accuracy of confirmation statements immediately
after their receipt.
Right to Reject Purchase Orders/Market Timing. Purchases and exchanges
should be made for investment purposes only. Each Fund and MFD each reserves
the right to restrict or to reject any specific purchase or exchange request.
In the
20
<PAGE>
event that a Fund or MFD rejects an exchange request, neither the redemption
nor the purchase side of the exchange will be processed.
The Funds are not designed for professional market timing organizations or
other entities using programmed or frequent exchanges. The Funds define a
"market timer" as an individual, or organization acting on behalf of one or
more individuals, if (i) the individual or organization makes three or more
exchange requests out of a Fund per calendar year and (ii) any one of such
exchange requests represents shares equal in value to 1/2 of 1% or more of a
Fund's net assets at the time of the request. Accounts under common ownership
or control, including accounts administered by market timers, will be
aggregated for purposes of this definition.
As noted above, the Funds and MFD each reserves the right to reject or restrict
any specific purchase and exchange request and, in addition, may impose
specific limitations with respect to market timers, including delaying for up
to seven days the purchase side of an exchange request by market timers or
specifically rejecting or otherwise restricting purchase and exchange requests
by market timers. In the event that any individual or entity is determined
either by a Fund or MFD, in its sole discretion, to be a market timer with
respect to any calendar year, the Fund and/or MFD will reject all exchange
requests into the Fund during the remainder of that calendar year. Other funds
in the MFS Funds may have different and/or more restrictive policies with
respect to market timers than the Funds. These policies are disclosed in the
prospectuses of these other MFS Funds.
Dealer Concessions. Dealers may receive different compensation with
respect to sales of Class A, Class B and Class C shares. In addition, from time
to time, MFD may pay dealers 100% of the applicable sales charge on sales of
Class A shares of certain specified MFS Funds sold by such dealer during a
specified sales period. In addition, MFD or its affiliates may, from time to
time, pay dealers an additional commission equal to 0.50% of the net asset
value of all of the Class B and/or Class C shares of certain specified MFS
Funds sold by such dealer during a specified sales period. In addition, from
time to time, MFD, at its expense, may provide additional commissions,
compensation or promotional incentives ("concessions") to dealers which sell or
arrange the sale of shares of a Fund. Such concessions provided by MFD may
include financial assistance to dealers in connection with preapproved
conferences or seminars, sales or training programs for invited registered
representatives and other employees, payment for travel expenses, including
lodging, incurred by registered representatives and other employees for such
seminars or training programs, seminars for the public, advertising and sales
campaigns regarding one or more MFS Funds, and/or other dealer-sponsored
events. From time to time, MFD may make expense reimbursements for special
training of a dealer's registered representatives and other employees in group
meetings or to help pay the expenses of sales contests. Other concessions may
be offered to the extent not prohibited by state laws or any self-regulatory
agency, such as the NASD.
Special Investment Programs. For shareholders who elect to participate in
certain investment programs (e.g., the Automatic Investment Plan) or other
shareholder services, MFD or its affiliates may either (i) give a gift of
nominal value, such as a hand-held calculator, or (ii) make a nominal
charitable contribution on their behalf.
Restrictions on Activities of National Banks. The Glass-Steagall Act
prohibits national banks from engaging in the business of underwriting, selling
or distributing securities. Although the scope of the prohibition has not been
clearly defined, MFD believes that such Act should not preclude banks from
entering into agency agreements with MFD. If, however, a bank were prohibited
from so acting, the Trustees would consider what actions, if any, would be
necessary to continue to provide efficient and effective shareholder services
in respect of shareholders who invested in a Fund through a national bank. It
is not expected that shareholders would suffer any adverse financial
consequence as a result of these occurrences. In addition, state securities
laws on this issue may differ from the interpretation of federal law expressed
herein and banks and financial institutions may be required to register as
broker-dealers pursuant to state law.
EXCHANGES
Subject to the requirements set forth below, some or all of the shares in an
account with a Fund for which payment has been received by the Fund (i.e., an
established account) may be exchanged for shares of the same class of any of
the other MFS Funds at net asset value (if available for sale). Shares of one
class may not be exchanged for shares of any other class.
EXCHANGES AMONG MFS FUNDS (excluding exchanges from MFS money market funds): No
initial sales charge or CDSC will be imposed in connection with an exchange
from shares of an MFS Fund to shares of any other MFS Fund, except with respect
to exchanges from an MFS money market fund to another MFS Fund which is not an
MFS money market fund (discussed below). With respect to an exchange involving
shares subject to a CDSC, the CDSC will be unaffected by the exchange and the
holding period for purposes of calculating the CDSC will carry over to the
acquired shares.
EXCHANGES FROM AN MFS MONEY MARKET FUND: Special rules apply with respect to
the imposition of an initial sales charge or a CDSC for exchanges from an MFS
money market fund to another MFS Fund which is not an MFS money market fund.
These rules are described under the caption "Exchanges" in the Prospectuses of
those MFS money market funds.
21
<PAGE>
EXCHANGES INVOLVING THE MFS FIXED FUND: Class A shares of any MFS Fund held by
certain qualified retirement plans may be exchanged for units of participation
of the MFS Fixed Fund (a bank collective investment fund) (the "Units"), and
Units may be exchanged for Class A shares of any MFS Fund. With respect to
exchanges between Class A shares subject to a CDSC and Units, the CDSC will
carry over to the acquired shares or Units and will be deducted from the
redemption proceeds when such shares or Units are subsequently redeemed,
assuming the CDSC is then payable (the period during which the Class A shares
and the Units were held will be aggregated for purposes of calculating the
applicable CDSC). In the event that a shareholder initially purchases Units and
then exchanges into Class A shares subject to an initial sales charge of an MFS
Fund, the initial sales charge shall be due upon such exchange, but will not be
imposed with respect to any subsequent exchanges between such Class A shares
and Units with respect to shares on which the initial sales charge has already
been paid. In the event that a shareholder initially purchases Units and then
exchanges into Class A shares subject to a CDSC of an MFS Fund, the CDSC period
will commence upon such exchange, and the applicability of the CDSC with
respect to subsequent exchanges shall be governed by the rules set forth above
in this paragraph.
GENERAL: A shareholder should read the prospectus of the other MFS Funds and
consider the differences in objectives, policies and restrictions before making
any exchange. Exchanges will be made only after instructions in writing or by
telephone (an "Exchange Request") are received for an established account by
the Shareholder Servicing Agent in proper form (i.e., if in writing--signed by
the record owner(s) exactly as the shares are registered; if by
telephone--proper account identification is given by the dealer or shareholder
of record) and each exchange must involve either shares having an aggregate
value of at least $1,000 ($50 in the case of retirement plan participants whose
sponsoring organizations subscribe to the MFS FUNDamental 401(k) Plan or
another similar 401(k) recordkeeping system made available by the Shareholder
Servicing Agent) or all the shares in the account. If an Exchange Request is
received by the Shareholder Servicing Agent on any business day prior to the
close of regular trading on the Exchange (generally, 4:00 p.m., Eastern time),
the exchange will occur on that day if all the requirements set forth above
have been complied with at that time and subject to the Fund's right to reject
purchase orders. No more than five exchanges may be made in any one Exchange
Request by telephone. Additional information concerning this exchange privilege
and prospectuses for any of the other MFS Funds may be obtained from dealers or
the Shareholder Servicing Agent. For federal and (generally) state income tax
purposes, an exchange is treated as a sale of the shares exchanged and,
therefore, an exchange could result in a gain or loss to the shareholder making
the exchange. Exchanges by telephone are automatically available to most
non-retirement plan accounts and certain retirement plan accounts. For further
information regarding exchanges by telephone, see "Redemptions by Telephone."
The exchange privilege (or any aspect of it) may be changed or discontinued and
is subject to certain limitations, including certain restrictions on purchases
by market timers.
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the value of his account on
any date on which a Fund is open for business by redeeming shares at their net
asset value (a redemption) or by selling such shares to a Fund through a dealer
(a repurchase). Certain redemptions and repurchases are, however, subject to a
CDSC. See "Contingent Deferred Sales Charge" below. Because the net asset value
of shares of the account fluctuates, redemptions or repurchases, which are
taxable transactions, are likely to result in gains or losses to the
shareholder. When a shareholder withdraws an amount from his account, the
shareholder is deemed to have tendered for redemption a sufficient number of
full and fractional shares in his account to cover the amount withdrawn. The
proceeds of a redemption or repurchase will normally be available within seven
days, except for shares purchased or received in exchange for shares purchased
by check (including certified checks or cashier's checks). Payment of
redemption proceeds may be delayed for up to 15 days from the purchase date in
an effort to assure that such check has cleared.
REDEMPTION BY MAIL: Each shareholder may redeem all or any portion of the
shares in his account by mailing or delivering to the Shareholder Servicing
Agent (see back cover for address) a stock power with a written request for
redemption or letter of instruction, together with his share certificates (if
any were issued), all in "good order" for transfer. "Good order" generally
means that the stock power, written request for redemption, letter of
instruction or certificate must be endorsed by the record owner(s) exactly as
the shares are registered and the signature(s) must be guaranteed in the manner
set forth below under the caption "Signature Guarantee." In addition, in some
cases "good order" will require the furnishing of additional documents. The
Shareholder Servicing Agent may make certain de minimis exceptions to the above
requirements for redemption. Within seven days after receipt of a redemption
request in "good order" by the Shareholder Servicing Agent, each Fund will make
payment in cash of the net asset value of the shares next determined after such
redemption request was received, reduced by the amount of any applicable CDSC
described above and the amount of any income tax required to be withheld,
except during any period in which the right of redemption is suspended or date
of payment is postponed because the Exchange is closed or trading on such
Exchange is restricted or to the extent otherwise permitted by the 1940 Act if
an emergency exists. See "Tax Status" below.
22
<PAGE>
REDEMPTION BY TELEPHONE: Each shareholder may redeem an amount from his account
by telephoning the Shareholder Servicing Agent toll-free at (800) 225-2606.
Shareholders wishing to avail themselves of this telephone redemption privilege
must so elect on their Account Application, designate thereon a bank and
account number to receive the proceeds of such redemption, and sign the Account
Application Form with the signature(s) guaranteed in the manner set forth below
under the caption "Signature Guarantee." The proceeds of such a redemption,
reduced by the amount of any applicable CDSC and the amount of any income tax
required to be withheld, are mailed by check to the designated account, without
charge, if the redemption proceeds do not exceed $1,000, and are wired in
federal funds to the designated account if the redemption proceeds exceed
$1,000. If a telephone redemption request is received by the Shareholder
Servicing Agent by the close of regular trading on the Exchange on any business
day, shares will be redeemed at the closing net asset value of the Fund on that
day. Subject to the conditions described in this section, proceeds of a
redemption are normally mailed or wired on the next business day following the
date of receipt of the order for redemption. The Shareholder Servicing Agent
may be liable for any losses resulting from unauthorized telephone transactions
if it does not follow reasonable procedures designed to verify the identity of
the caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
REPURCHASE THROUGH A DEALER: If a shareholder desires to sell his shares
through his dealer (a repurchase), the shareholder can place a repurchase order
with his dealer, who may charge the shareholder a fee. If the dealer receives
the shareholder's order prior to the close of regular trading on the Exchange
and communicates it to MFD before the close of business on the same day, the
shareholder will receive the net asset value calculated on that day, reduced by
the amount of any applicable CDSC and the amount of any income tax required to
be withheld.
CONTINGENT DEFERRED SALES CHARGE: Investments in Class A, Class B and Class C
shares ("Direct Purchases") will be subject to a CDSC for a period of: (i) with
respect to Class A and Class C shares, 12 months (however, the CDSC on Class A
shares is only imposed with respect to purchases of $1 million or more of Class
A shares or purchases by certain retirement plans of Class A shares); or (ii)
with respect to Class B shares, six years. Purchases of Class A shares made
during a calendar month, regardless of when during the month the investment
occurred, will age one month on the last day of the month and each subsequent
month. Class C and Class B shares purchased on or after January 1, 1993 will be
aggregated on a calendar month basis--all transactions made during a calendar
month, regardless of when during the month they have occurred, will age one
year at the close of business on the last day of such month in the following
calendar year and each subsequent year. For Class B shares of each Fund
purchased prior to January 1, 1993, transactions will be aggregated on a
calendar year basis-- all transactions made during a calendar year, regardless
of when during the year they have occurred, will age one year at the close of
business on December 31 of that year and each subsequent year.
At the time of a redemption, the amount by which the value of a shareholder's
account for a particular class of shares represented by Direct Purchases
exceeds the sum of the six calendar year aggregations (12 months in the case of
purchases of Class C shares and of purchases of $1 million or more of Class A
shares or purchases by certain retirement plans of Class A shares) of Direct
Purchases may be redeemed without charge ("Free Amount"). Moreover, no CDSC is
ever assessed on additional shares acquired through the automatic reinvestment
of dividends or capital gain distributions ("Reinvested Shares"). Therefore, at
the time of redemption of a particular class, (i) any Free Amount is not
subject to the CDSC and (ii) the amount of the redemption equal to the
then-current value of Reinvested Shares is not subject to the CDSC, but (iii)
any amount of the redemption in excess of the aggregate of the then-current
value of Reinvested Shares and the Free Amount is subject to a CDSC. The CDSC
will first be applied against the amount of Direct Purchases which will result
in any such charge being imposed at the lowest possible rate. The CDSC to be
imposed upon redemptions of shares will be calculated as set forth in
"Purchases" above.
The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except as described in Appendix A hereto.
GENERAL: The following information applies to redemptions and repurchases of
all classes of each Fund's shares.
Signature Guarantee. In order to protect shareholders against fraud, each
Fund requires, in certain instances as indicated above, that the shareholder's
signature be guaranteed. In these cases, the shareholder's signature must be
guaranteed by an eligible bank, broker, dealer, credit union, national
securities exchange, registered securities association, clearing agency or
savings association. Signature guarantees shall be accepted in accordance with
policies established by the Shareholder Servicing Agent.
Reinstatement Privilege. Shareholders of a Fund who have redeemed their
shares have a one-time right to reinvest the redemption proceeds in the same
class of shares of any of the MFS Funds (if shares of such Fund are available
for sale)
23
<PAGE>
at net asset value (with a credit for any CDSC paid) within 90 days of the
redemption pursuant to the Reinstatement Privilege. If the shares credited for
any CDSC paid are then redeemed within six years of the initial purchase in the
case of Class B shares or within 12 months of the initial purchase for Class C
shares and certain Class A share purchases, a CDSC will be imposed upon
redemption. Such purchases under the Reinstatement Privilege are subject to all
limitations in the SAI regarding this privilege.
In-Kind Distributions. The Trust agrees to redeem shares of each Fund
solely in cash up to the lesser of $250,000 or 1% of the net asset value of the
Fund during any 90-day period for any one shareholder. Each Fund has reserved
the right to pay other redemptions, either totally or partially, by a
distribution in-kind of securities (instead of cash) from the Fund's portfolio.
The securities distributed in such a distribution would be valued at the same
amount as that assigned to them in calculating the net asset value for the
shares being sold. If a shareholder received a distribution in-kind, the
shareholder could incur brokerage or transaction charges when converting the
securities to cash.
Involuntary Redemptions/Small Accounts. Due to the relatively high cost of
maintaining small accounts, each Fund reserves the right to redeem shares in
any account for their then-current value if at any time the total investment in
such account drops below $500 because of redemptions or exchanges, except in
the case of accounts being established for monthly automatic investments and
certain payroll savings programs, Automatic Exchange Plan accounts and
tax-deferred retirement plans, for which there is a lower minimum investment
requirement. See "Purchases--General Minimum Investment." Shareholders will be
notified that the value of their account is less than the minimum investment
requirement and allowed 60 days to make an additional investment before the
redemption is processed.
DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class A, Class B and Class C
shares pursuant to Section 12(b) of the 1940 Act and Rule 12b-1 thereunder (the
"Distribution Plan"), after having concluded that there is a reasonable
likelihood that the Plan would benefit each Fund and its shareholders.
In certain circumstances, the fees described below may not be imposed or are
being waived. These circumstances, if any, are described below under the
heading "Current Level of Distribution and Service Fees."
FEATURES COMMON TO EACH CLASS OF SHARES: There are features of the Distribution
Plan that are common to each Class of shares, as described below.
Service Fees. The Distribution Plan provides that a Fund may pay MFD a
service fee of up to 0.25% of the average daily net assets attributable to the
class of shares to which the Distribution Plan relates (i.e., Class A, Class B
or Class C shares, as appropriate) (the "Designated Class") annually in order
that MFD may pay expenses on behalf of the Fund relating to the servicing of
shares of the Designated Class. The service fee is used by MFD to compensate
dealers which enter into a sales agreement with MFD in consideration for all
personal services and/or account maintenance services rendered by the dealer
with respect to shares of the Designated Class owned by investors for whom such
dealer is the dealer or holder of record. MFD may from time to time reduce the
amount of the service fees paid for shares sold prior to a certain date.
Service fees may be reduced for a dealer that is the holder or dealer of record
for an investor who owns shares of a Fund having an aggregate net asset value
at or above a certain dollar level. Dealers may from time to time be required
to meet certain criteria in order to receive service fees. MFD or its
affiliates are entitled to retain all service fees payable under the
Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by MFD or its affiliates
to shareholder accounts.
Distribution Fees. The Distribution Plan provides that a Fund may pay MFD
a distribution fee in addition to the service fee described above based on the
average daily net assets attributable to the Designated Class as partial
consideration for distribution services performed and expenses incurred in the
performance of MFD's obligations under its distribution agreement with the
Fund. See "Management of the Funds--Distributor" in the SAI. The amount of the
distribution fee paid by a Fund with respect to each class differs under the
Distribution Plan, as does the use by MFD of such distribution fees. Such
amounts and uses are described below in the discussion of the provisions of the
Distribution Plan relating to each Class of shares. While the amount of
compensation received by MFD in the form of distribution fees during any year
may be more or less than the expenses incurred by MFD under its distribution
agreement with the Fund, the Fund is not liable to MFD for any losses MFD may
incur in performing services under its distribution agreement with the Fund.
Other Common Features. Fees payable under each Distribution Plan are
charged to, and therefore reduce, income allocated to shares of the Designated
Class. The provisions of the Distribution Plan are severable with respect to
each class of shares offered by the Fund.
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FEATURES UNIQUE TO CLASS OF SHARES: There are certain features of the
Distribution Plan that are unique to each class of shares, as described below.
Class A Shares. Class A shares are generally offered pursuant to an
initial sales charge, a substantial portion of which is paid to or retained by
the dealer making the sale (the remainder of which is paid to MFD). See
"Purchases--Class A Shares" above. In addition to the initial sales charge, the
dealer also generally receives the ongoing 0.25% per annum service fee, as
discussed above.
The distribution fee paid to MFD under the Distribution Plan is equal, on an
annual basis, to 0.10% of a Fund's average daily net assets attributable to
Class A shares. As noted above, MFD may use the distribution fee to cover
distribution-related expenses incurred by it under its distribution agreement
with the Fund, including commissions to dealers and payments to wholesalers
employed by MFD (e.g., MFD pays commissions to dealers with respect to
purchases of $1 million or more and purchases by certain retirement plans of
Class A shares which are sold at net asset value but which are subject to a 1%
CDSC for one year after purchase). Distribution fee payments under the
Distribution Plan may be used by MFD to pay securities dealers a distribution
fee in an amount equal to 0.10% per annum of each Fund's average daily net
assets attributable to Class A shares (other than Class A shares that have
converted from Class B shares) owned by investors from whom that securities
dealer is the holder or dealer of record. See "Purchases--Class A Shares"
above. In addition, to the extent that the aggregate service and distribution
fees paid under the Class A Distribution Plan do not exceed 0.35% per annum of
the average daily net assets of a Fund attributable to Class A shares, the Fund
is permitted to pay such distribution-related expenses or other
distribution-related expenses.
Class B Shares. Class B shares are offered at net asset value without an
initial sales charge but subject to a CDSC. See "Purchases--Class B Shares"
above. MFD will advance to dealers the first year service fee described above
at a rate equal to 0.25% of the purchase price of such shares and, as
compensation therefor, MFD may retain the service fee paid by a Fund with
respect to such shares for the first year after purchase. Dealers will become
eligible to receive the ongoing 0.25% per annum service fee with respect to
such shares commencing in the thirteenth month following purchase.
Under the Distribution Plan, a Fund pays MFD a distribution fee equal, on an
annual basis, to 0.75% of the Fund's average daily net assets attributable to
Class B shares. As noted above, this distribution fee may be used by MFD to
cover its distribution-related expenses under its distribution agreement with
the Fund (including the 3.75% commission it pays to dealers upon purchase of
Class B shares, as described under "Purchases--Class B Shares" above).
Class C Shares. Class C shares are offered at net asset value without an
initial sales charge but subject to a CDSC of 1.00% upon redemption of 1.00%
during the first year See "Purchases--Class C shares" above. MFD will pay a
commission to dealers of 1.00% of the purchase price of Class C shares
purchased through dealers at the time of purchase. In compensation for this
1.00% commission paid by MFD to dealers, MFD will retain the 1.00% per annum
Class C distribution and service fees paid by the Fund with respect to such
shares for the first year after purchase, and dealers will become eligible to
receive from MFD the ongoing 1.00% per annum distribution and service fees paid
by the Fund to MFD with respect to such shares commencing in the thirteenth
month following purchase.
This ongoing 1.00% fee is comprised of the 0.25% per annum service fee paid to
MFD under the Distribution Plan (which MFD in turn pays to dealers), as
discussed above, and a distribution fee paid to MFD (which MFD also in turn
pays to dealers) under the Distribution Plan equal, on an annual basis, to
0.75% of a Fund's average daily net assets attributable to Class C shares.
CURRENT LEVEL OF DISTRIBUTION AND SERVICE FEES: Each Fund's Class A, Class B
and Class C distribution and service fees for its current fiscal year are
0.00%, 1.00% and 1.00%, per annum, respectively. Distribution and service fees
for Class A shares under the Distribution Plan are currently being waived on a
voluntary basis and may be imposed at the discretion of MFD.
DISTRIBUTIONS
Each Fund intends to pay substantially all of its net investment income to its
shareholders as dividends at least annually. In determining the net investment
income available for distributions, each Fund may rely on projections of its
anticipated net investment income over a longer term, rather than its actual
net investment income for the period. If a Fund earns less than projected, or
otherwise distributes more than its earnings for the year, a portion of the
distributions may constitute a return of capital. Each Fund may make one or
more distributions during the calendar year to its shareholders from any
long-term capital gains and may also make one or more distributions during the
calendar year to its shareholders from short-term capital
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gains. Shareholders may elect to receive dividends and capital gain
distributions in either cash or additional shares of the same class with
respect to which a distribution is made. See "Tax Status" and "Shareholder
Services--Distribution Options" below. Distributions paid by a Fund with
respect to Class A shares will generally be greater than those paid with
respect to Class B and Class C shares because expenses attributable to Class B
and Class C shares will generally be higher.
TAX STATUS
Each Fund is treated as an entity separate from the other Funds and the other
series of the Trust for federal income tax purposes. In order to minimize the
taxes each Fund would otherwise be required to pay, each Fund intends to
qualify each year as a "regulated investment company" under Subchapter M of the
Code. Because each Fund intends to distribute all of its net investment income
and net realized capital gains to its shareholders in accordance with the
timing requirements imposed by the Code, it is not expected that the Funds will
be required to pay any federal income or excise taxes, although a Fund's
foreign-source income may be subject to foreign withholding taxes.
Shareholders of a Fund normally will have to pay federal income tax, and any
state or local income taxes, on the dividends and capital gain distributions
they receive from the Fund, whether the distribution is paid in cash or
reinvested in additional shares. A portion of the dividends received from each
Fund (but none of the Funds' capital gains distributions) may qualify for the
dividends-received deduction for corporations. Shortly after the end of each
year, each shareholder of a Fund will be sent a statement setting forth the
federal income tax status of all of the Fund's dividends and distributions for
that calendar year, including the portion taxable as ordinary income, the
portion taxable as long-term capital gain, the portion, if any, representing a
return of capital (which is free of current taxes but which results in a basis
reduction) and the amount, if any, of federal income tax withheld. The
information in this statement will designate the portions of capital gain
distributions that are subject to (1) the 20% maximum rate of tax enacted that
applies to non-corporate taxpayers' net capital gain (i.e., the excess of net
long-term capital gain over net short-term capital loss) on securities held for
more than 18 months, and (2) the 28% maximum tax rate, applicable to such gain
on securities held for more than one year and up to 18 months.
Fund distributions will reduce a Fund's net asset value per share. Shareholders
who buy shares shortly before a Fund makes a distribution may thus pay the full
price for the shares and then effectively receive a portion of the purchase
price back as a taxable distribution.
Each Fund intends to withhold U.S. federal income tax at the rate of 30% (or
any lower rate permitted under an applicable treaty) on dividends and other
payments that are subject to such withholding and that are made to persons who
are neither citizens nor residents of the U.S. Each Fund is also required in
certain circumstances to apply backup withholding at a rate of 31% on taxable
dividends, capital gain distributions and redemption proceeds paid to any
non-corporate shareholder (including a shareholder who is neither a citizen nor
a resident of the U.S.) who does not furnish to the Fund certain information
and certifications or who is otherwise subject to backup withholding. Backup
withholding will not, however, be applied to payments that have been subject to
30% withholding. Prospective investors should read the Funds' Account
Application for additional information regarding backup withholding of federal
income tax and should consult their own tax advisers as to the tax consequences
to them of an investment in a Fund.
NET ASSET VALUE
The net asset value per share of each class of each Fund is determined each day
during which the Exchange is open for trading. This determination is made once
each day as of the close of regular trading on the Exchange by deducting the
amount of the liabilities attributable to the class from the value of the
assets attributable to the class and dividing the difference by the number of
shares of the class outstanding. Assets in a Fund's portfolio are valued on the
basis of their market values or otherwise at their fair values, as described in
the SAI. All investments and assets are expressed in U.S. dollars based upon
current currency exchange rates. The net asset value per share of each class of
shares is effective for orders received in "good order" by the dealer prior to
its calculation and received by the dealer prior to the close of that business
day.
EXPENSES
The Trust pays the compensation of the Trustees who are not officers of MFS or
Vertex and all expenses of the Funds (other than those assumed by Vertex)
including but not limited to: advisory and administrative services;
governmental fees; interest charges; taxes; membership dues in the Investment
Company Institute allocable to the Funds; fees and expenses of independent
auditors, of legal counsel, and of any transfer agent, registrar or dividend
disbursing agent of the Funds; 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;
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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 Funds' custodian, for all
services to the Funds, including safekeeping of funds and securities and
maintaining required books and accounts; expenses of calculating the net asset
value of shares of the Funds; and expenses of shareholder meetings. Expenses
relating to the issuance, registration and qualification of shares of the Funds
and the preparation, printing and mailing of prospectuses are borne by the
Funds 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.
Subject to termination or revision at the sole discretion of Vertex, Vertex has
agreed to bear each Fund's expenses (after taking into effect any compensating
balance and offset arrangements) such that each such Fund's "Other Expenses,"
which are defined to include all Fund expenses except for management fees, Rule
12b-1 fees, taxes, extraordinary expenses, brokerage and transaction costs and
class specific expenses, do not exceed 2.00% per annum of its average daily net
assets (the "Maximum Percentage"). The payments made by Vertex on behalf of
each Fund under this arrangement are subject to reimbursement by such Fund to
Vertex, which will be accomplished by the payment of an expense reimbursement
fee by the Fund to Vertex computed and paid monthly at a percentage of its
average daily net assets for its then current fiscal year, with a limitation
that immediately after such payment such Fund's "Other Expenses" will not
exceed the Maximum Percentage. The obligation of Vertex to bear a Fund's "Other
Expenses" pursuant to this arrangement and the Fund's obligation to pay the
reimbursement fee to Vertex, terminates on the earlier of the date on which
payments made by the Fund equal the prior payment of such reimbursable expenses
by Vertex or May 1, 2001.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
Each Fund has three classes of shares which it offers to the general public,
entitled Class A, Class B and Class C shares of Beneficial Interest (without
par value). Each Fund also has a class of shares which it offers exclusively to
certain institutional investors, entitled Class I shares. As of the date of
this Prospectus, the Trust has six series. The Trust has reserved the right to
create and issue additional classes and series of shares, in which case each
class of shares of a series would participate equally in the earnings,
dividends and assets attributable to that class of that particular series.
Shareholders are entitled to one vote for each share held and shares of each
series would be entitled to vote separately to approve investment advisory
agreements or changes in investment restrictions, but shares of all series
would vote together in the election of Trustees and selection of accountants.
Additionally, each class of shares of a series will vote separately on any
material increases in the fees under the Distribution Plan or on any other
matter that affects solely that class of shares, but will otherwise vote
together with all other classes of shares of the series on all other matters.
The Trust does not intend to hold annual shareholder meetings. The Trust's
Declaration of Trust provides that a Trustee may be removed from office in
certain instances (see "Description of Shares, Voting Rights and Liabilities"
in the SAI).
Each share of a class of each Fund represents an equal proportionate interest
in that Fund with each other class share, subject to the liabilities of the
particular class. Shares have no pre-emptive or conversion rights (except as
set forth in "Purchases--Conversion of Class B shares" above). Shares are fully
paid and non-assessable. Should a Fund be liquidated, shareholders of each
class are entitled to share pro rata in the net assets attributable to that
class available for distribution to shareholders. Shares will remain on deposit
with the Shareholder Servicing Agent and certificates will not be issued except
in connection with pledges and assignments and in certain other limited
circumstances.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under
certain circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability would be limited to circumstances in which
both inadequate insurance existed and the Trust itself was unable to meet its
obligations.
PERFORMANCE INFORMATION
From time to time, each Fund may provide yield, current distribution rate and
total rate of return quotations for each class of shares and may also quote
fund rankings in the relevant fund category from various sources, such as
Lipper Analytical Services, Inc., and Wiesenberger Investment Companies
Service. Yield quotations are based on the annualized net investment income per
share allocated to each class of a Fund over a 30-day period stated as a
percent of the maximum public offering price of that class on the last day of
that period. Yield calculations for Class B and Class C shares assume no CDSC
is paid. The current distribution rate for each class is generally based upon
the total amount of dividends per share paid by a Fund to shareholders of that
class during the past 12 months and is computed by dividing the amount of such
dividends by the maximum public offering price of that class at the end of such
period. Current distribution rate calculations for Class B and Class C shares
assumes no CDSC is paid. The current distribution rate differs from the yield
calculation because it may include distributions to shareholders from sources
other than dividends and interest, such as premium income from option writing,
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short-term capital gains, and return of invested capital, and is calculated
over a different period of time. Total rate of return quotations will reflect
the average annual percentage change over stated periods in the value of an
investment in each class of shares of a Fund made at the maximum public
offering price of the shares of that class with all distributions reinvested
and which will give effect to the imposition of any applicable CDSC assessed
upon redemptions of the Fund's Class B and Class C shares. Such total rate of
return quotations may be accompanied by quotations which do not reflect the
reduction in value of the initial investment due to the sales charge or the
deduction of the CDSC, and which will thus be higher. Each Fund offers multiple
classes of shares which were initially offered for sale to, and purchased by,
the public on different dates (the "class inception date"). The calculation of
total rate of return for a class of shares which has a later class inception
date than another class of shares of a Fund is based both on (i) the
performance of the Fund's newer class from its inception date and (ii) the
performance of the Fund's oldest class from its inception date up to the class
inception date of the newer class. See the SAI for further information on the
calculation of total rate of return for share classes with different class
inception dates.
All performance quotations are based on historical performance and are not
intended to indicate future performance. Yield reflects only net portfolio
income as of a stated period of time and current distribution rate reflects
only the rate of distributions paid by a Fund over a stated period of time,
while total rate of return reflects all components of investment return over a
stated period of time. A Fund's quotations may from time to time be used in
advertisements, shareholder reports or other communications to shareholders.
For a discussion of the manner in which a Fund will calculate its yield,
current distribution rate and total rate of return, see the SAI. In addition to
information provided in shareholder reports, each Fund may, in its discretion,
from time to time, make a list of all or a portion of its holdings available to
investors upon request.
8. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described below
or concerning other aspects of a Fund, should contact the Shareholder Servicing
Agent (see back cover for address and phone number). A shareholder whose shares
are held in the name of, or controlled by, a dealer might not receive many of
the privileges and services from a Fund (such as Right of Accumulation, Letter
of Intent and certain recordkeeping services) that a Fund ordinarily provides.
Account and Confirmation Statements--Each shareholder will receive confirmation
statements showing the transaction activity in his account. At the end of each
calendar year, each shareholder will receive information regarding the tax
status of reportable dividends and distributions for that year (see "Tax
Status").
Distribution Options--The following options are available to all accounts
(except Systematic Withdrawal Plan accounts described below) and may be changed
as often as desired by notifying the Shareholder Servicing Agent:
-- Dividends and capital gain distributions reinvested in additional
shares; this option will be assigned if no other option is specified;
-- Dividends (including short-term capital gains) in cash; capital gain
distributions reinvested in additional shares; or
-- Dividends and capital gain distributions in cash.
Reinvestments (net of any tax withholding) will be made in additional full and
fractional shares of the same class of shares at the net asset value in effect
at the close of business on the record date. Dividends and capital gain
distributions in amounts less than $10 will automatically be reinvested in
additional shares of each Fund. If a shareholder has elected to receive
dividends and/or capital gain distributions in cash, and the postal or other
delivery service is unable to deliver checks to the shareholder's address of
record, or the shareholder does not respond to mailings from the Shareholder
Servicing Agent with regard to uncashed distribution checks, such shareholder's
distribution option will automatically be converted to having all dividends and
other distributions reinvested in additional shares. Any request to change a
distribution option must be received by the Shareholder Servicing Agent by the
record date for a dividend or distribution in order to be effective for that
dividend or distribution. No interest will accrue on amounts represented by
uncashed distribution or redemption checks.
Investment and Withdrawal Programs--For the convenience of shareholders, each
Fund makes available the following programs designed to enable shareholders to
add to their investment in an account with a Fund or withdraw from it with a
minimum of paper work. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or a Fund.
Letter of Intent: If a shareholder (other than a group purchaser as
described in the SAI) anticipates purchasing $50,000 or more of Class A shares
of a Fund alone or in combination with shares of Class B or Class C shares of a
Fund or any of
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the classes of other MFS Funds or MFS Fixed Fund (a bank collective investment
fund) within a 13-month period (or 36-month period for purchases of $1 million
or more), the shareholder may obtain such shares at the same reduced sales
charge as though the total quantity were invested in one lump sum, subject to
escrow agreements and the appointment of an attorney for redemptions from the
escrow amount if the intended purchases are not completed, by completing the
Letter of Intent section of the Account Application.
Right of Accumulation: A shareholder qualifies for cumulative quantity
discounts on purchases of Class A shares when his new investment, together with
the current offering price value of all holdings of Class A, Class B and Class
C shares of that shareholder in the MFS Funds or MFS Fixed Fund (a bank
collective investment fund) reaches a discount level.
Distribution Investment Program: Shares of a particular class of a Fund
may be sold at net asset value (and without any applicable CDSC) through the
automatic reinvestment of dividend and capital gain distributions from the same
class of another MFS Fund. Furthermore, distributions made by a Fund may be
automatically invested at net asset value in shares of the same class of
another MFS Fund, if shares of such Fund are available for sale (without a
sales charge and not subject to any applicable CDSC).
Systematic Withdrawal Plan: A shareholder may direct the Shareholder
Servicing Agent to send to him (or any one he designates) regular periodic
payments based upon the value of his account. Each payment under a Systematic
Withdrawal Plan (a "SWP") must be at least $100, except in certain limited
circumstances. The aggregate withdrawals of Class B and Class C shares in any
year pursuant to a SWP will not be subject to a CDSC and are generally limited
to 10% of the value of the account at the time of the establishment of the SWP.
The CDSC will not be waived in the case of SWP redemptions of Class A shares
which are subject to CDSC.
Dollar Cost Averaging Programs--
Automatic Investment Plan: Cash investments of $50 or more may be made
through a shareholder's checking account on any day of the month. If the
shareholder does not specify a date, the investment will automatically occur on
the first business day of the month. Required forms are available from the
Shareholder Servicing Agent or investment dealers.
Automatic Exchange Plan: Shareholders having account balances of at least
$5,000 in any MFS Fund may participate in the Automatic Exchange Plan, a dollar
cost averaging program. The Automatic Exchange Plan provides for automatic
monthly or quarterly exchanges of funds from the shareholder's account in an
MFS Fund for investment in the same class of shares of other MFS Funds selected
by the shareholder (if available for sale). Under the Automatic Exchange Plan,
exchanges of at least $50 each may be made to up to six different funds. A
shareholder should consider the objectives and policies of a fund and review
its prospectus before electing to exchange money into such fund through the
Automatic Exchange Plan. No transaction fee is imposed in connection with
exchange transactions under the Automatic Exchange Plan. However, exchanges of
shares of MFS Money Market Fund, MFS Government Money Market Fund or Class A
shares of MFS Cash Reserve Fund will be subject to any applicable sales charge.
For federal and (generally) state income tax purposes, an exchange is treated
as a sale of the shares transferred and, therefore, could result in a capital
gain or loss to the shareholder making the exchange. See the SAI for further
information concerning the Automatic Exchange Plan. Investors should consult
their tax advisers for information regarding the potential capital gain and
loss consequences of transactions under the Automatic Exchange Plan.
Because a dollar cost averaging program involves periodic purchases of shares
regardless of fluctuating share offering prices, a shareholder should consider
his financial ability to continue his purchases through periods of low price
levels. Maintaining an investment program concurrently with a withdrawal
program would be disadvantageous because of the sales charges included in share
purchases in the case of Class A shares, and because of the assessment of the
CDSC for share redemption (if applicable) in the case of Class A shares.
Tax-Deferred Retirement Plans--Except as noted under "Purchases--Class C
Shares" above, shares of each Fund may be purchased by all types of
tax-deferred retirement plans, including IRAs, Simplified Employee Pension
plans, 401(k) plans, 403(b) plans and other corporate pension and
profit-sharing plans. Investors should consult with their tax advisers before
establishing any of the tax-deferred retirement plans described above.
---------------
The Funds' SAI contains more detailed information about each Fund, including,
but not limited to, information related to: (i) each Fund's investment policies
and restrictions; (ii) the Trustees, officers and Adviser; (iii) portfolio
trading; (iv) the shares, including rights and liabilities of shareholders; (v)
tax status of dividends and distributions; (vi) the Distribution Plan; and
(vii) various services and privileges provided by each Fund for the benefit of
its shareholders, including additional information with respect to the exchange
privilege.
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APPENDIX A
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable
sales charges are waived (Section I), the initial sales charge and the CDSC for
Class A shares are waived (Section II), and the CDSC for Class B and Class C
shares is waived (Section III). As used in the Prospectus and any appendices
thereto, the term "dealer" includes any broker, dealer, bank (including bank
trust departments), registered investment adviser, financial planner and any
other financial institutions having a selling agreement or other similar
agreement with MFD.
I. WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on
purchases of Class A shares and the CDSC imposed on certain redemptions of
Class A shares and on redemptions of Class B and Class C shares, as
applicable, are waived:
1. Dividend Reinvestment
[bullet] Shares acquired through dividend or capital gain reinvestment;
and
[bullet] Shares acquired by automatic reinvestment of distributions of
dividends and capital gains of any fund in the MFS Funds pursuant
to the Distribution Investment Program.
2. Certain Acquisitions/Liquidations
[bullet] Shares acquired on account of the acquisition or liquidation of
assets of other investment companies or personal holding
companies.
3. Affiliates of an MFS Fund/Certain Dealers. Shares acquired by:
[bullet] Officers, eligible directors, employees (including retired
employees) and agents of MFS, MFS, Sun Life or any of their
subsidiary companies;
[bullet] Trustees and retired trustees of any investment company for
which MFD serves as distributor;
[bullet] Employees, directors, partners, officers and trustees of any
sub-adviser to any MFS Fund;
[bullet] Employees or registered representatives of dealers;
[bullet] Certain family members of any such individual and their spouses
identified above and certain
[bullet] trusts, pension, profit-sharing or other retirement plans for
the sole benefit of such persons, provided the shares are not
resold except to the MFS Fund which issued the shares; and
[bullet] Institutional Clients of MFS or MFS Institutional Advisors, Inc.
4. Involuntary Redemptions (CDSC waiver only)
[bullet] Shares redeemed at an MFS Fund's direction due to the small size
of a shareholder's account. See "Redemptions and Repurchases--
General--Involuntary Redemptions/Small Accounts" in the
Prospectus.
5. Retirement Plans (CDSC waiver only). Shares redeemed on account of
distributions made under the following circumstances:
Individual Retirement Accounts ("IRAs")
[bullet] Death or disability of the IRA owner.
Section 401(a) Plans ("401(a) Plans") and Section 403(b) Employer
Sponsored Plans ("ESP Plans")
[bullet] Death, disability or retirement of 401(a) or ESP Plan
participant;
[bullet] Loan from 401(a) or ESP Plan;
[bullet] Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
[bullet] Termination of employment of 401(a) or ESP Plan participant
(excluding, however, a partial or other termination of the Plan);
[bullet] Tax-free return of excess 401(a) or ESP Plan contributions;
[bullet] To the extent that redemption proceeds are used to pay expenses
(or certain participant expenses) of the 401(a) or ESP Plan
(e.g., participant account fees), provided that the Plan sponsor
subscribes to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping system made available by MFS Service Center, Inc.
(the "Shareholder Servicing Agent"); and
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[bullet] Distributions from a 401(a) or ESP Plan that has invested its
assets in one or more of the MFS Funds for more than 10 years
from the later to occur of: (i) January 1, 1993 or (ii) the date
such 401(a) or ESP Plan first invests its assets in one or more
of the MFS Funds. The sales charges will be waived in the
case of a redemption of all of the 401(a) or ESP Plan's shares
in all MFS Funds (i.e., all the assets of the 401(a) or ESP Plan
invested in the MFS Funds are withdrawn), unless immediately
prior to the redemption, the aggregate amount invested by the
401(a) or ESP Plan in shares of the MFS Funds (excluding the
reinvestment of distributions) during the prior four years
equals 50% or more of the total value of the 401(a) or ESP
Plan's assets in the MFS Funds, in which case the sales charges
will not be waived.
Section 403(b) Salary Reduction Only Plans ("SRO Plans")
[bullet] Death or disability of SRO Plan participant.
6. Certain Transfers of Registration (CDSC waiver only). Shares
transferred:
[bullet] To an IRA rollover account where any sales charges with respect
to the shares being reregistered would have been waived had they
been redeemed; and
[bullet] From a single account maintained for a 401(a) Plan to multiple
accounts maintained by the Shareholder Servicing Agent on behalf
of individual participants of such Plan, provided that the Plan
sponsor subscribes to the MFS FUNDamental 401(k) Plan or another
similar recordkeeping system made available by the Shareholder
Servicing Agent.
7. Loan Repayments:
[bullet] Shares acquired pursuant to repayments by retirement plan
participants of loans from 401(a) or ESP Plans with respect to
which such Plan or its sponsoring organization subscribes to the
MFS FUNDamental 401(k) Program or the MFS Recordkeeper Plus
Program (but not the MFS Recordkeeper Program).
II. WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A
shares and the CDSC imposed on certain redemptions of Class A shares are
waived:
1. Wrap Account and Fund "Supermarket" Investments
[bullet] Shares acquired by investments through certain dealers
(including registered investment advisers and financial planners)
which have established certain operational arrangements with MFD
which include a requirement that such shares be sold for the sole
benefit of clients participating in a "wrap" account, mutual
fund "supermarket" account or a similar program under which such
clients pay a fee to such dealer.
2. Investment by Insurance Company Separate Accounts
[bullet] Shares acquired by insurance company separate accounts.
3. Retirement Plans
Administrative Services Arrangements
[bullet] Shares acquired by retirement plans or trust accounts whose
third party administrators or dealers have entered into an
administrative services agreement with MFD or one of its
affiliates to perform certain administrative services, subject
to certain operational and minimum size requirements specified
from time to time by MFD or one or more of its affiliates.
Reinvestment of Distributions from Qualified Retirement Plans
[bullet] Shares acquired through the automatic reinvestment in Class A
shares of Class A or Class B distributions which constitute
required withdrawals from qualified retirement plans.
A-2
<PAGE>
Shares redeemed on account of distributions made under the following
circumstances: IRAs
[bullet] Distributions made on or after the IRA owner has attained the
age of 591/2 years old; and
[bullet] Tax-free returns of excess IRA contributions.
401(a) Plans
[bullet] Distributions made on or after the 401(a) Plan participant has
attained the age of 591/2 years old; and
[bullet] Certain involuntary redemptions and redemptions in connection
with certain automatic withdrawals from a 401(a) Plan.
ESP Plans and SRO Plans
[bullet] Distributions made on or after the ESP or SRO Plan participant
has attained the age of 591/2 years old.
4. Purchases of at Least $5 Million (CDSC waiver only)
[bullet] Shares acquired of Eligible Funds (as defined below) if the
shareholder's investment equals or exceeds $5 million in one or
more Eligible Funds (the "Initial Purchase") (this waiver applies
to the shares acquired from the Initial Purchase and all shares
of Eligible Funds subsequently acquired by the shareholder);
provided that the dealer through which the Initial Purchase is
made enters into an agreement with MFD to accept delayed payment
of commissions with respect to the Initial Purchase and all
subsequent investments by the shareholder in the Eligible Funds
subject to such requirements as may be established from time to
time by MFD (for a schedule of the amount of commissions paid by
MFD to the dealer on such investments, see "Purchases--Class A
Shares--Purchases subject to a CDSC" in the Prospectus). The
Eligible Funds are all funds included in the MFS Family of Funds,
except for Massachusetts Investors Trust, Massachusetts Investors
Growth Stock Fund, MFS Municipal Bond Fund, MFS Municipal Limited
Maturity Fund, MFS Money Market Fund, MFS Government Money Market
Fund and MFS Cash Reserve Fund.
III. WAIVERS OF CLASS B AND CLASS C SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B and Class C shares
is waived:
1. Systematic Withdrawal Plan
[bullet] Systematic Withdrawal Plan redemptions with respect to up to 10%
per year (or 15% per year, in the case of accounts registered as
IRAs where the redemption is made pursuant to Section 72(t) of
the Internal Revenue Code of 1986, as amended) of the account
value at the time of establishment.
2. Death of Owner
[bullet] Shares redeemed on account of the death of the account owner if
the shares are held solely in the deceased individual's name or
in a living trust for the benefit of the deceased individual.
3. Disability of Owner
[bullet] Shares redeemed on account of the disability of the account owner
if shares are held either solely or jointly in the disabled
individual's name or in a living trust for the benefit of the
disabled individual (in which case a disability certification
form is required to be submitted to the Shareholder Servicing
Agent).
4. Retirement Plans. Shares redeemed on account of distributions made under
the following circumstances:
IRAs, 401(a) Plans, ESP Plans and SRO Plans
[bullet] Distributions made on or after the IRA owner or the 401(a), ESP
or SRO Plan participant, as applicable, has attained the age of
701/2 years old, but only with respect to the minimum
distribution under Code rules.
Salary Reduction Simplified Employee Pension Plans ("SAR-SEP Plans")
[bullet] Distributions made on or after the SAR-SEP Plan participant has
attained the age of 701/2 years old, but only with respect to the
minimum distribution under applicable Code rules; and
[bullet] Death or disability of a SAR-SEP Plan participant.
A-3
<PAGE>
APPENDIX B
DESCRIPTION OF BOND RATINGS
MOODY'S
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment some time in the future.
Baa: Bonds which are rated Baa are considered as medium-grade
obligations, (i.e., they are neither highly protected nor poorly secured).
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Some bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Absence of Rating: Where no rating has been assigned or where a rating
has been suspended or withdrawn, it may be for reasons unrelated to the quality
of the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances
arise, the effects of which preclude satisfactory analysis; if there is no
longer available reasonable up-to-date data to permit a judgment to be formed;
if a bond is called for redemption; or for other reasons.
Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic
rating classification from Aa to B. The modifier 1 indicates that the company
ranks in the higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates that the company
ranks in the lower end of its generic rating category.
B-1
<PAGE>
S&P
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B: Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial, or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The CCC rating
category is also used for debt subordinated to senior debt that is assigned an
actual or implied B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior
debt that is assigned an actual or implied CCC rating.
C: The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI: The rating CI is reserved for income bonds on which no interest is
being paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The "D" rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the
addition or a plus or minus signed to show relative standing within the major
categories.
NR: indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
FITCH
AAA: Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA: Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated 'AAA'. Because bonds rated
in the 'AAA' and 'AA' categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated 'F-1+'.
A: Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these bonds,
and therefore impair timely payment. The likelihood that the ratings of these
bonds will fall below investment grade is higher than for bonds with higher
ratings.
BB: Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified which
could assist the obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service
B-2
<PAGE>
requirements, the probability of continued timely payment of principal and
interest reflects the obligor's limited margin of safety and the need for
reasonable business and economic activity throughout the life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
Plus (+) Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the 'AAA' category.
NR Indicates that Fitch does not rate the specific issue.
Conditional: A conditional rating is premised on the successful
completion of a project or the occurrence of a specific event.
Suspended: A rating is suspended when Fitch deems the amount of
information available from the issuer to be inadequate for rating purposes.
Withdrawn: A rating will be withdrawn when an issue matures or is called
or refinanced, and, at Fitch's discretion, when an issuer fails to furnish
proper and timely information.
FitchAlert Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the likely direction
of such change. These are designed as "Positive," indicating a potential
upgrade, "Negative," for potential downgrade, or "Evolving," where ratings may
be lowered, FitchAlert is relatively short-term, and should be resolved within
12 months.
B-3
<PAGE>
Investment Adviser Vertex Investment Management, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
Distributor
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
Custodian and Dividend Disbursing Agent
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
Shareholder Servicing Agent
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: 800-225-2606
Mailing Address:
P.O. Box 2281, Boston, MA 02107-9906
Independent Auditors
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116
Vertex All Cap Fund
Vertex Research All Cap Fund
Vertex Growth Fund
Vertex Discovery Fund
Vertex Contrarian Fund
500 Boylston Street, Boston, MA 02116
<PAGE>
APRIL 1, 1998
SUBJECT TO COMPLETION
Vertex All Cap Fund
STATEMENT OF ADDITIONAL
Vertex Research All Cap Fund
INFORMATION
Vertex Growth Fund
Vertex Discovery Fund
May 1, 1998
Vertex Contrarian Fund
(Members of the MFS Family of Funds[RegTM])
Each a series of MFS Series Trust XI
500 Boylston Street, Boston, MA 02116
(617) 954-5000
<TABLE>
<CAPTION>
Page
-----
<S> <C> <C>
1. Definitions ................................................... 1
2. Investment Objectives, Policies and Restrictions .............. 1
3. Management of the Funds ....................................... 15
Trustees .................................................... 15
Officers .................................................... 15
Trustee Compensation Table .................................. 16
Investment Adviser .......................................... 16
Administrator ............................................... 17
Custodian ................................................... 17
Shareholder Servicing Agent ................................. 17
Distributor ................................................. 18
4. Portfolio Transactions and Brokerage Commissions .............. 18
5. Shareholder Services .......................................... 19
Investment and Withdrawal Programs .......................... 19
Exchange Privilege .......................................... 22
Tax-Deferred Retirement Plans ............................... 23
6. Tax Status .................................................... 23
7. Distribution Plan ............................................. 25
8. Determination of Net Asset Value and Performance .............. 26
9. Description of Shares, Voting Rights and Liabilities .......... 29
10. Independent Auditors .......................................... 30
</TABLE>
This Statement of Additional Information, as amended or supplemented from time
to time ("SAI"), sets forth information which may be of interest to investors
but which is not necessarily included in the Funds' Prospectus dated May 1,
1998. This SAI should be read in conjunction with the Prospectus, a copy of
which may be obtained without charge by contacting the Shareholder Servicing
Agent (see back cover for address and phone number).
This SAI is NOT a prospectus and is authorized for distribution to prospective
investors only if preceded or accompanied by a current prospectus.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MUST NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION DOES NOT CONSTITUTE A
PROSPECTUS.
<PAGE>
I. DEFINITIONS
<TABLE>
<S> <C>
All Cap Fund Vertex All Cap Fund, a non-
diversified series of the Trust.
Research All Cap Vertex Research All Cap Fund, a
Fund non-diversified series of the Trust.
Growth Fund Vertex Growth Fund, a non-
diversified series of the Trust.
Discovery Fund Vertex Discovery Fund, a non-
diversified series of the Trust.
Contrarian Fund Vertex Contrarian Fund, a non-
diversified series of the Trust.
"Fund(s)" All Cap Fund, Research All Cap
Fund, Growth Fund, Discovery
Fund and Contrarian Fund.
"Trust" MFS Series Trust XI, a
Massachusetts business Trust,
organized in 1993. Prior to
January 28, 1998, the Trust was
known as MFS Union Standard
Trust.
"Vertex" or the Vertex Investment Management,
"Adviser" Inc., a Delaware corporation.
"MFD" MFS Fund Distributors, Inc., a
Delaware corporation.
"Prospectus" The Prospectus of the Funds,
dated May 1, 1998, as amended or
supplemented from time to time.
</TABLE>
2. INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
Investment Objectives and Policies. The investment objective and policies of
each Fund are described in the Prospectus and below. The following discussion
of each Fund's investment techniques and restrictions supplements, and should
be read in conjunction with, the information set forth in the "Investment
Objectives and Policies," "Certain Securities and Investment Techniques" and
"Additional Risk Factors" sections of the Prospectus.
Certain Securities and Investment Techniques.
Lending of Portfolio Securities: Each 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 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, the Fund would continue to receive
the equivalent of the interest or dividens paid by the issuer on the securities
loaned. The Fund would also receive a fee from the borrower. The Fund would
receive 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 the Fund would call the loan in anticipation of an
important vote to be taken among holders of the securities or of the giving or
withholding of their consent on a material matter affecting the investment. As
with other extensions of credit there are risks of delay in recovery or even
loss of rights in the collateral should the borrower of the securities fail
financially. However, the loans would be made only to firms deemed by the
Adviser to be of good standing, and when, in the judgment of the Adviser, the
consideration which can be earned currently from securities loans of this type
justifies the attendant risk. If the Adviser determines to make securities
loans, it is intended that the value of the securities loaned, as represented
by the collateral received by the Fund in connection with such loans, would not
exceed 50% of the value of a Fund's net assets.
Repurchase Agreements: Each Fund may enter into repurchase agreements with
sellers who are member firms (or a subsidiary thereof) of the Exchange or
members of the Federal Reserve System, recognized primary U.S. Government
securities dealers or institutions which the Adviser has determined to be of
comparable creditworthiness. The securities that 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 the Fund, or the purchase and repurchase prices may be the same, with
interest at a standard rate due to the Fund together with the repurchase price
on repurchase. In either case, the income to the Fund is unrelated to the
interest rate on the Government securities.
The repurchase agreement provides that in the event the seller fails to pay the
amount agreed upon on the agreed upon delivery date or upon demand, as the case
may be, a Fund will have the right to liquidate the securities. If at the time
the Fund is contractually entitled to exercise its right to liquidate the
securities, the seller is subject to a proceeding under the bankruptcy laws or
its assets are otherwise subject to a stay order, the Fund's exercise of its
right to liquidate the securities may be delayed and result in certain losses
and costs to the Fund. Each 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 agreed upon repurchase price, and the Fund has
the right to make margin calls at any time if the value of the securities falls
below the agreed upon collateral.
"When-Issued" Securities: Each Fund may purchase securities on a "when-issued"
or on a "forward delivery"
1
<PAGE>
basis. When a Fund commits to purchase these securities on a "when-issued" or
"forward delivery" basis, it will set up procedures consistent with the General
Statement of Policy of the Securities and Exchange Commission (the "SEC")
concerning such purchases. Since that policy currently recommends that an
amount of each Fund's assets equal to the amount of the purchase be held aside
or segregated to be used to pay for the commitment, a Fund will always have
liquid assets sufficient to cover any commitments or to limit any potential
risk. Purchases of securities on such bases may involve more risk than other
types of purchases. For example, a Fund may have to sell assets which have been
set aside in order to meet redemptions. Also, if a Fund determines it is
necessary to sell the "when-issued" or "forward delivery" securities before
delivery, it may incur a loss because of market fluctuations since the time the
commitment to purchase such securities was made.
Foreign Securities: Each Fund may invest in dollar-denominated and non
dollar-denominated foreign securities. As discussed in the Prospectus,
investing in foreign securities generally represents a greater degree of risk
than investing in domestic securities due to possible exchange rate
fluctuations, less publicly available information, more volatile markets, less
securities regulation, less favorable tax provisions, war or expropriation. As
a result of its investments in foreign securities, 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 the Fund to take advantage of
favorable movements in the applicable exchange rate, such strategy also exposes
the Fund to risk of loss if exchange rates move in a direction adverse to the
Fund's position. Such losses could reduce any profits or increase any losses
sustained by the Fund from the sale or redemption of securities and could
reduce the dollar value of interest or dividend payments received.
Depositary Receipts: Each Fund may invest in American Depositary Receipts
("ADRs") which are certificates issued by a U.S. depository (usually a bank)
and represent a specified quantity of shares of an underlying non-U.S. stock on
deposit with a custodian bank as collateral. ADRs may be sponsored or
unsponsored. A sponsored ADR is issued by a depository which has an exclusive
relationship with the issuer of the underlying security. An unsponsored ADR may
be issued by any number of U.S. depositories. Under the terms of most sponsored
arrangements, depositories agree to distribute notices of shareholder meetings
and voting instructions, and to provide shareholder communications and other
information to the ADR holders at the request of the issuer of the deposited
securities. The depository of an unsponsored ADR, on the other hand, is under
no obligation to distribute shareholder communications received from the issuer
of the deposited securities or to pass through voting rights to ADR holders in
respect of the deposited securities. Each 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. Each Fund may purchase securities in local
markets and direct delivery of these ordinary shares to the local depository of
an ADR agent bank in the foreign country. Simultaneously, the ADR agents create
a certificate which settles at the Fund's custodian in five days. Each Fund may
also execute trades on the U.S. markets using existing ADRs. A foreign issuer
of the security underlying an ADR is generally not subject to the same
reporting requirements in the United States as a domestic issuer. Accordingly,
information available to a U.S. investor will be limited to the information the
foreign issuer is required to disclose in its own country and the market value
of an ADR may not reflect undisclosed material information concerning the
issuer of the underlying security. ADRs may also be subject to exchange rate
risks if the underlying foreign securities are denominated in a foreign
currency. Each Fund may also invest in Global Depositary Receipts ("GDRs") and
other types of depositary receipts. 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 U.S. company.
Zero Coupon Bonds, Deferred Interest Bonds and PIK Bonds: Each 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. Each 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 each Fund's distribution obligations.
Short Sales: Each Fund each may seek to hedge investments or realize additional
gains through short sales.
2
<PAGE>
Short sales 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, the Fund must borrow the security to make delivery to the
buyer. The Fund then is obligated to replace the security borrowed by
purchasing it at the market price at the time of replacement. The price at such
time may be more or less than the price at which the security was sold by the
Fund. Until the security is replaced, the Fund is required to repay the lender
any dividends or interest which accrue during the period of the loan. To borrow
the security, the Fund also may be required to pay a premium, which would
increase the cost of the security sold. The net proceeds of the short sale will
be retained by the broker, to the extent necessary to meet margin requirements,
until the short position is closed out. The Fund also will incur transaction
costs in effecting short sales.
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 the
Fund replaces the borrowed security. The Fund will realize a gain if the price
of the security declines in price between those dates. The amount of any gain
will be decreased, and the amount of any loss increased, by the amount of the
premium, dividends or interest the Fund may be required to pay in connection
with a short sale.
Each Fund may make short sales "against the box," i.e., when a security
identical to or convertible or exchangeable into one owned by the Fund is
borrowed and sold short. The Fund may also enter into so called "naked" short
sales, i.e., when a security identical to or exchangeable into the security
borrowed and sold short is not owned by the Fund.
A Fund will not sell short securities whose underlying value (minus any amounts
deposited as margin) exceeds 100% of its net assets.
Whenever the Fund engages in short sales, it segregates cash or U.S. Government
securities in an amount that, when combined with the amount of collateral
deposited with the broker in connection with the short sale, equals the current
market value of the security sold short. The segregated assets are marked to
market daily.
Bank Borrowings: Each Fund may borrow money for investment purposes from banks
and invest the proceeds in accordance with its investment objective and
policies. Bank borrowings by a Fund will not exceed 50% of its net assets. To
the extent that portfolio securities are purchased by a Fund with proceeds from
bank borrowings, the net asset value of the Fund's shares generally will
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
these proceeds which is in excess of the expenses associated therewith can be
expected to cause the value of the Fund's shares and distributions on the
Fund's shares to rise more quickly than would otherwise be the case.
Conversely, if the investment income or gains earned from the portfolio
securities purchased with proceeds from bank borrowings fails to cover the
expenses associated therewith, the value of the Fund's shares is likely to
decrease more quickly than otherwise would be the case and distributions
thereon will be reduced or eliminated. Hence, bank borrowing (leverage) is
speculative and increases the risk of owning or investing in the shares of the
Fund. Bank borrowings also increase each Fund's expenses because of interest
payments and administrative expenses associated with the borrowing of money.
Unless the appreciation and income on assets purchased with proceeds from bank
borrowings exceed the costs associated with the bank borrowings, the use of
leverage by a Fund would diminish the investment performance of the Fund
compared with what it would have been without leverage.
Investment in Other Investment Companies: Each Fund's investment in other
investment companies, as described in the Prospectus, is limited in amount by
the Investment Company Act of 1940, as amended (the "1940 Act"). Such
investment may involve the payment of substantial premiums above the value of
such investment companies' portfolio securities, and the total return on such
investment will be reduced by the operating expenses and fees of such other
investment companies, including advisory fees.
Indexed Securities: Each Fund may purchase securities whose prices are indexed
to the prices of other securities, securities indices, currencies, precious
metals or other commodities, or other financial indicators. Indexed securities
typically, but not always, are debt securities or deposits whose value at
maturity (i.e., principal value) or coupon rate is determined by reference to a
specific instrument or statistic. Gold-indexed securities, for example,
typically provide for a maturity value that depends on the price of gold,
resulting in a security whose price tends to rise and fall together with gold
prices. Currency-indexed securities typically are short-term to
intermediate-term debt securities whose maturity values or interest rates are
determined by reference to the values of one or more specified foreign
currencies, and may offer higher yields than U.S. dollar-denominated securities
of equivalent issuers. Currency-indexed securities may be positively or
negatively indexed; that is, their principal value or interest rates may
increase when the specified currency value increases, resulting in a security
that performs similarly to a foreign-denominated instrument, or their maturity
value may decline when foreign currencies increase, resulting in a security
whose price characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad.
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At the same time, indexed securities are subject to the credit risks associated
with the issuer of the security, and their values may decline substantially if
the issuer's creditworthiness deteriorates. Recent issuers of indexed
securities have included banks, corporations and certain U.S. Government
agencies.
Swaps and Related Transactions: Each Fund may enter into interest rate swaps,
currency swaps and other types of available swap agreements, such as caps,
collars and floors.
Swap agreements may be individually negotiated and structured to include
exposure to a variety of different types of investments or market factors.
Depending on their structure, swap agreements may increase or decrease a Fund's
exposure to long or short-term interest rates (in the U.S. or abroad), foreign
currency values, mortgage securities, corporate borrowing rates, or other
factors such as securities prices or inflation rates. Swap agreements can take
many different forms and are known by a variety of names. A Fund is not limited
to any particular form or variety of swap agreement if the Adviser determines
it is consistent with the Fund's investment objective and policies.
Each Fund will maintain cash or appropriate liquid assets to cover its current
obligations under swap transactions. If a Fund enters into a swap agreement on
a net basis (i.e., the two payment streams are netted out, with the Fund
receiving or paying, as the case may be, only the net amount of the two
payments), the Fund will maintain cash or liquid assets with a daily value at
least equal to the excess, if any, of the Fund's accrued obligations under the
swap agreement over the accrued amount the Fund is entitled to receive under
the agreement. If a Fund enters into a swap agreement on other than a net
basis, it will maintain cash or liquid assets with a value equal to the full
amount of the Fund's accrued obligations under the agreement.
The most significant factor in the performance of swaps, caps, floors and
collars is the change in the specific interest rate, currency or other factor
that determines the amount of payments to be made under the arrangement. If 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, the Fund must be prepared to make such payments when due. In
addition, if the counterparty's creditworthiness declined, 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 the Fund is contractually entitled to receive. Each 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.
Options on Securities: Each 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 the Fund owns the security
underlying the call or has an absolute and immediate right to acquire that
security without additional cash consideration (or for additional cash
consideration segregated by the Fund) 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 liquid assets representing the difference is
segregated by the Fund. A put option written by a Fund is "covered" if the Fund
segregates liquid assets with a value equal to the exercise price, or else
holds a put on the same security and in the same principal amount as the put
written where the exercise price of the put held is equal to or greater than
the exercise price of the put written or where the exercise price of the put
held is less than the exercise price of the put written if the difference is
segregated by the Fund in assets. 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 the Fund to write another put option to the
extent that the exercise price thereof is secured by deposited liquid 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 the Fund is less than the
premium received from writing the option, or if the premium received in
connection with the closing of an option purchased by 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
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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 the
Fund.
The 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 the Fund determines to write
will depend upon the expected price movement of the underlying security. The
exercise price of a call option may be below ("in-the-money"), equal to
("at-the-money") or above ("out-of-the-money") the current value of the
underlying security at the time the option is written. Buy-and-write
transactions using in-the-money call options may be used when it is expected
that the price of the underlying security will decline moderately during the
option period. Buy-and-write transactions using out-of-the-money call options
may be used when it is expected that the premiums received from writing the
call option plus the appreciation in the market price of the underlying
security up to the exercise price will be greater than the appreciation in the
price of the underlying security alone. If the call options are exercised in
such transactions, a Fund's maximum gain will be the premium received by it for
writing the option, adjusted upwards or downwards by the difference between the
Fund's purchase price of the security and the exercise price, less related
transaction costs. If the options are not exercised and the price of the
underlying security declines, the amount of such decline will be offset in
part, or entirely, by the premium received.
The writing of covered put options is similar in terms of risk/
return characteristics to buy-and-write transactions. If the market price of
the underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and 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
the 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.
Each 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 the Fund will be required to sell the
underlying security at a below market price. This loss may be offset, however,
in whole or part, by the premiums received on the writing of the two options.
Conversely, if the price of the security declines by a sufficient amount, the
put will likely be exercised. The writing of straddles will likely be
effective, therefore, only where the price of the security remains stable and
neither the call nor the put is exercised. In those instances where one of the
options is exercised, the loss on the purchase or sale of the underlying
security may exceed the amount of the premiums received.
By writing a call option, 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.
Each 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.
Each Fund may also purchase call options to hedge against an increase in the
price of securities that the Fund anticipates purchasing in the future. If such
increase occurs, the call option will permit the Fund to purchase the
securities at the exercise price, or to close out the options at a profit. The
premium paid for the call option plus any transaction costs will reduce the
benefit, if any, realized by a Fund upon exercise of the option, and, unless
the price of the underlying security rises sufficiently, the option may expire
worthless to the Fund.
Reset Options: In certain instances, each Fund may enter into 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
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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 is paid
at termination, the Fund assumes the risk that (i) the premium may be less than
the premium which would otherwise have been received at the initiation of the
option because of such factors as the volatility in yield of the underlying
Treasury security over the term of the option and adjustments made to the
strike price of the option, and (ii) the option purchaser may default on its
obligation to pay the premium at the termination of the option.
Options on Indices: Each Fund may write (sell) covered call and put options and
purchase call and put options on indices. In contrast to an option on a
security, an option on a stock index provides the holder with the right but not
the obligation to make or receive a cash settlement upon exercise of the
option, rather than the right to purchase or sell a security. The amount of
this settlement is equal to (i) the amount, if any, by which the fixed exercise
price of the option exceeds (in the case of a call) or is below (in the case of
a put) the closing value of the underlying index on the date of exercise,
multiplied by (ii) a fixed "index multiplier."
Each Fund may cover call options on stock indices by owning securities whose
price changes, in the opinion of the Adviser, are expected to be similar to
those of the underlying index, or by having an absolute and immediate right to
acquire such securities without additional cash consideration (or for
additional cash consideration held in a segregated account by its custodian)
upon conversion or exchange of other securities in its portfolio. Where 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, the
Fund will not be fully covered and could be subject to risk of loss in the
event of adverse changes in the value of the index. Each Fund may also cover
call options on stock indices by holding a call on the same index and in the
same principal amount as the call written where the exercise price of the call
held (a) is equal to or less than the exercise price of the call written or (b)
is greater than the exercise price of the call written if the difference is
maintained by the Fund in liquid assets in a segregated account. Each Fund may
cover put options on stock indices by maintaining liquid assets with a value
equal to the exercise price in a segregated account, 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 is equal to or greater than the exercise price
of the put written or where the exercise price of the put held is less than the
exercise price of the put written if the difference is maintained by the Fund
in liquid assets in a segregated account. 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.
Each Fund will receive a premium from writing a put or call option, which
increases the Fund's gross income in the event the option expires unexercised
or is closed out at a profit. If the value of an index on which a Fund has
written a call option falls or remains the same, the Fund will realize a profit
in the form of the premium received (less transaction costs) that could offset
all or a portion of any decline in the value of the securities it owns. If the
value of the index rises, however, the Fund will realize a loss in its call
option position, which will reduce the benefit of any unrealized appreciation
in the Fund's stock investments. By writing a put option, 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.
Each Fund may also purchase put options on 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 the Fund's investments does not
decline as anticipated, or if the value of the option does not increase, the
Fund's loss will be limited to the premium paid for the option plus related
transaction costs. The success of this strategy will largely depend on the
accuracy of the correlation between the changes in value of the index and the
changes in value of the Fund's security holdings.
The purchase of call options on 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 the 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 the Fund owns.
The index underlying a stock index option may be a "broad-based" index, such as
the Standard & Poor's 500 Index or the New York Stock Exchange Composite Index,
the changes in value of which ordinarily will reflect movements in the stock
market in general. In contrast, certain options may be based on narrower market
indices, such as the Standard & Poor's 100 Index, or on indices of securities
of particular industry groups, such as those of oil and gas or technology
companies. A stock index assigns relative values to the stocks included in the
index and the index fluctuates with changes in the market values of the stocks
so included. The composition of the index is changed periodically.
"Yield Curve" Options: Each 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
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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, the Fund will
be able to profit from movements in the spread between the yields of the
underlying securities. The trading of yield curve options is subject to all of
the risks associated with the trading of other types of options. In addition,
however, such options present risk of loss even if the yield of one of the
underlying securities remains constant, if the spread moves in a direction or
to an extent which was not anticipated. Yield curve options written by a Fund
will be "covered." A call (or put) option is covered if the Fund holds another
call (or put) option on the spread between the same two securities and liquid
assets sufficient to cover the 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 the Fund's liability under the option
written by the Fund less the value of the option held by the Fund. Yield curve
options may also be covered in such other manner as may be in accordance with
the requirements of the counterparty with which the option is traded and
applicable laws and regulations. Yield curve options are traded
over-the-counter and because they have been only recently introduced,
established trading markets for these securities have not yet developed.
Because these securities are traded over-the-counter, the SEC has taken the
position that yield curve options are illiquid and, therefore, cannot exceed
the SEC illiquidity ceiling.
Options: The staff of the SEC has taken the position that purchased
over-the-counter options and assets used to cover written over-the-counter
options are illiquid and, therefore, together with other illiquid securities,
cannot exceed a certain percentage of the Fund's assets (the "SEC illiquidity
ceiling"). Although the Adviser disagrees with this position, the Adviser
intends to limit each Fund's writing of over-the-counter options in accordance
with the following procedure. Except as provided below, the Fund intends to
write over-the-counter options only with primary U.S. Government securities
dealers recognized by the Federal Reserve Bank of New York. Also, the contracts
which the Fund has in place with such primary dealers will provide that the
Fund has the absolute right to repurchase an option it writes at any time at a
price which represents the fair market value, as determined in good faith
through negotiation between the parties, but which in no event will exceed a
price determined pursuant to a formula in the contract. Although the specific
formula may vary between contracts with different primary dealers, the formula
will generally be based on a multiple of the premium received by a Fund for
writing the option, plus the amount, if any, of the option's intrinsic value
(i.e., the amount that the option is in-the-money). The formula may also
include a factor to account for the difference between the price of the
security and the strike price of the option if the option is written
out-of-the-money. Each Fund will treat all or a part of the formula price as
illiquid for purposes of the SEC illiquidity ceiling. Each Fund may also write
over-the-counter options with non-primary dealers, including foreign dealers,
and will treat the assets used to cover these options as illiquid for purposes
of such SEC illiquidity ceiling.
Futures Contracts: Each Fund may purchase and sell futures contracts on stock
indices and commodities, and may purchase and sell futures contracts on foreign
currencies or indices of foreign currencies ("Futures Contracts"). Consistent
with each Fund's investment objective, each Fund may 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 or foreign currency,
or for the making and acceptance of a cash settlement, at a stated time in the
future for a fixed price. By its terms, a Futures Contract provides for a
specified settlement date on which, in the case of the majority of interest
rate and foreign currency futures contracts, the fixed income securities or
currency are delivered by the seller and paid for by the purchaser, or on
which, in the case of stock index futures contracts, commodities 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."
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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 the Fund's securities portfolio that might otherwise result. If
such decline occurs, the loss in value of portfolio securities may be offset,
in whole or part, by gains on the futures position. When 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 the Fund intends to purchase. As such purchases are made, the
corresponding positions in stock index futures contracts will be closed out. In
a substantial majority of these transactions, the Fund will purchase such
securities upon termination of the futures position, but under unusual market
conditions, a long futures position may be terminated without a related
purchase of securities.
Interest rate Futures Contracts may be purchased or sold to attempt to protect
against the effects of interest rate changes on 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, that 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 that
Fund's portfolio. If interest rates did increase, the value of the debt
securities in the portfolio would decline, but the value of that Fund's
interest rate futures contracts would increase at approximately the same rate,
thereby keeping the net asset value of that 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 that 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 is more liquid than the cash market, the use of
interest rate futures contracts as a hedging technique allows a Fund to hedge
its interest rate risk without having to sell its portfolio securities.
As noted in the Prospectus, 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 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, the Fund will sustain losses on its futures position which could
reduce or eliminate the benefits of the reduced cost of portfolio securities to
be acquired.
Forward Contracts: Each 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 as well as for
non-hedging purposes. Each Fund may also enter into Forward Contracts for
"cross-hedging" purposes as noted in the Prospectus. The Fund will enter into
Forward Contracts for the purpose of protecting its current or intended
investments from fluctuations in currency exchange rates.
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, the Fund may enter into a Forward
Contract to purchase a given currency to protect against a projected increase
in the dollar value of securities denominated in such currency which the Fund
intends to acquire.
If a hedging transaction in Forward Contracts is successful, the decline in the
value of portfolio securities or the increase in the cost of securities to be
acquired may be offset, at least in part, by profits on the Forward Contract.
Nevertheless, by entering into such Forward Contracts, the Fund may be required
to forego all or a portion of the benefits which otherwise could have been
obtained from favorable movements in exchange rates. Each 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 the Fund's profit or loss based upon the value of the Contracts at the time
the offsetting transaction is executed.
Each Fund has established procedures which require the use of segregated assets
or "cover" in connection with the
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purchase and sale of such Contracts. In those instances in which the Fund
satisfies this requirement through segregation of assets, it will maintain, in
a segregated account, liquid assets which will be marked to market on a daily
basis, in an amount equal to the value of its commitments under Forward
Contracts.
Options on Futures Contracts: Each 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 Fund (i.e., the same exercise
price and expiration date) as the option previously purchased or sold. The
difference between the premiums paid and received represents the 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
Commodities 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 the difference is maintained by the Fund
in liquid assets in a segregated account with its custodian. A Fund may cover
the writing of put Options on Futures Contracts (a) through sales of the
underlying Futures Contract, (b) through segregation of liquid assets in an
amount equal to the value of the security or index underlying the Futures
Contract, or (c) through the holding of a put on the same Futures Contract and
in the same principal amount as the put written where the exercise price of the
put held is equal to or greater than the exercise price of the put written or
where the exercise price of the put held is less than the exercise price of the
put written if the difference is maintained by the Fund in liquid assets in a
segregated account with its custodian. Put and call Options on Futures
Contracts may also be covered in such other manner as may be in accordance with
the rules of the exchange on which the option is traded and applicable laws and
regulations. Upon the exercise of a call Option on a Futures Contract written
by a Fund, the Fund will be required to sell the underlying Futures Contract
which, if the Fund has covered its obligation through the purchase of such
Contract, will serve to liquidate its futures position. Similarly, where a put
Option on a Futures Contract written by a Fund is exercised, the Fund will be
required to purchase the underlying Futures Contract which, if the Fund has
covered its obligation through the sale of such Contract, will close out its
futures position.
The writing of a call option on a Futures Contract for hedging purposes
constitutes a partial hedge against declining prices of the securities or other
instruments required to be delivered under the terms of the Futures Contract.
If the futures price at expiration of the option is below the exercise price, 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 the Fund's portfolio holdings. The writing of a put option on
a Futures Contract constitutes a partial hedge against increasing prices of the
securities or other instruments required to be delivered under the terms of the
Futures Contract. If the futures price at expiration of the option is higher
than the exercise price, 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 the Fund intends to purchase. If a put or call option a Fund
has written is exercised, the Fund will incur a loss which will be reduced by
the amount of the premium it receives. Depending on the degree of correlation
between changes in the value of its portfolio securities and the changes in the
value of its futures positions, 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.
Each 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
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call Options on Futures Contracts, rather than purchasing the underlying
Futures Contracts.
Options on Foreign Currencies: Each Fund may purchase and write options on
foreign currencies for hedging purposes in a manner similar to that in which
futures contracts on foreign currencies, or Forward Contracts, will be
utilized. For example, a decline in the dollar value of a foreign currency in
which portfolio securities are denominated will reduce the dollar value of such
securities, even if their value in the foreign currency remains constant. In
order to protect against such diminutions in the value of portfolio securities,
a Fund may purchase put options on the foreign currency. If the value of the
currency does decline, the Fund will have the right to sell such currency for a
fixed amount in dollars and will thereby offset, in whole in part, the adverse
effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby increasing the cost of
such securities, each Fund may purchase call options thereon. The purchase of
such options could offset, at least partially, the effects of the adverse
movements in exchange rates. As in the case of other types of options, however,
the benefit to the Fund deriving from purchases of foreign currency options
will be reduced by the amount of the premium and related transaction costs. In
addition, where currency exchange rates do not move in the direction or to the
extent anticipated, the Fund could sustain losses on transactions in foreign
currency options which would require it to forego a portion or all of the
benefits of advantageous changes in such rates. Each Fund may write options on
foreign currencies for the same types of hedging purposes. For example, where
the Fund anticipates a decline in the dollar value of foreign-denominated
securities due to adverse fluctuations in exchange rates it could, instead of
purchasing a put option, write a call option on the relevant currency. If the
expected decline occurs, the option will most likely not be exercised, and the
diminution in value of portfolio securities will be offset by the amount of the
premium received less related transaction costs. As in the case of other types
of options, therefore, the writing of Options on Foreign Currencies will
constitute only a partial hedge.
Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, each Fund could write
a put option on the relevant currency which, if rates move in the manner
projected, will expire unexercised and allow the Fund to hedge such increased
cost up to the amount of the premium. Foreign currency options written by 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.
ADDITIONAL RISK FACTORS:
Options, Futures and Forward 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 options, Futures Contracts, Options on Futures Contracts,
Forward Contracts and options on foreign currencies depends on the degree to
which price movements in the underlying index or instrument correlate with
price movements in the relevant portion of the Fund's portfolio. In the case of
futures and options based on an index, the portfolio will not duplicate the
components of the index, and in the case of futures and options on fixed income
securities, the portfolio securities which are being hedged may not be the same
type of obligation underlying such contract. The use of Forward Contracts for
"cross hedging" purposes may involve greater correlation risks. As a result,
the correlation probably will not be exact. Consequently, the Fund bears the
risk that the price of the portfolio securities being hedged will not move in
the same amount or direction as the underlying index or obligation.
For example, if a Fund purchases a put option on an index and the index
decreases less than the value of the hedged securities, the Fund would
experience a loss which is not completely offset by the put option. It is also
possible that there may be a negative correlation between the index or
obligation underlying an option or Futures Contract in which the Fund has a
position and the portfolio securities the Fund is attempting to hedge, which
could result in a loss on both the portfolio and the hedging instrument. In
addition, a Fund may enter into transactions in Forward Contracts or options on
foreign currencies in order to hedge against exposure arising from the
currencies underlying such instruments. In such instances, the Fund will be
subject to the additional risk of imperfect correlation between changes in the
value of the currencies underlying such forwards or options and changes in the
value of the currencies being hedged. It should be noted that stock index
futures contracts or options based upon a narrower index of securities, such as
those of a particular industry group, may present greater risk than options or
futures based on a broad market index. This is due to the fact that a narrower
index is more susceptible to rapid and extreme fluctuations as a result of
changes in the value of a small number of securities. Nevertheless, where 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 the Fund's portfolio or
the intended acquisitions being hedged.
The trading of Futures Contracts, options and Forward Contracts for hedging
purposes entails the additional risk of imperfect correlation between movements
in the futures or option price and the price of the underlying index or
obligation. The anticipated spread between the prices may be distorted due
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to the differences in the nature of the markets such as differences in margin
requirements, the liquidity of such markets and the participation of
speculators in the options, futures and forward markets. In this regard,
trading by speculators in options, futures and Forward Contracts has in the
past occasionally resulted in market distortions, which may be difficult or
impossible to predict, particularly near the expiration of such contracts.
The trading of Options on Futures Contracts also entails the risk that changes
in the value of the underlying Futures 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 the Fund may not be
fully covered. As a result, the Fund could be subject to risk of loss in the
event of adverse market movements.
The writing of options on securities, options on stock indices or Options on
Futures Contracts constitutes only a partial hedge against fluctuations in the
value of 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 the Fund will retain the amount of the
premium, less related transaction costs, which will constitute a partial hedge
against any decline that may have occurred in the Fund's portfolio holdings or
any increase in the cost of the instruments to be acquired.
Where the price of the underlying obligation moves sufficiently in favor of the
holder to warrant exercise of the option, however, and the option is exercised,
the Fund will incur a loss which may only be partially offset by the amount of
the premium it received.
Moreover, by writing an option, 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.
The Funds may enter transactions in options (except for Options on Foreign
Currencies), Futures Contracts, Options on Futures Contracts and Forward
Contracts for non-hedging purposes as well as hedging purposes. Non-hedging
transactions in such investments involve greater risks and may result in losses
which may not be offset by increases in the value of portfolio securities or
declines in the cost of securities to be acquired. The Funds will only write
covered options, such that cash or securities necessary to satisfy an option
exercise will be segregated at all times, unless the option is covered in such
other manner as may be in accordance with the rules of the exchange on which
the option is traded and applicable laws and regulations. Nevertheless, the
method of covering an option employed by a Fund may not fully protect it
against risk of loss and, in any event, the Fund could suffer losses on the
option position which might not be offset by corresponding portfolio gains.
Entering into transactions in Futures Contracts, Options on Futures Contracts
and Forward Contracts for other than hedging purposes could expose the Fund to
significant risk of loss if foreign currency exchange rates do not move in the
direction or to the extent anticipated.
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
the Fund may have an option exercised against it regardless of whether the
price of the security increases or decreases.
Risk of a potential lack of a liquid secondary market. Prior to exercise or
expiration, a futures or option position can only be terminated by entering
into a closing purchase or sale transaction. This requires a secondary market
for such instruments on the exchange on which the initial transaction was
entered into. While the Funds will enter into options or futures positions only
if there appears to be a liquid secondary market therefor, there can be no
assurance that such a market will exist for any particular contracts at any
specific time. In that event, it may not be possible to close out a position
held by a Fund, and the Fund could be required to purchase or sell the
instrument underlying an option, make or receive a cash settlement or meet
ongoing variation margin requirements. Under such circumstances, if the Fund
has insufficient cash available to meet margin requirements, it will be
necessary to liquidate portfolio securities or other assets at a time when it
is disadvantageous to do so. The inability to close out options and futures
positions, therefore, could have an adverse impact on the Fund's ability
effectively to hedge its portfolio, and could result in trading losses.
The liquidity of a secondary market in a Futures Contract or option thereon may
be adversely affected by "daily price
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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 opening of a
futures or forward position and the writing of an option, such transactions
involve substantial leverage. As a result, relatively small movements in the
price of the contract can result in substantial unrealized gains or losses.
Where 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 the Fund or decreases in the prices of securities or other
assets the 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 the Fund to greater risk.
Trading and position limits. The exchange on which futures and options are
traded may impose limitations governing the maximum number of positions on the
same side of the market and involving the same underlying instrument which may
be held by a single investor, whether acting alone or in concert with others
(regardless of whether such contracts are held on the same or different
exchanges or held or written in one or more accounts or through one or more
brokers). Further, the CFTC and the various contract markets have established
limits referred to as "speculative position limits" on the maximum net long or
net short position which any person may hold or control in a particular futures
or option contract. An exchange may order the liquidation of positions found to
be in violation of these limits and it may impose other sanctions or
restrictions. The Adviser does not believe that these trading and position
limits will have any adverse impact on the strategies for hedging the
portfolios of the Fund.
Risks of Options on Futures Contracts. The amount of risk 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 related to foreign currencies and transactions not
conducted on U.S. exchanges. Transactions in Forward Contracts on foreign
currencies, as well as futures and options on foreign currencies and
transactions executed on foreign exchanges, are subject to all of the
correlation, liquidity and other risks outlined above. In addition, however,
such transactions are subject to the risk of governmental actions affecting
trading in or the prices of currencies underlying such contracts, which could
restrict or eliminate trading and could have a substantial adverse effect on
the value of positions held by 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 the Fund to respond to such events in a timely
manner.
Settlements of exercises of over-the-counter Forward Contracts or foreign
currency options generally must occur within the country issuing the underlying
currency, which in turn requires traders to accept or make delivery of such
currencies in conformity with any U.S. or foreign restrictions and regulations
regarding the maintenance of foreign banking relationships, fees, taxes or
other charges.
Unlike transactions entered into by a Fund in Futures Contracts and
exchange-traded options, options on foreign currencies, Forward Contracts and
over-the-counter options on securities are not traded on contract markets
regulated by the CFTC or (with the exception of certain foreign currency
options) the SEC. To the contrary, such instruments are traded through
financial institutions acting as market-makers, although foreign currency
options are also traded on certain national securities exchanges, such as the
Philadelphia Stock Exchange and the Chicago Board Options Exchange, subject to
SEC regulation. In an over-the-counter trading environment, many of the
protections afforded to exchange participants will not be available. For
example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of
time. Although the purchaser of an option cannot lose more than the amount of
the
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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 the Fund. Where
no such counterparty is available, it will not be possible to enter into a
desired transaction. There also may be no liquid secondary market in the
trading of over-the-counter contracts, and a Fund could be required to retain
options purchased or written, or Forward Contracts entered into, until
exercise, expiration or maturity. This in turn could limit the Fund's ability
to profit from open positions or to reduce losses experienced, and could result
in greater losses.
Further, over-the-counter transactions are not subject to the guarantee of an
exchange clearinghouse, and 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 the 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 the 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 the Fund's assets, after taking into
account unrealized profits and unrealized losses on any such contracts the Fund
has entered into, and excluding, in computing such 5%, the in-the-money amount
with respect to an option that is in-the-money at the time of purchase.
Risks of investing in Lower Rated Bonds
Each Fund may invest in fixed income securities, and may invest in convertible
securities, rated Baa by Moody's Investors Service, Inc. ("Moody's") or BBB by
Standard & Poor's Ratings Services ("S&P"), Fitch Investors Service, Inc.
("Fitch") or Duff & Phelps Credit Rating Co. ("Duff & Phelps"), and comparable
unrated securities. These securities, while normally exhibiting adequate
protection parameters, have speculative characteristics and changes in economic
conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than in the case of higher
grade fixed income securities.
Each Fund may also 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") to the extent described in the
Prospectus. 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
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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.
--------------------------------
The policies stated above are not fundamental and may be changed without
shareholder approval, as may each Fund's investment objective.
Investment Restrictions.
Each Fund has adopted the following restrictions which cannot be changed
without the approval of the holders of a majority of a Fund's shares (which, as
used in this SAI, means the lesser of (i) more than 50% of the outstanding
shares of the Trust or a series or class, as applicable or (ii) 67% or more of
the outstanding shares of the Trust or a series or class, as applicable,
present at a meeting at which holders of more than 50% of the outstanding
shares of the Trust or a series or class, as applicable are represented in
person or by proxy): Except for Investment Restriction (1) and non-fundamental
investment policy (1), these investment restrictions and policies are adhered
to at the time of purchase of utilization of assets; a subsequent change in
circumstances will not be considered to result in a violation of policy.
Each Fund may not:
(1) borrow amounts in excess of 331/3% of its net assets plus 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 contract, and
collateral arrangements with respect to initial and variation margin, are
not deemed to be the issuance of a senior security;
(5) make loans to other persons. For these purposes, the purchase of short-term
commercial paper, the purchase of a portion or all of an issue of debt
securities, the lending of portfolio securities, or the investment of a
Fund's assets in repurchase agreements, shall not be considered the making
of a loan; or
(6) purchase any securities of an issuer of a particular industry, if as a
result, 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, each Fund has the following nonfundamental policies which may be
changed without shareholder approval. Each Fund will not:
(1) invest in illiquid investments, including securities subject to legal or
contractual restrictions on resale or for
14
<PAGE>
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; or
(3) pledge, mortgage or hypothecate in excess of 331/3% 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.
3. MANAGEMENT OF THE FUNDS
The Trust's Board of Trustees provides broad supervision over the affairs of
each Fund. The Adviser 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
ages and principal occupations during the past five years. (Their titles may
have varied during that period.)
Trustees
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; Real Estate Consultant; Capitol Entertainment (Blockbuster
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
JAMES O. YOST,* Assistant Treasurer (born 6/12/60) Massachusetts Financial
Services Company, Vice President
MARK E. BRADLEY,* Assistant Treasurer (born 11/23/59) Massachusetts Financial
Services Company, Vice President (since March 1997); Putnam Investments, Vice
President (from September 1994 until March 1997); Ernst & Young, Senior Tax
Manager (prior to September 1994).
ELLEN M. MOYNIHAN,* Assistant Treasurer
(born 11/13/57)
Massachusetts Financial Services Company, Vice President (since September
1996); Deloitte & Touche, LLP, Senior Manager (prior to September 1996).
STEPHEN E. CAVAN,* Secretary and Clerk (born 11/6/53) Vertex Investment
Management, Inc., Secretary; Massachusetts Financial Services Company, Senior
Vice President, General Counsel and Assistant Secretary
JAMES R. BORDEWICK, JR.,* Assistant Secretary
(born 3/6/59)
Massachusetts Financial Services Company, Senior Vice President and Associate
General Counsel
--------------------------------
* "Interested persons" (as defined in the 1940 Act) of the Adviser, whose
address is 500 Boylston Street, Boston, Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain affiliates of
Vertex or with certain other funds of which Vertex or an affiliate of Vertex is
the investment adviser or distributor. Mr. Cavan, the Secretary of MFD, holds
similar positions with certain other Vertex affiliates.
While each Fund pays the compensation of the non-interested Trustees, the
Trustees are currently waiving their rights to receive such fees.
Trustee Compensation Table
The Trust pays the compensation of the Trustees who are not officers of
Vertex (who will each receive $1,300 annually plus $150 per meeting and $150
per committee meeting attended). Set forth below is certain information
concerning the cash compensation paid to the Trustees.
<TABLE>
<CAPTION>
Trustee Fees Total Trustee Fees
from from the Fund
Name of Trustee Fund(1) Complex(2)
- ------------------- -------------- -------------------
<S> <C> <C>
Nelson J. Darling $0
William R. Gutow 0
</TABLE>
- ------------------------
(1) Estimated for the fiscal year ended September 30, 1998.
(2) For calendar year 1997. All Trustees receiving compensation served as
Trustees of 18 funds within the MFS Fund Complex (having aggregate net
assets at December 31, 1997 of approximately $ million).
The Declaration of Trust provides that the Trust will indemnify its Trustees
and officers against liabilities and expenses incurred in connection with
litigation in which they may be involved because of their offices with the
Trust, unless, as to liabilities 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
15
<PAGE>
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
Vertex is a wholly owned subsidiary of Massachusetts Financial Services Company
("MFS"). 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 Assurance Company of Canada ("Sun Life").
Investment Advisory Agreement--The Adviser manages each Fund pursuant to
separate Investment Advisory Agreements, each dated April , 1998 (the
"Advisory Agreements"). Under the Advisory Agreements, 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.
As described in the Prospectus, each Fund pays the Adviser as compensation for
its services, a management fee that is comprised of two components. The first
component is a basic fee equal to 1.50% per annum of the each Fund's average
daily net assets (the "Basic Fee"). The second component is a performance fee
adjustment. Only the Basic Fee will be paid by the Funds during their first
year of investment operations (May 1, 1998 through April 30, 1999); the
performance fee adjustment will be in effect on and after May 1, 1999.
The application of the performance adjustment is illustrated by the following
hypothetical example, assuming that the net asset value of Class A shares of a
Fund and the level of the Index were $10 and $100, respectively, on the first
day of the Performance Period.
<TABLE>
<CAPTION>
Investment
Performance* Cumulative Change
First Day Last Day Absolute Percentage
<S> <C> <C> <C> <C>
Fund $ 10 $ 13 +$3 +30%
Index 100 123 +23 +23%
Relative
Performance +7%
</TABLE>
*Reflects performance at net asset value. Any dividends or capital gains
distributions paid by the Fund are treated as if reinvested in shares of the
Fund at net asset value as of the record date and any dividends paid on
securities which comprise the Index are treated as if reinvested on the
ex-dividend date.
The difference in relative performance for the Performance Period is +7
percentage points. Accordingly, the annualized management fee rate for the last
month of the Performance Period would be calculated as follows (assuming the
last month has 30 days): (i) 30/365 of the Basic Fee of 1.50% would be applied
to the Fund's average daily net assets for the month resulting in a dollar
amount; (ii) the +7 percentage point difference is multiplied by the
performance adjustment rate of 0.10% producing a rate of 0.70%; and (iii)
30/365 of 0.70% is then applied to the average daily net assets of the Fund
over the Performance Period resulting in a dollar amount which is added to the
dollar amount of the Basic Fee. This is the amount of the management fee paid
for the month.
Therefore, since the difference in performance is +7 percentage points, the
monthly fee rate for the month would be 30/365 of 1.50% (the Basic Fee) plus a
performance adjustment of 30/365 of 0.70% (7 x 0.10%), or 30/365 of 2.20%.
If the investment performance of the Fund during the performance period was
exceeded by the record of the S&P 500 Index for the All Cap Fund, the Research
All Cap Fund, the Growth Fund and the Contrarian Fund, and the Russell 2000
Index for the Discovery Fund, the dollar amount of performance adjustment would
be deducted from the Basic Fee. The fee cannot exceed 3.00% or be below 0% on a
per annum basis.
The Adviser is currently waiving its right to receive its management fee from
each Fund. 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 each Fund's
investments, effecting its portfolio transactions, and, in general,
administering its affairs.
Each Advisory Agreement will remain in effect until August 1, 1999, and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Fund's shares (as defined in "Investment Objective, Policies and Restrictions")
and, in either case, by a majority of the Trustees who are not parties to the
Advisory Agreement or interested persons of any such party.
Each 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 Objectives, Policies and Restrictions"), or by either
party on not more than 60 days' nor less than 30 days' written notice. Each
Advisory Agreement provides that if Vertex ceases to serve as the Adviser to
the Fund, the Fund will change its name so as to delete the word "Vertex" and
that Vertex may render services to others and may permit other fund clients to
use the word "Vertex" in their names. Each 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.
16
<PAGE>
Administrator
MFS provides each Fund with certain financial, legal, compliance, shareholder
communications and other administrative services pursuant to a Master
Administrative Services Agreement dated March 1, 1997, as amended. Under this
Agreement, the Fund pays MFS an administrative fee of up to 0.015% per annum of
the Fund's average daily net assets. This fee reimburses MFS for a portion of
the costs it incurs to provide such services.
Custodian
State Street Bank and Trust Company (the "Custodian") is the custodian of each
Fund's assets. The Custodian's responsibilities include safekeeping and
controlling each Fund's cash and securities, handling the receipt and delivery
of securities, determining income and collecting interest and dividends on each
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 each Fund. The Custodian does not
determine the investment policies of each Fund or decide which securities a
Fund will buy or sell. Each 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 each
Fund.
Shareholder Servicing Agent
MFS Service Center, Inc. (the "Shareholder Servicing Agent"), a wholly owned
subsidiary of MFS, is each Fund's shareholder servicing agent, pursuant to
Shareholder Servicing Agreement dated November 17, 1995, as amended (the
"Agency Agreement"), with the Trust. The Shareholder Servicing Agent's
responsibilities under the Agency Agreement include administering and
performing transfer agent functions and the keeping of records in connection
with the issuance, transfer and redemption of each class of shares of each
Fund. For these services, the Shareholder Servicing Agent will receive a fee
calculated as a percentage of the average daily net assets of each Fund at an
effective annual rate of 0.1125%. In addition, the Shareholder Servicing Agent
will be reimbursed by each Fund for certain expenses incurred by the
Shareholder Servicing Agent on behalf of the Fund. The Custodian has contracted
with the Shareholder Servicing Agent to perform certain dividend disbursing
agent functions for the Fund.
Distributor
MFD, a wholly owned subsidiary of MFS, serves as distributor for the continuous
offering of shares of each Fund pursuant to a Distribution Agreement with the
Trust dated as of January 1, 1995 (the "Distribution Agreement").
Class A Shares: MFD acts as agent in selling Class A shares of each Fund to
dealers. The public offering price of Class A shares of each Fund is their net
asset value next computed after the sale plus a sales charge which varies based
upon the quantity purchased. The public offering price of a Class A share of
each Fund is calculated by dividing the net asset value of a Class A share by
the difference (expressed as a decimal) between 100% and the sales charge
percentage of offering price applicable to the purchase (see "Purchases" in the
Prospectus). The sales charge scale set forth in the Prospectus applies to
purchases of Class A shares of each Fund alone or in combination with shares of
all classes of certain other funds in the MFS Family of Funds (the "MFS Funds")
and other funds (as noted under Right of Accumulation) by any person, including
members of a family unit (e.g., husband, wife and minor children) and bona fide
trustees, and also applies to purchases made under the Right of Accumulation or
a Letter of Intent (see "Investment and Withdrawal Programs" below). A group
might qualify to obtain quantity sales charge discounts (see "Investment and
Withdrawal Programs" below).
Class A shares of each Fund may be sold at their net asset value to certain
persons and in certain instances, as described in the Prospectus. Such sales
are made without a sales charge to promote good will with employees and others
with whom Vertex, MFS, MFD and/or a Fund have business relationships, and
because the sales effort, if any, involved in making such sales is negligible.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price of the Class A shares. Dealer allowances
expressed as a percentage of offering price for all offering prices are set
forth in the Prospectus (see "Purchases" in the Prospectus). The difference
between the total amount invested and the sum of (a) the net proceeds to a Fund
and (b) the dealer commission, is the commission paid to the distributor.
Because of rounding in the computation of offering price, the portion of the
sales charge paid to the distributor may vary and the total sales charge may be
more or less than the sales charge calculated using the sales charge expressed
as a percentage of the offering price or as a percentage of the net amount
invested as listed in the Prospectus. In the case of the maximum sales charge,
the dealer retains 5.00% and MFD retains approximately 3/4 of 1% of the public
offering price. MFD, on behalf of each Fund, pays a commission to dealers who
initiate and are responsible for purchases of $1 million or more as described
in the Prospectus.
Class B Shares, Class C Shares and Class I Shares: MFD acts as agent in selling
Class B, Class C shares and Class I shares of each Fund. The public offering
price of Class B, Class C and Class I shares is their net asset value next
computed after the sale (see "Purchases" in the Prospectus and the Prospectus
supplement pursuant to which Class I shares are offered).
GENERAL: Neither MFD nor dealers are permitted to delay placing orders to
benefit themselves by a price change. On occasion, MFD may obtain brokers loans
from various banks, including the custodian banks for the Vertex Funds, to
facilitate
17
<PAGE>
the settlement of sales of shares of a Fund to dealers. MFD may benefit from
its temporary holding of funds paid to it by investment dealers for the
purchase of Fund shares.
The Distribution Agreement will remain in effect until August 1, 1999 and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Trust's shares (as defined in "Investment Objective, Policies and
Restrictions--Investment Restrictions") and in either case, by a majority of
the Trustees who are not parties to the Distribution Agreement or interested
persons of any such party. The Distribution Agreement terminates automatically
if it is assigned and may be terminated without penalty by either party on not
more than 60 days' nor less than 30 days' notice.
4. PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the 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 each Fund's investments are reviewed by the Board of Trustees.
The primary consideration in placing portfolio security transactions is
execution at the most favorable prices. The Adviser has complete freedom as to
the markets in and broker-dealers through which it seeks this result. In the
U.S. and in some other countries debt securities are traded principally in the
over-the-counter market on a net basis through dealers acting for their own
account and not as brokers. In other countries both debt and equity securities
are traded on exchanges at fixed commission rates. The cost of securities
purchased from underwriters includes an underwriter's commission or concession,
and the prices at which securities are purchased and sold from and to dealers
include a dealer's mark-up or mark-down. The Adviser normally seeks to deal
directly with the primary market makers or on major exchanges unless, in its
opinion, better prices are available elsewhere. Subject to the requirement of
seeking execution at the best available price, securities 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 a Fund and of the other investment company clients of MFD as a factor
in the selection of broker-dealers to execute the Fund's portfolio
transactions. Under the Advisory Agreements 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 a 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 a
Fund. The Trustees (together with the Trustees of the other MFS Funds) have
directed the Adviser and MFS to allocate a total of $39,355 of commission
business from the MFS Funds to the Pershing Division of Donaldson Lufkin &
Jenrette as consideration for the annual renewal of certain publications
provided by Lipper Analytical Securities Corporation (which provides
information useful to the Trustees in reviewing the relationship between a Fund
and the Adviser).
The Adviser's investment management personnel attempt to evaluate the quality
of Research provided by brokers. The Adviser sometimes uses evaluations
resulting from this effort as a consideration in the selection of brokers to
execute portfolio transactions.
The management fee of the Adviser will not be reduced as a consequence of the
Adviser's receipt of brokerage and research service. To the extent a 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
18
<PAGE>
which cannot be presently determined. Such services would be useful and of
value to the Adviser in serving both a 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 a Fund's
portfolio as well as for that of one or more of the other clients of the
Adviser or any affiliate of the Adviser. Investment decisions for a 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 a Fund is concerned. In other cases, however, a Fund
believes that its ability to participate in volume transactions will produce
better executions for the Fund.
5. SHAREHOLDER SERVICES
Investment and Withdrawal Programs--Each Fund makes available the following
programs designed to enable shareholders to add to their investment or withdraw
from it with a minimum of paper work. These are described below and, in certain
cases, in the Prospectus. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or a Fund.
Letter of Intent: If a shareholder (other than a group purchaser
described below) anticipates purchasing $50,000 or more of Class A shares of a
Fund alone or in combination with shares of any class of MFS Funds or MFS Fixed
Fund (a bank collective investment fund) within a 13-month period (or 36-month
period, in the case of purchases of $1 million or more), the shareholder may
obtain Class A shares of the Fund at the same reduced sales charge as though
the total quantity were invested in one lump sum by completing the Letter of
Intent section of the Account Application or filing a separate Letter of Intent
application (available from the Shareholder Servicing Agent) within 90 days of
the commencement of purchases. Subject to acceptance by MFD and the conditions
mentioned below, each purchase will be made at a public offering price
applicable to a single transaction of the dollar amount specified in the Letter
of Intent application. The shareholder or his dealer must inform MFD that the
Letter of Intent is in effect each time shares are purchased. The shareholder
makes no commitment to purchase additional shares, but if his purchases within
13 months (or 36 months in the case of purchases of $1 million or more) plus
the value of shares credited toward completion of the Letter of Intent do not
total the sum specified, he will pay the increased amount of the sales charge
as described below. Instructions for issuance of shares in the name of a person
other than the person signing the Letter of Intent application must be
accompanied by a written statement from the dealer stating that the shares were
paid for by the person signing such Letter. Neither income dividends nor
capital gain distributions taken in additional shares will apply toward the
completion of the Letter of Intent. Dividends and distributions of other MFS
Funds automatically reinvested in shares of a Fund pursuant to the Distribution
Investment Program will also not apply toward completion of the Letter of
Intent.
Out of the shareholder's initial purchase (or subsequent purchases if
necessary), 5% of the dollar amount specified in the Letter of Intent
application shall be held in escrow by the Shareholder Servicing Agent in the
form of shares registered in the shareholder's name. All income dividends and
capital gain distributions on escrowed shares will be paid to the shareholder
or to his order. When the minimum investment so specified is completed (either
prior to or by the end of the 13-month period or 36-month period, as
applicable), the shareholder will be notified and the escrowed shares will be
released.
If the intended investment is not completed, the Shareholder Servicing Agent
will redeem an appropriate number of the escrowed shares in order to realize
such difference. Shares remaining after any such redemption will be released by
the Shareholder Servicing Agent. By completing and signing the Account
Application or separate Letter of Intent application, the shareholder
irrevocably appoints the Shareholder Servicing Agent his attorney to surrender
for redemption any or all escrowed shares with full power of substitution in
the premises.
Right of Accumulation: A shareholder qualifies for cumulative quantity
discounts on the purchase of Class A shares when his new investment, together
with the current offering price value of all holdings of Class A, Class B and
Class C shares of that shareholder in the MFS Funds or MFS Fixed Fund reaches a
discount level. See "Purchases" in the Prospectus for the sales charges on
quantity discounts. For example, if a shareholder owns shares with a current
offering price value of $37,500 and purchases an additional $12,500 of Class A
shares of a Fund, the sales charge for the $12,500 purchase would be at the
rate of 4.75% (the rate applicable to single transactions of $50,000). A
shareholder must provide the Shareholder Servicing Agent (or his investment
dealer must provide MFD) with information to verify that the quantity sales
charge discount is applicable at the time the investment is made.
Subsequent Investment by Telephone: Each shareholder may purchase
additional shares of any MFS
19
<PAGE>
Fund by telephoning the Shareholder Servicing Agent toll-free at (800)
225-2606. The minimum purchase amount is $50 and the maximum purchase amount is
$100,000. Shareholders wishing to avail themselves of this telephone purchase
privilege must so elect on their Account Application and designate thereon a
bank and account number from which purchases will be made. If a telephone
purchase request is received by the Shareholder Servicing agent on any business
day prior to the close of regular trading on the Exchange (generally, 4:00
p.m., Eastern time), the purchase will occur at the closing net asset value of
the shares purchased on that day. The Shareholder Servicing Agent may be liable
for any losses resulting from unauthorized telephone transactions if it does
not follow reasonable procedures designed to verify the identity of the caller.
The Shareholder Servicing agent will request personal or other information from
the caller, and will normally also record calls. Shareholders should verify the
accuracy of confirmation statements immediately after their receipt.
Distribution Investment Program: Distributions of dividends and capital
gains made by a Fund with respect to a particular class of shares may be
automatically invested in shares of the same class of one of the other MFS
Funds, if shares of that fund are available for sale. Such investments will be
subject to additional purchase minimums. Distributions will be invested at net
asset value (exclusive of any sales charge) and will not subject to any CDSC.
Distributions will be invested at the close of business on the payable date for
the distribution. A shareholder considering the Distribution Investment Program
should obtain and read the prospectus of the other fund and consider the
differences in objectives and policies before making any investment.
Systematic Withdrawal Plan: A shareholder may direct the Shareholder
Servicing Agent to send him (or anyone he designates) regular periodic payments
based upon the value of his account. Each payment under a Systematic Withdrawal
Plan ("SWP") must be at least $100, except in certain limited circumstances.
The aggregate withdrawals of Class B and Class C shares in any year pursuant to
a SWP generally are limited to 10% of the value of the account at the time of
establishment of the SWP. SWP payments are drawn from the proceeds of share
redemptions (which would be a return of principal and, if reflecting a gain,
would be taxable). Redemptions of Class B and Class C shares will be made in
the following order: (i) any "Reinvested Shares"; (ii) to the extent necessary,
any "Free Amount"; and (iii) to the extent necessary, the "Direct Purchase"
subject to the lowest CDSC (as such terms are defined in "Contingent Deferred
Sales Charge" in the Prospectus). The CDSC will be waived in the case of
redemptions of Class B and Class C shares pursuant to a SWP, but will not be
waived in the case of SWP redemptions of Class A shares which are subject to a
CDSC. To the extent that redemptions for such periodic withdrawals exceed
dividend income reinvested in the account, such redemptions will reduce and may
eventually exhaust the number of shares in the shareholder's account. All
dividend and capital gain distributions for an account with a SWP will be
received in full and fractional shares of a Fund at the net asset value in
effect at the close of business on the record date for such distributions. To
initiate this service, shares having an aggregate value of at least $5,000
either must be held on deposit by, or certificates for such shares must be
deposited with, the Shareholder Servicing Agent. With respect to Class A
shares, maintaining a withdrawal plan concurrently with an investment program
would be disadvantageous because of the sales charges included in share
purchases and the imposition of a CDSC on certain redemptions. The shareholder
may deposit into the account additional shares of a Fund, change the payee or
change the dollar amount of each payment. The Shareholder Servicing Agent may
charge the account for services rendered and expenses incurred beyond those
normally assumed by a Fund with respect to the liquidation of shares. No charge
is currently assessed against the account, but one could be instituted by the
Shareholder Servicing Agent on 60 days' notice in writing to the shareholder in
the event that a Fund ceases to assume the cost of these services. Each Fund
may terminate any SWP for an account if the value of the account falls below
$5,000 as a result of share redemptions (other than as a result of a SWP) or an
exchange of shares of the Fund for shares of another MFS Fund. Any SWP may be
terminated at any time by either the shareholder or the Fund.
Invest by Mail: Additional investments of $50 or more may be made at any
time by mailing a check payable to a Fund directly to the Shareholder Servicing
Agent. The shareholder's account number and the name of his investment dealer
must be included with each investment.
Group Purchases: A bona fide group and all its members may be treated as
a single purchaser and, under the Right of Accumulation (but not the Letter of
Intent) obtain quantity sales charge discounts on the purchase of Class A
shares if the group (1) gives its endorsement or authorization to the
investment program so it may be used by the investment dealer to facilitate
solicitation of the membership, thus effecting economies of sales effort; (2)
has been in existence for at least six months and has a legitimate purpose
other than to purchase mutual fund shares at a discount; (3) is not a group of
individuals whose sole organizational nexus is as credit cardholders of a
company, policyholders of an insurance company, customers of a bank or
broker-dealer, clients of an investment Adviser or other similar groups; and
(4) agrees to provide certification of membership of those members investing
money in the MFS Funds upon the request of MFD.
Automatic Exchange Plan: Shareholders having account balances of at least
$5,000 in any MFS Fund may participate in the Automatic Exchange Plan. The
Automatic Exchange Plan provides for automatic exchanges of funds from the
shareholder's account in an MFS Fund for investment in the same class of shares
of other MFS Funds selected by the shareholder (if available for sale). Under
the Automatic Exchange Plan, exchanges of at least $50 each may be made to up
to six different funds effective on the seventh day of each month or of every
third month, depending whether monthly or quarterly exchanges are
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elected by the shareholder. If the seventh day of the month is not a business
day, the transaction will be processed on the next business day. Generally, the
initial transfer will occur after receipt and processing by the Shareholder
Servicing Agent of an application in good order. Exchanges will continue to be
made from a shareholder's account in any MFS Fund, as long as the balance of
the account is sufficient to complete the exchanges. Additional payments made
to a shareholder's account will extend the period that exchanges will continue
to be made under the Automatic Exchange Plan. However, if additional payments
are added to an account subject to the Automatic Exchange Plan shortly before
an exchange is scheduled, such funds may not be available for exchanges until
the following month; therefore, care should be used to avoid inadvertently
terminating the Automatic Exchange Plan through exhaustion of the account
balance.
No transaction fee for exchanges will be charged in connection with the
Automatic Exchange Plan. However, exchanges of shares of MFS Money Market Fund,
MFS Government Money Market Fund and Class A shares of MFS Cash Reserve Fund
will be subject to any applicable sales charge. Changes in amounts to be
exchanged to each fund, the Funds to which exchanges are to be made and the
timing of exchanges (monthly or quarterly), or termination of a shareholder's
participation in the Automatic Exchange Plan will be made after instructions in
writing or by telephone (an "Exchange Change Request") are received by the
Shareholder Servicing Agent in proper form (i.e., if in writing--signed by the
record owner(s) exactly as shares are registered; if by telephone--proper
account identification is given by the dealer or shareholder of record). Each
Exchange Change Request (other than termination of participation in the
program) must involve at least $50. Generally, if an Exchange Change Request is
received by telephone or in writing before the close of business on the last
business day of a month, the Exchange Change Request will be effective for the
following month's exchange.
A shareholder's right to make additional investments in any of the MFS Funds,
to make exchanges of shares from one MFS Fund to another and to withdraw from
an MFS Fund, as well as a shareholder's other rights and privileges are not
affected by a shareholder's participation in the Automatic Exchange Plan. The
Automatic Exchange Plan is part of the Exchange Privilege. For additional
information regarding the Automatic Exchange Plan, including the treatment of
any CDSC, see "Exchange Privilege" below.
Reinstatement Privilege: Shareholders of each Fund and shareholders of
the other MFS Funds (except MFS Money Market Fund, MFS Government Money Market
Fund and holders of Class A shares of MFS Cash Reserve Fund in the case where
shares of such funds are acquired through direct purchase or reinvested
dividends) who have redeemed their shares have a one-time right to reinvest the
redemption proceeds in the same class of shares of any of the MFS Funds (if
shares of the fund are available for sale) at net asset value (without a sales
charge) and, if applicable, with credit for any CDSC paid. In the case of
proceeds reinvested in MFS Money Market Fund, MFS Government Money Market Fund
and Class A shares of MFS Cash Reserve Fund, the shareholder has the right to
exchange the acquired shares for shares of another MFS Fund at net asset value
pursuant to the exchange privilege described below. Such a reinvestment must be
made within 90 days of the redemption and is limited to the amount of the
redemption proceeds. If the shares credited for any CDSC paid are then redeemed
within six years of the initial purchase in the case of Class B shares or 12
months of the initial purchase in the case of Class C shares and certain Class
A shares, a CDSC will be imposed upon redemption. Although redemptions and
repurchases of shares are taxable events, a reinvestment within a certain
period of time in the same fund may be considered a "wash sale" and may result
in the inability to recognize currently all or a portion of a loss realized on
the original redemption for federal income tax purposes. Please see your tax
adviser for further information.
Exchange Privilege--Subject to the requirements set forth below, some or all of
the shares of the same class in an account with a Fund for which payment has
been received by the Fund (i.e., an established account) may be exchanged for
shares of the same class of any of the other MFS Funds (if available for sale
and if purchaser is eligible to purchase the Class of shares) at net asset
value. Exchanges will be made only after instructions in writing or by
telephone (an "Exchange Request") are received for an established account by
the Shareholder Servicing Agent.
Each Exchange Request must be in proper form (i.e., if in writing--signed by
the record owner(s) exactly as the shares are registered; if by
telephone--proper account identification is given by the dealer or shareholder
of record), and each exchange must involve either shares having an aggregate
value of at least $1,000 ($50 in the case of retirement plan participants whose
sponsoring organizations subscribe to MFS FUNDamental 401(k) Plan or another
similar 401(k) recordkeeping system made available by the Shareholder Servicing
Agent) or all the shares in the account. Each exchange involves the redemption
of the shares of the Fund to be exchanged and the purchase at net asset value
(i.e., without a sales charge) of shares of the same class of the other MFS
Fund. Any gain or loss on the redemption of the shares exchanged is reportable
on the shareholder's federal income tax return, unless both the shares received
and the shares surrendered in the exchange are held in a tax-deferred
retirement plan or other tax-exempt account. No more than five exchanges may be
made in any one Exchange Request by telephone. If the Exchange Request is
received by the Shareholder Servicing Agent prior to the close of regular
trading on the Exchange the exchange usually will occur on that day if all the
requirements set forth above have been complied with at that time. However,
payment of the redemption proceeds by a Fund, and thus the purchase of shares
of the other MFS Fund, may be delayed for up to seven days if the Fund
determines that such a delay would be in the
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best interest of all its shareholders. Investment dealers which have satisfied
criteria established by MFD may also communicate a shareholder's Exchange
Request to MFD by facsimile subject to the requirements set forth above.
No CDSC is imposed on exchanges among the MFS Funds, although liability for the
CDSC is carried forward to the exchanged shares. For purposes of calculating
the CDSC upon redemption of shares acquired in an exchange, the purchase of
shares acquired in one or more exchanges is deemed to have occurred at the time
of the original purchase of the exchanged shares.
Additional information with respect to any of the MFS Funds, including a copy
of its current prospectus, may be obtained from investment dealers or the
Shareholder Servicing Agent. A shareholder considering an exchange should
obtain and read the prospectus of the other fund and consider the differences
in objectives and policies before making any exchange. Shareholders of the
other MFS Funds (except MFS Money Market Fund, MFS Government Money Market Fund
and Class A Shares of MFS Cash Reserve Fund for shares acquired through direct
purchase and dividends reinvested prior to June 1, 1992) have the right to
exchange their shares for shares of each Fund, subject to the conditions, if
any, set forth in their respective prospectuses. In addition, unitholders of
the MFS Fixed Fund have the right to exchange their units (except units
acquired through direct purchases) for shares of a Fund, subject to the
conditions, if any, imposed upon such unitholders by the MFS Fixed Fund.
Any state income tax advantages for investment in shares of each state-specific
series of MFS Municipal Series Trust may only benefit residents of such states.
Investors should consult with their own tax advisers to be sure this is an
appropriate investment, based on their residency and each state's income tax
laws. The exchange privilege (or any aspect of it) may be changed or
discontinued and is subject to certain limitations (see "Purchases" in the
Prospectus).
Tax-Deferred Retirement Plans--Shares of each Fund may be purchased by all
types of tax-deferred retirement plans. MFD makes available through investment
dealers plans and/ or custody agreements for the following:
[bullet] Individual Retirement Accounts (IRAs) (for individuals and their
non-employed spouses who desire to make limited contributions to a
tax-deferred retirement program and, if eligible, to receive a federal
Income tax deduction for amounts contributed);
[bullet] Simplified Employee Pension (SEP-IRA) Plans;
[bullet] Retirement plans qualified under Section 401(k) of the Internal
Revenue Code of 1986, as amended (the "Code");
[bullet] 403(b) Plans (deferred compensation arrangements for employees of
public school systems and certain non-profit organizations); and
[bullet] Certain other qualified pension and profit-sharing plans.
The plan documents provided by MFD designate a trustee or custodian (unless
another trustee or custodian is designated by the individual or group
establishing the plan) and contain specific information about the plans. Each
plan provides that dividends and distributions will be reinvested
automatically. For further details with respect to any plan, including fees
charged by the trustee, custodian or MFD, tax consequences and redemption
information, see the specific documents for that plan. Plan documents other
than those provided by MFD may be used to establish any of the plans described
above. Third party administrative services, available for some corporate plans,
may limit or delay the processing of transactions.
An investor should consult with his tax adviser before establishing any of the
tax-deferred retirement plans described above.
Class C shares are not currently available for purchase by any retirement plan
qualified under Code Sections 401(a) or 403(b) if the retirement plan and/or
the sponsoring organization subscribe to the MFS FUNDamental 401(k) Plan or
another similar Section 401(a) or 403(b) recordkeeping program made available
by the Shareholder Servicing Agent.
6. TAX STATUS
Each Fund has elected to be treated and intends to qualify each year as a
"regulated investment company" under Subchapter M of the Code, by meeting all
applicable requirements of Subchapter M, including requirements as to the
nature of the Fund's gross income, the amount of Fund distributions, and the
composition of the Fund's portfolio assets. Because each Fund intends to
distribute all of its net investment income and net realized capital gains to
shareholders in accordance with the timing requirements imposed by the Code, it
is not expected that any Fund will be required to pay any federal income or
excise taxes, although a Fund's foreign-source income may be subject to foreign
withholding taxes. If a Fund should fail to qualify as a "regulated investment
company" in any year, the Fund would incur a regular corporate federal income
tax upon its taxable income and Fund distributions would generally be taxable
as ordinary dividend income to the shareholders.
Shareholders of each Fund normally will have to pay federal income tax and any
state or local income taxes on the dividends and capital gain distributions
they receive from the Fund. Dividends from ordinary income and any
distributions from net short-term capital gains are taxable to shareholders as
ordinary income for federal income tax purposes, whether the distributions are
paid in cash or reinvested in additional shares. A portion of a Fund's
dividends from ordinary income 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.
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Distributions of net capital gain (i.e., the excess of net long-term capital
gains over net short-term capital loss), whether paid in cash or reinvested in
additional shares, are taxable to a Fund's shareholders as long-term capital
gains for federal income tax purposes without regard to the length of time
shareholders have held their shares. Such capital gains may be taxable to
shareholders that are individuals, estates or trusts at maximum rates of 20%,
25%, or 28% depending upon the source of the gains.
Any Fund dividend or other distribution that is declared in October, November
or December of any calendar year, that is payable to shareholders of record in
such a month, and that is paid the following January will be treated as if
received by the shareholders on December 31 of the year in which the
distribution is declared. Each Fund will notify shareholders regarding the
federal tax status of its distributions after the end of each calendar year.
Any Fund distribution will have the effect of reducing the per share net asset
value of shares in a Fund by the amount of the distribution. Shareholders
purchasing shares shortly before the record date of any distribution may thus
pay the full price for the shares and then effectively receive a portion of the
purchase price back as a taxable distribution.
In general, any gain or loss realized upon a taxable disposition of shares of a
Fund by a shareholder that holds such shares as a capital asset will be treated
as long-term capital gain or loss if the shares have been held for more than
twelve months and otherwise as short-term capital gain or loss; a long-term
capital gain realized by an individual, estate or trust may be eligible for the
reduced tax rates noted above if the shares were held for more than 18 months.
However, any loss realized upon a disposition of shares in a Fund held for six
months or less will be treated as a long-term capital loss to the extent of any
distributions of net capital gain made with respect to those shares. Any loss
realized upon a disposition of shares may also be disallowed under rules
relating to wash sales. Gain may be increased (or loss reduced) upon a
redemption of Class A shares of a Fund within ninety days after their purchase
followed by any purchase (including purchases by exchange or by reinvestment)
without payment of an additional sales charge of Class A shares of that Fund or
of another MFS Fund (or any other shares of an MFS Fund generally sold subject
to a sales charge).
Each Fund's current dividend and accounting policies will affect the amount,
timing, and character of distributions to shareholders and may under certain
circumstances make an economic return of capital taxable to shareholders. A
Fund's investments in zero coupon bonds, deferred interest bonds,
payment-in-kind bonds, certain stripped securities, and certain securities
purchased at a market discount will cause that Fund to recognize income prior
to the receipt of cash payments with respect to those securities. In order to
distribute this income and avoid a tax on the Fund, the Fund may be required to
liquidate portfolio securities that it might otherwise have continued to hold,
potentially resulting in additional taxable gain or loss to the Fund. An
investment in residual interests of a CMO that has elected to be treated as a
real estate mortgage investment conduit, or "REMIC," can create complex tax
problems, especially if the Fund has state or local governments or other
tax-exempt organizations as shareholders.
Each 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 which could alter the effects of
these rules. Each Fund will limit its activities in options, Futures Contracts,
Forward Contracts, short sales and swaps and related transactions to the extent
necessary to meet the requirements of Subchapter M of the Code.
If a Fund has an "appreciated financial position"--generally, an interest
(including an interest through an option, Futures Contract or Forward Contract,
or short sale) with respect to any stock, debt instrument (other than "straight
debt"), or partnership interest the fair market value of which exceeds its
adjusted basis--and enters into a "constructive sale" of the same or
substantially similar property, the Fund will be treated as having made an
actual sale thereof, with the result that gain will be recognized at that time.
A constructive sale generally consists of a short sale, an offsetting notional
principal contract, or Futures Contract or Forward Contract entered into by a
Fund or a related person with respect to the same or substantially similar
property. In addition, if the appreciated financial position is itself a short
sale or such a contract, acquisition of the underlying property or
substantially similar property will be deemed a constructive sale.
Special tax considerations apply with respect to foreign investments of a Fund.
Foreign exchange gains or losses realized by a Fund may be treated as ordinary
income or losses. Investment by a Fund in stock of certain "passive foreign
investment companies" may be limited in order to avoid imposition of 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 a Fund to recognize income prior to the receipt of cash payments with
respect to those investments; in order to distribute this income and avoid a
tax on the Fund, the Fund may be required to liquidate portfolio securities
that it might otherwise have continued to hold, potentially resulting in
additional taxable gain or loss to the Fund.
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Investment income received by a Fund from foreign securities may be subject to
foreign income taxes withheld at the source; the Funds do not expect to be able
to pass through to their shareholders foreign tax credits with respect to
foreign income taxes paid by the Funds. 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 a Fund's effective rate of foreign tax in advance since the amount of
the Fund's assets to be invested within various countries is not known.
Dividends and certain other payments to persons who are not citizens or
residents of the United States or U.S. entities ("Non-U.S. Persons") are
generally subject to U.S. tax withholding at the rate of 30%. Each Fund intends
to withhold U.S. federal income tax payments at the rate of 30% (or any lower
rate permitted under an applicable treaty) on taxable dividends and other
payments to Non-U.S. Persons that are subject to such withholding. Any amounts
overwithheld may be recovered by such persons by filing a claim for refund with
the U.S. Internal Revenue Service within the time period appropriate to such
claims. Distributions received from a Fund by Non-U.S. Persons may also be
subject to tax under the laws of their own jurisdictions. Each Fund is also
required in certain circumstances to apply backup withholding at the rate of
31% on taxable dividends and redemptions proceeds paid to any shareholder
(including a Non-U.S. Person) who does not furnish to the Fund certain
information and certifications or who is otherwise subject to backup
withholding. Backup withholding will not, however, be applied to payments that
have been subject to 30% withholding.
A Fund will not be required to pay Massachusetts income or excise taxes as long
as it qualifies as a regulated investment company under the Code.
Distributions of a Fund that are derived from interest on obligations of the
U.S. Government and certain of its agencies and instrumentalities (but
generally not from capital gains realized upon the disposition of such
obligations) may be exempt from state and local income taxes. Each Fund intends
to advise its shareholders of the extent, if any, to which its distributions
consist of such interest. Shareholders are urged to consult their tax advisers
regarding the possible exclusion of such portion of their dividends for state
and local income tax purposes as well as regarding the tax consequences of an
investment in a Fund.
7. DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for each Fund (the "Distribution
Plan") pursuant to Section 12(b) of the 1940 Act and Rule 12b-1 thereunder (the
"Rule") after having concluded that there is a reasonable likelihood that the
Distribution Plan would benefit each Fund and each respective class of
shareholders. The provisions of the Distribution Plan are severable with
respect to each Class of shares offered by each Fund. The Distribution Plan is
designed to promote sales, thereby increasing the net assets of each Fund. Such
an increase may reduce the expense ratio to the extent a Fund's fixed costs are
spread over a larger net asset base. Also, an increase in net assets may lessen
the adverse effect that could result were a Fund required to liquidate
portfolio securities to meet redemptions. There is, however, no assurance that
the net assets of a Fund will increase or that the other benefits referred to
above will be realized.
The Distribution Plan is described in the Prospectus under the caption
"Distribution Plan," which is incorporated herein by reference. The following
information supplements this Prospectus discussion.
SERVICE FEES: With respect to Class A shares, no service fees will be paid: (i)
to any dealer who is the holder or dealer or record for investors who own Class
A shares having an aggregate net asset value less than $750,000, or such other
amount as may be determined from time to time by MFD (MFD, however, may waive
this minimum amount requirement from time to time); or (ii) to any insurance
company which has entered into an agreement with the Fund and MFD that permits
such insurance company to purchase Class A shares from a Fund at their net
asset value in connection with annuity agreements issued in connection with the
insurance company's separate accounts. Dealers may from time to time be
required to meet certain other criteria in order to receive service fees.
With respect to Class B shares, except in the case of the first year service
fee, no service fees will be paid to any securities dealer who is the holder or
dealer of record for investors who own Class B shares having an aggregate net
asset value of less than $750,000 or such other amount as may be determined by
MFD from time to time. MFD, however, may waive this minimum amount requirement
from time to time. Dealers may from time to time be required to meet certain
other criteria in order to receive service fees.
MFD or its affiliates shall be entitled to receive any service fee payable
under the Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by MFD or its affiliates
for shareholder accounts.
DISTRIBUTION FEES: The purpose of distribution payments to MFD under the
Distribution Plan is to compensate MFD for its distribution services to a Fund.
MFD pays commissions to dealers as well as expenses of printing prospectuses
and reports used for sales purposes, expenses with respect to the preparation
and printing of sales literature and other distribution related expenses,
including, without limitation, the cost necessary to provide distribution-
related services, or personnel, travel, office expense and equipment.
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GENERAL: The Distribution Plan will remain in effect until August 1, 1999, and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by vote of both the Trustees and a majority of the
Trustees who are not "interested persons" or financially interested parties of
such Plan ("Distribution Plan Qualified Trustees"). The Distribution Plan also
requires that the Fund and MFD each shall provide the Trustees, and the
Trustees shall review, at least quarterly, a written report of the amounts
expended (and purposes therefor) under such Plan. The Distribution Plan may be
terminated at any time by vote of a majority of the Distribution Plan Qualified
Trustees or by vote of the holders of a majority of the respective class of the
Fund's shares (as defined in "Investment Restrictions"). All agreements
relating to any of the Distribution Plan entered into between the Fund or MFD
and other organizations must be approved by the Board of Trustees, including a
majority of the Distribution Plan Qualified Trustees. Agreements under the
Distribution Plan must be in writing, will be terminated automatically if
assigned, and may be terminated at any time without payment of any penalty, by
vote of a majority of the Distribution Plan Qualified Trustees or by vote of
the holders of a majority of the respective class of a Fund's shares. The
Distribution Plan may not be amended to increase materially the amount of
permitted distribution expenses without the approval of a majority of the
respective class of the Fund's shares (as defined in "Investment Restrictions")
or may not be materially amended in any case without a vote of the Trustees and
a majority of the Distribution Plan Qualified Trustees. The selection and
nomination of Distribution Plan Qualified Trustees shall be committed to the
discretion of the non-interested Trustees then in office. No Trustee who is not
an "interested person" has any financial interest in the Distribution Plan or
in any related agreement.
8. DETERMINATION OF NET ASSET VALUE AND PERFORMANCE
Net Asset Value: The net asset value per share of each class of each Fund is
determined each day during which the Exchange is open for trading. (As of the
date of this SAI, the Exchange is open for trading every weekday except for the
following holidays (or the days on which they are observed): New Year's Day,
Martin Luther King Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.) This
determination is made once each day as of the close of regular trading on the
Exchange by deducting the amount of the liabilities attributable to the class
from the value of the assets attributable to the class and dividing the
difference by the number of shares of the class outstanding. 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 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. 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, 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 a 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 a Fund's net asset
value unless the Trustees deem that such event would materially affect the net
asset value in which case an adjustment would be made.
All investments and assets are expressed in U.S. dollars based upon current
currency exchange rates. A share's net asset value is effective for orders
received by the dealer prior to its calculation and received by MFD prior to
the close of that business day.
PERFORMANCE INFORMATION
Total Rate of Return: Each Fund will calculate its total rate of return for
each class of shares for certain periods by determining the average annual
compounded rates of return over those periods that would cause an investment of
$1,000 (made with all distributions reinvested and reflecting the CDSC or the
maximum public offering price) to reach the value of that investment at the end
of the periods. Each Fund may also calculate (i) a total rate of return, which
is not reduced by the CDSC (4% maximum for Class B shares and 1% maximum for
Class C shares) and therefore may result
25
<PAGE>
in a higher rate of return, (ii) a total rate of return assuming an initial
account value of $1,000, which will result in a higher rate of return since the
value of the initial account will not be reduced by the sales charge (5.75%
maximum with respect to Class A shares) and/or (iii) a total rate of return
which represents aggregate performance over a period or year-by-year
performance, and which may or may not reflect the effect of the maximum or
other sales charge or CDSC.
Each Fund offers multiple classes of shares which were initially offered for
sale to, and purchased by, the public on different dates (the "class inception
date"). The calculation of total rate of return for a class of shares which has
a later inception date than another class of shares of a Fund is based both on
(i) the performance of the Fund's newer class from its inception date and (ii)
the performance of the Fund's oldest class from its inception date up to the
class inception date of the newer class.
As discussed in the Prospectus, the sales charges, expenses and expense ratios,
and therefore the performance, of a Fund's classes of shares differ. In
calculating total rate of return for a newer class of shares in accordance with
certain formulas required by the SEC, the performance will be adjusted to take
into account the fact that the newer class is subject to a different sales
charge than the oldest class (e.g., if the newer class is Class A shares, the
total rate of return quoted will reflect the deduction of the initial sales
charge applicable to Class A shares; if the newer class is Class B shares, the
total rate of return quoted will reflect the deduction of the CDSC applicable
to Class B shares). However, the performance will not be adjusted to take into
account the fact that the newer class of shares bears different class specific
expenses than the oldest shares (e.g., Rule 12b-1 fees). Therefore, the total
rate of return quoted for a newer class of shares will differ from the return
that would be quoted had the newer class of shares been outstanding for the
entire period over which the calculation is based (i.e., the total rate of
return quoted for the newer class will be higher than the return that would
have been quoted had the newer class of shares been outstanding for the entire
period over which the calculation is based if the class specific expenses for
the newer class are higher than the class specific expenses of the oldest
class, and the total rate of return quoted for the newer class will be lower
than the return that would be quoted had the newer class of shares been
outstanding for this entire period if the class specific expenses for the newer
class are lower than the class specific expenses of the oldest class).
Yield: Any yield quotation for a class of shares of a Fund is based on the
annualized net investment income per share of that class for the 30-day period.
The yield for each class of the Fund is calculated by dividing the net
investment income allocated to that class earned during the period by the
maximum offering price per share of that class of the Fund on the last day of
the period. The resulting figure is then annualized. Net investment income per
share of a class is determined by dividing (i) the dividends and interest
allocated to that class during the period, minus accrued expense of that class
for the period by (ii) the average number of shares of the class entitled to
receive dividends during the period multiplied by the maximum offering price
per share on the last day of the period. The Fund's yield calculations assume a
maximum sales charge of 5.75% in the case of Class A shares and no payment of
any CDSC in the case of Class B and Class C shares.
Current Distribution Rate: Yield, which is calculated according to a formula
prescribed by the SEC, is not indicative of the amounts which were or will be
paid to a Fund's shareholders. Amounts paid to shareholders of each class are
reflected in the quoted "current distribution rate" for that class. The current
distribution rate for a class is computed by dividing the total amount of
dividends per share paid by the Fund to shareholders of that class during the
past 12 months by the maximum public offering price of that class at the end of
such period. Under certain circumstances, such as when there has been a change
in the amount of dividend payout, or a fundamental change in investment
policies, it might be appropriate to annualize the dividends paid over the
period such policies were in effect, rather than using the dividends during the
past 12 months. The current distribution rate differs from the yield
computation because it may include distributions to shareholders from sources
other than dividends and interest, such as premium income from option writing,
short-term capital gains and return of invested capital, and is calculated over
a different period of time. A Fund's current distribution rate calculation for
Class A shares assumes a maximum sales charge of 5.75%. The Fund's current
distribution rate calculation for Class B and Class C shares assumes no CDSC is
paid.
General: From time to time each Fund may, as appropriate, quote Fund rankings
or reprint all or a portion of evaluations of fund performance and operations
appearing in various independent publications, including but not limited to the
following: Money, Fortune, U.S. News and World Report, Kiplinger's Personal
Finance, The Wall Street Journal, Barron's, Investors Business Daily, Newsweek,
Financial World, Financial Planning, Investment Advisor, USA Today, Pensions
and Investments, SmartMoney, Forbes, Global Finance, Registered Representative,
Institutional Investor, the Investment Company Institute, Johnson's Charts,
Morningstar, Lipper Analytical Services, Inc., CDA Wiesenberger, Shearson
Lehman and Salomon Bros. Indices, Ibbotson, Business Week, Lowry Associates,
Media General, Investment Company Data, The New York Times, Your Money,
Strangers Investment Advisor, Financial Planning on Wall Street, Standard and
Poor's, Individual Investor, The 100 Best Mutual Funds You Can Buy, by Gordon
K. Williamson, Consumer Price Index, and Sanford C. Bernstein & Co. Fund
performance may also be compared to the performance of other mutual funds
tracked by financial or business publications or periodicals. Each 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
26
<PAGE>
return to illustrate the effects of compounding and tax-deferral. Each 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.
The Fund may also quote evaluations mentioned in independent radio or
television broadcasts.
From time to time the Fund may use charts and graphs to illustrate the past
performance of various indices such as those mentioned above and illustrations
using hypothetical rates of return to illustrate the effects of compounding and
tax-deferral.
From time to time the Fund may also discuss or quote the views of its
distributor, its investment adviser and other financial planning, legal, tax,
accounting, insurance, estate planning and other professionals, or from
surveys, regarding individual and family financial planning. Such views may
include information regarding: retirement planning; tax management strategies;
estate planning; general investment techniques (e.g., asset allocation and
disciplined saving and investing); business succession; ideas and information
provided through the MFS Heritage Planning(sm) program, an intergenerational
financial planning assistance program; issues with respect to insurance (e.g.,
disability and life insurance and Medicare supplemental insurance); issues
regarding financial and health care management for elderly family members; and
other similar or related matters.
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 low. While such a strategy does not
assure a profit or guard against a loss in a declining market, the investor's
average cost per share can be lower than if fixed numbers of shares are
purchased at the same intervals.
MFS Firsts: MFS has a long history of innovations.
<TABLE>
<S> <C>
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[RegTM] 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[RegTM] World Governments Fund is established as
America's first globally diversified fixed-income
mutual fund.
1984 MFS[RegTM] Municipal High Income Fund is the first
open-end mutual fund to seek high tax-free
income from lower-rated municipal securities.
1986 MFS[RegTM] Managed Sectors Fund becomes the first
mutual fund to target and shift investments
among industry sectors for shareholders.
1986 MFS[RegTM] Municipal Income Trust is the first closed-
end, high-yield municipal bond fund traded on
the New York Stock Exchange.
1987 MFS[RegTM] Multimarket Income Trust is the first
closed-end, multimarket high income fund listed
on the New York Stock Exchange.
1989 MFS[RegTM] Regatta becomes America's first non-
qualified market value adjusted fixed/variable
annuity.
1990 MFS[RegTM] World Total Return Fund is the first
global balanced fund.
1993 MFS[RegTM] World Growth Fund is the first global
emerging markets fund to offer the expertise of
two sub-advisers.
1993 MFS[RegTM] becomes money manager of MFS[RegTM] Union
Standard Equity Fund, the first fund to invest
solely 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.
</TABLE>
27
<PAGE>
9. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional Shares of Beneficial Interest (without par value) of one or
more separate series and to divide or combine the shares of any series into a
greater or lesser number of shares without thereby changing the proportionate
beneficial interests in that series. The Trustees have currently authorized
shares of each Fund and one other series. The Declaration of Trust further
authorizes the Trustees to classify or reclassify any series of shares into one
or more classes. Pursuant thereto, the Trustees have authorized the issuance of
four classes of shares of each Fund (Class A, Class B, Class C and Class I
shares). Each share of a class of a Fund represents an equal proportionate
interest in the assets of the Fund allocable to that class. Upon liquidation of
a Fund, shareholders of each class of the Fund are entitled to share pro rata
in the Fund's net assets allocable to such class available for distribution to
shareholders. The Trust reserves the right to create and issue a number of
series and additional classes of shares, in which case the shares of each class
of a series would participate equally in the earnings, dividends and assets
allocable to that class of the particular series.
Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to meetings of
shareholders. 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"). 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.
10. INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS
Ernst & Young LLP are each Fund's independent auditors, providing audit
services, tax services, and assistance and consultation with respect to the
preparation of filings with the SEC.
28
<PAGE>
Investment Adviser Vertex Investment Management, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
Distributor
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
Custodian and Dividend Disbursing Agent
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
Shareholder Servicing Agent
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: 800-225-2606
Mailing Address:
P.O. Box 2281, Boston, MA 02107-9906
Independent Auditors
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116
Vertex All Cap Fund
Vertex Research All Cap Fund
Vertex Growth Fund
Vertex Discovery Fund
Vertex Contrarian Fund
500 BOYLSTON STREET,
BOSTON, MA 02116
<PAGE>
SUBJECT TO COMPLETION VERTEX ALL CAP FUND
VERTEX RESEARCH ALL CAP FUND
VERTEX GROWTH FUND
VERTEX DISCOVERY FUND
VERTEX CONTRARIAN FUND
Supplement to the May 1, 1998 Prospectus and Statement of Additional
Information
The following information should be read in conjunction with the Funds'
Prospectus and Statement of Additional Information ("SAI"), dated May 1, 1998,
as supplemented, and contains a description of Class I shares.
Class I shares are available for purchase only by certain investors as
described under the caption "Eligible Purchasers" below.
EXPENSE SUMMARY
<TABLE>
<CAPTION>
Class I
------------------------------------------------------------
Research
All Cap All Cap Growth Discovery Contrarian
Fund Fund Fund Fund Fund
--------- --------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Shareholder Transaction Expenses:
Maximum Initial Sales Charge Imposed on
Purchases of Fund Shares (as a percentage of
offering price) .............................. None None None None None
Maximum Contingent Deferred Sales Charge
(as a percentage of original purchase price or
redemption proceeds, as applicable ........... None None None None None
</TABLE>
<TABLE>
<CAPTION>
Research
All Cap All Cap Growth Discovery Contrarian
Fund Fund Fund Fund Fund
---------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Annual Operating Expenses (as a percentage of
average net assets):
Management Fees (after fee reduction)(1) .................. 0.00% 0.00% 0.00% 0.00% 0.00%
Rule 12b-1 Fees ........................................... None None None None None
Other Expenses (after fee reduction)(2) ................... 1.80% 1.80% 1.80% 1.80% 1.80%
----- ----- ----- ----- -----
Total Operating Expenses (after fee reduction)(3) ......... 1.80% 1.80% 1.80% 1.80% 1.80%
</TABLE>
- -----------
(1) The Adviser is currently waiving its right to receive management fees from
each Fund. Absent this waiver, "Management Fees" would be as follows:
<TABLE>
<CAPTION>
Research
All Cap All Cap Growth Discovery Contrarian
Fund Fund Fund Fund Fund
- ------------ --------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
1.50% 1.50% 1.50% 1.50% 1.50%
</TABLE>
Commencing May 1, 1999, the management fee will be subject to performance
adjustments as described under "Management of the Funds--Investment
Adviser" in the Prospectus.
(2) 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 under "Other Expenses."
(3) Absent any fee waivers and expense reductions, "Total Operating Expenses"
for each Fund would be as follows:
<TABLE>
<CAPTION>
Research
All Cap All Cap Growth Discovery Contrarian
Fund Fund Fund Fund Fund
- ------------ --------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
3.30% 3.30% 3.30% 3.30% 3.30%
</TABLE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MUST NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
1
<PAGE>
Example of Expenses
An investor would pay the following dollar amounts of expenses on a $1,000
investment in Class I shares of each Fund, assuming (a) a 5% annual return and
(b) redemption at the end of each of the time periods indicated:
<TABLE>
<CAPTION>
Research
All Cap All Cap Growth Discovery Contrarian
Period Fund Fund Fund Fund Fund
- ----------------- --------- --------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1 year .......... $18 $18 $18 $18 $18
3 years ......... 57 57 57 57 57
</TABLE>
The purpose of the expense table above is to assist investors in
understanding the various costs and expenses that a shareholder of the Funds
will bear directly or indirectly. A more complete description of each Fund's
management fee is set forth under the caption "Management of the Funds" in the
Prospectus.
The "Example" set forth above should not be considered a representation of
past or future expenses of the Funds; actual expenses may be greater or less
than those shown.
ELIGIBLE PURCHASERS
Class I shares are available for purchase only by the following purchasers
("Eligible Purchasers"):
(i) certain retirement plans established for the benefit of employees of
Vertex Investment Management, Inc. ("Vertex"), the Fund's investment
adviser, Massachusetts Financial Services Company ("MFS"), the corporate
parent of Vertex, and employees of MFS and its affiliates; and
(ii) any fund distributed by MFS Fund Distributors, Inc. ("MFD"), the Fund's
distributor, if the fund seeks to achieve its investment objective by
investing primarily in shares of the Fund and other funds distributed by
MFD.
In no event will the Fund, Vertex, MFS, MFD or any of their affiliates pay
any sales commissions or compensation to any third party in connection with the
sale of Class I shares; the payment of any such sales commission or
compensation would, under the Fund's policies, disqualify the purchaser as an
eligible investor of Class I shares.
SHARE CLASSES OFFERED BY THE FUNDS
While each Fund has four classes of shares (Class A, Class B, Class C and
Class I shares), Class A and Class I shares are the only classes presently
available for sale. Class I shares are available for purchase only by Eligible
Purchasers, as defined above, and are described in this Supplement. Class A
shares, Class B shares and Class C shares are described in the Funds'
Prospectus.
Class A shares are offered at net asset value plus an initial sales charge
up to a maximum of 5.75% of the offering price (or a contingent deferred sales
charge (a "CDSC") of 1.00% upon redemption during the first year in the case of
purchases of $1 million or more and certain purchases by retirement plans), and
are subject to an annual distribution fee and service fee up to a maximum of
0.35% per annum. Class B shares are offered at net asset value without an
initial sales charge but are subject to a CDSC upon redemption (declining from
4.00% during the first year to 0% after six years) and an annual distribution
fee and service fee up to a maximum of 1.00% per annum; Class B shares convert
to Class A shares approximately eight years after purchase. Class C shares are
offered at net asset value without an initial sales charge but are subject to a
CDSC of 1.00% upon redemption during the first year and an annual distribution
fee and service fee up to a maximum of 1.00% per annum. Class I shares are
offered at net asset value without an initial sales charge or CDSC and are not
subject to a distribution or service fee. Class C and Class I shares do not
convert to any other class of shares of the Funds.
OTHER INFORMATION
Eligible Purchasers may purchase Class I shares only directly through MFD.
Eligible Purchasers may exchange Class I shares of a Fund for Class I shares of
any other MFS Fund available for purchase by such Eligible Purchasers at their
net asset value (if available for sale), and may exchange Class I shares of a
Fund for shares of the MFS Money Market Fund (if available for sale), and may
redeem Class I shares of a Fund at net asset value. Distributions paid by a
Fund with respect to Class I shares generally will be greater than those paid
with respect to Class A shares, Class B shares and Class C shares because
expenses attributable to Class A shares, Class B shares and Class C shares
generally will be higher.
Subject to termination or revision at the sole discretion of Vertex,
Vertex has agreed to bear each Fund's expenses (after taking into effect any
compensating balance and offset arrangements) such that each such Fund's "Other
Expenses," which
2
<PAGE>
are defined to include all Fund expenses except for management fees, Rule 12b-1
fees, taxes, extraordinary expenses, brokerage and transaction costs and class
specific expenses, do not exceed 2.00% per annum of its average daily net
assets (the "Maximum Percentage"). The payments made by Vertex on behalf of
each Fund under this arrangement are subject to reimbursement by such Fund to
Vertex, which will be accomplished by the payment of an expense reimbursement
fee by the Fund to Vertex computed and paid monthly at a percentage of its
average daily net assets for its then current fiscal year, with a limitation
that immediately after such payment such Fund's "Other Expenses" will not
exceed the Maximum Percentage. The obligation of Vertex to bear a Fund's "Other
Expenses" pursuant to this arrangement, and the Fund's obligation to pay the
reimbursement fee to Vertex, terminates on the earlier of the date on which
payments made by the Fund equal the prior payment of such reimbursable expenses
by Vertex or May 1, 2001.
The date of this Supplement is May 1, 1998
3
<PAGE>
PART C
Item 24. Financial Statements and Exhibits
(a) Financial Statements Included in Part A:
None
Financial Statements Included in Part B:
None
(b) Exhibits
1 (a) Amended and Restated Declaration of Trust, dated
January 24, 1996. (6)
(b) Amendment to the Amended and Restated Declaration
of Trust, dated January 29, 1997 - Abolishment of
MFS Union Standard Research Fund, a series of MFS
Union Standard Trust. (11)
(c) Certification of Amendment to the Declaration of
Trust, dated July 30, 1997 - Redesignation of
Series of Shares. (14).
(d) Amendment to the Declaration of Trust, dated
January 28, 1998; filed herewith.
2 By-Laws, dated September 1, 1993. (4)
3 Not Applicable.
4 Form of Share Certificate. (3)
5 Investment Advisory Agreement by and between MFS
Union Standard Trust on behalf of MFS Union
Standard Equity Fund and Massachusetts Financial
Services Company, dated December 8, 1993. (4)
6 (a) Amended and Restated Master Distribution
Agreement, dated as of December 8, 1993 and
Amended and Restated as of July 30, 1997. (14)
(b) Dealer Agreement between MFS Fund Distributors,
Inc. ("MFD") and a dealer and the Mutual Fund
Agreement between MFD and a bank or NASD affiliate
as amended on April 11, 1997. (9)
7 Not Applicable.
<PAGE>
8 (a) Custodian Agreement between Registrant and State
Street Bank and Trust Company, dated December
8, 1993. (5)
(b) Amendment to the Custodian Agreement, dated
December 8, 1993. (4)
(c) Amendment to Custodian Contract, dated November
17, 1995. (5)
9 (a) Amended and Restated Shareholder Servicing Agent
Agreement, dated November 17, 1995 between
Registrant and MFS and Form of Amendment to
Amended and Restated Shareholder Servicing
Agent Agreement, dated January 1, 1998. (14)
(b) Proxy Services Agreement between MFS Union
Standard Trust and American Capital Strategies
Ltd., dated December 8, 1993. (5)
(c) Dividend Disbursing Agency Agreement between
Registrant and State Street Bank and Trust
Company, dated December 8, 1993. (4)
(d) Loan Agreement by and among the Banks named
therein, the MFS Funds named therein, and The
First National Bank of Boston, dated as of
February 21, 1995. (2)
(e) Third Amendment, dated February 14, 1997 to Loan
Agreement, dated February 21, 1995 by and among
the Banks named therein, the MFS Funds named
therein and the First National Bank of Boston,
dated February 14, 1997. (10)
(f) Master Administrative Services Agreement, dated
March 1, 1997. (7)
(g) Exchange Privilege Agreement dated July 31,
1997. (12)
10 Consent and Opinion of Counsel, dated January
27, 1998. (14)
11 Not Applicable.
12 Not Applicable.
13 Investment Representation Letter, dated November
19, 1993. (4)
14 (a) Forms for Individual Retirement Account Disclosure
Statement, as currently in effect. (8)
<PAGE>
(b) Forms 403(b) Custodial Account Agreement, as
currently in effect. (8)
(c) Forms for MFS Prototype Paired Defined
Contribution Plans as Trust Agreement, as
currently in effect. (8)
15 Master Distribution Plan pursuant to 12b-1 under
the Investment Company Act of 1940, effective
July 30, 1997. (14).
16 Schedule of Computation for Performance
Quotations - Total Return. (1)
17 Not Applicable.
18 Plan pursuant to Rule 18f-3(d) under the
Investment Company Act of 1940. (13)
Power of Attorney dated August 12, 1994. (4)
-------------------------
(1) Incorporated by reference to MFS Municipal Series Trust (File Nos. 2-92915
and 811-4096) Post-Effective Amendment No. 26 filed with the SEC via EDGAR
on February 22, 1995.
(2) Incorporated by reference to Amendment No. 8 on Form N-2 for MFS Municipal
Income Trust (File No. 811-4841) filed with the SEC via EDGAR on February
28, 1995.
(3) Incorporated by reference to MFS Municipal Series Trust (File Nos. 2-92915
and 811-4096) Post-Effective Amendment No. 28 filed with the SEC via EDGAR
on July 28, 1995.
(4) Incorporated by reference to Registrant's Post-Effective Amendment No. 3
filed with the SEC via EDGAR on September 1, 1995.
(5) Incorporated by reference to Registrant's Post-Effective Amendment No. 4
filed with the SEC via EDGAR on January 26, 1996.
(6) Incorporated by reference to Registrant's Post-Effective Amendment No. 5
filed with the SEC via EDGAR on January 28, 1997.
(7) Incorporated by reference to MFS/Sun Life Series Trust (File Nos. 2-83616
and 811-3732) Post-Effective Amendment No. 19, filed with the SEC via EDGAR
on March 18, 1997.
(8) Incorporated by reference to MFS Series Trust IX (File Nos. 2-50409 and
811-2464) Post-Effective Amendment No. 32 filed with the SEC via EDGAR on
August 28, 1995.
(9) Incorporated by reference to MFS Series Trust III (File Nos. 2-60491 and
811-2794) Post-Effective Amendment No. 24, filed with the SEC via EDGAR on
May 29, 1997.
(10) Incorporated by reference to MFS Series Trust I (File Nos. 33-7638 and
811-4777) Post-Effective Amendment No. 28 filed with the SEC via EDGAR on
June 26, 1997.
(11) Incorporated by reference to Registrant's Post-Effective Amendment No. 6
filed with the SEC via EDGAR on June 24, 1997.
(12) Incorporated by reference to Massachusetts Investors Growth Stock Fund
(File Nos. 2-14677 and 811-859) Post-Effective Amendment No. 64 filed with
the SEC on October 29, 1997.
(13) Incorporated by reference to MFS Series Trust I (File Nos. 33-7638 and
811-4777) Post-Effective Amendment No. 25 filed with the SEC on August 27,
1996.
(14) Incorporated by reference to Registrant's Post-Effective Amendment No. 7
filed with the SEC on January 28, 1998.
Item 25. Persons Controlled by or under Common Control with Registrant
Not applicable.
<PAGE>
<TABLE>
<CAPTION>
Item 26. Number of Holders of Securities
MFS Union Standard Equity Fund
<S> <C> <C>
(1) (2)
Title of Class Number of Record Holders
Class A Shares of Beneficial Interest 76
(without par value) (as of December 31, 1997)
Class B Shares of Beneficial Interest 30
(without par value) (as of December 31, 1997)
Class C Shares of Beneficial Interest 8
(without par value) (as of December 31, 1997)
Class I Shares of Beneficial Interest 23
(without par value) (as of December 31, 1997)
Vertex All Cap Fund
(1) (2)
Title of Class Number of Record Holders
Class A Shares of Beneficial Interest 0
(without par value) (as of December 31, 1997)
Class B Shares of Beneficial Interest 0
(without par value) (as of December 31, 1997)
Class C Shares of Beneficial Interest 0
(without par value) (as of December 31, 1997)
Class I Shares of Beneficial Interest 0
(without par value) (as of December 31, 1997)
Vertex Contrarian Fund
(1) (2)
Title of Class Number of Record Holders
Class A Shares of Beneficial Interest 0
(without par value) (as of December 31, 1997)
Class B Shares of Beneficial Interest 0
(without par value) (as of December 31, 1997)
<PAGE>
Class C Shares of Beneficial Interest 0
(without par value) (as of December 31, 1997)
Class I Shares of Beneficial Interest 0
(without par value) (as of December 31, 1997)
Vertex Research All Cap Fund
(1) (2)
Title of Class Number of Record Holders
Class A Shares of Beneficial Interest 0
(without par value) (as of December 31, 1997)
Class B Shares of Beneficial Interest 0
(without par value) (as of December 31, 1997)
Class C Shares of Beneficial Interest 0
(without par value) (as of December 31, 1997)
Class I Shares of Beneficial Interest 0
(without par value) (as of December 31, 1997)
Vertex Growth Fund
(1) (2)
Title of Class Number of Record Holders
Class A Shares of Beneficial Interest 0
(without par value) (as of December 31, 1997)
Class B Shares of Beneficial Interest 0
(without par value) (as of December 31, 1997)
Class C Shares of Beneficial Interest 0
(without par value) (as of December 31, 1997)
Class I Shares of Beneficial Interest 0
(without par value) (as of December 31, 1997)
Vertex Discovery Fund
(1) (2)
Title of Class Number of Record Holders
Class A Shares of Beneficial Interest 0
(without par value) (as of December 31, 1997)
<PAGE>
Class B Shares of Beneficial Interest 0
(without par value) (as of December 31, 1997)
Class C Shares of Beneficial Interest 0
(without par value) (as of December 31, 1997)
Class I Shares of Beneficial Interest 0
(without par value) (as of December 31, 1997)
</TABLE>
Item 27. Indemnification
Section 5.3 of the Registrant's Amended and Restated Declaration
of Trust provides that every person who is or has been a Trustee or officer of
the Registrant shall be indemnified by the Registrant against all liability and
against all expenses reasonably incurred or paid by him in connection with any
claim, action, suit or proceeding in which he becomes involved as a party or
otherwise by virtue of his being or having been a Trustee or officer and against
amounts paid or incurred by him in the settlement thereof. However, Section 5.3
further provides that no indemnification shall be provided to a Trustee or
officer:
(i) against any liability to the Registrant or the
shareholders of the Registrant by reason of a final
adjudication by the court or other body before which the
proceeding was brought that he engaged in willful
misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his
office;
(ii) with respect to any matter as to which he shall have
been finally adjudicated not to have acted in good faith
in the reasonable belief that his action was in the best
interest of the Registrant; or
(iii) in the event of a settlement involving a payment by a
Trustee or officer or other disposition not involving a
final adjudication as provided in paragraph (i) or (ii)
above resulting in a payment by a Trustee or officer,
unless there has been either a determination that such
Trustee or officer did not engage in willful
misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his
office by the court or other body approving the
settlement or other disposition or by a reasonable
determination, based upon a review of readily available
facts (as opposed to a full trial-type inquiry) that he
did not engage in such conduct:
(A) by vote of a majority of the Disinterested
Trustees (as defined below) acting on the matter
(provided that a majority of the Disinterested
Trustees then in office act on the matter); or
(B) by written opinion of independent legal counsel.
The term "Disinterested Trustee" is defined as one who is not an
interested person of the Registrant and against whom none of such actions, suits
or other proceedings or
<PAGE>
another action, suit or other proceeding on the same or similar grounds is then
or had been pending.
Expenses of preparation and presentation of a defense to any
claim, action, suit, or proceeding of the character described in Section 5.3 of
the Registrant's Declaration of Trust shall be advanced by the Registrant prior
to final disposition thereof upon receipt of an undertaking by or on behalf of
the recipient to repay such amount if it is ultimately determined that he is not
entitled to indemnification under Section 5.3, provided that either:
(i) such undertaking is secured by a surety bond or some
other appropriate security or the Registrant shall be
insured against losses arising out of any such advances;
or
(ii) a majority of the Disinterested Trustees acting on the
matter (provided that a majority of the Disinterested
Trustees then in office act on the matter) or an
independent legal counsel in a written opinion, shall
determine, based upon a review of readily available
facts (as opposed to a full trial-type inquiry), that
there is reason to believe that the recipient ultimately
will be found entitled to indemnification.
Section 9 of the Amended and Restated Shareholder Servicing Agent
Agreement between the Registrant and MFS Service Center, Inc. ("MFSC") specifies
that the Registrant will indemnify MFSC against and hold MFSC harmless from any
and all losses, claims, damages, liabilities or expenses (including reasonable
counsel fees and expenses) resulting from any claim, demand, action or suit not
resulting from MFSC's bad faith or negligence, and arising out of, or in
connection with, MFSC's duties on behalf of the Registrant under such Agreement.
In addition, Section 9 provides that the Registrant will indemnify MFSC against
and hold MFSC harmless from any and all losses, claims, damages, liabilities or
expenses (including reasonable counsel fees and expenses) resulting from any
claim, demand, action or suit as a result of MFSC acting in accordance with any
instructions reasonably believed by MFSC to have been executed or orally
communicated by any person duly authorized by the Registrant or its principal
underwriter, or as a result of acting in accordance with written or oral advice
reasonably believed by MFSC to have been given by counsel for the Registrant, or
as a result of acting in accordance with any instrument or share certificate
reasonably believed by MFSC to have been genuine and signed, countersigned or
executed by any person or persons authorized to sign, countersign or execute the
same (unless contributed to by MFSC's gross negligence or bad faith).
The Trustees and officers of the Registrant and the personnel of
the Registrant's investment adviser and distributor will be insured as of the
effective date of this Registration Statement under an errors and omissions
liability insurance policy. The Registrant and its officers are also insured
under the fidelity bond required by Rule 17g-1 under the Investment Company Act
of 1940, as amended.
Item 28. Business and Other Connections of Investment Adviser
MFS serves as investment adviser to the following open-end Funds
comprising the MFS Family of Funds (except the Vertex Funds mentioned below):
Massachusetts Investors
<PAGE>
Trust, Massachusetts Investors Growth Stock Fund, MFS Growth Opportunities Fund,
MFS Government Securities Fund, MFS Government Limited Maturity Fund, MFS Series
Trust I (which has thirteen series: MFS Managed Sectors Fund, MFS Cash Reserve
Fund, MFS World Asset Allocation Fund, MFS Strategic Growth Fund, MFS Research
Growth and Income Fund, MFS Core Growth Fund, MFS Equity Income Fund, MFS
Special Opportunities Fund, MFS Convertible Securities Fund, MFS Blue Chip Fund,
MFS New Discovery Fund, MFS Science and Technology Fund and MFS Research
International Fund), MFS Series Trust II (which has three series: MFS Emerging
Growth Fund, MFS Large Cap Growth Fund and MFS Intermediate Income Fund), MFS
Series Trust III (which has two series: MFS High Income Fund and MFS Municipal
High Income Fund), MFS Series Trust IV (which has four series: MFS Money Market
Fund, MFS Government Money Market Fund, MFS Municipal Bond Fund and MFS Mid Cap
Growth Fund), MFS Series Trust V (which has six series: MFS Total Return Fund,
MFS Research Fund, MFS International Opportunities Fund, MFS International
Strategic Growth Fund, MFS International Value Fund and MFS Asia Pacific Fund),
MFS Series Trust VI (which has three series: MFS World Total Return Fund, MFS
Utilities Fund and MFS World Equity Fund), MFS Series Trust VII (which has two
series: MFS World Governments Fund and MFS Value Fund), MFS Series Trust VIII
(which has two series: MFS Strategic Income Fund and MFS World Growth Fund), MFS
Series Trust IX (which has three series: MFS Bond Fund, MFS Limited Maturity
Fund and MFS Municipal Limited Maturity Fund), MFS Series Trust X (which has
eight series: MFS Government Mortgage Fund, MFS/Foreign & Colonial Emerging
Markets Equity Fund, MFS International Growth Fund, MFS International Growth and
Income Fund, MFS Real Estate Investment Fund, MFS Strategic Value Fund, MFS
Small Cap Value Fund and MFS Emerging Markets Debt Fund), MFS Series Trust XI
(which has six series: MFS Union Standard Equity Fund, Vertex All Cap Fund,
Vertex Research All Cap Fund, Vertex Growth Fund, Vertex Discovery Fund and
Vertex Contrarian Fund (the Vertex Funds are expected to be declared effective
April 28, 1998)), and MFS Municipal Series Trust (which has 16 series: MFS
Alabama Municipal Bond Fund, MFS Arkansas Municipal Bond Fund, MFS California
Municipal Bond Fund, MFS Florida Municipal Bond Fund, MFS Georgia Municipal Bond
Fund, MFS Maryland Municipal Bond Fund, MFS Massachusetts Municipal Bond Fund,
MFS Mississippi Municipal Bond Fund, MFS New York Municipal Bond Fund, MFS North
Carolina Municipal Bond Fund, MFS Pennsylvania Municipal Bond Fund, MFS South
Carolina Municipal Bond Fund, MFS Tennessee Municipal Bond Fund, MFS Virginia
Municipal Bond Fund, MFS West Virginia Municipal Bond Fund and MFS Municipal
Income Fund) (the "MFS Funds"). The principal business address of each of the
MFS Funds is 500 Boylston Street, Boston, Massachusetts 02116.
MFS also serves as investment adviser of the following open-end
Funds: MFS Institutional Trust ("MFSIT") (which has seven series) and MFS
Variable Insurance Trust ("MVI") (which has twelve series). The principal
business address of each of the aforementioned funds is 500 Boylston Street,
Boston, Massachusetts 02116.
In addition, MFS serves as investment adviser to the following
closed-end funds: MFS Municipal Income Trust, MFS Multimarket Income Trust, MFS
Government Markets Income Trust, MFS Intermediate Income Trust, MFS Charter
Income Trust and MFS Special Value Trust (the "MFS Closed-End Funds"). The
principal business address of each of the MFS Closed-End Funds is 500 Boylston
Street, Boston, Massachusetts 02116.
Lastly, MFS serves as investment adviser to MFS/Sun Life Series
Trust ("MFS/SL") (which has 26 series), Money Market Variable Account, High
Yield Variable Account,
<PAGE>
Capital Appreciation Variable Account, Government Securities Variable Account,
World Governments Variable Account, Total Return Variable Account and Managed
Sectors Variable Account (collectively, the "Accounts"). The principal business
address of MFS/SL is 500 Boylston Street, Boston, Massachusetts 02116. The
principal business address of each of the aforementioned Accounts is One Sun
Life Executive Park, Wellesley Hills, Massachusetts 02181.
Vertex Investment Management, Inc., a Delaware corporation and a
wholly owned subsidiary of MFS, whose principal business address is 500 Boylston
Street, Boston, Massachusetts 02116 ("Vertex"), serves as investment adviser to
Vertex All Cap Fund, Vertex Research All Cap Fund, Vertex Growth Fund, Vertex
Discovery Fund and Vertex Contrarian Fund, each a series of MFS Series Trust XI.
The principal business address of the aforementioned Funds is 500 Boylston
Street, Boston, Massachusetts 02116.
MFS International Ltd. ("MIL"), a limited liability company
organized under the laws of Bermuda and a subsidiary of MFS, whose principal
business address is Cedar House, 41 Cedar Avenue, Hamilton HM12 Bermuda, serves
as investment adviser to and distributor for MFS American Funds (which has six
portfolios: MFS American Funds-U.S. Equity Fund, MFS American Funds-U.S.
Emerging Growth Fund, MFS American Funds-U.S. High Yield Bond Fund, MFS American
Funds - U.S. Dollar Reserve Fund, MFS American Funds-Charter Income Fund and MFS
American Funds-U.S. Research Fund) (the "MIL Funds"). The MIL Funds are
organized in Luxembourg and qualify as an undertaking for collective investments
in transferable securities (UCITS). The principal business address of the MIL
Funds is 47, Boulevard Royal, L-2449 Luxembourg.
MIL also serves as investment adviser to and distributor for MFS
Meridian U.S. Government Bond Fund, MFS Meridian Charter Income Fund, MFS
Meridian Global Governments Fund, MFS Meridian U.S. Emerging Growth Fund, MFS
Meridian Global Equity Fund, MFS Meridian Limited Maturity Fund, MFS Meridian
World Growth Fund, MFS Meridian Money Market Fund, MFS Meridian World Total
Return Fund, MFS Meridian U.S. Equity Fund, MFS Meridian Research Fund, MFS
Meridian U.S. High Yield Fund and MFS Meridian Emerging Markets Debt Fund
(collectively the "MFS Meridian Funds"). Each of the MFS Meridian Funds is
organized as an exempt company under the laws of the Cayman Islands. The
principal business address of each of the MFS Meridian Funds is P.O. Box 309,
Grand Cayman, Cayman Islands, British West Indies.
MFS International (U.K.) Ltd. ("MIL-UK"), a private limited
company registered with the Registrar of Companies for England and Wales whose
current address is 4 John Carpenter Street, London, England ED4Y 0NH, is
involved primarily in marketing and investment research activities with respect
to private clients and the MIL Funds and the MFS Meridian Funds.
MFS Institutional Advisors (Australia) Ltd. ("MFSI-Australia"), a
private limited company organized under the Corporations Law of New South Wales,
Australia whose current address is Level 37, Governor Phillip Tower, One Farrer
Place, Sydney, N5W2000, Australia, is involved primarily in investment
management and distribution of Australian superannuation unit trusts and acts as
an investment adviser to institutional accounts.
<PAGE>
MFS Holdings Australia Pty Ltd. ("MFS Holdings Australia"), a
private limited company organized pursuant to the Corporations Law of New South
Wales, Australia whose current address is Level 37, Governor Phillip Tower, One
Farrer Place, Sydney, NSW2000 Australia, and whose function is to serve
primarily as a holding company.
MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary of
MFS, serves as distributor for the MFS Funds, MVI and MFSIT.
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of
MFS, serves as shareholder servicing agent to the MFS Funds, the MFS Closed-End
Funds, MFSIT and MVI.
MFS Institutional Advisors, Inc. ("MFSI"), a wholly owned
subsidiary of MFS, provides investment advice to substantial private clients.
MFS Retirement Services, Inc. ("RSI"), a wholly owned subsidiary
of MFS, markets MFS products to retirement plans and provides administrative and
record keeping services for retirement plans.
MFS
The Directors of MFS are Jeffrey L. Shames, Arnold D. Scott, John
W. Ballen, Donald A. Stewart and John D. McNeil. Mr. Shames is the Chairman,
Chief Executive Officer and President, Mr. Scott is a Senior Executive Vice
President and Secretary, William W. Scott, Jr., Patricia A. Zlotin, John W.
Ballen, Thomas J. Cashman, Jr., Joseph W. Dello Russo and Kevin R. Parke are
Executive Vice Presidents, Stephen E. Cavan is a Senior Vice President, General
Counsel and an Assistant Secretary, Robert T. Burns is a Senior Vice President,
Associate General Counsel and an Assistant Secretary of MFS, and Thomas B.
Hastings is a Vice President and Treasurer of MFS.
Massachusetts Investors Trust
Massachusetts Investors Growth Stock Fund
MFS Growth Opportunities Fund
MFS Government Securities Fund
MFS Series Trust I
MFS Series Trust V
MFS Series Trust VI
MFS Series Trust X
MFS Government Limited Maturity Fund
Stephen E. Cavan is the Secretary, W. Thomas London is the
Treasurer, James O. Yost, Ellen M. Moynihan and Mark E. Bradley, Vice Presidents
of MFS, are the Assistant Treasurers, James R. Bordewick, Jr., Senior Vice
President and Associate General Counsel of MFS, is the Assistant Secretary.
MFS Series Trust II
Leslie J. Nanberg, Senior Vice President of MFS, is a Vice
President, Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer,
James O. Yost, Ellen M. Moynihan
<PAGE>
and Mark E. Bradley are e Assistant Treasurers, and James R. Bordewick, Jr. is
the Assistant Secretary.
MFS Government Markets Income Trust
MFS Intermediate Income Trust
Leslie J. Nanberg, Senior Vice President of MFS, is a Vice
President, Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer,
James O. Yost, Ellen M. Moynihan and Mark E. Bradley are the Assistant
Treasurers, and James R. Bordewick, Jr. is the Assistant Secretary.
MFS Series Trust III
James T. Swanson, Robert J. Manning and Joan S. Batchelder, Senior
Vice Presidents of MFS, and Bernard Scozzafava, Vice President of MFS, are Vice
Presidents, Sheila Burns-Magnan, Assistant Vice President of MFS, and Daniel E.
McManus, Vice President of MFS, are Assistant Vice Presidents, Stephen E. Cavan
is the Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen M.
Moynihan and Mark E. Bradley are the Assistant Treasurers, and James R.
Bordewick, Jr. is the Assistant Secretary.
MFS Series Trust IV
MFS Series Trust IX
Robert A. Dennis and Geoffrey L. Kurinsky, Senior Vice Presidents
of MFS, are Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas London
is the Treasurer, James O. Yost, Ellen M. Moynihan and Mark E. Bradley are the
Assistant Treasurers and James R. Bordewick, Jr. is the Assistant Secretary.
MFS Series Trust VII
Leslie J. Nanberg and Stephen C. Bryant, Senior Vice Presidents of
MFS, are Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas London is
the Treasurer, James O. Yost, Ellen M. Moynihan and Mark E. Bradley are the
Assistant Treasurers and James R. Bordewick, Jr. is the Assistant Secretary.
MFS Series Trust VIII
Jeffrey L. Shames, Leslie J. Nanberg and James T. Swanson and John
D. Laupheimer, Jr., a Senior Vice President of MFS, are Vice Presidents, Stephen
E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost,
Ellen M. Moynihan and Mark E. Bradley are the Assistant Treasurers and James R.
Bordewick, Jr. is the Assistant Secretary.
MFS Municipal Series Trust
Robert A. Dennis is Vice President, David B. Smith and Geoffrey L.
Schechter, Vice Presidents of MFS, are Vice Presidents, Daniel E. McManus, Vice
President of MFS, is an Assistant Vice President, Stephen E. Cavan is the
Secretary, W. Thomas London is the
<PAGE>
Treasurer, James O. Yost, Ellen M. Moynihan and Mark E. Bradley are the
Assistant Treasurers and James R. Bordewick, Jr. is the Assistant Secretary.
MFS Variable Insurance Trust
MFS Series Trust XI
MFS Institutional Trust
Stephen E. Cavan is the Secretary, W. Thomas London is the
Treasurer, James O. Yost, Ellen M. Moynihan and Mark E. Bradley are the
Assistant Treasurers and James R. Bordewick, Jr. is the Assistant Secretary.
MFS Municipal Income Trust
Robert J. Manning is Vice President, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen M. Moynihan
and Mark E. Bradley are the Assistant Treasurers and James R. Bordewick, Jr. is
the Assistant Secretary.
MFS Multimarket Income Trust
MFS Charter Income Trust
Leslie J. Nanberg and James T. Swanson are Vice Presidents,
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O.
Yost, Ellen M. Moynihan and Mark E. Bradley are the Assistant Treasurers and
James R. Bordewick, Jr. is the Assistant Secretary.
MFS Special Value Trust
Robert J. Manning is Vice President, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen M. Moynihan
and Mark E. Bradley are the Assistant Treasurers and James R. Bordewick, Jr. is
the Assistant Secretary.
MFS/Sun Life Series Trust
John D. McNeil, Chairman and Director of Sun Life Assurance
Company of Canada, is the Chairman, Stephen E. Cavan is the Secretary, W. Thomas
London is the Treasurer, James O. Yost, Ellen M. Moynihan and Mark E. Bradley
are the Assistant Treasurers and James R. Bordewick, Jr. is the Assistant
Secretary.
Money Market Variable Account
High Yield Variable Account
Capital Appreciation Variable Account
Government Securities Variable Account
Total Return Variable Account
World Governments Variable Account
Managed Sectors Variable Account
John D. McNeil is the Chairman, Stephen E. Cavan is the Secretary,
and James R. Bordewick, Jr. is the Assistant Secretary.
<PAGE>
Vertex
Jeffrey L. Shames and Arnold D. Scott are the Directors, Jeffrey
L. Shames is the President, Kevin R. Parke and John W. Ballen are Executive Vice
Presidents, John F. Brennan, Jr., and John D. Laupheimer are Senior Vice
Presidents, Brian E. Stack is a Vice President, Joseph W. Dello Russo is the
Treasurer, Thomas B. Hastings is the Assistant Treasurer, Stephen E. Cavan is
the Secretary and Robert T. Burns is the Assistant Secretary.
MIL
Arnold D. Scott, Jeffrey L. Shames and Thomas J. Cashman, Jr. are
Directors, Stephen E. Cavan is a Director, Senior Vice President and the Clerk,
Robert T. Burns is an Assistant Clerk, Joseph W. Dello Russo, Executive Vice
President and Chief Financial Officer of MFS, is the Treasurer and Thomas B.
Hastings is the Assistant Treasurer.
MIL-UK
Thomas J. Cashman, Jr. is President and a Director, Arnold D.
Scott and Jeffrey L. Shames are Directors, Stephen E. Cavan is a Director and
the Secretary, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer and Robert T. Burns is the Assistant Secretary.
MFSI - Australia
Thomas J. Cashman, Jr. is President and a Director, Graham E.
Lenzer, John A. Gee and David Adiseshan are Directors, Stephen E. Cavan is the
Secretary, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer, and Robert T. Burns is the Assistant Secretary.
MFS Holdings - Australia
Jeffrey L. Shames is the President and a Director, Arnold D.
Scott, Thomas J. Cashman, Jr., and Graham E. Lenzer are Directors, Stephen E.
Cavan is the Secretary, Joseph W. Dello Russo is the Treasurer, Thomas B.
Hastings is the Assistant Treasurer, and Robert T. Burns is the Assistant
Secretary.
MIL Funds
Richard B. Bailey, John A. Brindle, Richard W. S. Baker, Arnold D.
Scott, Jeffrey L. Shames and William F. Waters are Directors, Stephen E. Cavan
is the Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen M.
Moynihan and Mark E. Bradley are the Assistant Treasurers and James R.
Bordewick, Jr. is the Assistant Secretary.
MFS Meridian Funds
Richard B. Bailey, John A. Brindle, Richard W. S. Baker, Arnold D.
Scott, Jeffrey L. Shames and William F. Waters are Directors, Stephen E. Cavan
is the Secretary, W. Thomas
<PAGE>
London is the Treasurer, James R. Bordewick, Jr. is the Assistant
Secretary and James O. Yost, Ellen M. Moynihan and Mark E. Bradley are the
Assistant Treasurers.
MFD
Arnold D. Scott and Jeffrey L. Shames are Directors, William W.
Scott, Jr., an Executive Vice President of MFS, is the President, Stephen E.
Cavan is the Secretary, Robert T. Burns is the Assistant Secretary, Joseph W.
Dello Russo is the Treasurer, and Thomas B. Hastings is the Assistant Treasurer.
MFSC
Arnold D. Scott and Jeffrey L. Shames are Directors, Joseph A.
Recomendes, a Senior Vice President and Chief Information Officer of MFS, is
Vice Chairman and a Director, Janet A. Clifford is the President, Joseph W.
Dello Russo is the Treasurer, Thomas B. Hastings is the Assistant Treasurer,
Stephen E. Cavan is the Secretary, and Robert T. Burns is the Assistant
Secretary.
MFSI
Jeffrey L. Shames, and Arnold D. Scott are Directors, Thomas J.
Cashman, Jr., is the President and a Director, Leslie J. Nanberg is a Senior
Vice President, a Managing Director and a Director, Kevin R. Parke is the
Executive Vice President and a Managing Director, George F. Bennett, Jr., John
A. Gee, Brianne Grady, Joseph A. Kosciuszek and Joseph J. Trainor are Senior
Vice Presidents and Managing Directors, Joseph W. Dello Russo is the Treasurer,
Thomas B. Hastings is the Assistant Treasurer and Robert T. Burns is the
Secretary.
RSI
Arnold D. Scott is the Chairman and a Director, Martin E. Beaulieu
is the President, William W. Scott, Jr. is a Director, Joseph W. Dello Russo is
the Treasurer, Thomas B. Hastings is the Assistant Treasurer, Stephen E. Cavan
is the Secretary and Robert T. Burns is the Assistant Secretary.
In addition, the following persons, Directors or officers of MFS,
have the affiliations indicated:
<TABLE>
<CAPTION>
<S> <C>
Donald A. Stewart President and a Director, Sun Life Assurance
Company of Canada, Sun Life Centre, 150
King Street West, Toronto, Ontario, Canada
(Mr. Stewart is also an officer and/or
Director of various subsidiaries and
affiliates of Sun Life)
John D. McNeil Chairman, Sun Life Assurance Company of
Canada, Sun Life Centre, 150 King Street
West, Toronto, Ontario, Canada (Mr. McNeil is
also an officer and/or Director of various
subsidiaries and affiliates of Sun Life)
<PAGE>
Joseph W. Dello Russo Director of Mutual Fund Operations, The Boston
Company, Exchange Place, Boston,
Massachusetts (until August, 1994)
</TABLE>
Item 29. Distributors
(a) Reference is hereby made to Item 28 above.
(b) Reference is hereby made to Item 28 above; the principal
business address of each of these persons is 500 Boylston Street, Boston,
Massachusetts 02116.
(c) Not applicable.
Item 30. Location of Accounts and Records
The accounts and records of the Registrant are located, in whole
or in part, at the office of the Registrant and the following locations:
NAME ADDRESS
Massachusetts Financial 500 Boylston Street
Services Company Boston, MA 02116
MFS Fund Distributors, Inc. 500 Boylston Street
Boston, MA 02116
State Street Bank and State Street South
Trust Company 5-West
North Quincy, MA 02171
MFS Service Center, Inc. 500 Boylston Street
Boston, MA 02116
The Registrant's corporate documents are kept by the Registrant
at its offices. Portfolio brokerage orders, other purchase orders, reasons for
brokerage allocation and lists of persons authorized to transact business for
the Registrant are kept by Massachusetts Financial Services Company at 500
Boylston Street, Boston, Massachusetts 02116. Shareholder account records are
kept by MFS Service Center, Inc. at 500 Boylston Street, Boston, Massachusetts
02116. Transaction journals, receipts for the acceptance and delivery of
securities and cash, ledgers and trial balances are kept by State Street Bank
and Trust Company at State Street South, 5-West, North Quincy, Massachusetts
02171.
Item 31. Management Services
Not applicable.
<PAGE>
Item 32. Undertakings
(a) Not applicable.
(b) The Trust undertakes to file a post-effective amendment on
behalf of Vertex All Cap Fund, Vertex Contrarian Fund, Vertex Research All Cap
Fund, Vertex Growth Fund and Vertex Discovery Fund (the "Vertex Funds") using
financial statements which need not be certified, within four to six months from
the effective date of the Vertex Funds' 1933 Act Registration Statement or the
commencement of investment operations of the Vertex Funds.
(c) The registrant undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest annual report to
shareholders upon request and without charge.
(d) Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to trustees, officers and controlling
persons of the Registrant pursuant to the provisions set forth in Item 27 of
this Part C, or otherwise, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a trustee, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the Securities being Registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of Boston and
The Commonwealth of Massachusetts on the 11 day of February, 1998.
MFS SERIES TRUST XI
By: JAMES R. BORDEWICK, JR.
-----------------------
Name: James R. Bordewick, Jr.
Title: Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to its Registration Statement has been signed below by
the following persons in the capacities indicated on February 11, 1998.
SIGNATURE TITLE
STEPHEN E. CAVAN
- --------------------------- Principal Executive Officer
Stephen E. Cavan
W. THOMAS LONDON* Treasurer (Principal Financial
- --------------------------- Officer and Principal Accounting
W. Thomas London Officer)
WILLIAM R. GUTOW* Trustee
- ---------------------------
William R. Gutow
<PAGE>
NELSON J. DARLING, JR.* Trustee
- ----------------------------
Nelson J. Darling, Jr.
*By: JAMES R. BORDEWICK, JR.
-----------------------
Name: James R. Bordewick, Jr.
as Attorney-in-fact
Executed by James R. Bordewick, Jr.
on behalf of those indicated pursuant
to a Power of Attorney dated
August 12, 1994, incorporated by
reference to the Registrant's Post-
Effective Amendment No. 3
filed electronically with the
Securities and Exchange
Commission on September 1, 1995.
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBITS
1 (d) Amendment to the Declaration of Trust, dated
January 28, 1998.
EXHIBIT NO. 99.1(d)
MFS UNION STANDARD TRUST
CERTIFICATION OF AMENDMENT
TO THE DECLARATION OF TRUST
ESTABLISHMENT AND DESIGNATION
OF SERIES
AND
ESTABLISHMENT AND DESIGNATION
OF CLASSES
Pursuant to Section 9.3 of the Amended and Restated Declaration of Trust dated
January 24, 1996, as amended (the "Declaration"), of MFS Union Standard Trust
(the "Trust"), the Trustees of the Trust hereby amend Section 1.1 of the
Declaration to read in its entirety as follows:
"Section 1.1 - Name. The name of trust created hereby is the "MFS
Series Trust XI," the current address of which is 500 Boylston
Street, Boston, Massachusetts 02116."
Pursuant to Section 6.9 of the Declaration, the undersigned Trustees of the
Trust, being a majority of the Trustees of the Trust, hereby establish and
designate five new series of Shares (as defined in the Declaration), such series
to have the following special and relative rights:
1. The new series shall be designated:
- Vertex All Cap Fund;
- Vertex Contrarian Fund;
- Vertex Research All Cap Fund;
- Vertex Growth Fund; and
- Vertex Discovery Fund.
2. The series shall be authorized to invest in cash, securities,
instruments and other property as from time to time described in the
Trust's then currently effective registration statement under the
Securities Act of 1933, as
<PAGE>
amended, and the Investment Company Act of 1940, as amended, to the
extent pertaining to the offering of Shares of such series. Each
Share of the series shall be redeemable, shall be entitled to one
vote or fraction thereof in respect of a fractional share on matters
on which Shares of the series shall be entitled to vote, shall
represent a pro rata beneficial interest in the assets allocated or
belonging to the series, and shall be entitled to receive its pro
rata share of the net assets of the series upon liquidation of the
series, all as provided in Section 6.9 of the Declaration.
3. Shareholders of each series shall vote separately as a class on any
matter to the extent required by, and any matter shall be deemed to
have been effectively acted upon with respect to the series as
provided in Rule 18f-2, as from time to time in effect, under the
Investment Company Act of 1940, as amended, or any successor rule,
and by the Declaration.
4. The assets and liabilities of the Trust shall be allocated among the
previously established and existing series of the Trust and such new
series as set forth in Section 6.9 of the Declaration.
5. Subject to the provisions of Section 6.9 and Article IX of the
Declaration, the Trustees (including any successor Trustees) shall
have the right at any time and from time to time to reallocate
assets and expenses or to change the designation of any series now
or hereafter created, or to otherwise change the special and
relative rights of any such establishment and designation of series
of Shares.
Pursuant to Section 6.9(h) of the Declaration, this instrument shall be
effective upon the execution by a majority of the Trustees of the Trust.
The undersigned, being a majority of the Trustees of the Trust, acting pursuant
to Section 6.10 of the Declaration, do hereby divide the Shares of Vertex All
Cap Fund, Vertex Contrarian Fund, Vertex Research All Cap Fund, Vertex Growth
Fund and Vertex Discovery Fund to create four classes of Shares, within the
meaning of Section 6.10, as follows:
1. The four classes of Shares are designated "Class A Shares," "Class B
Shares," "Class C Shares" and "Class I Shares";
2. Class A Shares, Class B Shares, Class C Shares and Class I Shares
shall be entitled to all the rights and preferences accorded to
shares under the Declaration;
<PAGE>
3. The purchase price of Class A Shares, Class B Shares, Class C Shares
and Class I Shares, the method of determination of the net asset
value of Class A Shares, Class B Shares, Class C Shares and Class I
Shares, the price, terms and manner of redemption of Class A Shares,
Class B Shares, Class C Shares and Class I Shares, any conversion
feature of Class B Shares, and relative dividend rights of holders
of Class A Shares, Class B Shares, Class C Shares and Class I Shares
shall be established by the Trustees of the Trust in accordance with
the Declaration and shall be set forth in the current prospectus and
statement of additional information of the Trust or any series
thereof, as amended from time to time, contained in the Trust's
registration statement under the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended;
4. Class A Shares, Class B Shares, Class C Shares and Class I Shares
shall vote together as a single class except that shares of a class
may vote separately on matters affecting only that class and shares
of a class not affected by a matter will not vote on that matter;
and
5. A class of shares of any series of the Trust may be terminated by
the Trustees by written notice to the Shareholders of the class.
<PAGE>
IN WITNESS WHEREOF, a majority of the Trustees of the Trust have executed
this amendment, in one or more counterparts, all constituting a single
instrument, as an instrument under seal in The Commonwealth of Massachusetts, as
of this 28th day of January 1998 and further certify, as provided by the
provisions of Section 9.3(d) of the Declaration, that this amendment was duly
adopted by the undersigned in accordance with the second sentence of Section
9.3(a) of the Declaration.
- -------------------------------
A. Keith Brodkin
76 Farm Road
Sherborn, MA 01770
NELSON J. DARLING, JR.
- -------------------------------
Nelson J. Darling, Jr.
75 Beach Bluff Avenue
Swampscott, MA 01907
WILLIAM R. GUTOW
- -------------------------------
William R. Gutow
3 Rue Dulac
Dallas TX 75230
