As filed with the Securities and Exchange Commission on May 31, 1995
FORM N-1A
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 20
AND
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 22
MFS SERIES TRUST III
(Exact name of Registrant as specified in Charter)
500 Boylston Street, Boston, Massachusetts 02116
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (617) 954-5000 Stephen E. Cavan, Massachusetts Financial Services Company 500 Boylston Street, Boston, Massachusetts 02116
(Name and Address of Agent for Service)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
It is proposed that this filing will become effective (check appropriate box)
|_| immediately upon filing pursuant to paragraph (b) |X| on May 31, 1995 pursuant to paragraph (b) |_| 60 days after filing pursuant to paragraph (a)(i) |_| on [date] pursuant to paragraph (a)(i) |_| 75 days after filing pursuant to paragraph (a)(ii) |_| on [date] pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
|_| this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
Pursuant to Rule 24f-2, the Registrant has registered an indefinite number of its Shares of Beneficial Interest (without par value), under the Securities Act of 1933. The Registrant filed a Rule 24f-2 Notice for its fiscal year ended January 31, 1995 on March 30, 1995.
MFS SERIES TRUST III
MFS HIGH INCOME FUND
MFS MUNICIPAL HIGH INCOME 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)
ITEM NUMBER STATEMENT OF ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
1 (a), (b) Front Cover Page *
2 (a) Expense Summary *
(b), (c) * *
3 (a) Condensed Financial *
Information
(b) * *
(c) Information Concerning *
Shares of the Fund -
Performance Information
(d) Condensed Financial *
Information
4 (a) The Fund; Investment *
Objective and Policies
(b), (c) Investment Objective and *
Policies
5 (a) The Fund; Management of the *
Fund - Investment Adviser
(b) Front Cover Page; *
Management of the Fund -
Investment Adviser; Back
Cover Page
(c), (d) Management of the Fund - *
Investment Adviser
(e) Management of the Fund - *
Shareholder Servicing
Agent; Back Cover Page
(f) Expense Summary; Condensed *
Financial Information
(g) Information Concerning *
Shares of the Fund -
Purchases
5A (a), (b), (c) ** **
6 (a) Information Concerning *
Shares of the Fund -
Description of Shares,
Voting Rights and
Liabilities; Information
Concerning Shares of the
Fund - Redemptions and
Repurchases; Information
Concerning Shares of the
Fund - Purchases;
Information Concerning
Shares of the Fund -
Exchanges
(b), (c), (d) * *
(e) Shareholder Services *
(f) Information Concerning *
Shares of the Fund -
Distributions; Shareholder
Services - Distribution
Options
(g) Information Concerning *
Shares of the Fund - Tax
Status; Information
Concerning Shares of the
Fund - Distributions
7 (a) Front Cover Page; Management *
of the Fund - Distributor;
Back Cover Page
(b) Information Concerning *
Shares of the Fund -
Purchases; Information
Concerning Shares of the
Fund - Net Asset Value
(c) Information Concerning *
Shares of the Fund -
Purchases; Information
Concerning Shares of the
Fund - Exchanges; Shareholder
Services
(d) Front Cover Page; Information *
Concerning Shares of the
Fund - Purchases
(e) Information Concerning *
Shares of the Fund -
Distribution Plans; Expense
Summary
(f) Information Concerning *
Shares of the Fund -
Distribution Plans
8 (a) Information Concerning *
Shares of the Fund -
Redemptions and
Repurchases; Information
Concerning Shares of the
Fund - Purchases
(b), (c), (d) Information Concerning *
Shares of the Fund -
Redemptions and Repurchases
9 * *
10 (a), (b) * Front Cover Page
11 * Front Cover Page
12 * Definitions
13 (a), (b), (c) * Investment Objective,
Policies and Restrictions
(d) * *
14 (a), (b) * Management of the Fund -
Trustees and Officers
(c) * Management of the Fund -
Trustees and Officers;
Appendix A
15 (a) * *
(b), (c) * Management of the Fund -
Trustees and Officers
16 (a) Management of the Fund - Management of the Fund -
Investment Adviser Investment Adviser;
Management of the Fund -
Trustees and Officers
(b) Management of the Fund - Management of the Fund -
Investment Adviser Investment Adviser
(c) * *
(d) * Management of the Fund -
Investment Adviser
(e) * Portfolio Transactions and
Brokerage Commissions
(f) Information Concerning Distribution Plans
of the Fund - Distribution
Plans
(g) * *
(h) * Management of the Fund -
Custodian; Independent
Accountants and Financial
Statements; Back Cover
Page
(i) * Management of the Fund -
Shareholder Servicing
Agent
17 (a), (b), (c), * Portfolio Transactions and
(d), (e) Brokerage Commissions
18 (a) Information Concerning Description of Shares
Shares of the Fund - Voting Rights and
Description of Shares, Liabilities
Voting Rights and
Liabilities
(b) * *
19 (a) Information Concerning Shareholder Services
Shares of the Fund -
Purchases; Shareholder
Services
(b) Information Concerning Management of the Fund -
Shares of the Fund - Distributor; Determination
Net Asset Value; of Net Asset Value and
Information Concerning Performance - Net Asset
Shares of the Fund - Value
Purchases
(c) * *
20 * Tax Status
21 (a), (b) * Management of the Fund -
Distributor; Distribution
Plans
(c) * *
22 (a) * *
(b) * Determination of Net Asset
Value and Performance
23 * Independent Accountants and
Financial Statements
- -----------------------------
* Not Applicable
** Contained in Annual Report
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PROSPECTUS -- June 1, 1995
Class A Shares of Beneficial Interest
MFS(R) HIGH INCOME FUND Class B Shares of Beneficial Interest
(A Member of the MFS Family of Funds(R)) Class C Shares of Beneficial Interest
- ------------------------------------------------------------------------------
Page
----
1. Expense Summary .................................................... 2
2. The Fund .......................................................... 3
3. Condensed Financial Information .................................... 4
4. Investment Objective and Policies .................................. 6
5. Management of the Fund ............................................. 16
6. Information Concerning Shares of the Fund ......................... 17
Purchases ...................................................... 17
Exchanges ...................................................... 22
Redemptions and Repurchases .................................... 23
Distribution Plans ............................................. 25
Distributions .................................................. 26
Tax Status ..................................................... 27
Net Asset Value ................................................ 27
Description of Shares, Voting Rights and Liabilities ........... 27
Performance Information ........................................ 28
7. Shareholder Services ............................................... 28
Appendix A ......................................................... 31
Appendix B ......................................................... 34
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
MFS HIGH INCOME FUND 500 Boylston Street, Boston, Massachusetts 02116 (617) 954-5000
The investment objective of MFS High Income Fund (the "Fund") is to seek high current income by investing primarily in a professionally managed diversified portfolio of fixed income securities, some of which may involve equity features (see "Investment Objective and Policies"). The Fund is a diversified series of MFS Series Trust III (the "Trust"), an open-end investment company. The minimum initial investment is generally $1,000 per account (see "Purchases").
THE FUND MAY INVEST UP TO 100% OF ITS ASSETS IN LOWER RATED BONDS, COMMONLY KNOWN AS "JUNK BONDS," THAT ENTAIL GREATER RISKS, INCLUDING DEFAULT RISKS, THAN THOSE FOUND IN HIGHER RATED SECURITIES. INVESTORS SHOULD CAREFULLY CONSIDER
THESE RISKS BEFORE INVESTING (SEE "INVESTMENT OBJECTIVE AND POLICIES").
The Fund's investment adviser and distributor are Massachusetts Financial Services Company ("MFS" or the "Adviser") and MFS Fund Distributors, Inc. ("MFD"), respectively, both of which are located at 500 Boylston Street, Boston, Massachusetts 02116.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
This Prospectus sets forth concisely the information concerning the Trust and the Fund that a prospective investor ought to know before investing. The Trust, on behalf of the Fund, has filed with the Securities and Exchange Commission a Statement of Additional Information, dated June 1, 1995, which contains more detailed information about the Trust and the Fund and is incorporated into this Prospectus by reference. See page 30 for a further description of the information set forth in the Statement of Additional Information. A copy of the Statement of Additional Information may be obtained without charge by contacting the Shareholder Servicing Agent (see back cover for address and phone number).
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
1. EXPENSE SUMMARY
CLASS A CLASS B CLASS C
SHAREHOLDER TRANSACTION EXPENSES: ------- ------- -------
Maximum Initial Sales Charge Imposed on Purchases of Fund
Shares (as a percentage of offering price) ..................4.75% 0.00% 0.00%
Maximum Contingent Deferred Sales Charge (as a percentage of
original purchase price or redemption proceeds, as
applicable) .................................................See Below<F1> 4.00% 0.00%
ANNUAL OPERATING EXPENSES OF THE FUND
(AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees ............................................... 0.45% 0.45% 0.45%
Rule 12b-1 Fees ............................................... 0.21%<F2> 1.00%<F3> 1.00%<F3>
Other Expenses ................................................ 0.32% 0.39% 0.32%
---- ---- ----
Total Operating Expenses ...................................... 0.98% 1.84% 1.77%
- ----------
<F1> Purchases of $1 million or more are not subject to an initial sales charge; however, a contingent deferred sales charge (a
"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).
<F2> The Fund has adopted a Distribution Plan for its Class A shares in accordance with Rule 12b-1 under the Investment Company
Act of 1940, as amended (the "1940 Act") which provides that it will pay distribution/ service fees aggregating up to (but
not necessarily all of) 0.35% per annum of the average daily net assets attributable to the Class A shares (see "Distribution
Plans"). Currently, 0.10% of the distribution/service fee is being waived. After a substantial period of time, distribution
expenses paid under this Plan, together with the initial sales charge, may total more than the maximum sales charge that
would have been permissible if imposed entirely as an initial sales charge.
<F3>]The Fund has adopted separate Distribution Plans for its Class B and its Class C shares in accordance with Rule 12b-1 under
the 1940 Act, which provide that it will pay distribution/service fees aggregating up to (but not necessarily all of) 1.00%
per annum of the average daily net assets attributable to the Class B shares under the Class B Distribution Plan and the
Class C shares under the Class C Distribution Plan (see "Distribution Plans"). After a substantial period of time,
distribution expenses paid under these Plans, together with any CDSC payable upon redemption of Class B shares, may total
more than the maximum sales charge that would have been permissible if imposed entirely as an initial sales charge.
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An investor would pay the following dollar amounts of expenses on a $1,000 investment in the Fund, assuming (a) 5% annual return and (b) redemption at the end of each of the time periods indicated (unless otherwise noted):
PERIOD CLASS A CLASS B CLASS C
------ ------- -------------------- -------
\1/
1 year ................ $ 57 $ 59 $ 19 $ 18
3 years ............... 77 88 58 56
5 years ............... 99 120 100 96
10 years ............... 162 193\2/ 193\2/ 208
- ----------
\1/ Assumes no redemption.
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\2/ Class B shares convert to Class A shares approximately eight years after purchase; therefore, years nine and ten reflect Class A expenses.
The purpose of the expense table is to assist investors in understanding the various costs and expenses that a shareholder of the Fund will bear directly or indirectly. More complete descriptions of the following expenses of the Fund are set forth in the following sections of the Prospectus: (i) varying sales charges on share purchases -- "Purchases"; (ii) varying CDSCs -- "Purchases"; (iii) management fees -- "Investment Adviser"; and (iv) Rule 12b- 1 (i.e. distribution plan) fees -- "Distribution Plans".
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
2. THE FUND The Fund is a diversified series of the Trust, an open-end management investment company which was organized as a business trust under the laws of The Commonwealth of Massachusetts in 1977. The Trust presently consists of two series, each of which represents a portfolio with separate investment policies. Shares of the Fund are continuously sold to the public and the Fund then uses the proceeds to buy securities (primarily bonds and other fixed income instruments) for its portfolio. Three classes of shares of the Fund currently are offered to the general public. Class A shares are offered at net asset value plus an initial sales charge (or a CDSC in the case of certain purchases of $1 million or more) and subject to a Distribution Plan providing for a distribution and service fee. Class B shares are offered at net asset value without an initial sales charge but subject to a CDSC and a Distribution Plan providing for a distribution and service fee which are greater than the Class A distribution and service fee. Class B shares will convert to Class A shares approximately eight years after purchase. Class C shares are offered at net asset value without an initial sales charge or a CDSC but subject to a Distribution Plan providing for an annual distribution and service fee which are equal to the Class B annual distribution and service fee. Class C shares do not convert to any other class of shares of the Fund.
The Trust's Board of Trustees provides broad supervision over the affairs of the Fund. MFS is the Fund's investment adviser. A majority of the Trustees are not affiliated with the Adviser. The Adviser is responsible for the management of the assets of the Fund and the officers of the Trust are responsible for the Fund's operations. The Adviser manages the portfolio from day to day in accordance with the Fund's investment objective and policies. The selection of investments and the way they are managed depend on the conditions and trends in the economy and the financial marketplaces. The Fund also offers to buy back (redeem) its shares from its shareholders at any time at their net asset value, less any applicable CDSC.
3. CONDENSED FINANCIAL INFORMATION
The following per share information has been audited and should be read in conjunction with financial statements included in the Fund's Annual Report to shareholders which are incorporated by reference into the Statement of Additional Information in reliance upon the report of the Fund's independent auditors, as experts in accounting and auditing. The Fund's current independent auditors are Deloitte & Touche LLP.
FINANCIAL HIGHLIGHTS
YEAR ENDED JANUARY 31,
-------------------------------------------------------
1995 1994 1993 1992 1991 1990
- --------------------------------------------------------------------------------------------
CLASS A
- --------------------------------------------------------------------------------------------
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value - beginning of
period ..................... $ 5.50 $ 5.11 $ 4.89 $ 3.71 $ 4.85 $ 6.04
------ ------ ------ ------ ------ ------
Income from investment
operations<F3> -
Net investment income<F4>... $ 0.44 $ 0.40 $ 0.51 $ 0.56 $ 0.65 $ 0.69
Net realized and unrealized
gain (loss) on investments (0.66) 0.48 0.24 1.21 (1.08) (1.13)
------ ------ ------ ------ ------ ------
Total from investment
operations ............ $(0.22) $ 0.88 $ 0.75 $ 1.77 $(0.43) $(0.44)
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.43) $(0.42) $(0.51) $(0.56) $(0.71) $(0.75)
In excess of net investment
income .................. (0.01) (0.07) -- -- -- --
From paid-in capital ...... -- -- (0.02) (0.03) -- --<F2>
------ ------ ------ ------ ------ ------
Total distributions
declared to shareholders $(0.44) $(0.49) $(0.53) (0.59) $(0.71) $(0.75)
------ ------ ------ ------ ------ ------
Net asset value - end of period $ 4.84 $ 5.50 $ 5.11 $ 4.89 $ 3.71 $ 4.85
====== ====== ====== ====== ====== ======
Total return<F1>............. (3.95)% 18.13% 16.36% 49.64% (10.99)% (9.18)%
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA(S):
Expenses .................. 0.99% 1.00% 1.03% 1.10% 1.05% 0.87%
Net investment income ..... 8.65% 8.22% 10.21% 11.59% 14.97% 12.17%
PORTFOLIO TURNOVER .......... 59% 68% 75% 28% 24% 25%
NET ASSETS AT END OF PERIOD
(000,000 OMITTED) .......... $ 524 $ 645 $ 585 $ 556 $ 380 $ 574
- ----------
<F1> Total returns do not include the applicable sales charge (except for the reinvestment of dividends prior to March 1, 1991).
If the charge had been included, the results would have been lower.
<F2> Includes a per share distribution from paid-in capital of $0.004.
<F3> Per share data for the period subsequent to January 31, 1994 is based on average shares outstanding.
<F4> The distributor waived a portion of its distribution fee for the years indicated. If this fee had been incurred by the Fund,
the net investment income per share and the ratios would have been:
Net investment income ... $ 0.43 $ 0.40 -- -- -- --
Ratios (to average net assets):
Expenses 1.09% 1.04% -- -- -- --
Net investment income 8.55% 8.18% -- -- -- --
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<
FINANCIAL HIGHLIGHTS -- CONTINUED
YEAR ENDED JANUARY 31,
---------------------------------------------------------------------------------------
1989 1988 1987 1986 1995 1994<F1> 1995 1994<F2>
- -----------------------------------------------------------------------------------------------------------------------------------
CLASS A CLASS B CLASS C
- -----------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value - beginning of period $ 6.17 $ 7.11 $ 7.14 $ 6.84 $ 5.50 $ 5.27 $ 5.50 $ 5.41
------ ------ ------ ------ ------ ------ ------ ------
Income from investment operations<F4> -
Net investment income ............. $ 0.76 $ 0.77 $ 0.93 $ 0.87 $ 0.39 $ 0.15 $ 0.41 --
Net realized and unrealized gain
(loss) on investments ............ (0.09) (0.83) 0.07 0.37 (0.65) 0.22 (0.66) 0.09
------ ------ ------ ------ ------ ------ ------ ------
Total from investment operations $ 0.67 $(0.06) $ 1.00 $ 1.24 $(0.26) $ 0.37 $(0.25) $ 0.09
------ ------ ------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders -
From net investment income ........ $(0.75) $(0.87) $(0.93) $(0.94) $(0.39) $(0.13) $(0.39) --<F5>
In excess of net investment income -- -- -- -- (0.01) (0.01) (0.01) --<F5>
From net realized gain on investments (0.05) (0.01) (0.10) -- -- -- -- --
From paid-in capital .............. --<F7> -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Total distributions declared to
shareholders ................... $(0.80) $(0.88) $(1.03) $(0.94) $(0.40) $(0.14) $(0.40) --
------ ------ ------ ------ ------ ------ ------ ------
Net asset value - end of period ..... $ 6.04 $ 6.17 $ 7.11 $ 7.14 $ 4.84 $ 5.50 $ 4.85 $ 5.50
====== ====== ====== ====== ====== ====== ====== ======
Total return<F6> .................... 10.68% (1.94)% 14.03% 18.34% (4.77)% 20.29%<F3> (4.51)% 20.94%<F3>
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses .......................... 0.87% 0.75% 0.71% 0.80% 1.85% 1.79%<F3> 1.79% 1.36%<F3>
Net investment income.............. 12.44% 11.49% 12.49% 12.47% 7.79% 6.94%<F3> 8.01% 5.92%<F3>
PORTFOLIO TURNOVER .................. 34% 28% 46% 49% 59% 68% 59% 68%
NET ASSETS AT END OF PERIOD
(000,000 OMITTED) ................. $ 880 $1,001 $1,232 $ 581 $ 286 $ 371 $ 3 $ 1
- ----------
<F1> For the period from the commencement of offering of Class B shares, September 27, 1993 to January 31, 1994.
<F2> For the period from the commencement of offering of Class C shares, January 3, 1994 to January 31, 1994.
<F3> Annualized.
<F4> Per share data for the period subsequent to January 31, 1994 is based on average shares outstanding.
<F5> Includes per share distributions from net investment income and in excess of net investment income of $0.004 and $0.001,
respectively.
<F6> Total returns for Class A shares do not include the applicable sales charge (except for the reinvestment of dividends prior
to March 1, 1991). If the charge had been included, the results would have been lower.
<F7> Includes a per share distribution from paid-in capital of $0.0006.
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4. INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE -- The investment objective of the Fund is to seek high current income by investing primarily in a professionally managed diversified portfolio of fixed income securities, some of which may involve equity features. Capital growth, if any, is a consideration incidental to the objective of the Fund of high current income. Any investment involves risk and there can be no assurance that the Fund will achieve its investment objective.
INVESTMENT POLICIES -- Fixed income securities offering the high current income sought by the Fund normally include those fixed income securities which offer a current yield above that generally available on debt securities in the three highest rating categories of the recognized rating agencies (commonly known as "junk bonds" if rated below the four highest categories of recognized rating agencies). However, since available yields and yield differentials vary over time, no specific level of income or yield differential can ever be assured. The dividends paid by the Fund will increase or decrease in relation to the income received by the Fund from its investments, which would in any case be reduced by the expenses of the Fund before such income is distributed to its shareholders. For a description of these rating categories, see Appendix A to this Prospectus, and for a chart indicating the composition of the bond portion of the Fund's portfolio for its fiscal year ended January 31, 1995, with the debt securities separated into rating categories, see Appendix B to this Prospectus (see "Investment Objective and Policies -- Risk Factors of Lower Rated Securities" below for a description of the risks involved in investing in these lower rated fixed income securities).
Fixed income securities include preferred and preference stocks and all types of debt obligations of both domestic and foreign issuers, such as bonds, debentures, notes, equipment lease certificates, equipment trust certificates (including interests in trusts or other entities representing such obligations), conditional sales contracts, commercial paper and obligations issued or guaranteed by the U.S. Government, any foreign government or any of their respective political subdivisions, agencies or instrumentalities (including obligations, such as repurchase agreements, secured by such instruments).
Corporate debt securities may bear fixed, fixed and contingent, or variable rates of interest and may involve equity features, 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). Under normal market conditions, not more than 25% of the value of the total assets of the Fund will be invested in equity securities, including common stocks, warrants and rights.
Fixed income securities that the Fund may invest in also include 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 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. The 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.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES: The Fund may invest a portion of its assets in collateralized mortgage obligations ("CMOs"), which are debt obligations collateralized by mortgage loans or mortgage pass-through securities (such collateral collectively hereinafter referred to as "Mortgage Assets"). The Fund may also invest a portion of its assets in multiclass pass-through securities which are equity interests in a trust composed of Mortgage Assets. Unless the context indicates otherwise, all references herein to CMOs include multiclass pass-through securities. Payments of principal of and interest on the Mortgage Assets, and any reinvested income thereon, provide the funds to pay debt service on the CMOs or make scheduled distributions on the multiclass pass-through securities. In CMOs, a series of bonds or certificates are usually issued in multiple classes with different maturities. Each class of CMOs, often referred to as a "tranch", is issued at a specific fixed or floating coupon rate and has a stated maturity or final distribution date. Principal prepayments on the Mortgage Assets may cause the CMOs to be retired substantially earlier then their stated maturities or final distribution dates, resulting in a loss of all or a part of the premium, if any has been paid. The Fund may also invest in parallel pay CMOs and Planned Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to provide payments of principal on each payment date to more than one class. PAC Bonds generally require payments of a specified amount of principal on each payment date. PAC Bonds are always parallel pay CMOs with the required principal payment on such securities having the highest priority after interest has been paid to all classes. For a further description of CMOs, see the Statement of Additional Information.
STRIPPED MORTGAGE-BACKED SECURITIES: The Fund may invest a portion of its assets in stripped mortgage-backed securities, which are derivative securities usually structured with two classes that receive different proportions of the interest and principal distributions from an underlying pool of Mortgage Assets. For a further discussion of stripped mortgage-backed securities and the risks related to transactions therein, see the Statement of Additional Information.
AMERICAN DEPOSITARY RECEIPTS: The Fund may invest in American Depositary Receipts ("ADRs") which are certificates issued by a U.S. depository (usually a bank) and represent a specified quantity of shares of an underlying non-U.S. Stock on deposit with a custodian bank as collateral. Because ADRs trade on United States securities exchanges, the Adviser does not treat them as foreign securities. However, they are subject to many of the risks of foreign securities such as changes in exchange rates and more limited information about foreign issuers.
FOREIGN SECURITIES: The Fund may invest up to 50% (and expects generally to invest between 5% and 20%) of its total assets in foreign securities which are not traded on a U.S. exchange (not including ADRs). Investing in securities of foreign issuers generally involves risks not ordinarily associated with investing in securities of domestic issuers. These include changes in currency rates, exchange control regulations, governmental administration or economic or monetary policy (in the United States or abroad) or circumstances in dealings between nations. Costs may be incurred in connection with conversions between various currencies. Special considerations may also include more limited information about foreign issuers, higher brokerage costs, different accounting standards and thinner trading markets. Foreign securities markets may also be less liquid, more volatile and less subject to government supervision than in the United States. Investments in foreign countries could be affected by other factors including expropriation, confiscatory taxation and potential difficulties in enforcing contractual obligations and could be subject to extended settlement periods. The Fund may hold foreign currency received in connection with investments in foreign securities when, in the judgment of the Adviser, it would be beneficial to convert such currency into U.S. dollars at a later date, based on anticipated changes in the relevant exchange rate. The Fund may also hold foreign currency in anticipation of purchasing foreign securities. The Fund may invest in foreign securities without limitation and has authority to invest up to 25% of its total assets in securities issued or guaranteed by foreign governments or their agencies or instrumentalities. However, the Fund has made commitments to regulatory authorities to limit its investments in securities issued by any single foreign government to 5% of its total assets and to continue to maintain its status as a diversified company under the Investment Company Act of 1940, as amended (the "1940 Act"). See the Statement of Additional Information for further discussion of foreign securities and the holding of foreign currency, as well as the associated risks.
The Fund may invest up to 40% of the value of its total assets in each of the electric utility and telephone industries, but will not invest more than 25% in either of those industries unless yields available for four consecutive weeks in the four highest rating categories on new issue bonds in such industry (issue size of $50 million or more) have averaged in excess of 105% of yields of new issue long-term industrial bonds similarly rated (issue size of $50 million or more) and, in the opinion of the Adviser, the relative return available from the electric utility or telephone industry and the relative risk, marketability, quality and availability of securities of such industry justifies such an investment.
During periods of unusual market conditions when the Adviser believes that investing for defensive purposes is appropriate, part or all of the assets of the Fund may be invested in cash (including foreign currency) or short-term money market instruments including, but not limited to, certificates of deposit, commercial paper, short-term notes, obligations issued or guaranteed by the U.S. Government or any of its agencies or instrumentalities and repurchase agreements.
When and if available, fixed income securities may be purchased at a discount from face value. However, the Fund does not intend to hold such securities to maturity for the purpose of achieving potential capital gains, unless current yields on these securities remain attractive. From time to time the Fund may purchase securities not paying interest at the time acquired if, in the opinion of the Adviser, such securities have the potential for future income or capital appreciation.
EMERGING MARKET SECURITIES: Consistent with the Fund's investment objective and policies and its ability to invest in foreign securities, the Fund may invest in countries or regions with relatively low gross national product per capita compared to the world's major economies, and in countries or regions with the potential for rapid economic growth (emerging markets). Emerging markets will include any country: (i) having an "emerging stock market" as defined by the International Finance Corporation; (ii) with low-to middle- income economies according to the International Bank for Reconstruction and Development (the "World Bank"); (iii) listed in World Bank publications as developing; or (iv) determined by the Adviser to be an emerging market as defined above. The Fund may invest in securities of: (i) companies the principal securities trading market for which is an emerging market country; (ii) companies organized under the laws of, and with a principal office in, an emerging market country; (iii) companies whose principal activities are located in emerging market countries; or (iv) companies traded in any market that derive 50% or more of their total revenue from either goods or services produced in an emerging market or sold in an emerging market.
The risks of investing in foreign securities may be intensified in the case of investments in emerging markets. Securities of many issuers in emerging markets may be less liquid and more volatile than securities of comparable domestic issuers. Emerging markets also have different clearance and settlement procedures, and in certain markets there have been times when settlements have been unable to keep pace with the volume of securities transactions, making it difficult to conduct such transactions. Delays in settlement could result in temporary periods when a portion of the assets of the Fund is uninvested and no return is earned thereon. The inability of the Fund to make intended security purchases due to settlement problems could cause the Fund to miss attractive investment opportunities. Inability to dispose of portfolio securities due to settlement problems could result either in losses to the Fund due to subsequent declines in value of the portfolio security or, if the Fund has entered into a contract to sell the security, in possible liability to the purchaser. Certain markets may require payment for securities before delivery. Securities prices in emerging markets can be significantly more volatile than in the more developed nations of the world, reflecting the greater uncertainties of investing in less established markets and economies. In particular, countries with emerging markets may have relatively unstable governments, present the risk of nationalization of businesses, restrictions on foreign ownership, or prohibitions of repatriation of assets, and may have less protection of property rights than more developed countries. The economies of countries with emerging markets may be predominantly based on only a few industries, may be highly vulnerable to changes in local or global trade conditions, and may suffer from extreme and volatile debt burdens or inflation rates. Local securities markets may trade a small number of securities and may be unable to respond effectively to increases in trading volume, potentially making prompt liquidation of substantial holdings difficult or impossible at times. Securities of issuers located in countries with emerging markets may have limited marketability and may be subject to more abrupt or erratic price movements.
Certain emerging markets may require governmental approval for the repatriation of investment income, capital or the proceeds of sales of securities by foreign investors. In addition, if a deterioration occurs in an emerging market's balance of payments or for other reasons, a country could impose temporary restrictions on foreign capital remittances. The Fund could be adversely affected by delays in, or a refusal to grant, any required governmental approval for repatriation of capital, as well as by the application to the Fund of any restrictions on investments.
Investment in certain emerging market debt obligations may be restricted or controlled to varying degrees. These restrictions or controls may at times preclude investment in certain emerging market debt obligations and increase the expenses of the Fund.
BRADY BONDS: The Fund may invest in Brady Bonds, which are securities created through the exchange of existing commercial bank loans to public and private entities in certain emerging markets for new bonds in connection with debt restructurings under a debt restructuring plan introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan debt restructurings have been implemented to date in Argentina, Brazil, Bulgaria, Costa Rica, Ecuador, Mexico, Nigeria, the Philippines, Poland, Uruguay and Venezuela. Brady Bonds have been issued only recently, and for that reason do not have a long payment history. Brady Bonds may be collateralized or uncollateralized, are issued in various currencies (but primarily the U.S. dollar) and are actively traded in over-the-counter secondary markets. U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed rate bonds or floating-rate bonds, are generally collateralized in full as to principal by U.S. Treasury zero coupon bonds having the same maturity as the bonds. Brady Bonds are often viewed as having three or four valuation components: the collateralized repayment of principal at final maturity; the collateralized interest 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.
RISK FACTORS OF LOWER RATED SECURITIES: Securities offering the high current income sought by the Fund are ordinarily in the lower rating categories of recognized rating agencies (that is, ratings of Baa or lower by Moody's Investors Service, Inc. ("Moody's") or BBB or lower by Standard & Poor's Ratings Group ("S&P") or Fitch Investors Service, Inc. ("Fitch")) or are unrated and, as described below, generally involve greater volatility of price and risk of principal and income than securites in the higher rating categories. Accordingly, an investment in shares of the Fund should not constitute a complete investment program and may not be appropriate for all investors. The Fund, however, seeks to reduce risk through diversification, credit analysis and attention to current developments and trends in both the economy and financial markets. In addition, investments in foreign securities may serve to provide further diversification.
The Fund may invest in fixed income securities rated Baa by Moody's or BBB by S&P or Fitch (and comparable unrated securities). These securities, while normally exhibiting adequate protection parameters, have speculative characteristics and changes in economic conditions or other circumstances are more likely to lead to a weakened capacity to make principal and interest payments than in the case of higher grade fixed income securities.
The Fund may also invest in fixed income securities rated Ba or lower by Moody's or BB or lower by S&P or Fitch (and comparable unrated securities) (commonly known as "junk bonds"). No minimum rating standard is required by the Fund. These securities are considered speculative and, while generally providing greater income than investments in higher rated securities, will involve greater risk of principal and income (including the possibility of default or bankruptcy of the issuers of such securities) and may involve greater volatility of price (especially during periods of economic uncertainty or change) than securities in the higher rating categories 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 be affected by 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 securities are also affected by changes in interest rates as described below). In the past, economic downturns or an increase in interest rates have, under certain circumstances, caused a higher incidence of default by the issuers of these securities and may do so in the future, especially in the case of highly leveraged issuers. During certain periods, the higher yields on the Fund's lower rated high yielding fixed income securities are paid primarily because of the increased risk of loss of principal and income, arising from such factors as the heightened possibility of default or bankruptcy of the issuers of such securities. Due to the fixed income payments of these securities, the Fund may continue to earn the same level of interest income while its net asset value declines due to portfolio losses, which could result in an increase in the Fund's yield despite the actual loss of principal. The prices for these securities may be affected by legislative and regulatory developments. For example, new federal rules require that savings and loan associations gradually reduce their holdings of high-yield securities. An effect of such legislation may be to depress the prices of outstanding lower rated high yielding fixed income securities. The market for these lower rated fixed income securities may be less liquid than the market for investment grade fixed income securities. Furthermore, the liquidity of these lower rated securities may be affected by the market's perception of their credit quality. Therefore, the Adviser's judgment may at times play a greater role in valuing these securities than in the case of investment grade fixed income securities, and it also may be more difficult during times of certain adverse market conditions to sell these lower rated securities to meet redemption requests or to respond to changes in the market.
While the Adviser may refer to ratings issued by established credit rating agencies, it is not the Fund's policy to rely exclusively on ratings issued by these rating agencies, but rather to supplement such ratings with the Adviser's own independent and ongoing review of credit quality. The Fund's achievement of its investment objective may be more dependent on the Adviser's own credit analysis than in the case of an investment company primarily investing in higher quality fixed income securities.
Because shares of the Fund represent an investment in securities with fluctuating market prices, shareholders should understand that the value of shares of the Fund will vary as the aggregate value of the portfolio securities of the Fund increases or decreases. However, changes in the value of securities subsequent to their acquisition will not affect cash income or yield to maturity to the Fund.
The net asset value of the shares of an open-end investment company, such as the Fund, which invests primarily in fixed income securities, changes as the general levels of interest rates fluctuate. When interest rates decline, the value of a portfolio invested at higher yields can be expected to rise. Conversely, when interest rates rise, the value of a portfolio invested at lower yields can be expected to decline.
The Fund seeks to maximize the return on its portfolio by taking advantage of market developments, yield disparities and variations in the creditworthiness of issuers. This may result in increases or decreases in the current income of the Fund available for distribution to its shareholders and in the holding by the Fund of debt securities which sell at moderate to substantial premiums or discounts from face value. Moreover, if the Fund's expectations of changes in interest rates or its evaluation of the normal yield relationship between two securities proves to be incorrect, the income, net asset value and potential capital gain of the Fund may be decreased or its potential capital loss may be increased.
MORTGAGE PASS-THROUGH SECURITIES: The Fund may invest in mortgage pass-through securities. Mortgage pass-through securities are securities representing interests in "pools" of mortgage loans. Monthly payments of interest and principal by the individual borrowers on mortgages are passed through to the holders of the securities (net of fees paid to the issuer or guarantor of the securities) as the mortgages in the underlying mortgage pools are paid off. The average lives of mortgage pass-throughs are variable when issued because their average lives depend on prepayment rates. The average life of these securities is likely to be substantially shorter than their stated final maturity as a result of unscheduled principal prepayment. Prepayments on underlying mortgages result in a loss of anticipated interest, and all or part of a premium if any has been paid, and the actual yield (or total return) to the Fund may be different than the quoted yield on the securities. Mortgage prepayments generally increase with falling interest rates and decrease with rising interest rates. Like other fixed income securities, when interest rates rise the value of a mortgage pass-through security generally will decline; however, when interest rates are declining, the value of mortgage pass-through securities with prepayment features may not increase as much as that of other fixed income securities.
SWAPS AND RELATED TRANSACTIONS: As one way of managing its exposure to different types of investments, the Fund may enter into interest rate swaps, currency swaps and other types of available swap agreements, such as caps, collars and floors. Swaps involve the exchange by the Fund with another party of cash payments based upon different interest rate indexes, currencies, and other prices or rates, such as the value of mortgage prepayment rates. For example, in the typical interest rate swap, the Fund might exchange a sequence of cash payments based on a floating rate index for cash payments based on a fixed rate. Payments made by both parties to a swap transaction are based on a principal amount determined by the parties.
The Fund may also purchase and sell caps, floors and collars. In a typical cap or floor agreement, one party agrees to make payments only under specified circumstances, usually in return for payment of a fee by the counterparty. For example, the purchase of an interest rate cap entitles the buyer, to the extent that a specified index exceeds a predetermined interest rate, to receive payments of interest on a contractually-based principal amount from the counterparty selling such interest rate cap. The sale of an interest rate floor obligates the seller to make payments to the extent that a specified interest rate falls below an agreed-upon level. A collar arrangement combines elements of buying a cap and selling a floor.
Swap agreements will tend to shift the Fund's investment exposure from one type of investment to another. For example, if the Fund agreed to exchange payments in dollars for payments in a foreign currency, in each case based on a fixed rate, the swap agreement would tend to decrease the Fund's exposure to U.S. interest rates and increase its exposure to foreign currency and interest rates. Caps and floors have an effect similar to buying or writing options. Depending on how they are used, swap agreements may increase or decrease the overall volatility of the Fund's investments and its share price and yield.
Swap agreements are sophisticated hedging instruments that typically involve a small investment of cash relative to the magnitude of risks assumed. As a result, swaps can be highly volatile and may have a considerable impact on the Fund's performance. Swap agreements are subject to risks related to the counterparty's ability to perform, and may decline in value if the counterparty's creditworthiness deteriorates. The Fund may also suffer losses if it is unable to terminate outstanding swap agreements or reduce its exposure through offsetting transactions.
Swaps, caps, floors and collars are highly specialized activities which involve certain risks. See the Statement of Additional Information on the risks involved in, these activities.
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements in order to earn additional income on available cash or as a temporary defensive measure. Under a repurchase agreement, the Fund acquires securities subject to the seller's agreement to repurchase at a specified time and price. If the seller becomes subject to a proceeding under the bankruptcy laws or its assets are otherwise subject to a stay order, the Fund's right to liquidate the securities may be restricted (during which time the value of the securities could decline). As discussed in the Statement of Additional Information, the Fund has adopted certain procedures intended to minimize any risk.
LENDING OF PORTFOLIO SECURITIES: The Fund may seek to increase its income by lending portfolio securities. Such loans will usually be made to member firms (and subsidiaries thereof) of the New York Stock Exchange (the "Exchange") and to member banks of the Federal Reserve System, and would be required to be secured continuously by collateral in cash, cash equivalents or U.S. Treasury securities maintained on a current basis at an amount at least equal to the market value of the securities loaned. If the Adviser determines to make securities loans, it is intended that the value of the securities loaned would not exceed 30% of the value of the total assets of the Fund.
LOANS AND OTHER DIRECT INDEBTEDNESS: The Fund may invest a portion of its assets in "loans." By purchasing a loan, the Fund acquires some or all of the interest of a bank or other lending institution in a loan to a corporate borrower. Many such loans are secured, and most impose restrictive covenants which must be met by the borrower. These loans are made generally to finance internal growth, mergers, acquisitions, stock repurchases, leveraged buy-outs and other corporate activities. Such loans may be in default at the time of purchase. The Fund may also purchase trade or other claims against companies, which generally represent money owed by the company to a supplier of goods or services. These claims may also be purchased at a time when the company is in default. Certain of the loans acquired by the Fund may involve revolving credit facilities or other standby financing commitments which obligate the Fund to pay additional cash on a certain date or on demand.
The highly leveraged nature of many such loans may make such loans especially vulnerable to adverse changes in economic or market conditions. Loans and other direct investments may not be in the form of securities or may be subject to restrictions on transfer, and only limited opportunities may exist to resell such instruments. As a result, the Fund may be unable to sell such investments at an opportune time or may have to resell them at less than fair market value. For a further discussion of loans and the risks related to transactions therein, see the Statement of Additional Information.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: The Fund may enter into mortgage "dollar roll" transactions with selected banks and broker-dealers pursuant to which the Fund sells mortgage-backed securities for delivery in the future (generally within 30 days) and simultaneously contracts to repurchase substantially similar (same type, coupon and maturity) securities on a specified future date. The Fund will only enter into covered rolls. A "covered roll" is a specific type of dollar roll for which there is an offsetting cash position or a cash equivalent security position which matures on or before the forward settlement date of the dollar roll transaction.
"WHEN-ISSUED" SECURITIES: The Fund may purchase some securities on a "when- issued" or on a "forward delivery" basis, which means that the securities will be delivered to the Fund at a future date usually beyond customary settlement time. The commitment to purchase a security for which payment will be made on a future date may be deemed a separate security. The Fund does not pay for the securities until received, and does not start earning interest on the securities until the contractual settlement date. In order to invest its assets immediately, while awaiting delivery of securities purchased on such bases, the Fund will normally invest in short-term securities that offer same- day settlement and earnings.
INDEXED SECURITIES: The Fund may invest in indexed securities whose value is linked to foreign currencies, interest rates, commodities, indices or other financial indicators. Most indexed securities are short to intermediate term fixed-income securities whose values at maturity or interest rates rise or fall according to the change in one or more specified underlying instruments. Indexed securities may be positively or negatively indexed (i.e., their value may increase or decrease if the underlying instrument appreciates), and may have return characteristics similar to direct investments in the underlying instrument or to one or more options on the underlying instrument. Indexed securities may be more volatile than the underlying instrument itself.
CORPORATE ASSET-BACKED SECURITIES: The Fund may invest in corporate asset- backed securities. These securities, issued by trusts and special purpose corporations, are backed by a pool of assets, such as credit card or automobile loan receivables, representing the obligations of a number of different parties. Corporate asset-backed securities present certain risks. For instance, in the case of credit card receivables, these securities may not have the benefit of any security interest in the related collateral. See the Statement of Additional Information for further information on these securities.
RESTRICTED SECURITIES: The Fund may also purchase securities that are not registered under the Securities Act of 1933 ("1933 Act") ("restricted securities"), including those that can be offered and sold to "qualified institutional buyers" under Rule 144A under the 1933 Act ("Rule 144A securities"). The Trust's Board of Trustees determines, based upon a continuing review of the trading markets for a specific Rule 144A security, whether such security is illiquid and thus subject to a Fund's limitation on investing not more than 15% of its net assets in illiquid investments, or liquid and thus not subject to such limitation. The Board of Trustees has adopted guidelines and delegated to MFS the daily function of determining and monitoring the liquidity of Rule 144A securities. The Board, however, will retain sufficient oversight and be ultimately responsible for the determinations. The Board will carefully monitor the Fund's investments in Rule 144A securities, focusing on such important factors, among others, as valuation, liquidity and availability of information. This investment practice could have the effect of increasing the level of illiquidity in the Fund to the extent that qualified institutional buyers become for a time uninterested in purchasing Rule 144A securities held in the Fund's portfolio. Subject to the Fund's 15% limitation on investments in illiquid investments, the Fund may also invest in restricted securities that may not be sold under Rule 144A, which presents certain risks. As a result, the Fund might not be able to sell these securities when the Adviser wishes to do so, or might have to sell them at less than fair value. In addition, market quotations are less readily available. Therefore, judgment may at times play a greater role in valuing these securities than in the case of unrestricted securities.
OPTIONS: The Fund may write (sell) "covered" put and call options on domestic and foreign fixed income securities. Call options written by the Fund give the holder the right to buy the underlying securities from the Fund at a fixed exercise price up to a stated expiration date or, in the case of certain options, on such date. Put options give the holder the right to sell the underlying security to the Fund during the term of the option at a fixed exercise price up to a stated expiration date or, in the case of certain options, on such date. Call options are "covered" by the Fund, for example, when it owns the underlying securities, and put options are "covered" by the Fund, for example, when it has established a segregated account of cash, short-term money market instruments and high quality debt securities which can be liquidated promptly to satisfy any obligation of the Fund to purchase the underlying securities. The Fund may also write straddles (combinations of puts and calls on the same underlying security). Such transactions generate additional premium income but also include greater risk.
The Fund will receive a premium from writing a put or call option, which increases the Fund's gross income in the event the option expires unexercised or is closed out at a profit. The amount of the premium will reflect, among other things, the relationship of the exercise price to the market price and volatility of the underlying security, the remaining term of the option, supply and demand and interest rates. By writing a call option, the Fund limits its opportunity to profit from any increase in the market value of the underlying security above the exercise price of the option. By writing a put option, the Fund assumes the risk that it may be required to purchase the underlying security for an exercise price higher than its then current market value, resulting in a potential capital loss unless the security subsequently appreciates in value.
The Fund may terminate an option that it has written prior to its expiration by entering into a closing purchase transaction in which it purchases an option having the same terms as the option written. It is possible, however, that illiquidity in the options markets may make it difficult from time to time for the Fund to close out its written option positions.
The Fund may also purchase put or call options in anticipation of changes in interest rates which may adversely affect the value of its portfolio or the prices of securities that the Fund wants to purchase at a later date. 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 of the option, and, unless the price of the underlying security changes sufficiently, the option may expire without value to the Fund.
The Fund may write and purchase options on securities not only for hedging purposes, but also for the purpose of increasing its return. Options on securities that are written or purchased by the Fund will be traded on U.S. and foreign exchanges and over-the-counter.
The Fund may also enter into options on the yield "spread" or yield differential between two fixed income securities, a transaction referred to as a "yield curve" option, for hedging and non-hedging purposes. In contrast to other types of options, a yield curve option is based on the difference between the yields of designated fixed income securities rather than the actual prices of the individual securities. Yield curve options written by the Fund will be "covered" but could involve additional risks, as discussed in the Statement of Additional Information.
The staff of the Securities and Exchange Commission (the "SEC") has taken the position that purchased over-the-counter options and assets used to cover written over-the-counter options are illiquid and, therefore, together with other illiquid securities held by the Fund, cannot exceed a certain percentage of the Fund's assets (the "SEC illiquidity ceiling"). Although the Adviser disagrees with this position, the Adviser intends to limit the Fund's writing of over-the-counter options in accordance with the following procedure. Except as provided below, the Fund intends to write over-the-counter options only with primary U.S. Government securities dealers recognized as such by the Federal Reserve Bank of New York. Also, the contracts which the Fund has in place with such primary dealers provide that the Fund has the absolute right to repurchase an option it writes at any time at a price which represents the fair market value, as determined in good faith through negotiation between the parties, but which in no event will exceed a price determined pursuant to a formula in the contract. Although the specific formula may vary between contracts with different primary dealers, the formula generally is based on a multiple of the premium received by the Fund for writing the option, plus the amount, if any, of the option's intrinsic value (i.e., the amount that the option is in-the-money). The formula may also include a factor to account for the difference between the price of the security and the strike price of the option if the option is written out-of-the-money. The Fund will treat all or a portion of the formula price as illiquid for purposes of the SEC illiquidity ceiling. The Fund may also write over-the-counter options with non-primary dealers, including foreign dealers, and will treat the assets used to cover these options as illiquid for purposes of the SEC illiquidity ceiling.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS: The Fund may purchase and sell futures contracts on fixed income securities or indices of such securities, including municipal bond indices and any other indices of fixed income securities which may become available for trading ("Futures Contracts"). The Fund may also purchase and write options on such Futures Contracts ("Options on Futures Contracts"). These instruments will be used to hedge against anticipated future changes in interest rates which otherwise might either adversely affect the value of the Fund's portfolio securities or adversely affect the prices of securities which the Fund intends to purchase at a later date. Should interest rates move in an unexpected manner, the Fund may not achieve the anticipated benefits of the hedging transactions and may realize a loss. The Fund may also purchase and sell Futures Contracts and Options on Futures Contracts for non-hedging purposes, subject to applicable law, which involves greater risk and could result in losses which are not offset by gains on other portfolio assets.
In order to assure that the Fund will not be deemed to be a "commodity pool" for purposes of the Commodity Exchange Act, regulations of the CFTC require that the Fund enter into transactions in Futures Contracts and Options on Futures Contracts only (i) for bona fide hedging purposes (as defined in CFTC regulations), or (ii) for non-hedging purposes, provided that the aggregate initial margin and premiums on such non-hedging positions does not exceed 5% of the liquidation value of the Fund's assets. In addition, the Fund must comply with the requirements of various state securities laws in connection with such transactions.
The Fund has adopted the additional restriction that it will not enter into a Futures Contract if, immediately thereafter, the value of securities and other obligations underlying all such Futures Contracts would exceed 50% of the value of the Fund's total assets. Moreover, the Fund will not purchase put and call options on securities, on Futures Contracts or on foreign currencies, if as a result, more than 5% of its total assets would be invested in such options.
Futures Contracts and Options on Futures Contracts that are entered into by the Fund will be traded on U.S. and foreign exchanges.
FORWARD CONTRACTS: The Fund may enter into forward foreign currency exchange contracts ("Forward Contracts") to attempt to minimize the risk to the Fund from adverse changes in the relationship between the U.S. dollar and foreign currencies. A Forward Contract is an obligation to purchase or sell a specific currency for an agreed price at a future date which is individually negotiated and privately traded by currency traders and their customers. The Fund may enter into a Forward Contract, for example, when it enters into a contract for the purchase or sale of a security denominated in a foreign currency in order to "lock in" the U.S. dollar price of the security. Additionally, for example, when the Fund believes that a foreign currency may suffer a substantial decline against the U.S. dollar, it may enter into a Forward Contract to sell an amount of that foreign currency approximating the value of some or all of the Fund's portfolio securities denominated in such foreign currency. Conversely, when the Fund believes that the U.S. dollar may suffer a substantial decline against a foreign currency, it may enter into a Forward Contract to buy that foreign currency for a fixed dollar amount. The Fund may also enter into a Forward Contract on one Currency in order to hedge against risk of loss arising from fluctuations in the value of a second currency (referred to as a "cross-hedge") if, in the judgment of the Adviser, a reasonable degree of correlation can be expected between movements in the values of the two currencies. The Fund has established procedures consistent with the General Statement of Policy of the SEC concerning such purchases. Since that policy currently recommends that an amount of the Fund's assets equal to the amount of the purchase be held aside or segregated to be used to pay for the commitment, the Fund will always have cash, high quality debt securities or cash equivalents available sufficient to cover any commitments under these contracts or to limit any potential risk. The segregated account will be marked to market on a daily basis. The Fund may also be required to, or may elect to, receive delivery of foreign currencies underlying Forward Contracts, which may involve certain risks. The Fund has established procedures consistent with statements of the SEC and its staff regarding the use of Forward Contracts by registered investment companies, which requires use of segregated assets or "cover" in connection with the purchase and sale of such contracts. See "Investment Objective and Policies -- Additional Risk Factors" below. The Fund has established procedures consistent with statements of the SEC and its staff regarding the use of Forward Contracts by registered investment companies, which requires the use of segregated assets or "cover" in connection with the purchase and sale of such contracts.
OPTIONS ON FOREIGN CURRENCIES: The Fund may purchase and write put and call options on foreign currencies for the purpose of protecting against declines in the dollar value of foreign portfolio securities and against increases in the dollar cost of foreign securities to be acquired. As in the case of other kinds of options, however, the writing of an option on foreign currency will constitute only a partial hedge, up to the amount of the premium received, and the Fund could be required to purchase or sell foreign currencies at disadvantageous exchange rates, thereby incurring losses. The purchase of an option on foreign currency may constitute an effective hedge against fluctuations in exchange rates although, in the event of rate movements adverse to the Fund's position, it may forfeit the entire amount of the premium plus related transaction costs. Options on foreign currencies written or purchased by the Fund will be traded on U.S. and foreign exchanges and over-the-counter. The Fund may also be required to, or may elect to, receive delivery of foreign currency underlying options on foreign currencies, which may involve certain risks. See Additional Risk Factors" below.
ADDITIONAL RISK FACTORS: Although the Fund will enter into certain transactions in options, Futures Contracts, Options on Futures Contracts, Forward Contracts and options on foreign currencies for hedging purposes, such transactions nevertheless involve risks. For example, a lack of correlation between the instrument underlying an option or Futures Contract and the assets being hedged, or unexpected adverse price movements, could render the Fund's hedging strategy unsuccessful and could result in losses. The Fund also may enter into option transactions and Futures Contracts and Options on Futures Contracts for other than hedging purposes, which involves greater risk. In addition, there can be no assurance that a liquid secondary market will exist for any contract purchased or sold, and the Fund may be required to maintain a position until exercise or expiration, which could result in losses. The Statement of Additional Information contains a further description of options, Futures Contracts, Options on Futures Contracts, Forward Contracts and options on foreign currencies, and a discussion of the risks related to transactions therein. Transactions entered into for non-hedging purposes involve greater risk and could result in losses which are not offset by gains on other portfolio assets.
As a result of its investments in foreign securities, the Fund may receive interest or dividend payments, or the proceeds of the sale or redemption of such securities, in the foreign currencies in which such securities are denominated which creates a currency exchange rate risk. The Fund may also choose to, or be required to, receive delivery of the foreign currencies underlying Forward Contracts and options on foreign currencies it has entered into. Under certain circumstances, such as where the Adviser believes that the applicable exchange rate is unfavorable at the time the currencies are received or the Adviser anticipates, for any other reason, that the exchange rate will improve, the Fund may hold such currencies for an indefinite period of time. 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.
Transactions in options may be entered into by the Fund on United States exchanges regulated by the SEC, in the over-the-counter market and on foreign exchanges, while Forward Contracts may be entered into only in the over-the-counter market. Futures Contracts and Options on Futures Contracts may be entered into on United States exchanges regulated by the CFTC and on foreign exchanges. In addition, the securities underlying options and Futures Contracts traded by the Fund may include foreign as well as domestic securities. Investing in foreign securities and trading in foreign markets involve considerations and possible risks not typically associated with investing in domestic securities or entering into transactions on domestic exchanges. The value of foreign securities investments will be affected by changes in currency rates or exchange control regulations, changes in governmental administration or economic or monetary policy (in this country or abroad) or changed circumstances in dealings between nations. Costs may be incurred in connection with conversions between various currencies. Moreover, foreign issuers are not subject to accounting, auditing and financial reporting standards and requirements comparable to those of domestic issuers. Securities and other instruments issued or traded in foreign countries may be less liquid and more volatile than those issued or traded in the United States and foreign brokerage commissions are generally higher than in the United States. Foreign securities and foreign markets may be less subject to governmental supervision than in the United States, and foreign exchanges may impose different exercise and settlement procedures. Investments in foreign countries could be affected by other factors not present in the United States, including expropriation, confiscatory taxation and potential difficulties in enforcing contractual obligations and could be subject to extended settlement periods. Over-the-counter transactions also involve certain risks which may not be present in exchange-traded transactions.
PORTFOLIO TRADING: The primary consideration in placing portfolio security transactions is execution at the most favorable prices. Consistent with the foregoing primary consideration, the Rules of Fair Practice of the National Association of Securities Dealers, Inc. (the "NASD") and such other policies as the Trustees may determine, the Adviser may consider sales of shares of the Fund and of the other investment company clients of MFD as a factor in the selection of broker-dealers to execute the portfolio transactions of the Fund. From time to time, the Adviser may direct certain portfolio transactions to broker-dealer firms which, in turn, have agreed to pay a portion of the Fund's operating expenses (e.g., fees charged by the custodian of the Fund's assets). For a further discussion of portfolio trading, see "Portfolio Transactions and Brokerage Commissions" in the Statement of Additional Information.
The policies described above are not fundamental and may be changed without shareholder approval, as may the investment objective of the Fund.
The Statement of Additional Information includes a discussion of other investment policies and a listing of specific investment restrictions which govern the investment policies of the Fund and which may not be changed without shareholder approval. See the "Investment Restrictions" in the Statement of Additional Information. The Fund's investment limitations and policies are adhered to at the time of purchase or utilization of assets; a subsequent change in circumstances will not be considered to result in a violation of policy.
5. MANAGEMENT OF THE FUND
INVESTMENT ADVISER -- MFS manages the Fund pursuant to an Investment Advisory Agreement, dated May 20, 1987 (the "Advisory Agreement"). MFS provides the Fund with overall investment advisory and administrative services, as well as general office facilities. Robert J. Manning, a Senior Vice President of the Adviser, has become the Fund's portfolio manager. Mr. Manning has been employed by the Adviser since 1984. Subject to such policies as the Trustees may determine, the Adviser makes investment decisions for the Fund. For these services and facilities, MFS receives a management fee, computed and paid monthly, on the basis of a formula based upon a percentage of the average daily net assets of the Fund plus a percentage of its gross income (i.e., income other than gains from the sale of securities or gains received from futures contracts) in each case on an annualized basis for the then-current fiscal year of the Fund. The applicable percentages are reduced as assets and income reach the following levels:
ANNUAL RATE OF MANAGEMENT FEE ANNUAL RATE OF MANAGEMENT FEE BASED ON AVERAGE DAILY NET ASSETS BASED ON GROSS INCOME - --------------------------------- ------------------------------ 0.220% of the first $200 million 3.00% of the first $22 million 0.187% of average daily net assets in excess of $200 million 2.55% of gross income in excess of $22 million |
For the Fund's fiscal year ended January 31, 1995, MFS received management fees under the Advisory Agreement of $3,756,072.
MFS also serves as investment adviser to each of the other funds in the MFS Family of Funds (the "MFS Funds") and to MFS(R) Municipal Income Trust, MFS Multimarket Income Trust, MFS Government Markets Income Trust, MFS Intermediate Income Trust, MFS Charter Income Trust, MFS Special Value Trust, MFS Variable Insurance Trust, MFS Institutional Trust, MFS Union Standard Trust, MFS/Sun Life Series Trust, Sun Growth Variable Annuity Fund, Inc. and seven variable accounts, each of which is a registered investment company established by Sun Life Assurance Company of Canada (U.S.) ("Sun Life of Canada (U.S.)") in connection with the sale of Compass-2 and Compass-3 combination fixed/variable annuity contracts. MFS and its wholly owned subsidiary, MFS Asset Management, Inc., provide investment advice to substantial private clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor organizations have a history of money management dating from 1924 and the founding of the first mutual fund in the United States, Massachusetts Investors Trust. Net assets under the management of the MFS organization were approximately $35.4 billion on behalf of approximately 1.7 million investor accounts as of April 28, 1995. As of such date, the MFS organization managed approximately $19 billion of assets in fixed income funds and fixed income portfolios of MFS Asset Management, Inc. MFS is a wholly owned subsidiary of Sun Life of Canada (U.S.) which in turn is a wholly owned subsidiary of Sun Life Assurance Company of Canada ("Sun Life"). The Directors of MFS are A. Keith Brodkin, Jeffrey L. Shames, Arnold D. Scott, John R. Gardner and John D. McNeil. Mr. Brodkin is the Chairman, Mr. Shames is the President and Mr. Scott is the Secretary and a Senior Executive Vice President of MFS. Messrs. McNeil and Gardner are the Chairman and the President, respectively, of Sun Life. Sun Life, a mutual life insurance company, is one of the largest international life insurance companies and has been operating in the United States since 1895, establishing a headquarters office here in 1973. The executive officers of MFS report directly to the Chairman of Sun Life.
A. Keith Brodkin, the Chairman and a Director of MFS, is also the Chairman and President of the Trust. Joan S. Batchelder, Cynthia M. Brown, Matthew N. Fontaine, Robert J. Manning, Bernard Scozzafava, James T. Swanson, W. Thomas London, Stephen E. Cavan, James O. Yost and James R. Bordewick, Jr., all of whom are officers of MFS, are officers of the Trust.
DISTRIBUTOR -- MFD, a wholly owned subsidiary of MFS, is the distributor of shares of the Fund and also serves as distributor for each of the other MFS Funds.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. ("Shareholder Servicing Agent"), a wholly owned subsidiary of MFS, performs transfer agency, dividend disbursing agency and certain other services for the Fund.
6. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Shares of the Fund may be purchased at the public offering price through any
securities dealer, certain banks and other financial institutions having selling
agreements with MFD. Non-securities dealer financial institutions will receive
transaction fees that are the same as commission fees to dealers. Securities
dealers and financial institutions may also charge their customers fees relating
to investments in the Fund.
The Fund offers three classes of shares which bear sales charges and distribution fees in different forms and amounts:
CLASS A SHARES: Class A shares are offered at net asset value per share plus an initial sales charge (or CDSC in the case of certain purchases of $1 million or more) as follows:
- --------------------------------------------------------------------------------------------------------
SALES CHARGE<F1> AS
PERCENTAGE OF:
-------------------------------- DEALER ALLOWANCE
NET AMOUNT AS A PERCENTAGE
AMOUNT OF PURCHASE OFFERING PRICE INVESTED OF OFFERING PRICE
Less than $100,000 ......................................................... 4.75% 4.99% 4.00%
$100,000 but less than $250,000 ............................................ 4.00 4.17 3.20
$250,000 but less than $500,000 ............................................ 2.95 3.04 2.25
$500,000 but less than $1,000,000 .......................................... 2.20 2.25 1.70
$1,000,000 or more ......................................................... None<F2> None<F2> See Below<F2>
- ----------
<F1> Because of rounding in the calculation of offering price, actual sales charges may be more or less than those calculated
using the percentages above.
<F2> A CDSC may apply in certain circumstances. MFD (on behalf of the Fund) will also pay a commission on purchases of $1 million
or more.
|
No sales charge is payable at the time of purchase of Class A shares on investments of $1 million or more. However, a CDSC may be imposed on such investments in the event of a share redemption within 12 months following the share purchase, at the rate of 1% of the lesser of the value of the shares redeemed (exclusive of reinvested dividends and capital gain distributions) or the total cost of such shares.
In determining whether a CDSC on such Class A shares is payable, and, if so, the
amount of the charge, it is assumed that shares not subject to the CDSC are the
first redeemed followed by other shares held for the longest period of time. All
investments made during a calendar month, regardless of when during the month
the investment occurred, will age one month on the last day of the month and
each subsequent month. Except as noted below, the CDSC on Class A shares will be
waived in the case of: (i) exchanges (except that if the shares acquired by
exchange were then redeemed within 12 months of the initial purchase (other than
in connection with subsequent exchanges to other MFS Funds) the charge would not
be waived); (ii) distributions to participants from a Retirement Plan qualified
under section 401(a) of the Internal Revenue Code of 1986, as amended (the
"Code") (a "Retirement Plan"), due to: (a) a loan from the plan (repayments of
loans, however, will constitute new sales for purposes of assessing the CDSC);
(b) "financial hardship" of the participant in the plan, as that term is defined
in Treasury Regulation Section 1.401(k)-1(d)(2), as amended from time to time;
or (c) the death of a participant in such a plan; (iii) distributions from a
403(b) plan or an Individual Retirement Account ("IRA") due to death,
disability, or attainment of age 59 1/2; (iv) tax-free returns of excess
contributions to an IRA; (v) distributions by other employee benefit plans to
pay benefits and (vi) certain involuntary redemptions and redemptions in
connection with certain automatic withdrawals from a qualified retirement plan.
The CDSC on Class A shares will not be waived, however, if the Retirement Plan
withdraws from the Fund except if that Retirement Plan has invested its assets
in Class A shares of one or more of the MFS Funds for more than 10 years from
the later to occur of (i) January 1, 1993 or (ii) the date such Retirement Plan
first invests its assets in Class A shares of one or more of the MFS Funds, the
CDSC on Class A shares will be waived in the case of a redemption of all of the
Retirement Plan's shares (including shares of any other class) in all MFS Funds
(i.e., all the assets of the Retirement Plan invested in the MFS Funds are
withdrawn), unless, immediately prior to the redemption, the aggregate amount
invested by the Retirement Plan in Class A shares of the MFS Funds (excluding
the reinvestment of distributions) during the prior four year period equals 50%
or more of the total value of the Retirement Plan's assets in the MFS Funds, in
which case the CDSC will not be waived. The CDSC on Class A shares will be
waived upon redemption by a Retirement Plan where the redemption proceeds are
used to pay expenses of the Retirement Plan or certain expenses of participants
under the Retirement Plan (e.g., participant account fees), provided that the
Retirement Plan's sponsor subscribes to the MFS Fundamental 401(k) Plan(sm) or
another similar recordkeeping system made available by the Shareholder Servicing
Agent. The CDSC on Class A shares will be waived upon the transfer of
registration from shares held by a Retirement Plan through a single account
maintained by the Shareholder Servicing Agent to multiple Class A share accounts
maintained by the Shareholder Servicing Agent on behalf of individual
participants in the Retirement Plan, provided that the Retirement Plan's sponsor
subscribes to the MFS Fundamental 401(k) Plan(sm) or another similar
recordkeeping system made available by the Shareholder Servicing Agent. Any
applicable CDSC will be deferred upon an exchange of Class A shares of the Fund
for units of participation of the MFS Fixed Fund (a bank collective investment
fund) (the "Units"), and the CDSC will be deducted from the redemption proceeds
when such Units are subsequently redeemed (assuming the CDSC is then payable).
No CDSC will be assessed upon an exchange of Units for Class A shares of the
Fund. For purposes of calculating the CDSC payable upon redemption of Class A
shares of the Fund or Units acquired pursuant to one or more exchanges, the
period during which the Units are held will be aggregated with the period during
which the Class A shares are held. MFD shall receive all CDSCs which it intends
to apply for the benefit of the Fund.
MFD allows discounts to dealers (which are alike for all dealers) from the applicable public offering price, as shown in the above table. In the case of the maximum sales charge, the dealer retains 4% and MFD retains approximately 3/4 of 1% of the public offering price. The sales charge may vary depending on the number of shares of the Fund as well as certain MFS Funds and other funds owned or being purchased, the existence of an agreement to purchase additional shares during a 13-month period (or a 36-month period for purchases of $1 million or more) or other special purchase programs. A description of the Right of Accumulation, Letter of Intent and Group Purchases privileges by which the sales charge may also be reduced is set forth in the Statement of Additional Information. In addition, MFD, pays a commission to dealers who initiate and are responsible for purchases of $1 million or more as follows: 1.00% on sales up to $5 million, plus 0.25% on the amount in excess of $5 million. Purchases of $1 million or more for each shareholder account will be aggregated over a 12-month period (commencing from the date of the first such purchase) for purposes of determining the level of commissions to be paid during that period with respect to such account.
Class A shares of the Fund may be sold at their net asset value to the officers of the Trust, to any of the subsidiary companies of Sun Life, to eligible Directors, officers, employees (including retired employees) and agents of MFS, Sun Life or any of their subsidiary companies, to any trust, pension, profit-sharing or any other benefit plan for such persons, to any trustees and retired trustees of any investment company for which MFD serves as distributor or principal underwriter, and to certain family members of such persons and their spouses, provided the shares will not be resold except to the Fund. Class A shares of the Fund may be sold at net asset value to any employee, partner, officer or trustee of any sub-adviser to any MFS Fund and to certain family members of such individuals and their spouses, or to any trust, pension, profit-sharing or other retirement plan for the sole benefit of such employee or representative, provided such shares will not be resold except to the Fund. Class A shares of the Fund may also be sold at their net asset value to any employee or registered representative of any dealer or other financial institution which has a sales agreement with MFD or its affiliates, to certain family members of such employees or representatives and their spouses, or to any trust, pension, profit-sharing or other retirement plan for the sole benefit of such employee or representative, as well as to clients of MFS Asset Management, Inc.
Class A shares may be sold at net asset value, subject to appropriate documentation, through a dealer where the amount invested represents redemption proceeds from a registered open-end management investment company not distributed or managed by MFD or its affiliates if: (i) the redeemed shares were subject to an initial sales charge or a deferred sales charge (whether or not actually imposed); (ii) such redemption has occurred no more than 90 days prior to the purchase of Class A shares of the Fund; and (iii) the Fund, MFD or its affiliates have not agreed with such company or its affiliates, formally or informally, to sell Class A shares at net asset value or provide any other incentive with respect to such redemption and sale. In addition, Class A shares of the Fund may also be sold at net asset value where the amount invested represents redemption proceeds from the MFS Fixed Fund. In addition, Class A shares of the Fund may be sold at net asset value in connection with the acquisition or liquidation of the assets of other investment companies or personal holding companies. Insurance company separate accounts may purchase Class A shares of the Fund at their net asset value per share. Class A shares of the Fund may be purchased at net asset value by Retirement Plans whose third party administrators have entered into an administrative services agreement with MFD or one or more of its affiliates to perform certain administrative services, subject to certain operational requirements specified from time to time by MFD or one or more of its affiliates. Class A shares of the Fund may be purchased at net asset value through certain broker-dealers and other financial institutions which have entered into an agreement with MFD which includes a requirement that such shares be sold for the benefit of clients participating in a "wrap account" or a similar program under which such clients pay a fee to such broker-dealer or other financial institution.
Class A shares of the Fund may be purchased at net asset value by certain Retirement Plans subject to the Employee Retirement Income Security Act of 1974, as amended, subject to the following:
(i) The sponsoring organization must demonstrate to the satisfaction of MFD that either (a) the employer has at least 25 employees or (b) the aggregate purchases by the Retirement Plan of Class A shares of the MFS Funds will be in an amount of at least $250,000 within a reasonable period of time, as determined by MFD in its sole discretion; and
(ii) a CDSC of 1% will be imposed on such purchases in the event of certain redemption transactions within 12 months following such purchases.
Dealers who initiate and are responsible for purchases of Class A shares of the Fund in this manner will be paid a commission by MFD, as follows: 1.00% on sales up to $5 million, plus 0.25% on the amount in excess of $5 million; provided, however, that MFD may pay a commission, on sales in excess of $5 million to certain retirement plans, of 1.00% to certain dealers which, at MFD's invitation, enter into an agreement with MFD in which the dealer agrees to return any commission paid to it on the sale (or on a pro rata portion thereof) if the shareholder redeems his or her shares within a period of time after purchase as specified by MFD. Purchases of $1 million or more for each shareholder account will be aggregated over a 12-month period (commencing from the date of the first such purchase) for purposes of determining the level of commissions to be paid during that period with respect to such account.
Class A shares of the Fund may be purchased at net asset value by Retirement Plans through certain broker-dealers and other financial institutions which have entered into an agreement with MFD which includes certain minimum size qualifications for such Retirement Plans and provides that the broker-dealer or other financial institution will perform certain administrative services with respect to the plan's account. Class A shares of the Fund may be sold at net asset value through the automatic reinvestment of Class A and Class B distributions which constitute required withdrawals from qualified retirement plans. Furthermore, Class A shares of the Fund may be sold at net asset value through the automatic reinvestment of distributions of dividends and capital gains of Class A shares of other MFS Funds pursuant to the Distribution Investment Program (see "Shareholder Services" in the Statement of Additional Information).
CLASS B SHARES: Class B shares are offered at net asset value without an initial sales charge but subject to a CDSC as a percentage of the lesser of the original purchase price or redemption proceeds as follows:
YEAR OF CONTINGENT REDEMPTION DEFERRED SALES AFTER PURCHASE CHARGE -------------- -------------- First ................................................ 4% Second ............................................... 4% Third ................................................ 3% Fourth ............................................... 3% Fifth ................................................ 2% Sixth ................................................ 1% Seventh and following ................................ 0% |
For Class B shares purchased prior to January 1, 1993, the Fund imposes a CDSC as a percentage of the lesser of the original purchase price or redemption proceeds as follows:
YEAR OF CONTINGENT REDEMPTION DEFERRED SALES AFTER PURCHASE CHARGE -------------- -------------- First ................................................ 6% Second ............................................... 5% Third ................................................ 4% Fourth ............................................... 3% Fifth ................................................ 2% Sixth ................................................ 1% Seventh and following ................................ 0% |
No CDSC is paid upon an exchange of shares. For purposes of calculating the CDSC upon redemption of shares acquired in an exchange, the purchase of shares acquired in one or more exchanges is deemed to have occurred at the time of the original purchase of the exchanged shares. See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for further discussion of the CDSC.
The CDSC on Class B shares will be waived upon the death or disability (as
defined in Section 72(m)(7) of the Code) of any investor, provided the account
is registered (i) in the case of a deceased individual, solely in the deceased
individual's name, (ii) in the case of a disabled individual, solely or jointly
in the disabled individual's name or (iii) in the name of a living trust for the
benefit of the deceased or disabled individual. The CDSC on Class B shares will
also be waived in the case of redemptions of shares of the Fund pursuant to a
Systematic Withdrawal Plan. In addition, the CDSC on Class B shares will be
waived in the case of distributions from an IRA, SAR-SEP or any other retirement
plan qualified under sections 401(a) or 403(b) of the Code due to death or
disability, or in the case of required minimum distributions from any such
Retirement Plan due to attainment of age 70 1/2. The CDSC on Class B shares will
be waived in the case of distributions from a Retirement Plan due to (i) returns
of excess contribution to the plan, (ii) retirement of a participant in the
plan, (iii) a loan from the plan (repayments of loans, however, will constitute
new sales for purposes of assessing the CDSC), (iv) "financial hardship" of the
participant in the plan, as that term is defined in Treasury Regulation
401(k)-1(d)(2), as amended from time to time, and (v) termination of employment
of the participant in the plan (excluding, however, a partial or other
termination of the plan). The CDSC on Class B shares of the Fund will also be
waived upon redemption by (i) officers of the Fund, (ii) any of the subsidiary
companies of Sun Life, (iii) eligible Directors, officers, employees, retired
employees and agents of MFS, Sun Life or any of their subsidiary companies, (iv)
any trust, pension, profit-sharing or any other benefit plan for such persons,
(v) any trustees and retired trustees of any investment company for which MFD
serves as distributor or principal underwriter, and (vi) certain family members
of such individuals and their spouses, provided in each case that the shares
will not be resold except to the Fund. The CDSC on Class B shares will also be
waived in the case of redemptions by any employee or registered representative
of any dealer or other financial institution which has a sales agreement with
MFD, by certain family members of any such employee or representative and their
spouses or by any trust, pension, profit-sharing or other retirement plan for
the sole benefit of such employee or representative and by clients of MFS Asset
Management, Inc. A Retirement Plan that has invested its assets in Class B
shares of one or more of the MFS Funds for more than 10 years from the later to
occur of (i) January 1, 1993 or (ii) the date the Retirement Plan first invests
its assets in Class B shares of one or more of the MFS Funds will have the CDSC
on Class B shares waived in the case of a redemption of all the Retirement
Plan's shares (including shares of any other class) in all MFS Funds (i.e., all
the assets of the Retirement Plan invested in the MFS Funds are withdrawn),
except that if, immediately prior to the redemption, the aggregate amount
invested by the Retirement Plan in Class B shares of the MFS Funds (excluding
the reinvestment of distributions) during the prior four-year period equals 50%
or more of the total value of the Retirement Plan's assets in the MFS Funds,
then the CDSC will not be waived. The CDSC on Class B shares will be waived upon
redemption by a Retirement Plan where the redemption proceeds are used to pay
expenses of the Retirement Plan or certain expenses of participants under the
Retirement Plan (e.g., participant account fees), provided that the Retirement
Plan's sponsor subscribes to the MFS Fundamental 401(k) Plan(sm) or another
similar recordkeeping system made available by the Shareholder Servicing Agent.
The CDSC on Class B shares will be waived upon the transfer of registration from
shares held by a Retirement Plan through a single account maintained by the
Shareholder Servicing Agent to multiple Class B share accounts provided that the
Retirement Plan's sponsor subscribes to the MFS Fundamental 401(k) Plan(sm) or
another similar recordkeeping system made available by the Shareholder Servicing
Agent. The CDSC on Class B shares may also be waived in connection with the
acquisition or liquidation of the assets of other investment companies or
personal holding companies.
CONVERSION OF CLASS B SHARES: Class B shares of the Fund that remain outstanding for approximately eight years will convert to Class A shares of the Fund. Shares purchased through the reinvestment of distributions paid in respect of Class B shares will be treated as Class B shares for purposes of the payment of the distribution and service fees under the Distribution Plan applicable to Class B shares. However, for purposes of conversion to Class A shares, all shares in a shareholder's account that were purchased through the reinvestment of dividends and distributions paid in respect of Class B shares (and which have not converted to Class A shares as provided in the following sentence) will be held in a separate sub-account. Each time any Class B shares in the shareholder's account (other than those in the sub-account) convert to Class A shares, a portion of the Class B shares then in the sub-account will also convert to Class A shares. The portion will be determined by the ratio that the shareholder's Class B shares not acquired through reinvestment of dividends and distributions that are converting to Class A shares bear to the shareholder's total Class B shares not acquired through reinvestment. The conversion of Class B shares to Class A shares is subject to the continuing availability of a ruling from the Internal Revenue Service or an opinion of counsel that such conversion will not constitute a taxable event for federal tax purposes. There can be no assurance that such ruling or opinion will be available, and the conversion of Class B shares to Class A shares will not occur if such ruling or opinion is not available. In such event, Class B shares would continue to be subject to higher expenses than Class A shares for an indefinite period.
CLASS C SHARES: Class C shares are offered at net asset value without an initial sales charge or a CDSC. Class C shares do not convert to any other class of shares of the Fund. The maximum investment in Class C shares that may be made is $5,000,000 per transaction.
Class C shares are not currently available for purchase by any retirement plan qualified under 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 401(a) or 403(b) recordkeeping program made available by the Shareholder Servicing Agent.
GENERAL: Except as described below, the minimum initial investment is $1,000 per account and the minimum additional investment is $50 per account. Accounts being established for monthly automatic investments and under payroll savings programs and tax-deferred retirement programs (other than IRAs) involving the submission of investments by means of group remittal statements are subject to a $50 minimum on initial and additional investments per account. The minimum initial investment for IRAs is $250 per account and the minimum additional investment is $50 per account. Accounts being established for participation in the Automatic Exchange Plan are subject to a $50 minimum on initial and additional investments per account. There are also other limited exceptions to these minimums for certain tax-deferred retirement programs. Any minimums may be changed at any time at the discretion of MFD. The Fund reserves the right to cease offering its shares at any time.
For shareholders who elect to participate in certain investment programs (e.g., the Automatic Investment Plan) or other shareholder services, MFD or its affiliates may either (i) give a gift of nominal value, such as a hand-held calculator, or (ii) make a nominal charitable contribution on their behalf.
A shareholder whose shares are held in the name of, or controlled by, an investment dealer might not receive many of the privileges and services from the Fund (such as Right of Accumulation, Letter of Intent and certain recordkeeping services) that the Fund ordinarily provides.
Purchases and exchanges should be made for investment purposes only. The Fund and MFD each reserve the right to reject any specific purchase order or to restrict purchases by a particular purchaser (or group of related purchasers). The Fund or MFD may reject or restrict any purchases by a particular purchaser or group, for example, when such purchase is contrary to the best interests of the Fund's other shareholders or otherwise would disrupt the management of the Fund.
MFD may enter into an agreement with shareholders who intend to make exchanges among certain classes of certain MFS Funds (as determined by MFD) which follow a timing pattern, and with individuals or entities acting on such shareholders' behalf (collectively, "market timers"), setting forth the terms, procedures and restrictions with respect to such exchanges. In the absence of such an agreement, it is the policy of the Fund and MFD to reject or restrict purchases by market timers if (i) more than two exchange purchases are effected in a timed account in the same calendar quarter or (ii) a purchase would result in shares being held in timed accounts by market timers representing more than (x) one percent of the Fund's net assets or (y) specified dollar amounts in the case of certain MFS Funds which may include the Fund and which may change from time to time. The Fund and MFD each reserve the right to request market timers to redeem their shares at net asset value, less any applicable CDSC, if either of these restrictions is violated.
Securities dealers and other financial institutions may receive different compensation with respect to sales of Class A, Class B and Class C shares. In some instances, promotional incentives to dealers may be offered only to certain dealers who have sold or may sell significant amounts of Fund 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 shares of certain specified MFS Funds sold by such dealer during a specified sales period. In addition, from time to time, MFD, at its expense, may provide additional commissions, compensation or promotional incentives ("concessions") to dealers which sell shares of the Fund. The staff of the SEC has indicated that dealers who receive more than 90% of the sales charge may be considered underwriters. Such concessions provided by MFD may include financial assistance to dealers in connection with preapproved conferences or seminars, sales or training programs for invited registered representatives, payment for travel expenses, including lodging, incurred by registered representatives and members of their families or other invited guests to various locations for such seminars or training programs, seminars for the public, advertising and sales campaigns regarding one or more MFS Funds, and/or other dealer-sponsored events. In some instances, these concessions may be offered to dealers or only to certain dealers who have sold or may sell, during specified periods, certain minimum amounts of shares of the Fund. From time to time, MFD may make expense reimbursements for special training of a dealer's registered representatives in group meetings or to help pay the expenses of sales contests. Other concessions may be offered to the extent not prohibited by the laws of the state or any self-regulatory agency, such as the NASD.
The Glass-Steagall Act prohibits national banks from engaging in the business of underwriting, selling or distributing securities. Although the scope of the prohibition has not been clearly defined, MFD believes that such Act should not preclude banks from entering into agency agreements with MFD (as described above). If, however, a bank were prohibited from so acting, the Trustees would consider what actions, if any, would be necessary to continue to provide efficient and effective shareholder services. It is not expected that shareholders would suffer any adverse financial consequence as a result of these occurrences. In addition, state securities laws on this issue may differ from the interpretation of federal law expressed herein and banks and financial institutions may be required to register as broker-dealers pursuant to state law.
EXCHANGES
Subject to the requirements set forth below, some or all of the shares in an
account with the Fund for which payment has been received by the Fund (i.e., an
established account) may be exchanged for shares of the same class of any of the
other MFS Funds at net asset value (if available for sale). In addition, Class C
shares may be exchanged for shares of the MFS Money Market Fund at net asset
value. Shares of one class may not be exchanged for shares of any other class.
Exchanges will be made only after instructions in writing or by telephone (an
"Exchange Request") are received for an established account by the Shareholder
Servicing Agent in proper form (i.e., if in writing -- signed by the record
owner(s) exactly as the shares are registered; if by telephone -- proper account
identification is given by the dealer or shareholder of record) and each
exchange must involve either shares having an aggregate value of at least $1,000
($50 in the case of retirement plan participants whose sponsoring organizations
subscribe to the MFS FUNDamental 401(k) Plan or another similar 401(k)
recordkeeping system made available by the Shareholder Servicing Agent) or all
the shares in the account. If an Exchange Request is received by the Shareholder
Servicing Agent on any business day prior to the close of regular trading on the
New York Stock Exchange (the "Exchange"), the exchange usually will occur on
that day if all the requirements set forth above have been complied with at that
time. No more than five exchanges may be made in any one Exchange Request by
telephone. Additional information concerning this exchange privilege and
prospectuses for any of the other MFS Funds may be obtained from investment
dealers or the Shareholder Servicing Agent. A shareholder should read the
prospectus of the other MFS Fund and consider the differences in objectives and
policies before making any exchange. For federal and (generally) state income
tax purposes, an exchange is treated as a sale of the shares exchanged and,
therefore, an exchange could result in a gain or loss to the shareholder making
the exchange. Exchanges by telephone are automatically available to most non-
retirement plan accounts and certain retirement plan accounts. For further
information regarding exchanges by telephone, see "Redemptions by Telephone".
The exchange privilege (or any aspect of it) may be changed or discontinued and
is subject to certain limitations, including certain restrictions on purchases
by market timers. Special procedures, privileges and restrictions with respect
to exchanges may apply to market timers who enter into an agreement with MFD, as
set forth in such agreement (see "Purchases").
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the amount in his account on
any date on which the Fund is open for business by redeeming shares at their net
asset value or by selling such shares to the Fund through a dealer (a
repurchase). Certain purchases, however, may be subject to a CDSC in the event
of certain redemption transactions (see "Contingent Deferred Sales Charge"
below). Since 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. Payment of
redemption proceeds may be delayed for up to seven days from the redemption date
if the Fund determines that such a delay would be in the best interest of all
its shareholders.
A. REDEMPTION BY MAIL -- Each shareholder has the right to redeem all or any portion of the shares in his account by mailing or delivering to the Shareholder Servicing Agent (see back cover for address) a stock power with a written request for redemption or letter of instruction, together with his share certificates (if any were issued), all in "good order" for transfer. "Good order" generally means that the stock power, written request for redemption, letter of instruction or certificate must be endorsed by the record owner(s) exactly as the shares are registered and the signature(s) must be guaranteed in the manner set forth below under the caption "Signature Guarantee." In addition, in some cases "good order" will require the furnishing of additional documents. The Shareholder Servicing Agent may make certain de minimis exceptions to the above requirements for redemption. Within seven days after receipt of a redemption request in "good order" by the Shareholder Servicing Agent, the Fund will make payment in cash of the net asset value of the shares next determined after such redemption request was received, reduced by the amount of any applicable CDSC described above and the amount of any income tax required to be withheld, except during any period in which the right of redemption is suspended or date of payment is postponed because the Exchange is closed or trading on such Exchange is restricted or to the extent otherwise permitted by the 1940 Act if an emergency exists (see "Tax Status").
B. 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 commercial bank and account number to receive the proceeds of such redemption, and sign the Account Application Form with the signature(s) guaranteed in the manner set forth below under the caption "Signature Guarantee". The proceeds of such a redemption, reduced by the amount of any applicable CDSC described above and the amount of any income tax required to be withheld, are mailed by check to the designated account, without charge. As a special service, investors may arrange to have proceeds in excess of $1,000 wired in federal funds to the designated account. If a telephone redemption request is received by the Shareholder Servicing Agent by the close of regular trading on the Exchange on any business day, shares will be redeemed at the closing net asset value of the Fund on that day. Subject to the conditions described in this section, proceeds of a redemption are normally mailed or wired on the next business day following the date of receipt of the order for redemption. The Shareholder Servicing Agent will not be responsible for any losses resulting from unauthorized telephone transactions if it follows reasonable procedures designed to verify the identity of the caller. The Shareholder Servicing Agent will request personal or other information from the caller, and will normally also record calls. Shareholders should verify the accuracy of confirmation statements immediately after their receipt.
C. REPURCHASE THROUGH A DEALER -- If a shareholder desires to sell his shares at net asset value through his securities dealer (a repurchase), the shareholder can place a repurchase order with his dealer, who may charge the shareholder a fee. IF THE DEALER RECEIVES THE SHAREHOLDER'S ORDER PRIOR TO THE CLOSE OF REGULAR TRADING ON THE EXCHANGE AND COMMUNICATES IT TO MFD 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.
GENERAL: Shareholders of the Fund who have redeemed their shares have a one-time right to reinvest the redemption proceeds in the same class of shares of any of the MFS Funds (if shares of such Fund are available for sale) at net asset value (with a credit for any CDSC paid) within 90 days of the redemption pursuant to the Reinstatement Privilege. If the shares credited for any CDSC paid are then redeemed within six years of the initial purchase in the case of Class B shares or within 12 months of the initial purchase for certain Class A share purchases, a CDSC will be imposed upon redemption. Such purchases under the Reinstatement Privilege are subject to all limitations in the Statement of Additional Information regarding this privilege.
Subject to the Fund's compliance with applicable regulations, the Fund has reserved the right to pay the redemption or repurchase price of shares of the Fund, either totally or partially, by a distribution in kind of securities (instead of cash) from the Fund's portfolio. The securities distributed in such a distribution would be valued at the same amount as that assigned to them in calculating the net asset value for the shares being sold. If a shareholder received a distribution in kind, the shareholder could incur brokerage or transaction charges when converting the securities to cash.
Due to the relatively high cost of maintaining small accounts, the Fund reserves the right to redeem shares in any account for their then-current value (which will be promptly paid to the shareholder) if at any time the total investment in such account drops below $500 because of redemptions, except in the case of accounts 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". Shareholders will be notified that the value of their account is less than the minimum investment requirement and allowed 60 days to make an additional investment before the redemption is processed. No CDSC will be imposed with respect to such involuntary redemptions.
SIGNATURE GUARANTEE: In order to protect shareholders to the greatest extent possible against fraud, the Fund requires in certain instances as indicated above that the shareholder's signature be guaranteed. In these cases the shareholder's signature must be guaranteed by an eligible bank, broker, dealer, credit union, national securities exchange, registered securities association, clearing agency or savings association. Signature guarantees shall be accepted in accordance with policies established by the Shareholder Servicing Agent.
CONTINGENT DEFERRED SALES CHARGE -- Investments in Class A or Class B shares ("Direct Purchases") will be subject to a CDSC for a period of 12 months (in the case of purchases of $1 million or more of Class A shares) or six years (in the case of purchases of Class B shares). Purchases of Class A shares made during a calendar month, regardless of when during the month the investment occurred, will age one month on the last day of the month and each subsequent month. Class B shares purchased on or after January 1, 1993 will be aggregated on a calendar month basis -- all transactions made during a calendar month, regardless of when during the month they have occurred, will age one year at the close of business on the last day of such month in the following calendar year and each subsequent year. For Class B shares of the Fund purchased prior to January 1, 1993, transactions will be aggregated on a calendar year basis -- all transactions made during a calendar year, regardless of when during the year they have occurred, will age one year at the close of business on December 31 of that year and each subsequent year. At the time of a redemption, the amount by which the value of a shareholder's account for a particular class represented by Direct Purchases exceeds the sum of the six calendar year aggregations (12 months in the case of purchases of $1 million or more of Class A shares) of Direct Purchases may be redeemed without charge ("Free Amount"). Moreover, no CDSC is ever assessed on additional shares acquired through the automatic reinvestment of dividends or capital gain distributions ("Reinvested Shares").
Therefore, at the time of redemption of a particular class, (i) any Free Amount is not subject to the CDSC and (ii) the amount of the redemption equal to the then-current value of Reinvested Shares is not subject to the CDSC, but (iii) any amount of the redemption in excess of the aggregate of the then-current value of Reinvested Shares and the Free Amount is subject to a CDSC. The CDSC will first be applied against the amount of Direct Purchases which will result in any such charge being imposed at the lowest possible rate. The CDSC to be imposed upon redemptions of shares will be calculated as set forth in "Purchases" above.
The applicability of a CDSC will be unaffected by exchanges or transfers of registration, except that, with respect to transfers of registration to an IRA rollover account, the CDSC will be waived if the shares being reregistered would have been eligible for a CDSC waiver had they been redeemed.
DISTRIBUTION PLANS
The Trustees have adopted separate distribution plans for Class A, Class B and
Class C shares pursuant to Section 12(b) of the 1940 Act and Rule 12b-1
thereunder (the "Rule") after having concluded that there is a reasonable
likelihood that the plans would benefit the Fund and its shareholders.
CLASS A DISTRIBUTION PLAN. The Class A Distribution Plan provides that the Fund will pay MFD a distribution/service fee aggregating up to (but not necessarily all of) 0.35% of the average daily net assets attributable to Class A shares annually in order that MFD may pay expenses on behalf of the Fund related to the distribution and servicing of Class A shares. The expenses to be paid by MFD on behalf of the Fund include a service fee to securities dealers which enter into a sales agreement with MFD of up to 0.25% per annum of the Fund's average daily net assets attributable to Class A shares that are owned by investors for whom such securities dealer is the holder or dealer of record. This fee is intended to be partial consideration for all personal services and/or account maintenance services rendered by the dealer with respect to Class A shares. MFD may from time to time reduce the amount of the service fee for shares sold prior to a certain date. Currently, the service fee paid to dealers is reduced to 0.15% per annum for shares purchased prior to March 1, 1991. MFD may also retain a distribution fee of 0.10% per annum of the Fund's average daily net assets attributable to Class A shares as partial consideration for services performed and expenses incurred in the performance of MFD's obligations under its distribution agreement with the Fund. MFD, however, is currently waiving this 0.10% per annum distribution fee and will not accept payment of this fee unless it first obtains the approval of the Board of Trustees. In addition, to the extent that the aggregate of the foregoing fees does not exceed 0.35% per annum of the average daily net assets of the Fund attributable to Class A shares, the Fund is permitted to pay other distribution-related expenses, including commissions to dealers and payments to wholesalers employed by MFD for sales at or above a certain dollar level. Fees payable under the Class A Distribution Plan are charged to, and therefore reduce, income allocated to Class A shares. Service fees may be reduced for a securities dealer that is the holder or dealer of record for an investor who owns shares of the Fund having a net asset value at or above a certain dollar level. Dealers may from time to time be required to meet certain criteria in order to receive service fees. MFD or its affiliates are entitled to retain all service fees payable under the Class A Distribution Plan for which there is no dealer of record or for which qualification standards have not been met as partial consideration for personal services and/or account maintenance services performed by MFD or its affiliates for shareholder accounts. Certain banks and other financial institutions that have agency agreements with MFD will receive service fees that are the same as service fees to dealers.
CLASS B DISTRIBUTION PLAN. The Class B Distribution Plan provides that the Fund will pay MFD a daily distribution fee equal on an annual basis to 0.75% of the Fund's average daily net assets attributable to Class B shares and will pay MFD a service fee of up to 0.25% per annum of the Fund's average daily net assets attributable to Class B shares (which MFD will in turn pay to securities dealers which enter into a sales agreement with MFD at a rate of up to 0.25% per annum of the Fund's average daily net assets attributable to Class B shares owned by investors for whom that securities dealer is the holder or dealer of record). This service fee is intended to be additional consideration for all personal services and/or account maintenance services rendered by the dealer with respect to Class B shares. Fees payable under the Class B Distribution Plan are charged to, and therefore reduce, income allocated to Class B shares. The Class B Distribution Plan also provides that MFD will receive all CDSCs attributable to Class B shares (see "Redemptions and Repurchases" above), which do not reduce the distribution fee. MFD will pay commissions to dealers of 3.75% of the purchase price of Class B shares purchased through dealers. MFD will also advance to dealers the first year service fee at a rate equal to 0.25% per annum of the purchase price of such shares and, as compensation therefor, MFD may retain the service fee paid by the Fund with respect to such shares for the first year after purchase. Therefore, the total amount paid to a dealer upon the sale of shares is 4.00% of the purchase price of the shares (commission rate of 3.75% plus service fee equal to 0.25% of the purchase price). Dealers will become eligible for additional service fees with respect to such shares commencing in the thirteenth month following purchase. Dealers may from time to time be required to meet certain criteria in order to receive service fees. MFD or its affiliates are entitled to retain all service fees payable under the Class B Distribution Plan for which there is no dealer of record or for which qualification standards have not been met as partial consideration for personal services and/or account maintenance services performed by MFD or its affiliates for shareholder accounts. The purpose of the distribution payments to MFD under the Class B Distribution Plan is to compensate MFD for its distribution services to the Fund. Since MFD's compensation is not directly tied to its expenses, the amount of compensation received by MFD during any year may be more or less than its actual expenses. For this reason, this type of distribution fee arrangement is characterized by the staff of the SEC as being of the "compensation" variety. However, the Fund is not liable for any expenses incurred by MFD in excess of the amount of compensation it receives. The expenses incurred by MFD, including commissions to dealers, are likely to be greater than the distribution fees for the next several years, but thereafter such expenses may be less than the amount of the distribution fees. Certain banks and other financial institutions that have agency agreements with MFD will receive agency transaction and service fees that are the same as commissions and service fees to dealers.
CLASS C DISTRIBUTION PLAN. The Class C Distribution Plan provides that the Fund will pay MFD a distribution fee of up to 0.75% per annum of the Fund's average daily net assets attributable to Class C shares and will pay MFD a service fee of up to 0.25% per annum of the Fund's average daily net assets attributable to Class C shares (which MFD in turn pays to securities dealers which enter into a sales agreement with MFD at a rate of up to 0.25% per annum of the Fund's daily net assets attributable to Class C shares owned by investors for whom that securities dealer is the holder or dealer of record). The distribution/service fees attributable to Class C shares are designed to permit an investor to purchase such shares through a broker-dealer without the assessment of an initial sales charge or a CDSC while allowing MFD to compensate broker-dealers in connection with the sale of such shares. The service fee is intended to be additional consideration for all personal services and/or account maintenance services rendered with respect to Class C shares. MFD or its affiliates are entitled to retain all service fees payable under the Class C Distribution Plan with respect to accounts for which there is no dealer of record as partial consideration for personal services and/or account maintenance services performed by MFD or its affiliates for shareholder accounts. The purpose of the distribution payments to MFD under the Class C Distribution Plan is to compensate MFD for its distribution services to the Fund. Distribution payments under the Plan will be used by MFD to pay securities dealers a distribution fee in an amount equal on an annual basis to 0.75% per annum of the Fund's average daily net assets attributable to Class C shares owned by investors for whom that securities dealer is the holder or dealer of record. (Therefore, the total amount of distribution/ service fees paid to a dealer on an annual basis is 1.00% of the Fund's average daily net assets attributable to Class C shares owned by investors for whom the securities dealer is the holder or dealer of record.) MFD also pays expenses of printing prospectuses and reports used for sales purposes, expenses with respect to the preparation and printing of sales literature and other distribution related expenses, including, without limitation, the compensation of personnel and all costs of travel, office expense and equipment. Since MFD's compensation is not directly tied to its expenses, the amount of compensation received by MFD during any year may be more or less than its actual expenses. For this reason, this type of distribution fee arrangement is characterized by the staff of the SEC as being of the "compensation" variety. However, the Fund is not liable for any expenses incurred by MFD in excess of the amount of compensation it receives. Certain banks and other financial institutions that have agency agreements with MFD will receive agency transaction and service fees that are the same as distribution fees and service fees to dealers. Fees payable under the Class C Distribution Plan are charged to, and therefore reduce, income allocated to Class C shares.
DISTRIBUTIONS
The Fund intends to declare daily and pay to its shareholders substantially all
of its net investment income as dividends on a monthly basis. Dividends
generally are distributed on the first business day of the following month. In
addition, the Fund will make one or more distributions during the calendar year
to its shareholders from any long-term capital gains, and may also make one or
more distributions during the calendar year to its shareholders from short-term
capital gains. Shareholders may elect to receive dividends and capital gain
distributions in either cash or additional shares of the same class with respect
to which a distribution is made. All distributions not paid in cash will be
reinvested in shares of the class in which the distribution is paid. (see "Tax
Status" and "Shareholder Services -- Distribution Options" below). Distributions
paid by the Fund with respect to Class A shares will generally be greater than
those paid with respect to Class B and Class C shares because expenses
attributable to Class B and Class C shares will generally be higher.
TAX STATUS
The Fund is treated as an entity separate from the other series of the Trust for
federal income tax purposes. In order to minimize the taxes the Fund would
otherwise be required to pay, the Fund intends to qualify each year as a
"regulated investment company" under Subchapter M of the Code, and to make
distributions to its shareholders in accordance with the timing requirements
imposed by the Code. It is expected that the Fund will not be required to pay
any entity level federal income or excise taxes, although foreign-source income
received by the Fund may be subject to foreign withholding taxes.
Shareholders of the Fund normally will have to pay federal income taxes, and any state or local taxes, on dividends and capital gain distributions from the Fund whether paid in cash or additional shares. The Fund expects that its distributions will not, for the most part, be eligible for the dividends received deduction for corporations.
Shortly after the end of each calendar year, each Fund shareholder will receive a statement setting forth the federal income status of all dividends and distributions for that year, including any portion, taxable as ordinary income, the portion, if any, taxable as long-term capital gain, the portion, if any, representing a return of capital (which is generally free of current taxes, but results in a basis reduction), and the amount, if any, of federal income tax withheld.
Fund distributions will reduce the Fund's net asset value per share. Shareholders who buy shares shortly before the Fund makes a distribution of net capital gains or net short-term capital gains may thus pay the full price for the shares and then effectively receive a portion of the purchase price back as a taxable distribution.
The Fund intends to withhold U.S. federal income tax at the rate of 30% on
dividends and other payments that are subject to such withholding and that are
made to persons who are neither citizens nor residents of the U.S., regardless
of whether a lower rate may be permitted under an applicable treaty. The Fund is
also required in certain circumstances to apply backup withholding at a rate of
31% on taxable dividends and redemption proceeds paid to any shareholder
(including a shareholder who is neither a citizen nor a resident of the U.S.)
who does not furnish to the Fund certain information and certifications or who
is otherwise subject to backup withholding. However, backup withholding will not
be applied to payments which have been subject to 30% withholding.
Prospective investors should read the Fund's Account Application for additional information regarding backup withholding of federal income tax and should consult their own tax advisers as to the tax consequences to them of an investment in the Fund.
NET ASSET VALUE
The net asset value per share of each class of the Fund is determined each day
during which the Exchange is open for trading. This determination is made once
each day as of the close of regular trading on the Exchange by deducting the
amount of the liabilities attributable to the class from the value of the Fund's
assets attributable to the class and dividing the difference by the number of
shares of the class outstanding. Assets in the Fund's portfolio are valued on
the basis of valuations furnished by a pricing service or at their fair value,
as described in the Statement of Additional Information. The net asset value of
each class of shares is effective for orders received by the dealer prior to its
calculation and received by MFD, prior to the close of that business day.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES The Fund, one of two series of the Trust, has three classes of shares, entitled Class A, Class B and Class C Shares of Beneficial Interest (without par value). The Trust has reserved the right to create and issue additional classes and series of shares, in which case each class of shares of a series would participate equally in the earnings, dividends and assets attributable to that class of shares 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 its Distribution Plan or on any other matter that affects solely its class of shares, but will otherwise vote together with all other classes of shares of the series on all other matters. The Trust does not intend to hold annual shareholder meetings. The Declaration of Trust provides that a Trustee may be removed from office in certain instances (see "Description of Shares, Voting Rights and Liabilities" in the Statement of Additional Information).
Each share of a class of the Fund represents an equal proportionate interest in the Fund with each other class share, subject to any liabilities of that class. Shares have no pre-emptive or conversion rights (except as set forth above in "Purchases -- Conversion of Class B Shares"). Shares are fully paid and non-assessable. Should the Fund be liquidated, the shareholders of each class would be entitled to share pro rata in its net assets attributable to that class available for distribution to shareholders. Shares will remain on deposit with the Shareholder Servicing Agent and certificates will not be issued except in connection with pledges and assignments and in certain other limited circumstances.
The Trust is an entity of the type commonly known as a "Massachusetts business trust." Under Massachusetts law, shareholders of such a trust may, under certain circumstances, be held personally liable as partners for its obligations. However, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which both inadequate insurance (e.g., fidelity bonding and errors and omissions insurance) existed and the Trust itself was unable to meet its obligations.
PERFORMANCE INFORMATION
From time to time, the Fund will provide yield, current distribution rate and
total rate of return quotations for each class of shares and may also quote fund
rankings in the relevant fund category from various sources, such as the Lipper
Analytical Services, Inc. and Wiesenberger Investment Companies Service. Yield
quotations will be based on the annualized net investment income per share
allocated to each class of the 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 shares assume no CDSC is paid. The current
distribution rate for each class is generally based upon the total amount of
dividends per share paid by the Fund to shareholders of that class during the
past twelve months and is computed by dividing the amount of such dividends by
the maximum public offering price of that class at the end of such period.
Current distribution rate calculations for Class B shares assume no CDSC is
paid. The current distribution rate differs from the yield calculation because
it may include distributions to shareholders from sources other than dividends
and interest, such as premium income from option writing, short-term capital
gains, and return of invested capital, and is calculated over a different period
of time. Total rate of return quotations will reflect the average annual
percentage change over stated periods in the value of an investment in each
class of shares of the Fund made at the maximum public offering price of shares
of that class with all distributions reinvested and which, if quoted for periods
of six years or less, will give effect to the imposition of the CDSC assessed
upon redemptions of the Fund's Class B shares. Such total rate of return
quotations may be accompanied by quotations which do not reflect the reduction
in value of the initial investment due to the sales charge or the deduction of a
CDSC, and which will thus be higher. All performance quotations of the Fund are
based on historical performance and are not intended to indicate future
performance. Yield reflects only net portfolio income as of a stated time and
current distribution rate reflects only the rate of distributions paid by the
Fund over a stated period of time, while total rate of return reflects all
components of investment return over a stated period of time. The quotations of
the Fund may from time to time be used in advertisements, shareholder reports or
other communications to shareholders. For a discussion of the manner in which
the Fund will calculate its yield, current distribution rate and total rate of
return, see the Statement of Additional Information. For further information
about the Fund's performance for the fiscal year ended January 31, 1995, please
see the Fund's Annual Report. A copy of the Annual Report may be obtained
without charge by contacting the Shareholder Servicing Agent (see back cover for
address and phone number). In addition to information provided in shareholder
reports, the Fund may, in its discretion, from time to time, make a list of all
or a portion of its holdings available to investors upon request.
7. SHAREHOLDER SERVICES Shareholders with questions concerning the shareholder services described below or concerning other aspects of the Fund, should contact the Shareholder Servicing Agent (see back cover for address and phone number).
ACCOUNT AND CONFIRMATION STATEMENTS -- Each shareholder will receive confirmation statements showing the transaction activity in his account. At the end of each calendar year, each shareholder will receive information regarding the tax status of all 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) and may be changed as often as desired by notifying the Shareholder Servicing Agent:
-- Dividends and capital gain distributions reinvested in additional shares.
This option will be assigned if no other option is specified.
-- Dividends in cash; capital gain distributions (except as provided below) reinvested in additional shares.
-- Dividends and capital gain distributions in cash.
With respect to the second option, the Fund may from time to time make distributions from short-term capital gains on a monthly basis, and to the extent such gains are distributed monthly, they shall be paid in cash; any remaining short-term capital gains not so distributed shall be reinvested in additional shares.
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 gains distributions in amounts less than $10 will automatically be reinvested in additional shares of the Fund. If a shareholder has elected to receive dividends and/or capital gain distributions in cash and the postal or other delivery service is unable to deliver checks to the shareholder's address of record, such shareholder's distribution option will automatically be converted to having all dividends and other distributions reinvested in additional shares. Any request to change a distribution option must be received by the Shareholder Servicing Agent by the record date for a dividend or distribution in order to be effective for that dividend or distribution. No interest will accrue on amounts represented by uncashed distribution or redemption checks.
INVESTMENT AND WITHDRAWAL PROGRAMS -- For the convenience of shareholders, the Fund makes available the following programs designed to enable shareholders to add to their investment in an account with the Fund or withdraw from it with a minimum of paper work. The programs involve no extra charge to shareholders (other than a sales charge in the case of certain Class A share purchases) and may be changed or discontinued at any time by a shareholder or the Fund.
LETTER OF INTENT: If a shareholder (other than a group purchaser as described in the Statement of Additional Information) anticipates purchasing $100,000 or more of Class A shares of the Fund alone or in combination with Class B or Class C shares of the Fund or any of the classes of other MFS Funds or MFS Fixed Fund within a 13-month period (or 36-month period for purchases of $1 million or more), the shareholder may obtain such shares of the Fund at the same reduced sales charge as though the total quantity were invested in one lump sum, subject to escrow agreements and the appointment of an attorney for redemptions from the escrow amount if the intended purchases are not completed, by completing the Letter of Intent section of the Account Application.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity discounts on purchases of Class A shares when his new investment, together with the current offering price value of all holdings of the Class A, Class B and Class C shares of that shareholder in the MFS Funds or MFS Fixed Fund, reaches a discount level.
DISTRIBUTION INVESTMENT PROGRAM: Shares of a particular class of the Fund may be sold at net asset value (and without any applicable CDSC) through the automatic reinvestment of dividend and capital gain distributions from the same class of any other MFS Fund. Furthermore, distributions made by the Fund may be automatically invested at net asset value (and without any applicable CDSC) in shares of the same class of another MFS Fund, if shares of such Fund are available for sale.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder Servicing Agent to send him (or anyone he designates) regular periodic payments, as designated on the Account Application and based upon the value of his account. Each payment under a Systematic Withdrawal Plan (a "SWP") must be at least $100, except in certain limited circumstances. The aggregate withdrawals of Class B shares in any year pursuant to a SWP will not be subject to any CDSC and generally are limited to 10% of the value of the account at the time of the establishment of the SWP. The CDSC will not be waived in the case of SWP redemptions of Class A shares which are subject to a CDSC.
DOLLAR COST AVERAGING PROGRAMS --
AUTOMATIC INVESTMENT PLAN: Cash investments of $50 or more may be made
through a shareholder's checking account twice monthly, monthly or quarterly.
Required forms are available from the Shareholder Servicing Agent or investment
dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least $5,000 in any MFS Fund, may exchange their shares for the same class of shares of the other MFS Funds (and, in the case of Class C shares, for shares of MFS Money Market Fund) under the Automatic Exchange Plan. The Automatic Exchange Plan provides for automatic 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. Under the Automatic Exchange Plan, exchanges of at least $50 each may be made to up to four different funds. A shareholder should consider the objectives and policies of a fund and review its prospectus before electing to exchange money into such fund through the Automatic Exchange Plan. No transaction fee is imposed in connection with exchange transactions under the Automatic Exchange Plan. However, exchanges of shares of MFS Money Market Fund, MFS Government Money Market Fund or Class A shares of MFS Cash Reserve Fund will be subject to any applicable sales charge. For federal and (generally) state income tax purposes, an exchange is treated as a sale of the shares exchanged and, therefore, could result in a capital gain or loss to the shareholder making the exchange. See the Statement of Additional Information for further information concerning the Automatic Exchange Plan. Investors should consult their tax advisers for information regarding the potential capital gain and loss consequences of transactions under the Automatic Exchange Plan.
Because a dollar cost averaging program involves periodic purchases of shares regardless of fluctuating share offering prices, a shareholder should consider his financial ability to continue his purchases through periods of low price levels. Maintaining a dollar cost averaging program concurrently with a withdrawal program could be disadvantageous because of the sales charges included in shares purchases in the case of Class A shares and because of the assessment of the CDSC for certain share redemptions in the case of Class A shares.
TAX-DEFERRED RETIREMENT PLANS -- Except as noted under "Purchases -- Class C Shares," shares of the Fund may be purchased by all types of tax-deferred retirement plans, including IRAs, SEP-IRA plans, 401(k) plans, 403(b) plans and other corporate pension and profit-sharing plans. Investors should consult with their tax advisers before establishing any of the tax-deferred retirement plans described above.
The Fund's Statement of Additional Information, dated June 1, 1995, contains more detailed information about the Trust and the Fund, including, but not limited to, information related to (i) investment objective, policies and restrictions, including the purchase and sale of Options, Futures Contracts, Options on Futures Contracts, Forward Contracts and options on foreign currencies, (ii) Trustees, officers and investment adviser, (iii) portfolio transactions and brokerage commissions, (iv) the Fund's shares, including rights and liabilities of shareholders, (v) the method used to calculate yield and total rate of return quotations of the Fund, (vi) the Class A, Class B and Class C Distribution Plans and (vii) various services and privileges provided by the Fund for the benefit of its shareholders, including additional information with respect to the exchange privilege.
APPENDIX A
DESCRIPTION OF BOND RATINGS
The ratings of Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings Group ("S&P") and Fitch Investors Service, Inc. ("Fitch") represent their opinions as to the quality of various debt instruments. It should be emphasized, however, that ratings are not absolute standards of quality. Consequently, debt instruments with the same maturity, coupon and rating may have different yields while debt instruments of the same maturity and coupon with different ratings may have the same yield.
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations, (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during other good and bad times over the future. Uncertainty of position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has been suspended or withdrawn, it may be for reasons unrelated to the quality of the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the effects of which preclude satisfactory analysis; if there is no longer available reasonable up-to-date data to permit a judgment to be formed; if a bond is called for redemption; or for other reasons.
STANDARD & POOR'S RATINGS GROUP
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay principal and differs from the higher rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher rated categories.
BB, B, CCC, CC AND C: Debt rated BB, B, CCC, CC and C is regarded, on balance, as predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation. BB indicates the lowest degree of speculation and C the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions.
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 of a plus or minus sign to show relative standing within the major rating categories.
NR: indicates that no public rating has been requested, that there is insufficient information on which to base a rating, or that S&P does not rate a particular type of obligation as a matter of policy.
FITCH INVESTORS SERVICE, INC.
AAA: Bonds considered to be investment grade and of the highest credit quality. The obligor has an exceptionally strong ability to pay interest and repay principal, which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality. The obligor's ability to pay interest and repay principal is very strong, although not quite as strong as bonds rated "AAA". Because bonds rated in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable future developments, short-term debt of these issuers is generally rated "F- 1+".
A: Bonds considered to be investment grade and of 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, however, are more likely to have adverse impact on these bonds, and therefor impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay interest and repay principal may be affected over time by adverse economic changes. However, business and financial alternatives can be identified which could assist the obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are currently meeting debt service requirements, the probability of continued timely payment of principal and interest reflects the obligor's limited margin 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 unlikely to result in a rating change and the likely direction of such change. These are designated as "Positive," indicating a potential upgrade, "Negative," for potential downgrade, or "Evolving," where ratings may be raised or lowered. FitchAlert is relatively short-term, and should be resolved within 12 months.
APPENDIX B
PORTFOLIO COMPOSITION CHART
MFS HIGH INCOME FUND
FOR FISCAL YEAR ENDED JANUARY 31, 1995
The table below shows the percentages of the Fund's assets at January 31,
1995 invested in bonds assigned to the various rating categories by S&P, Moody's
(provided only for securities not rated by S&P) and Fitch (provided only for
securities not rated by S&P or Moody's) and in unrated securities determined by
MFS to be of comparable quality:
UNRATED
SECURITIES OF
COMPARABLE
RATING S&P MOODY'S FITCH ---------- TOTAL
- ------ --- ------- ----- QUALITY -----
AAA/Aaa ........................................... -- -- -- -- --
AA/Aa ...............................................-- -- -- -- --
A/A .................................................-- -- -- -- --
BBB/Baa .............................................-- -- -- -- --
BB/Ba ...............................................16.2% -- -- 0.3% 16.5%
B/B .................................................55.8% 1.0% -- 2.6% 59.4%
CCC/Caa ............................................. 6.4% -- -- 1.0% 7.4%
CC/Ca ............................................... 0.8% -- -- -- 0.8%
C/C ................................................. 0.3% -- -- -- 0.3%
Default .............................................-- -- -- 1.3% 1.3%
Other ...............................................-- -- -- -- 14.3%
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The chart does not necessarily indicate what the composition the Fund's portfolio will be in subsequent years. Rather, the Fund's investment objective, policies and restrictions indicate the extent to which the Fund may purchase securities in the various categories.
THE MFS FAMILY OF FUNDS(R) -- AMERICA'S OLDEST MUTUAL FUND GROUP
The members of the MFS Family of Funds are grouped below according to the types of securities in their portfolios. For free prospectcuses containing more complete information, including the exchange privilege and all charges and expenses, please contact your financial adviser or call MFS at 1-800-637-2929 any business day from 9 a.m. to 5 p.m. Eastern time (or, leave a message any time). This material should be read carefully before investing or sending money.
STOCK LIMITED MATURITY BOND
Massachusetts Investors Trust MFS(R) Government Limited Maturity Fund
- ----------------------------------------- ---------------------------------------------
Massachusetts Investors Growth Stock Fund MFS(R) Limited Maturity Fund
- ----------------------------------------- ---------------------------------------------
MFS(R) Capital Growth Fund MFS(R) Municipal Limited Maturity Fund
- ----------------------------------------- ---------------------------------------------
MFS(R) Emerging Growth Fund
- ----------------------------------------- WORLD
MFS(R) Gold & Natural Resources Fund MFS(R) World Asset Allocation Fund
- ----------------------------------------- ---------------------------------------------
MFS(R) Growth Opportunities Fund MFS(R) World Equity Fund
- ----------------------------------------- ---------------------------------------------
MFS(R) Managed Sectors Fund MFS(R) World Governments Fund
- ----------------------------------------- ---------------------------------------------
MFS(R) OTC Fund MFS(R) World Growth Fund
- ----------------------------------------- ---------------------------------------------
MFS(R) Research Fund MFS(R) World Total Return Fund
- ----------------------------------------- ---------------------------------------------
MFS(R) Value Fund
- -----------------------------------------
STOCK AND BOND NATIONAL TAX-FREE BOND
MFS(R) Total Return Fund MFS(R) Municipal Bond Fund
- ----------------------------------------- ---------------------------------------------
MFS(R) Utilities Fund MFS(R) Municipal High Income Fund
- ----------------------------------------- (closed to new investors)
---------------------------------------------
BOND MFS(R) Municipal Income Fund
---------------------------------------------
MFS(R) Bond Fund
- ----------------------------------------- STATE TAX-FREE BOND
MFS(R) Government Mortgage Fund
- ----------------------------------------- Alabama, Arkansas, California, Florida,
MFS(R) Government Securities Fund Georgia, Louisiana, Maryland, Massachusetts,
- ----------------------------------------- Mississippi, New York, North Carolina,
MFS(R) High Income Fund Pennsylvania, South Carolina, Tennessee, Texas,
- ----------------------------------------- Virginia, Washington, West Virginia
MFS(R) Intermediate Income Fund ---------------------------------------------
- -----------------------------------------
MFS(R) Strategic Income Fund MONEY MARKET
(formerly MFS(R) Income & Opportunity Fund)
- ----------------------------------------- MFS(R) Cash Reserve Fund
---------------------------------------------
MFS(R) Government Money Market Fund
---------------------------------------------
MFS(R) Money Market Fund
---------------------------------------------
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INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116
617) 954-5000
DISTRIBUTOR
MFS FUND DISTRIBUTORS, INC.
500 Boylston Street
Boston, MA 02116
(617) 954-5000
CUSTODIAN AND DIVIDEND DISBURSING AGENT
State Street Bank And Trust Company
225 Franklin Street
Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116
Toll-free: (800) 225-2606
MAILING ADDRESS:
P.O. Box 2281
Boston, MA 02107-9906
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP
125 Summer Street
Boston, MA 02110
[Logo]
THE FIRST NAME IN MUTUAL FUNDS
MFS(R) HIGH INCOME FUND
500 Boylston Street
Boston, MA 02116
MHI-1 6/95/117.5M 18/218/318
[Logo]
THE FIRST NAME IN MUTUAL FUNDS
MFS(R) HIGH INCOME FUND
PROSPECTUS
JUNE 1, 1995
MFS HIGH INCOME FUND
(a series of MFS SERIES TRUST III)
Supplement to be affixed to the current Prospectus for distribution in Indiana
The Fund invests primarily in securities (commonly known as "junk bonds") which are ordinarily in the lower rating categories of recognized rating agencies or are unrated and generally involve greater volatility of price and risk of loss of principal and interest income than securities in the higher rating categories. An investment in shares of the Fund should not be considered to constitute a complete investment program and investors should carefully assess the risks associated with an investment in this Fund.
The date of this Supplement is June 1, 1995
MFS HIGH INCOME FUND
(a series of MFS SERIES TRUST III)
Supplement to be affixed to the current Prospectus for distribution in Washington
The Fund invests primarily in securities (commonly known as "junk bonds") which are ordinarily in the lower rating categories of recognized rating agencies or are unrated and generally involve greater volatility of price and risk of loss of principal and interest income than securities in the higher rating categories. An investment in shares of the Fund should not be considered to constitute a complete investment program and investors should carefully assess the risks associated with an investment in this Fund.
The date of this Supplement is June 1, 1995
[LOGO: M F S]
THE FIRST NAME IN MUTUAL FUNDS
MFS(R) HIGH INCOME FUND STATEMENT OF
ADDITIONAL INFORMATION
(A Member of the MFS Family of Funds(R)) June 1, 1995
- ------------------------------------------------------------------------------
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Page
----
1. Definitions ......................................................... 2
2. Investment Objective, Policies and Restrictions ..................... 2
3. Management of the Fund .............................................. 12
Trustees ......................................................... 12
Officers ......................................................... 13
Investment Adviser ............................................... 13
Custodian ........................................................ 14
Shareholder Servicing Agent ...................................... 14
Distributor ...................................................... 15
4. Portfolio Transactions and Brokerage Commissions .................... 15
5. Shareholder Services ................................................ 16
Investment and Withdrawal Programs ............................... 16
Exchange Privilege ............................................... 18
Tax-Deferred Retirement Plans .................................... 18
6. Tax Status .......................................................... 19
7. Description of Shares, Voting Rights and Liabilities ................ 20
8. Determination of Net Asset Value and Performance .................... 20
9. Distribution Plans .................................................. 22
10. Independent Accountants and Financial Statements .................... 24
Appendix A .......................................................... 25
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MFS HIGH INCOME FUND
A Series of MFS Series Trust III
500 Boylston Street, Boston, Massachusetts 02116
(617) 954-5000
This Statement of Additional Information (the "SAI") sets forth information which may be of interest to investors but which is not necessarily included in the Fund's Prospectus dated June 1, 1995. This SAI should be read in conjunction with the Prospectus, a copy of which may be obtained without charge by contacting the Shareholder Servicing Agent (see last page for address and phone number).
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
1. DEFINITIONS
"Fund" -- MFS High Income Fund, a series of MFS Series
Trust III (the "Trust"), a Massachusetts
business trust. The Trust was known as
"Massachusetts Financial High Income Trust",
until its name was changed on August 20, 1993.
"MFS" or the "Adviser" -- Massachusetts Financial Services Company, a
Delaware corporation.
"MFD" -- MFS Fund Distributors, Inc., a Delaware
corporation.
"Prospectus" -- The Prospectus, dated June 1, 1995, of the
Fund.
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2. INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVE. The Fund's investment objective is to seek high current income by investing primarily in a professionally managed diversified portfolio of fixed income securities, some of which may involve equity features. Capital growth, if any, is a consideration incidental to the objective of high current income. There can be no assurance that the Fund will achieve its investment objective.
INVESTMENT POLICIES. The fixed income and other securities in which the Fund may invest and the risks associated with such investments are described in the Fund's Prospectus. The following policies are not fundamental and may be changed without shareholder approval as may the Fund's investment objective.
RESTRICTED SECURITIES: The Fund may invest in restricted securities of companies
which the Adviser believes have significant growth potential. These securities
are subject to legal or contractual restrictions on resale. Consequently, there
is no public trading market for these securities and market quotations are not
readily available. As a result, the Fund might not be able to sell these
securities when the Adviser wishes to do so, or might have to sell them at less
than fair value. The Fund may not invest more than 15% of its net assets in
restricted securities (as described in the Fund's investment restrictions)
(restricted securities the Board of Trustees has determined are liquid are not
included in this amount). See "Investment Objective, Policies and Restrictions
- -- Investment Restrictions."
The Fund will not (a) invest more than 5% of its assets, taken at market value, in warrants not acquired in a unit transaction or (b) invest more than 15% of its assets, taken at market value, in securities for which there are no readily available market quotations.
LOANS AND OTHER DIRECT INDEBTEDNESS: The Fund may purchase loans and other direct claims against a borrower. In purchasing loans, the Fund acquires some or all of the interest of a bank or other lending institution in a loan to a corporate borrower. Many such loans are secured, although some may be unsecured. Such loans may be in default at the time of purchase. Loans that are fully secured offer the Fund more protection than an unsecured loan in the event of non-payment of scheduled interest or principal. However, there is no assurance that the liquidation of collateral from a secured loan would satisfy the corporate borrower's obligation, or that the collateral can be liquidated.
These loans are made generally to finance internal growth, mergers, acquisitions, stock repurchases, leveraged buy-outs and other corporate activities. Such loans are typically made by a syndicate of lending institutions, represented by an agent lending institution which has negotiated and structured the loan and is responsible for collecting interest, principal and other amounts due on its own behalf and on behalf of the others in the syndicate, and for enforcing its and their other rights against the borrower. Alternatively, such loans may be structured as a novation, pursuant to which the Fund would assume all of the rights of the lending institution in a loan, or as an assignment, pursuant to which the Fund would purchase an assignment of a portion of a lender's interest in a loan either directly from the lender or through an intermediary. The Fund may also purchase trade or other claims against companies, which generally represent money owed by the company to a supplier of goods or services. These claims may also be purchased at a time when the company is in default.
Certain of the loans acquired by the Fund may involve revolving credit facilities or other standby financing commitments which obligate the Fund to pay additional cash on a certain date or on demand. These commitments may have the effect of requiring the Fund to increase its investment in a company at a time when the Fund might not otherwise decide to do so (including at a time when the company's financial condition makes it unlikely that such amounts will be repaid).The Fund will always have cash, short-term money market instruments or debt securities sufficient to cover any commitments or to limit any potential risk.
The Fund's ability to receive payments of principal, interest and other amounts due in connection with these investments will depend primarily on the financial condition of the borrower. In selecting the loans and other direct investments which the Fund will purchase, the Adviser will rely upon its (and not that of the original lending institution's) own credit analysis of the borrower. As the Fund may be required to rely upon another lending institution to collect and pass on to the Fund amounts payable with respect to the loan and to enforce the Fund's rights under the loan, an insolvency, bankruptcy or reorganization of the lending institution may delay or prevent the Fund from receiving such amounts. The highly leveraged nature of many such loans may make such loans especially vulnerable to adverse changes in economic or market conditions. Investments in such loans may involve additional risks to the Fund. For example, if a loan is foreclosed, the Fund could become part owner of any collateral, and would bear the costs and liabilities associated with owning and disposing of the collateral. In addition, it is conceivable that under emerging legal theories of lender liability, the Fund could be held liable as a co-lender. It is unclear whether loans and other forms of direct indebtedness offer securities law protections against fraud and misrepresentation. In the absence of definitive regulatory guidance, the Fund relies on the Adviser's research in an attempt to avoid situations where fraud or misrepresentation could adversely affect the Fund. In addition, loan participations and other direct investments may not be in the form of securities or may be subject to restrictions on transfer, and only limited opportunities may exist to resell such instruments. As a result, the Fund may be unable to sell such investments at an opportune time or may have to resell them at less than fair market value. To the extent that the Adviser determines that any such investments are illiquid, the Fund will include them in the investment limitations described below.
"WHEN-ISSUED" SECURITIES: When the Fund commits to purchase a security on a "when-issued" or "forward delivery" basis, it will set up procedures consistent with policies promulgated by the Securities and Exchange Commission (the "SEC") concerning such purchases. Since that policy currently recommends that an amount of the Fund's assets equal to the amount of the purchase be held aside or segregated to be used to pay for the commitment, the Fund will always have cash, short-term money market instruments or debt securities sufficient to cover any commitments or to limit any potential risk. However, although the Fund does not intend to make such purchases for speculative purposes and intends to adhere to policies promulgated by the SEC, purchases of securities on such bases may involve more risk than other types of purchases. For example, the Fund may have to sell assets which have been set aside in order to meet redemptions. Also, if the Fund determines it necessary to sell the "when-issued" or "forward delivery" securities before delivery, it may incur a loss because of market fluctuations since the time the commitment to purchase such securities was made.
FOREIGN SECURITIES: The Fund may invest up to 50% (and expects generally to invest between 5% and 20%) of its total assets in foreign securities which are not traded on a U.S. exchange (not including American Depositary Receipts) and has authority to invest up to 25% of its total assets in securities issued or guaranteed by foreign governments or their agencies or instrumentalities. The Fund has made commitments to regulatory authorities to limit its investments in securities of any single foreign government issuer to 5% of its total assets and to continue to maintain its status as a diversified company under the Investment Company Act of 1940, as amended (the "1940 Act"). 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, the Fund may receive interest or dividend payments, or the proceeds of the sale or redemption of such securities, in the foreign currencies in which such securities are denominated. Under certain circumstances, such as where the Adviser believes that the applicable exchange rate is unfavorable at the time the currencies are received or the Adviser anticipates, for any other reason, that the exchange rate will improve, the Fund may hold such currencies for an indefinite period of time. While the holding of currencies will permit the Fund to take advantage of favorable movements in the applicable exchange rate, such strategy also exposes the Fund to risk of loss if exchange rates move in a direction adverse to the Fund's position. Such losses could reduce any profits or increase any losses sustained by the Fund from the sale or redemption of securities and could reduce the dollar value of interest or dividend payments received. The Fund may also hold foreign currency in anticipation of purchasing foreign securities.
AMERICAN DEPOSITARY RECEIPTS: American Depositary 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. ADRs may be sponsored or unsponsored. A sponsored ADR is issued by a depository which has an exclusive relationship with the issuer of the underlying security. An unsponsored ADR may be issued by any number of U.S. depositories. The Fund may invest in either type of ADR. Although the U.S. investor holds a substitute receipt of ownership rather than direct stock certificates, the use of the depository receipts in the United States can reduce costs and delays as well as potential currency exchange and other difficulties. The Fund may purchase securities in local markets and direct delivery of these ordinary shares to the local depository of an ADR agent bank in the foreign country. Simultaneously, the ADR agents create a certificate which settles at the Fund's custodian in five days. The Fund may also execute trades on the U.S. markets using existing ADRs. A foreign issuer of the security underlying an ADR is generally not subject to the same reporting requirements in the United States as a domestic issuer. Accordingly the information available to a U.S. investor will be limited to the information the foreign issuer is required to disclose in its own country and the market value of an ADR may not reflect undisclosed material information concerning the issuer of the underlying security. ADRs may also be subject to exchange rate risks if the underlying foreign securities are denominated in foreign currency.
MORTGAGE PASS-THROUGH SECURITIES. The Fund may invest in mortgage pass-through securities as described in the Prospectus. Interests in pools of mortgage-related securities differ from other forms of debt securities, which normally provide for periodic payment of interest in fixed amounts with principal payments at maturity or specified call dates. Instead, these securities provide a monthly payment which consists of both interest and principal payments. In effect, these payments are a "pass-through" of the monthly payments made by the individual borrowers on their mortgage loans, net of any fees paid to the issuer or guarantor of such securities. Additional payments are caused by prepayments of principal resulting from the sale, refinancing or foreclosure of the underlying property, net of fees or costs which may be incurred. Some mortgage pass-through securities (such as securities issued by the Government National Mortgage Association ("GNMA"), are described as "modified pass-through." These securities entitle the holder to receive all interests and principal payments owed on the mortgages in the mortgage pool, net of certain fees, at the scheduled payment dates regardless of whether the mortgagor actually makes the payment.
The principal governmental guarantor of mortgage pass-through securities is the GNMA. GNMA is a wholly-owned U.S. Government corporation within the Department of Housing and Urban Development. GNMA is authorized to guarantee, with the full faith and credit of the U.S. Government, the timely payment of principal and interest on securities issued by institutions approved by GNMA (such as savings and loan institutions, commercial banks and mortgage bankers) and backed by pools of Federal Housing Administration-insured or Veteran's Administration ("VA")-guaranteed mortgages. These guarantees, however, do not apply to the market value or yield of mortgage pass-through securities. GNMA securities are often purchased at a premium over the maturity value of the underlying mortgages. This premium is not guaranteed and will be lost if prepayment occurs.
Government-related guarantors (i.e., whose guarantees are not backed by the full faith and credit of the U.S. Government) include the Federal National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). FNMA is a government-sponsored corporation owned entirely by private stockholders. It is subject to general regulation by the Secretary of Housing and Urban Development. FNMA purchases conventional residential mortgages (i.e., mortgages not insured or guaranteed by any governmental agency) from a list of approved seller/services which include state and federally-chartered savings and loan associations, mutual savings banks, commercial banks, credit unions and mortgage bankers. Pass-through securities issued by FNMA are guaranteed as to timely payment by FNMA of principal and interest.
FHLMC was created by Congress in 1970 as a corporate instrumentality of the U.S. Government for the purpose of increasing the availability of mortgage credit for residential housing. FHLMC issues Participation Certificates ("PCs") which represent interest in conventional mortgages (i.e., not federally insured or guaranteed) from FHLMC's national portfolio. FHLMC guarantees timely payment of interest and ultimate collection of principal regardless of the status of the underlying mortgage loans.
Commercial banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary market issuers also create pass-through pools of mortgage loans. Such issuers may also be the originators and/or servicers of the underlying mortgage-related securities. Pools created by such non-governmental issuers generally offer a higher rate of interest than government and government-related pools because there are no direct or indirect government or agency guarantees of payments in the former pools. However, timely payment of interest and principal of mortgage loans in these pools may be supported by various forms of insurance or guarantees, including individual loan, title, pool and hazard insurance and letters of credit. The insurance and guarantees are issued by governmental entities, private insurers and the mortgage poolers. There can be no assurance that the private insurers or guarantors can meet their obligations under the insurance policies or guarantee arrangements. The Fund may also buy mortgage-related securities without insurance or guarantees.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES: The Fund may invest a portion of its assets in collateralized mortgage obligations or "CMOs", which are debt obligations collateralized by mortgage loans or mortgage pass-through securities. Typically, CMOs are collateralized by certificates issued by GNMA, FNMA or FHLMC, but also may be collateralized by whole loans or private mortgage pass-through securities (such collateral collectively hereinafter referred to as "Mortgage Assets"). The Fund may also invest a portion of its assets in multiclass pass-through securities which are equity interests in a trust composed of Mortgage Assets. Unless the context indicates otherwise, all references herein to CMOs include multiclass pass-through securities. Payments of principal of and interest on the Mortgage Assets, and any reinvestment income thereon, provide the funds to pay debt service on the CMOs or make scheduled distributions on the multiclass pass-through securities. CMOs may be issued by agencies or instrumentalities of the United States government or by private originators of, or investors in, mortgage loans, including savings and loan associations, mortgage banks, commercial banks, investment banks and special purpose subsidiaries of the foregoing. The issuer of a series of CMOS may elect to be treated as a Real Estate Mortgage Investment Conduit (a "REMIC").
In a CMO, a series of bonds or certificates are usually issued in multiple classes with different maturities. Each class of CMOs, often referred to as a "tranch", is issued at a specific fixed or floating coupon rate and has a stated maturity or final distribution date. Principal prepayments on the Mortgage Assets may cause the CMOs to be retired substantially earlier than their stated maturities or final distribution dates, resulting in a loss of all or a part of the premium if any has been paid. Interest is paid or accrues on all classes of the CMOs on a monthly, quarterly or semiannual basis. The principal of and interest on the Mortgage Assets may be allocated among the several classes of a series of a CMO in innumerable ways. In a common structure, payments of principal, including any principal prepayments, on the Mortgage Assets are applied to the classes of the series of a CMO in the order of their respective stated maturities or final distribution dates, so that no payment of principal will be made on any class of CMOs until all other classes having an earlier stated maturity or final distribution date have been paid in full. Certain CMOs may be stripped (securities which provide only the principal or interest factor of the underlying security). See "Stripped Mortgage-Backed Securities" below for a discussion of the risks of investing in these stripped securities and of investing in classes consisting primarily of interest payments or principal payments.
The Fund may also invest in parallel pay CMOs and Planned Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to provide payments of principal on each payment date to more than one class. These simultaneous payments are taken into account in calculating the stated maturity date or final distribution date of each class, which, as with other CMO structures, must be retired by its stated maturity date or final distribution date, but may be retired earlier. PAC Bonds generally require payments of a specified amount of principal on each payment date. PAC Bonds are always parallel pay CMOs with the required principal payment on such securities having the highest priority after interest has been paid to all classes.
STRIPPED MORTGAGE-BACKED SECURITIES: In addition, the Fund may invest a portion of its assets in stripped mortgage-backed securities ("SMBS") which are derivative multiclass mortgage securities issued by agencies or instrumentalities of the United States government or by private originators of, or investors in, mortgage loans, including savings and loan associations, mortgage banks, commercial banks and investment banks.
SMBS are usually structured with two classes that receive different proportions of the interest and principal distributions from a pool of Mortgage Assets. A common type of SMBS will have one class receiving some of the interest and most of the principal from the Mortgage Assets, while the other class will receive most of the interest and the remainder of the principal. In the most extreme case, one class will receive all of the interest (the interest-only or "IO" Class) while the other class will receive all of the principal (the principal-only or "PO" Class). The yield to maturity on an IO is extremely sensitive to the rate of principal payments (including prepayments) on the related underlying Mortgage Assets, and a rapid rate of principal payments may have a material adverse effect on such security's yield to maturity. If the underlying Mortgage Assets experience greater than anticipated prepayments of principal, the Fund may fail to fully recoup its initial investment in these securities. The market value of the class consisting primarily or entirely of principal payments generally is unusually volatile in response to changes in interest rates. Because SMBS were only recently introduced, established trading markets for these securities have not yet developed, although the securities are traded among institutional investors and investment banking firms.
INDEXED SECURITIES: The Fund may purchase securities whose prices are indexed to the prices of other securities, securities indices, currencies, precious metals or other commodities, or other financial indicators. Indexed securities typically, but not always, are debt securities or deposits whose value at maturity or coupon rate is determined by reference to a specific instrument or statistic. Gold-indexed securities, for example, typically provide for a maturity value that depends on the price of gold, resulting in a security whose price tends to rise and fall together with gold prices. Currency-indexed securities typically are short-term to intermediate-term debt securities whose maturity values or interest rates are determined by reference to the values of one or more specified foreign currencies, and may offer higher yields than U.S. dollar-denominated securities of equivalent issuers. Currency-indexed securities may be positively or negatively indexed; that is, their maturity value may increase when the specified currency value increases, resulting in a security that performs similarly to a foreign-denominated instrument, or their maturity value may decline when foreign currencies increase, resulting in a security whose price characteristics are similar to a put on the underlying currency. Currency-indexed securities may also have prices that depend on the values of a number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the performance of the security, currency, or other instrument to which they are indexed, and may also be influenced by interest rate changes in the U.S. and abroad. At the same time, indexed securities are subject to the credit risks associated with the issuer of the security, and their values may decline substantially if the issuer's creditworthiness deteriorates. Recent issuers of indexed securities have included banks, corporations, and certain U.S. government agencies.
SWAPS AND RELATED TRANSACTIONS: The Fund may enter into interest rate swaps, currency swaps and other types of available swap agreements, such as caps, collars and floors.
Swap agreements may be individually negotiated and structured to include exposure to a variety of different types of investments or market factors. Depending on their structure, swap ageements may increase or decrease the Fund's exposure to long or short-term interest rates (in the U.S. or abroad), foreign currency values, mortgage securities, corporate borrowing rates, or other factors such as securities prices or inflation rates. Swap agreements can take many different forms and are known by a variety of names. The Fund is not limited to any particular form or variety of swap agreement if MFS determines it is consistent with the Fund's investment objective and policies.
The Fund will maintain cash or appropriate liquid assets with its custodian to cover its current obligations under swap transactions. If the Fund enters into a swap agreement on a net basis (i.e., the two payment streams are netted out, with the Fund receiving or paying, as the case may be, only the net amount of the two payments), the Fund will maintain cash or liquid assets with its custodian with a daily value at least equal to the excess, if any, of the Fund's accrued obligations under the swap agreement over the accrued amount the Fund is entitled to receive under the agreement. If the Fund enters into a swap agreement on other than a net basis, it will maintain cash or liquid assets with a value equal to the full amount of the Fund's accrued obligations under the agreement.
The most significant factor in the performance of swaps, caps, floors and collars is the change in the specific interest rate, currency or other factor that determines the amount of payments to be made under the arrangement. If MFS is incorrect in its forecasts of such factors, the investment performance of the Fund would be less than what it would have been if these investment techniques had not been used. If a swap agreement calls for payments by the Fund, the Fund must be prepared to make such payments when due. In addition, if the counterparty's creditworthiness declined, the value of the swap agreement would be likely to decline, potentially resulting in losses. If the counterparty defaults, the Fund's risk of loss consists of the net amount of payments that the Fund is contractually entitled to receive. The Fund anticipates that it will be able to eliminate or reduce its exposure under these arrangements by assignment or other disposition or by entering into an offsetting agreement with the same or another counterparty.
OPTIONS: The Fund may write covered put and call options and purchase put and call options on domestic and foreign fixed income securities that are traded on U.S. and foreign securities exchanges and over-the-counter. Call options written by the Fund give the holder the right to buy the underlying securities from the Fund at a fixed exercise price; put options written by the Fund give the holder the right to sell the underlying security to the Fund at a fixed exercise price. A call option written by the Fund is "covered" if the Fund owns the underlying security covered by the call or has an absolute and immediate right to acquire that security without additional cash consideration (or for additional cash consideration held in a segregated account by its custodian) upon conversion or exchange of other securities held in its portfolio. A call option is also covered if the Fund holds a call on the same security and in the same principal amount as the call written where the exercise price of the call held (a) is equal to or less than the exercise price of the call written or (b) is greater than the exercise price of the call written if the difference is maintained by the Fund in cash, high quality debt securities and short-term money market instruments in a segregated account with its custodian. A put option written by the Fund is "covered" if the Fund maintains cash, high quality debt securities and short-term money market instruments with a value equal to the exercise price in a segregated account with its custodian, or else holds a put on the same security and in the same principal amount as the put written where the exercise price of the put held is equal to or greater than the exercise price of the put written. Put and call options written by the Fund may also be covered in such other manner as may be in accordance with the requirements of the exchange on which, or the counter party with which, the option is traded and applicable laws and regulations. The writer of an option may have no control over when the underlying securities must be sold, in the case of a call option, or purchased, in the case of a put option, since with regard to certain options, the writer may be assigned an exercise notice at any time prior to the termination of the obligation.
Effecting a closing transaction in the case of a written call option will permit the Fund to write another call option on the underlying security with either a different exercise price or expiration date or both, or in the case of a written put option will permit the Fund to write another put option to the extent that the exercise price thereof is secured by deposited cash or short-term securities. Such transactions permit the Fund to generate additional premium income, which will partially offset declines in the value of portfolio securities or increases in the cost of securities to be acquired. Also, effecting a closing transaction will permit the cash or proceeds from the concurrent sale of any securities subject to the option to be used for other Fund investments. If the Fund desires to sell a particular security from its portfolio on which it has written a call option, it will effect a closing transaction prior to, or concurrent with, the sale of the security.
The Fund will realize a profit from a closing transaction if the premium paid in connection with the closing of an option is less than the premium received from writing the option or if the premium received in connection with the closing of an option purchased is more than the premium paid for the original purchase. Conversely, the Fund will suffer a loss if the premium paid or received in connection with a closing transaction is more or less, respectively, than the premium received or paid in establishing the option position. Because increases in the market price of a call option will generally reflect increases in the market price of the underlying security, any loss resulting from the closing out of a call option would likely be offset in whole or in part by appreciation of the underlying security owned by the Fund.
An option position may be closed out only where there exists a secondary market for an option of the same series. If a secondary market does not exist, it might not be possible to effect closing transactions in particular options with the result that the Fund would have to exercise the options in order to realize any profit. If the Fund is unable to effect a closing purchase transaction in a secondary market, it will not be able to sell the underlying security until the option expires or it delivers the underlying security upon exercise. Reasons for the absence of a liquid secondary market include the following: (i) there may be insufficient trading interest in certain options; (ii) restrictions may be imposed by a national securities exchange on opening transactions or closing transactions or both; (iii) trading halts, suspensions or other restrictions may be imposed with respect to particular classes or series of options or underlying securities; (iv) unusual or unforeseen circumstances may interrupt normal operations on an exchange; (v) the facilities of an exchange or the Options Clearing Corporation (the "OCC") may not at all times be adequate to handle current trading volume; or (vi) one or more exchanges could, for economic or other reasons, decide or be compelled at some future date to discontinue the trading of options (or a particular class or series of options), in which event the secondary market on that exchange (or in that class or series of options) would cease to exist, although outstanding options on that exchange that had been issued by the OCC as a result of trades on that exchange would continue to be exercisable in accordance with their terms.
The Fund may write options in connection with buy-and-write transactions; that is, the Fund may purchase a security and then write a call option against that security. The exercise price of the call the Fund determines to write will depend upon the expected price movement of the underlying security. The exercise price of a call option may be below ("in-the-money"), equal to ("at-the-money") or above ("out-of-the-money") the current value of the underlying security at the time the option is written. If the call options are exercised in such transactions, the Fund's maximum gain will be the premium received by it for writing the option, adjusted upwards or downwards by the difference between the Fund's purchase price of the security and the exercise price. 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. Put options may be used by the Fund in the same market environments that call options are used in equivalent buy-and-write transactions.
The Fund may write combinations of put and call options on the same security, a practice known as a "straddle." By writing a straddle, the Fund undertakes a simultaneous obligation to sell 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 in part, by the premiums received on the writing of the two options. Conversely, if the price of the security declines by a sufficient amount, the put will likely be exercised. The writing of straddles will likely be effective, therefore, only where the price of a security remains stable and neither the call nor the put is exercised. In an instance where one of the options is exercised, the loss on the purchase or sale of the underlying security may exceed the amount of the premiums received.
The Fund may purchase put options to hedge against a decline in the value of its portfolio. By using put options in this way, the Fund will reduce any profit it might otherwise have realized in the underlying security by the amount of the premium paid for the put option and by transaction costs.
The Fund may purchase call options to hedge against an increase in the price of domestic or foreign securities that the Fund anticipates purchasing in the future. The premium paid for the call option plus any transaction costs will reduce the benefit, if any, realized by the Fund upon exercise of the option, and, unless the price of the underlying security rises sufficiently, the option may expire worthless to the Fund.
YIELD CURVE OPTIONS: The Fund may also enter into options on the yield "spread" or yield differential between two fixed income securities, a transaction referred to as a "yield curve" option. In contrast to other types of options, a yield curve option is based on the difference between the yields of designated fixed income securities, rather than the prices of the individual securities, and is usually settled through cash payments. Accordingly, a yield curve option is profitable to the holder if this differential widens (in the case of a call) or narrows (in the case of a put), regardless of whether the yields of the underlying securities increase or decrease.
Yield curve options may be used for the same purposes as other options on securities. Specifically, the Fund may purchase or write such options for hedging purposes. For example, the Fund may purchase a call option on the yield spread between two securities if it owns one of the securities and anticipates purchasing the other security and wants to hedge against an adverse change in the yield spread between the two securities. The Fund may also purchase or write yield curve options for other than hedging purposes 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 fixed income 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 yield spread moves in a direction or to an extent which was not anticipated. Yield curve options written by the Fund will be covered. A call (or put) option written by the Fund is covered if the Fund holds another call (or put) option on the yield spread between the same two securities and maintains in a segregated account with its custodian cash or cash equivalents sufficient to cover the Fund's net liability under the two options. Therefore, the Fund's liability for such a covered option is generally limited to the difference between the amount of the Fund's liability under the option written by the Fund less the value of the option held by the Fund. Yield curve options may also be covered in such other manner as may be in accordance with the requirements of the counter party with which the option is traded and applicable laws and regulations. Yield curve options are traded over-the-counter and because they have been only recently introduced, established trading markets for these securities have not yet developed.
FUTURES CONTRACTS: The Fund may enter into contracts for the future delivery of domestic or foreign fixed income securities or contracts based on municipal bond or other financial indices including any index of domestic or foreign fixed income securities, as such contracts become available for trading ("Futures Contracts"). Such transactions may be entered into for hedging purposes and for non-hedging purposes, subject to applicable law. A "sale" of a Futures Contract means a contractual obligation to deliver the securities called for by the contract at a specified price in a fixed delivery month or, in the case of a Futures Contract on an index of securities, to make or receive a cash settlement. A "purchase" of a Futures Contract means a contractual obligation to acquire the securities called for by the contract at a specified price in a fixed delivery month or, in the case of a Futures Contract on an index of securities, to make or receive a cash settlement. U.S. Futures Contracts have been designed by exchanges which have been designated as "contract markets" by the Commodity Futures Trading Commission (the "CFTC"), and must be executed through a futures commission merchant, or brokerage firm, which is a member of the relevant contract market. Existing contract markets include the Chicago Board of Trade and the International Monetary Market of the Chicago Mercantile Exchange. Futures Contracts are traded on these markets, and, through their clearing corporations, the exchanges guarantee performance of the contracts as between the clearing members of the exchange. Futures Contracts purchased or sold by the Fund are also traded on foreign exchanges which are not regulated by the CFTC.
At the same time a Futures Contract is purchased or sold, the Fund must allocate cash or securities as a deposit payment ("initial deposit"). The initial deposit varies but may be as low as 5% or less of the value of the contract. Daily thereafter, the Futures Contract is valued and the Fund may be required to pay or receive additional payment of "variation margin" based on changes in the value of the contract.
At the time of delivery of securities pursuant to a Futures Contract based on fixed income securities, adjustments are made to recognize differences in value arising from the delivery of securities with a different interest rate from that specified in the contract. In some (but not many) cases, securities called for by a Futures Contract may not have been issued when the contract was written.
A Futures Contract based on an index of securities, such as a municipal bond index Futures Contract, provides for a cash payment equal to the amount, if any, by which the value of the index at maturity is above or below the value of the index at the time the contract was entered into, times a fixed index "multiplier". The index underlying such a Futures Contract is generally a broad based index of securities designed to reflect movements in the relevant market as a whole. The index assigns weighted values to the securities included in the index and its composition is changed periodically.
Although Futures Contracts call for the actual delivery of securities or, in the case of Futures Contracts based on an index, the making or acceptance of a cash settlement at a specified future time, the contractual obligation is usually fulfilled before such date by buying or selling, as the case may be, on a commodities exchange, an identical Futures Contract calling for settlement in the same month, subject to the availability of a liquid secondary market. The Fund incurs brokerage fees when it purchases and sells Futures Contracts.
The purpose of the purchase or sale of a Futures Contract for hedging purposes, in the case of a portfolio such as that of the Fund which holds or intends to acquire long-term fixed income securities, is to attempt to protect the Fund from fluctuations in interest rates without actually buying or selling long-term fixed income securities. For example, if the Fund owns long-term bonds and interest rates were expected to increase, the Fund might enter into Futures Contracts for the sale of debt securities. Such a sale would have much the same effect as selling an equivalent value of the long-term bonds in the portfolio of the Fund by the Fund. If interest rates did increase, the value of the debt securities in the portfolio would decline, but the value of the Futures Contracts would increase at approximately the same rate, thereby keeping the net asset value of the Fund from declining as much as it otherwise would have. The Fund could accomplish similar results by selling bonds with long maturities and investing in bonds with short maturities when interest rates are expected to increase. However, since the futures market is more liquid than the cash market, the use of Futures Contracts as an investment technique allows the Fund to maintain a hedging position without having to sell its portfolio securities.
Similarly, when it is expected that interest rates may decline, Futures Contracts may be purchased to attempt to hedge against anticipated purchases of long-term bonds at higher prices. Since the fluctuations in the value of Futures Contracts should be similar to that of long-term bonds, the Fund could take advantage of the anticipated rise in the value of long-term bonds without actually buying them until the market had stabilized. At that time, the Futures Contracts could be liquidated and the Fund could then buy long-term bonds on the cash market. To the extent the Fund enters into Futures Contracts for this purpose, the assets in the segregated asset account maintained to cover the Fund's obligations with respect to such Futures Contracts will consist of cash or short-term money market instruments from its portfolio in an amount equal to the difference between the fluctuating market value of such Futures Contracts and the aggregate value of the initial deposit and variation margin payments made by the Fund with respect to such Futures Contracts.
The ordinary spreads between prices in the cash and futures markets, due to differences in the nature of those markets, are subject to distortions. First, all participants in the futures market are subject to initial deposit and variation margin requirements. Rather than meeting additional variation margin requirements, investors may close out Futures Contracts through offsetting transactions which could distort the normal relationship between the cash and futures markets. Second, the liquidity of the futures market depends on participants entering into offsetting transactions rather than making or taking delivery. To the extent participants decide to make or take delivery, liquidity in the futures market could be reduced, thus producing distortion. Third, from the point of view of speculators, the margin deposit requirements in the futures market are less onerous than margin requirements in the securities market. Therefore, increased participation by speculators in the futures market may cause temporary price distortions. Due to the possibility of distortion, a correct forecast of general interest rate trends by the Adviser may still not result in a successful transaction.
In addition, Futures Contracts entail risks. Although the Fund believes that use of such contracts will benefit the Fund, if the Adviser's investment judgment about the general direction of interest rates is incorrect, the Fund's overall performance would be poorer than if it had not entered into any such contract. For example, if the Fund has hedged against the possibility of an increase in interest rates which would adversely affect the price of bonds held in its portfolio, and interest rates decrease instead, the Fund will lose part or all of the benefit of the increased value of its bonds which it has hedged because it will have offsetting losses in its futures positions. In addition, in such situations, if the Fund has insufficient cash, it may have to sell bonds from its portfolio to meet daily variation margin requirements. Such sales of bonds may be, but will not necessarily be, at increased prices which reflect the rising market. The Fund may have to sell securities at a time when it may be disadvantageous to do so. The purchase and sale of Futures Contracts for non-hedging purposes involves greater risk, and could result in losses which are not offset by gains on other portfolio assets.
OPTIONS ON FUTURES CONTRACTS: The Fund may purchase and write options on Futures Contracts ("Options on Futures Contracts") for hedging purposes and for non-hedging purposes subject to applicable laws. 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. Such Options on Futures Contracts will be traded on U.S. contract markets regulated by the CFTC as well as on foreign exchanges. Depending on the pricing of the option compared to either the price of the Futures Contract upon which it is based or the price of the underlying debt securities, it may or may not be less risky than ownership of the Futures Contract or underlying debt securities. As with the purchase of Futures Contracts, when the Fund is not fully invested it may purchase a call Option on a Futures Contract to hedge against a market advance due to declining interest rates.
The writing of a call Option on a Futures Contract constitutes a partial hedge against declining prices of the securities which are deliverable upon exercise of the Futures Contract. If the futures price at expiration of the option is below the exercise price, the Fund will retain the full amount of the option premium, less related transaction costs, which provides a partial hedge against any decline that may have occurred in the Fund's portfolio holdings. The writing of a put Option on a Futures Contract constitutes a partial hedge against increasing prices of the securities which are deliverable upon exercise of the Futures Contract. If the futures price at expiration of the option is higher than the exercise price, the Fund will retain the full amount of the option premium, less related transaction costs, which provides a partial hedge against any increase in the price of securities which the Fund intends to purchase. If a put or call option the Fund has written is exercised, the Fund will incur a loss which will be reduced by the amount of the premium it receives, less related transaction costs. Depending on the degree of correlation between changes in the value of its portfolio securities and changes in the value of its futures positions, the Fund's losses from existing Options on Futures Contracts may to some extent be reduced or increased by changes in the value of portfolio securities. The writer of an Option on a Futures Contract is subject to the requirement of initial and variation margin payments. The Fund may cover the writing of call Options on Futures Contracts through purchases of the underlying Futures Contract or through ownership of the security or securities included in the index underlying the Futures Contract. The Fund may also cover the writing of call Options on Futures Contracts through the purchase of such Options, provided that the exercise price of the call purchased (a) is equal to or less than the exercise price of the call written or (b) is greater than the exercise price of the call written if the difference is maintained by the Fund in cash, high quality debt securities or short-term money market instruments in a segregated account with the Fund's custodian. The Fund will cover the writing of put Options on Futures Contracts through sales of the underlying Futures Contract or through segregation of cash, high quality debt securities or short-term money market instruments in an amount equal to the value of the security or index underlying the Futures Contract. The Fund may also cover the writing of put Options on Futures Contracts through the purchase of such Options, provided that the exercise price of the put purchased is equal to or greater than the exercise price of the put written. In addition, the Fund may cover put and call Options on Futures Contracts in accordance with the requirements of the exchange on which the option is traded and applicable laws and regulations.
The purchase of a put Option on a Futures Contract is similar in some respects to the purchase of protective put options on portfolio securities. The Fund will purchase a put Option on a Futures Contract to hedge the Fund's portfolio against the risk of rising interest rates.
The amount of risk the Fund assumes when it purchases an Option on a Futures Contract is the premium paid for the option plus related transaction costs, although in order to realize a profit it may be necessary to exercise the option and close out the underlying Futures Contract. In addition to the correlation risks discussed above, the purchase of an option also entails the risk that changes in the value of the underlying Futures Contract will not be fully reflected in the value of the option purchased. The writer of an option or a futures contract is subject to all the risks of futures trading including the requirement of initial and variation margin payments. The purchase and sale of Options on Futures Contracts for non-hedging purposes involves greater risk, and could result in losses which are not offset by gains of other portfolio assets.
FORWARD CONTRACTS: The Fund may enter into contractual obligations to purchase or sell a specific quantity of a given foreign currency for a fixed exchange rate at a future date ("Forward Contracts"). Forward Contracts are individually negotiated and are traded through the "interbank currency market", an informal network of banks and brokerage firms which operates around the clock and throughout the world. Transactions in the interbank market may be executed only through financial institutions acting as market- makers in the interbank market or through brokers executing purchases and sales through such institutions. Market-makers in the interbank market generally act as principals in taking the opposite side of their customers' positions in Forward Contracts and ordinarily charge a mark-up or commission which may be included in the cost of the contract. In addition, market-makers may require their customers to deposit collateral upon entering into a Forward Contract as security for the customer's obligation to make or receive delivery of currency and to deposit additional collateral if exchange rates move adversely to the customer's position. Such deposits may function in a manner similar to the margining of Futures Contracts described above.
Prior to the stated maturity date of a Forward Contract, it may be possible to liquidate the transaction by entering into an offsetting contract. In order to do so, however, a customer may be required to maintain both contracts as open positions until maturity and to make or receive a settlement of the difference owed to or from the market-maker or broker at that time.
Forward Contracts may limit potential gain from a positive change in the relationship between the U.S. dollar and foreign currencies. Unanticipated changes in currency prices may result in poorer overall performance for the Fund than if it had not engaged in such contracts.
The Fund has established procedures consistent with Statements by the SEC and its staff regarding the use of Forward Contracts by registered investment companies, which require the use of segregated assets or "cover" in connection with the purchase and sale of such contracts. In those instances in which the Fund satisfies this requirement through segregation of assets, it will maintain, in a segregated account, cash, cash equivalents or high grade debt securities, which will be marked to market on a daily basis, in an amount equal to the value of its commitments under Forward Contracts entered into by the Fund. The Fund may also enter into Forward Contracts for "Cross-hedging" as noted in the Prospectus.
OPTIONS ON FOREIGN CURRENCIES: The Fund may purchase and write options on foreign currencies for hedging purposes in a manner similar to that in which Forward Contracts will be utilized. For example, a decline in the dollar value of a foreign currency in which portfolio securities are denominated will reduce the dollar value of such securities, even if their value in the foreign currency remains constant. In order to protect against such diminutions in the value of portfolio securities, the Fund may purchase put options on the foreign currency. If the value of the currency does decline, the Fund will have the right to sell such currency for a fixed amount in dollars and will thereby offset, in whole or in part, the adverse effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which securities to be acquired are denominated is projected, thereby increasing the cost of such securities, the Fund may purchase call options thereon. The purchase of such options could offset, at least partially, the effects of the adverse movements in exchange rates. As in the case of other types of options, however, the benefit to the Fund deriving from purchases of foreign currency options will be reduced by the amount of the premium and related transaction costs. In addition, where currency exchange rates do not move in the direction or to the extent anticipated, the Fund could sustain losses on transactions in foreign currency options which would require it to forego a portion or all of the benefits of advantageous changes in such rates.
The Fund may write options on foreign currencies for the same types of hedging purposes. For example, where the Fund anticipates a decline in the dollar value of foreign-denominated securities due to adverse fluctuations in exchange rates, it could, instead of purchasing a put option, write a call option on the relevant currency. If the expected decline occurs, the option will most likely not be exercised and the diminution in value of portfolio securities will be offset by the amount of the premium received, less related transaction costs.
Similarly, instead of purchasing a call option to hedge against an anticipated increase in the dollar cost of securities to be acquired, the Fund could write a put option on the relevant currency which, if rates move in the manner projected, will expire unexercised and allow the Fund to hedge such increased cost up to the amount of the premium, less related transaction costs. 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, less related transaction costs, and only if rates move in the expected direction. If this does not occur, the option may be exercised and the Fund would be required to purchase or sell the underlying currency at a loss which may not be offset by the amount of the premium. Through the writing of options on foreign currencies, the Fund also may be required to forego all or a portion of the benefits which might otherwise have been obtained from favorable movements in exchange rates.
Options on foreign currencies written or purchased by the Fund will be traded
over-the-counter or on U.S. or foreign securities exchanges. All options written
on foreign currencies will be covered. A call option written on foreign
currencies by the Fund is "covered" if the Fund owns the underlying foreign
currency covered by the call or has an absolute and immediate right to acquire
that foreign currency without additional cash consideration (or for additional
cash consideration held in a segregated account by its custodian) upon
conversion or exchange of other foreign currency held in its portfolio. A call
option is also covered if the Fund has a call on the same foreign currency and
in the same principal amount as the call written where the exercise price of the
call held (a) is equal to or less than the exercise price of the call written or
(b) is greater than the exercise price of the call written if the difference is
maintained by the Fund in cash, short-term money market instruments or high
quality debt securities in a segregated account with its custodian. A put option
written on foreign currencies by the Fund is "covered" if the Fund maintains
cash, short-term money market instruments or high quality debt securities with a
value equal to the exercise price in a segregated account with its custodian, or
else holds a put on the same foreign currency 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. Options on foreign
currencies written by the Fund may also be covered in such other manner as may
be in accordance with the requirements of the exchange on which the option is
traded and applicable laws and regulations.
ADDITIONAL RISKS OF OPTIONS ON SECURITIES, FUTURES CONTRACTS, OPTIONS ON FUTURES CONTRACTS, FORWARD CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES: Various additional risks exist with respect to the trading of options, Futures Contracts and Forward Contracts. For example, the Fund's ability effectively to hedge all or a portion of its portfolio through transactions in such instruments will depend on the degree to which price movements in the underlying index or instrument correlate with price movements in the relevant portion of the Fund's portfolio. The trading of futures and options entails the additional risk of imperfect correlation between movements in the futures or option price and the price of the underlying index or obligation, while the trading of options also entails the risk of imperfect correlation between securities used to cover options written and the securities underlying such options. The anticipated spread between the prices may be distorted because of various factors, which are set forth under "Investment Objective, Policies and Restrictions -- Futures Contracts" above. When the Fund purchases or sells Futures Contracts based on an index of securities, the securities comprising such index will not be the same as the portfolio securities being hedged, thereby creating a risk that changes in the value of the index will not correlate with changes in the value of such portfolio securities.
The Fund's ability to engage in options and futures strategies will also depend on the availability of liquid markets in such instruments. "Investment Objective, Policies and Restrictions -- Options" sets forth certain reasons why a liquid secondary market may not exist.
The liquidity of a secondary market in a Futures Contract or option thereon may be adversely affected by "daily price fluctuation limits", established by exchanges, which limit the amount of fluctuation in the price of a contract during a single trading day and prohibit trading beyond such limit. In addition, the exchanges on which futures and options are traded may impose limitations governing the maximum number of positions on the same side of the market and involving the same underlying instrument which may be held by a single investor, whether acting alone or in concert with others (regardless of whether such contracts are held on the same or different exchanges or held or written in one or more accounts or through one or more brokers).
Unlike transactions in Futures Contracts entered into by the Fund, options on foreign currencies and Forward Contracts are not traded on contract markets regulated by the CFTC or, with the exception of certain foreign currency options, by 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. Similarly, options on securities may be traded over-the-counter. In an over-the-counter trading environment, many of the protections afforded to exchange participants will not be available. For example, there are no daily price fluctuation limits, and adverse market movements could therefore continue to an unlimited extent over a period of time. Although the purchaser of an option cannot lose more than the amount of the premium plus related transaction costs, this entire amount could be lost. Moreover, the option writer and a trader of Forward Contracts could lose amounts substantially in excess of their initial investments due to the margin and collateral requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges are within the jurisdiction of the SEC, as are other securities and options 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 options on securities and on foreign currencies entered into on a national securities exchange are cleared and guaranteed by the OCC, thereby reducing the risk of counterparty default. Further, a liquid secondary market in options traded on a national securities exchange may be more readily available than in the over-the-counter market, potentially permitting the Fund to liquidate open positions at a profit prior to exercise or expiration, or to limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however, is subject to the risks of the availability of a liquid secondary market described above, as well as the risks regarding adverse market movements, margining of options written, the nature of the foreign currency market, possible intervention by governmental authorities and the effects of other political and economic events. In addition, exchange-traded options on foreign currencies involve certain risks not presented by the over-the-counter market. For example, exercise and settlement of such options must be made exclusively through the OCC, which has established banking relationships in applicable foreign countries for this purpose. As a result, the OCC may, if it determines that foreign governmental restrictions or taxes would prevent the orderly settlement of foreign currency option exercises, or would result in undue burdens on the OCC or its clearing member, impose special procedures on exercise and settlement, such as technical changes in the mechanics of delivery of currency, the fixing of dollar settlement prices or prohibitions on exercise.
In addition, options on securities, Futures Contracts, Options on Futures Contracts, Forward Contracts and options on foreign currencies may be traded on foreign exchanges. Such transactions are subject to the risk of governmental actions affecting trading in or the prices of foreign currencies or securities. The value of such positions also could be adversely affected by (i) other complex foreign, political and economic factors, (ii) lesser availability than in the United States of data on which to make trading decisions, (iii) delays in the Fund's ability to act upon economic events occuring in foreign markets during non-business hours in the United States, (iv) the imposition of different exercise and settlement terms and procedures and margin requirements than in the United States and (v) lesser trading volume.
As a result of its investments in foreign securities, the Fund may receive interest or dividend payments, or the proceeds of the sale or redemption of such securities, in foreign currencies. The Fund may also be required to receive delivery of the foreign currencies underlying options on foreign currencies or Forward Contracts it has entered into. This could occur, for example, if an option written by the Fund is exercised or the Fund is unable to close out a Forward Contract it has entered into. In addition, the Fund may elect to take delivery of such currencies. Under such circumstances, the Fund may promptly convert the foreign currencies into dollars at the then current exchange rate. Alternatively, the Fund may hold such currencies for an indefinite period of time if the Adviser believes that the exchange rate at the time of delivery is unfavorable or if, for any other reason, the Adviser anticipates favorable movements in such rates.
While the holding of currencies will permit the Fund to take advantage of favorable movements in the applicable exchange rate, it also exposes the Fund to risk of loss if such rates move in a direction adverse to a Fund's position. Such losses could also adversely affect the Fund's hedging strategies. Certain tax requirements may limit the extent to which the Fund will be able to hold currencies.
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements with sellers who are member firms (or a subsidiary thereof) of the New York Stock Exchange or members of the Federal Reserve System, recognized primary U.S. Government securities dealers or institutions which the Adviser has determined to be of comparable creditworthiness. The securities that the Fund purchases and holds through its agent are U.S. Government securities, the values of which are equal to or greater than the repurchase price agreed to be paid by the seller. The repurchase price may be higher than the purchase price, the difference being income to the Fund, or the purchase and repurchase prices may be the same, with interest at a standard rate due to the Fund together with the repurchase price on repurchase. In either case, the income to the Fund is unrelated to the interest rate on the U.S. Government securities.
The repurchase agreement provides that in the event the seller fails to pay the price agreed upon on the agreed upon delivery date or upon demand, as the case may be, the Fund will have the right to liquidate the securities. If at the time the Fund is contractually entitled to exercise its right to liquidate the securities the seller is subject to a proceeding under the bankruptcy laws or its assets are otherwise subject to a stay order, the Fund's exercise of its right to liquidate the securities may be delayed and result in certain losses and costs to the Fund. The Fund has adopted and follows procedures which are intended to minimize the risks of repurchase agreements. For example, the Fund only enters into repurchase agreements after the Adviser has determined that the seller is creditworthy, and the Adviser monitors that seller's creditworthiness on an ongoing basis. Moreover, under such agreements, the value of the securities (which are marked to market every business day) is required to be greater than the repurchase price, and the Fund has the right to make margin calls at any time if the value of the securities falls below the agreed upon margin.
LENDING OF PORTFOLIO SECURITIES: The Fund may seek to increase its income by lending portfolio securities. Such loans will usually be made only to member firms of the New York Stock Exchange (and subsidiaries thereof) and member banks of the Federal Reserve System, and would be required to be secured continuously by collateral in cash, cash equivalents 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 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 days). For the duration of a loan, the Fund would continue to receive the equivalent of the interest or dividends paid by the issuer on the securities loaned and would also receive compensation from the investment of the collateral. The Fund would not, however, have the right to vote any securities having voting rights during the existence of the loan, but 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 would not exceed 30% of the value of the Fund's total assets.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: As described in the Prospectus, the Fund may enter into mortgage "dollar roll" transactions. During the roll period, the Fund foregoes principal and interest paid on the mortgage-backed securities. The Fund is compensated for the lost interest by the difference between the current sales price and the lower price for the future purchase (often referred to as the "drop") as well as by the interest earned on the cash proceeds of the initial sale. The Fund may also be compensated by receipt of a commitment fee.
CORPORATE ASSET-BACKED SECURITIES: The Fund may invest in corporate asset- backed securities. These securities, issued by trusts and special purpose corporations, are backed by a pool of assets, such as credit card and automobile loan receivables, representing the obligations of a number of different parties.
Corporate asset-backed securities present certain risks. For instance, in the case of credit card receivables, these securities may not have the benefit of any security interest in the related collateral. Credit card receivables are generally unsecured and the debtors are entitled to the protection of a number of state and federal consumer credit laws, many of which give such debtors the right to set off certain amounts owed on the credit cards, thereby reducing the balance due. Most issuers of automobile receivables permit the servicers to retain possession of the underlying obligations. If the servicer were to sell these obligations to another party, there is a risk that the purchaser would acquire an interest superior to that of the holders of the related automobile receivables. In addition, because of the large number of vehicles involved in a typical issuance and technical requirements under state laws, the trustee for the holders of the automobile receivables may not have a proper security interest in all of the obligations backing such receivables. Therefore, there is the possibility that recoveries on repossessed collateral may not, in some cases, be available to support payments on these securities.
Corporate asset-backed securities are often backed by a pool of assets representing the obligations of a number of different parties. To lessen the effect of failures by obligors to make payments on underlying assets, the securities may contain elements of credit support which fall into two categories: (i) liquidity protection and (ii) protection against losses resulting from ultimate default by an obligor on the underlying assets. Liquidity protection refers to the provision of advances, generally by the entity administering the pool of assets, to ensure that the receipt of payments on the underlying pool occurs in a timely fashion. Protection against losses resulting from ultimate default ensures payment through insurance policies or letters of credit obtained by the issuer or sponsor from third parties. The Fund will not pay any additional or separate fees for credit support. The degree of credit support provided for each issue is generally based on historical information respecting the level of credit risk associated with the underlying assets. Delinquency or loss in excess of that anticipated or failure of the credit support could adversely affect the return on an instrument in such a security.
PORTFOLIO TRADING: The portfolio of the Fund will be fully managed by buying and selling securities, as well as by holding selected securities to maturity. The Fund will seek to maximize the return on its portfolio by taking advantage of market developments, yield disparities and variations in the creditworthiness of issuers. The portfolio management of the Fund may include use of the following strategies:
(1) varying the maturity mix or quality profile of its portfolio as warranted by overall market expectations;
(2) selling one type of debt security (e.g., industrial bonds) and buying another (e.g., utility bonds) when disparities arise in their relative values and prospects;
(3) changing from one debt security to a similar debt security when their respective yields are distorted due to market factors; and
(4) changing from one debt security to a similar debt security based upon credit analysis and fundamental research.
These strategies may result in increases or decreases in the current income of the Fund available for distribution to its shareholders and in its holdings of debt securities which sell at moderate to substantial premiums or discounts from face value. If the Fund's expectations of changes in interest rates or its evaluation of the normal yield relationship between two securities proves to be incorrect, the income, net asset value and potential capital gain may be reduced or its potential capital loss may be increased.
The Fund will engage in portfolio trading if it believes a transaction net of costs (including custodian charges) will help in attaining its investment objective. See "Portfolio Transactions and Brokerage Commissions."
To be eligible to be taxed under the provisions of the Internal Revenue Code applicable to regulated investment companies, the Fund must, among other things, limit its short-term trading so that less than 30% of its gross income is derived from gains realized on the sale or other disposition of securities held for less than three months. For this purpose, gross income includes all dividend and interest income and gross realized capital gains, both short and long-term, without offset for realized capital losses.
The investment objective and policies described above may be changed without shareholder approval.
INVESTMENT RESTRICTIONS. The Fund has adopted the following restrictions which cannot be changed without the approval of the holders of a majority of its shares (which, as used in this Statement of Additional Information, means the lesser of (i) more than 50% of the outstanding shares of the Trust (or a series or class, as applicable), or (ii) 67% or more of the outstanding shares of the Trust (or a series or class, as applicable) present at a meeting if holders of more than 50% of the outstanding shares of the Trust (or a series or class, as applicable) are represented in person or by proxy).
The Fund may not:
(1) Borrow amounts in excess of 10% of its gross assets, and then only as a temporary measure for extraordinary or emergency purposes, or pledge, mortgage or hypothecate its assets taken at market value to an extent greater than 15% of its gross assets, in each case taken at the lower of cost or market value and subject to a 300% asset coverage requirement (for the purpose of this restriction, collateral arrangements with respect to options on fixed income securities, Futures Contracts, Options on Futures Contracts, Forward Contracts and options on foreign currencies and payments of initial and variation margin in connection therewith are not considered a pledge of assets).
(2) Underwrite securities issued by other persons except insofar as the Fund may technically be deemed an underwriter under the Securities Act of 1933 in selling a portfolio security.
(3) Invest more than 25% of the market value of its total assets in securities of issuers in any one industry, except that up to 40% of the Fund's total assets, taken at market value, may be invested in each of the electric utility and telephone industries.
(4) Purchase or sell real estate (including limited partnership interests but excluding securities secured by real estate or interests therein), interests in oil, gas or mineral leases, commodities or commodity contracts (except Futures Contracts, Options on Futures Contracts, Forward Contracts and options on foreign currencies) in the ordinary course of the business of the Fund. The Fund reserves the freedom of action to hold and to sell real estate acquired as a result of the ownership of securities.
(5) Make loans to other persons except through the lending of its portfolio securities in accordance with, and to the extent permitted by, its investment objective and policies and except through repurchase agreements. Not more than 10% of the Fund's assets will be invested in repurchase agreements maturing in more than seven days. For these purposes the purchase of commercial paper or of all or a portion of a private or public issue of debt securities shall not be considered the making of a loan.
(6) Purchase the securities of any issuer if such purchase, at the time thereof, would cause more than 5% of the total assets of the Fund taken at market value to be invested in the securities of such issuer, other than securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities, and provided further that up to 25% of the total assets of the Fund may be invested in securities issued or guaranteed by any foreign government, its agencies or instrumentalities.
(7) Purchase voting securities of any issuer if such purchase, at the time thereof, would cause more than 10% of the outstanding voting securities of such issuer to be held by the Fund; or purchase securities of any issuer if such purchase at the time thereof would cause more than 10% of any class of securities of such issuer to be held by the Fund. For this purpose all indebtedness of an issuer shall be deemed a single class and all preferred stock of an issuer shall be deemed a single class.
(8) Invest for the purpose of exercising control or management.
(9) Purchase securities issued by any registered investment company except by purchase in the open market where no commission or profit to a sponsor or dealer results from such purchase other than the customary broker's commission, or except when such purchase, though not made in the open market, is part of a plan of merger or consolidation; provided, however, that the Fund shall not purchase the securities of any registered investment companies if such purchase at the time thereof would cause more than 10% of the Fund's total assets, taken at market value, to be invested in the securities of such issuers; and provided, further, that the Fund shall not purchase securities issued by any open-end investment company.
(10) Invest more than 5% of its assets in companies which, including predecessors, have a record of less than three years' continuous operation.
(11) Purchase or retain in its portfolio any securities issued by an issuer any of whose officers, directors, trustees or security holders is an officer or Trustee of the Fund, or is a partner, officer, director or trustee of the investment adviser of the Fund, if after the purchase of the securities of such issuer by the Fund one or more of such persons owns beneficially more than 1/2 of 1% of the shares or securities, or both, all taken at market value, of such issuer, and such persons owning more than 1/2 of 1% of such shares or securities together own beneficially more than 5% of such shares or securities, or both, all taken at market value.
(12) Purchase any securities or evidences of interest therein on margin except to make deposits on margin in connection with options on fixed income securities, Futures Contracts, Options on Futures Contracts, Forward Contracts and options on foreign currencies, and, except that the Fund may obtain such short-term credit as may be necessary for the clearance of purchases and sales of securities and provided that this shall not prevent the purchase, ownership, holding or sale of contracts for the future acquisition or delivery of fixed income securities.
(13) Sell any security which the Fund does not own unless by virtue of its ownership of other securities it has at the time of sale a right to obtain securities without payment of further consideration equivalent in kind and amount to the securities sold and provided that if such right is conditional the sale is made upon the same conditions.
(14) Purchase or sell any put or call options or any combination thereof, provided that this shall not prevent the purchase, ownership, holding or sale of warrants where the grantor of the warrants is the issuer of the underlying securities or the writing, purchasing and selling of puts, calls or combinations thereof with respect to securities, Futures Contracts and foreign currencies.
As a matter of non-fundamental policy, the Fund may not invest in securities (other than repurchase agreements) which are restricted as to disposition under the federal securities laws (unless the Board of Trustees has determined that such securities are liquid based upon trading markets for the specific security), if more than 15% of the Fund's assets would be invested in such securities.
These investment restrictions are adhered to at the time of purchase or utilization of assets; a subsequent change in circumstances will not be considered to result in a violation of policy.
3. MANAGEMENT OF THE FUND
The Board of Trustees provides broad supervision over the affairs of the Fund. The Adviser is responsible for the investment management, and the officers of the Fund are responsible for its operations. The Fund's Trustees and officers are listed below, together with their principal occupations during the past five years. (Their titles may have varied during that period.)
TRUSTEES
A. KEITH BRODKIN,* Chairman and President
Massachusetts Financial Services Company, Chairman
RICHARD B. BAILEY*
Private investor; Massachusetts Financial Services Company, former Chairman
(until September 30, 1991)
PETER G. HARWOOD
Private Investor
Address: 211 Lindsay Pond Road, Concord, Massachusetts
J. ATWOOD IVES
Eastern Enterprises (diversified holding company), Chairman and Chief Executive
Officer (since December 1991); General Cinema Corporation, Vice Chairman and
Chief Financial Officer (until December 1991); The Neiman Marcus Group, Inc.,
Vice Chairman and Chief Financial Officer (from August 1987 to December 1991)
United States Filter Corporation, Director
Address: 9 Riverside Road, Weston, Massachusetts
LAWRENCE T. PERERA
Hemenway & Barnes (attorneys), Partner
Address: 60 State Street, Boston, Massachusetts
WILLIAM J. POORVU
Harvard University Graduate School of Business Administration, Adjunct
Professor; CBL & Associates Properties, Inc. (a real estate investment trust),
Director; The Baupost Fund (a registered investment company), Vice Chairman
(since November 1993), Chairman and Trustee (from June 1990 until November
1993)
Address: Harvard Business School, Soldiers Field Road, Cambridge,
Massachusetts
CHARLES W. SCHMIDT
Private investor; Raytheon Company (diversified electronics manufacturer),
Senior Vice President and Group Executive (until December 1990); OHM
Corporation, Director; The Boston Company, Director; Boston Safe Deposit and
Trust Company, Director
Address: 30 Colpitts Road, Weston, Massachusetts
ARNOLD D. SCOTT*
Massachusetts Financial Services Company, Senior Executive Vice President and
Secretary
JEFFREY L. SHAMES*
Massachusetts Financial Services Company, President
ELAINE R. SMITH
Independent Consultant; Brigham and Women's Hospital, Executive Vice President
and Chief Operating Officer (from August 1990 to September 1992); Ernst &
Young (accountants), Consultant (from February to July 1990)
Address: Weston, Massachusetts
DAVID B. STONE
North American Management Corp. (investment advisers), Chairman
Address: 10 Post Office Square, Suite 300, Boston, Massachusetts
OFFICERS
JOAN S. BATCHELDER,* Vice President
Massachusetts Financial Services Company, Senior Vice President
CYNTHIA M. BROWN,* Vice President
Massachusetts Financial Services Company, Senior Vice President
MATTHEW N. FONTAINE,* Vice President
Massachusetts Financial Services Company, Assistant Vice President
ROBERT J. MANNING,* Vice President
Massachusetts Financial Services Company, Senior Vice President
BERNARD SCOZZAFAVA,* Vice President
Massachusetts Financial Services Company, Vice President
JAMES T. SWANSON,* Vice President
Massachusetts Financial Services Company, Senior Vice President
STEPHEN E. CAVAN,* Secretary and Clerk
Massachusetts Financial Services Company, Senior Vice President, General
Counsel and Assistant Secretary
JAMES R. BORDEWICK, JR.,* Assistant Secretary Massachusetts Financial Services Company, Vice President and Associate General Counsel (since September 1990); associated with major law firm (prior to August 1990)
W. THOMAS LONDON,* Treasurer
Massachusetts Financial Services Company, Senior Vice President
Each Trustee and officer holds comparable positions with certain MFS affiliates or with certain other funds of which MFS or a wholly owned subsidiary is the investment adviser or distributor. Mr. Brodkin, the Chairman of MFD, Messrs. Shames and Scott, Directors of MFD and Mr. Cavan, the Secretary of MFD, hold similar positions with certain other MFS affiliates. Mr. Bailey is a Director of Sun Life Assurance Company of Canada (U.S.) ("Sun Life of Canada (U.S.)"), the corporate parent of MFS.
The Fund pays the compensation of non-interested Trustees (who currently receive a fee of $2,500 per year plus $235 per meeting and committee meeting attended together with such Trustees' out-of-pocket expenses) and the Trust has adopted a retirement plan for non-interested Trustees and Mr. Bailey. Under this plan, a Trustee will retire upon reaching age 73 and if the Trustee has completed at least 5 years of service, he would be entitled to annual payments during his lifetime of up to 50% of such Trustee's average annual compensation (based on the three years prior to his retirement) depending on his length of service. A Trustee may also retire prior to age 73 and receive reduced payments if he has completed at least 5 years of service. Under the plan, a Trustee (or his beneficiaries) will also receive benefits for a period of time in the event the Trustee is disabled or dies. These benefits will also be based on the Trustee's average annual compensation and length of service. There is no retirement plan provided by the Trust for the interested Trustees (except Mr. Bailey). The Fund will accrue its allocable share of compensation expenses each year to cover current year's service and amortize past service cost.
Set forth in Appendix A hereto is certain information concerning the cash compensation paid to non-interested Trustees and Mr. Bailey and benefits accrued, and estimated benefits payable, under the retirement plan.
As of May 1, 1995, all Trustees and officers as a group owned less than 1% of shares outstanding on that date. As of May 1, 1995, Nationwide Life Insurance Company, P.O. Box 182029, Columbus, OH, was the record owner of approximately 6.35% of the outstanding shares of Class A shares of the Fund. As of May 1, 1995, Merrill Lynch, Pierce, Fenner & Smith, Inc., P.O. Box 45286, Jacksonville, FL, was the record owner of approximately 5.61% of the outstanding Class B shares of the Fund. As of May 1, 1995, Firstar Trust Co., P.O. Box 2973, Milwaukee, WI was the record owner of approximately 13.07% of the outstanding Class C shares of the Fund. As of May 1, 1995, Merrill Lynch, Pierce, Fenner & Smith, P.O. Box 45286, Jacksonville, FL, was the record owner of approximately 11.75% of the outstanding Class C shares of the Fund.
The Declaration of Trust provides that the Trust will indemnify its Trustees and officers against liabilities and expenses incurred in connection with litigation in which they may be involved because of their offices with the Trust, unless, as to liabilities to the Trust or its shareholders, it is finally adjudicated that they engaged in willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in their offices, or with respect to any matter, unless it is adjudicated that they did not act in good faith in the reasonable belief that their actions were in the best interest of the Trust. In the case of settlement, such indemnification will not be provided unless it has been determined pursuant to the Declaration of Trust that such officers or Trustees have not engaged in willful misfeasance, bad faith, gross negligence or reckless disregard of their duties.
INVESTMENT ADVISER
MFS and its predecessor organizations have a history of money management dating
from 1924. MFS is a wholly owned subsidiary of Sun Life of Canada (U.S.), which
in turn is a wholly owned subsidiary of Sun Life Assurance Company of Canada
("Sun Life").
The Adviser manages the Fund pursuant to an Investment Advisory Agreement, dated May 20, 1987 (the "Advisory Agreement"). The Adviser provides the Fund with overall investment advisory and administrative services, as well as general office facilities. Subject to such policies as the Trustees may determine, the Adviser makes investment decisions for the Fund.
For these services and facilities, under the Advisory Agreement, the Adviser receives a management fee computed and paid monthly, on the basis of a formula based upon a percentage of the average daily net assets of the Fund plus a percentage of the gross income (i.e., income other than gains from the sale of securities) of the Fund, in each case on an annualized basis for the then-current fiscal year. The applicable percentages are reduced as assets and income reach the following levels:
ANNUAL RATE OF MANAGEMENT FEE ANNUAL RATE OF MANAGEMENT FEE BASED ON AVERAGE DAILY NET ASSETS BASED ON GROSS INCOME - ----------------------------------- ------------------------------- 0.220% of the first $200 million 3.00% of the first $22 million 0.187% of average daily net assets 2.55% of gross income in excess in excess of $200 million of $22 million |
For the fiscal years ended January 31, 1993, 1994 and 1995, MFS received management fees under the Advisory Agreement of $2,854,750, $3,284,878 and $3,756,072, respectively.
In order to comply with the expense limitations of certain state securities commissions, the Adviser will reduce its management fee or otherwise reimburse the Fund for any expense, exclusive of interest, taxes and brokerage commissions, incurred by the Fund in any fiscal year to the extent such expenses exceed the most restrictive of such state expense limitations. The Adviser will make appropriate adjustments to such reimbursements in response to any amendment or recission of the various state requirements. Any such adjustment would not become effective until the beginning of the Fund's next fiscal year following the date of such amendments or the date on which such requirements become no longer applicable.
The Fund pays all of its expenses (other than those assumed by MFS or MFD) including: Trustee fees (discussed above); governmental fees; interest charges; taxes; membership dues in the Investment Company Institute allocable to the Fund; fees and expenses of independent auditors, of legal counsel, and of any transfer agent, registrar and dividend disbursing agent of the Fund; expenses of repurchasing and redeeming shares; expenses of preparing, printing and mailing share certificates, shareholder reports, notices, proxy statements and reports to governmental officers and commissions; brokerage and other expenses connected with the execution, recording and settlement of portfolio security transactions; insurance premiums; fees and expenses of the Fund's custodian, for all services to the Fund, including safekeeping of funds and securities and maintaining required books and accounts; expenses of calculating the net asset value of shares of the Fund; and expenses of shareholder meetings. Expenses relating to the issuance, registration and qualification of shares of the Fund and the preparation, printing and mailing of prospectuses for such purposes are borne by the Fund except that its Distribution Agreement with MFD, the Fund's Distributor, requires MFD to pay for prospectuses that are to be used for sales purposes. Expenses of the Trust which are not attributable to a specific series are allocated among the series in a manner believed by management of the Trust to be fair and equitable. For a list of the Fund's expenses, including the compensation paid to the Trustees who are not officers of MFS, during the fiscal year ended January 31, 1995, see "Statement of Operations" in the Fund's Annual Report to shareholders incorporated by reference into this Statement of Additional Information.
MFS pays the compensation of the Trust's officers and of any Trustee who is an officer of MFS. The Adviser also furnishes at its own expense all necessary administrative services, including office space, equipment, clerical personnel, investment advisory facilities, and all executive and supervisory personnel necessary for managing the investments of the Fund, effecting the portfolio transactions of the Fund, and, in general, administering the affairs of the Fund.
The Advisory Agreement will remain in effect until August 1, 1995 and will continue in effect thereafter only if such continuance is specifically approved at least annually by the Board of Trustees or by vote of a majority of the Fund's outstanding shares (as defined under "Investment Restrictions") and, in either case, by a majority of the Trustees who are not parties to the Advisory Agreement or interested persons of any such party. The Advisory Agreement terminates automatically if it is assigned and may be terminated without penalty by vote of a majority of the shares of the Fund (as defined in "Investment Restrictions") or by either party to the Agreement on not more than 60 days' nor less than 30 days' written notice. If MFS ceases to serve as the Adviser to the Fund, the Fund will change its name so as to delete the term "MFS". The Advisory Agreement provides that the Adviser may render services to others and may permit clients in addition to the Fund to use the term "MFS" in their names. The Advisory Agreement further provides that neither the Adviser nor its personnel shall be liable for any error of judgment or mistake of law or for any loss arising out of any investment or for any act or omission in the execution and management of the Fund, except for willful misfeasance, bad faith or gross negligence in the performance of its or their duties or by reason of reckless disregard of its or their obligations and duties under the Advisory Agreement.
CUSTODIAN
State Street Bank and Trust Company (the "Custodian") is the custodian of the
Fund's assets. The Custodian's responsibilities include safekeeping and
controlling the Fund's cash and securities, handling the receipt and delivery of
securities, determining income and collecting interest and dividends on the
Fund's investments, maintaining books of original entry for portfolio and fund
accounting and other required books and accounts, and calculating the daily net
asset value of each class of shares of the Fund. The Custodian does not
determine the investment policies of the Fund or decide which securities the
Fund will buy or sell. The Fund may, however, invest in securities of the
Custodian and may deal with the Custodian as principal in securities
transactions. The Trustees have reviewed and approved as in the best interests
of the Fund and its shareholders the custodial arrangements with The Chase
Manhattan Bank, N.A. for securities of the Fund held outside the United States.
The Custodian also acts as the dividend disbursing agent for the Fund. The
Custodian has contracted with the Adviser for the Adviser to perform certain
accounting functions related to options transactions for which the Adviser
receives remuneration on a cost basis.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (the "Shareholder Servicing Agent"), a wholly owned
subsidiary of MFS, is the Fund's shareholder servicing agent, pursuant to a
Shareholder Servicing Agent Agreement, effective August 1, 1985 (the "Agency
Agreement") with the Trust. The Shareholder Servicing Agent's responsibilities
under the Agency Agreement include administering and performing transfer agent
functions and the keeping of records in connection with the issuance, transfer
and redemption of each class of shares of the Fund. For these services, the
Shareholder Servicing Agent will receive a fee based on the net assets of each
class of shares of the Fund, computed and paid monthly. In addition, the
Shareholder Servicing Agent will be reimbursed by the Fund for certain expenses
incurred by the Shareholder Servicing Agent on behalf of the Fund. For the
fiscal year ended January 31, 1995, the Fund paid the Shareholder Servicing
Agent $1,445,125 under the Agency Agreement. State Street Bank and Trust
Company, the dividend and distribution disbursing agent of the Fund, has
contracted with the Shareholder Servicing Agent to administer and perform
certain dividend and distribution disbursing functions for the Fund.
DISTRIBUTOR
MFD, a wholly owned subsidiary of MFS, serves as distributor for the continuous
offering of shares of the Fund pursuant to a Distribution Agreement, dated
January 1, 1995 (the "Distribution Agreement"). Prior to January 1, 1995, MFS
Financial Services, Inc. ("FSI"), another wholly owned subsidiary of MFS, was
the Fund's distributor. Where this SAI refers to MFD in relation to the receipt
or payment of money with respect to a period or periods prior to January 1,
1995, such reference shall be deemed to include FSI, as the predecessor in
interest to MFD.
CLASS A SHARES: MFD acts as agent in selling Class A shares of the Fund to dealers. The public offering price of Class A shares of the Fund is their net asset value next computed after the sale plus a sales charge which varies based upon the quantity purchased. The public offering price of a Class A share of the Fund is calculated by dividing net asset value of a Class A share by the difference (expressed as a decimal) between 100% and the sales charge percentage of offering price applicable to the purchase (see "Purchases" in the Prospectus). The sales charge scale set forth in the Prospectus applies to purchases of Class A shares of the Fund alone or in combination with shares of all classes of certain other funds in the MFS Family of Funds (the "MFS Funds") and other funds (as noted under Right of Accumulation) by any person, including members of a family unit (e.g., husband, wife and minor children) and bona fide trustees, and also applies to purchases made under the Right of Accumulation or a Letter of Intent (see "Investment and Withdrawal Programs" in this Statement of Additional Information). A group might qualify to obtain quantity sales charge discounts (see "Investment and Withdrawal Programs" in this SAI).
Class A shares of the Fund may be sold at their net asset value to certain persons and in certain instances as described in the Prospectus. Such sales are made without a sales charge to promote good will with employees and others with whom MFS, MFD and/or the Fund have business relationships, and because the sales effort, if any, involved in making such sales is negligible.
MFD allows discounts to dealers (which are alike for all dealers) from the applicable public offering price of the Class A shares. Dealer allowances expressed as a percentage of offering price for all offering prices are set forth in the Prospectus (see "Purchases" in the Prospectus). The difference between the total amount invested and the sum of (a) the net proceeds to the Fund and (b) the dealer commission is the commission paid to the distributor. Because of rounding in the computation of offering price, the portion of the sales charge paid to the distributor may vary and the total sales charge may be more or less than the sales charge calculated using the sales charge expressed as a percentage of offering price or as a percentage of the net amount invested as listed in the Prospectus. In the case of the maximum sales charge, the dealer retains 4% and MFS retains approximately 3/4 of 1% of the public offering price. MFD, on behalf of the 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 AND CLASS C SHARES: MFD acts as agent in selling Class B and Class C shares of the Fund to dealers. The public offering price of Class B and Class C shares is their net asset value next computed after the sale (see "Purchases" in the Prospectus).
GENERAL: Neither MFD nor dealers are permitted to delay placing orders to benefit themselves by a price change. On occasion, MFD may obtain brokers loans from various banks, including the custodian banks for the MFS Funds, to facilitate the settlement of sales of shares of the Fund to dealers. MFD may benefit from its temporary holding of funds paid to it by investment dealers for the purchase of Fund shares.
For the Fund's fiscal year ended January 31, 1995, MFD received sales charges of $105,333 and dealers received sales charges of $612,900 (as their concession on gross sales charges of $718,233) for selling Class A shares of the Fund; the Fund received $80,688,929 representing the aggregate net asset value of such shares. For the Fund's fiscal year ended January 31, 1994, MFD received sales charges of $160,262 and dealers received sales charges of $946,284 (as their concession on gross sales charges of $1,106,546) for selling Class A shares of the Fund; the Fund received $98,444,425 representing the aggregate net asset value of such shares. For the Fund's fiscal year ended January 31, 1993, MFD received sales charges of $192,913 and dealers received sales charges of $999,549 (as their concession on gross sales charges of $1,192,462) for selling Class A shares of the Fund; the Fund received $93,122,736 representing the aggregate net asset value of such shares.
For the Fund's fiscal year ended January 31, 1995, the CDSC imposed on redemption of Class A shares was $303.
For the Fund's fiscal year ended January 31, 1995 and for the period September 7, 1993 through January 31, 1994, the CDSC imposed on redemption of Class B shares was $578,443 and $322,272, respectively.
The Distribution Agreement will remain in effect until August 1, 1996, and will continue in effect thereafter only if such continuance is specifically approved at least annually by the Board of Trustees or by vote of a majority of the Trust's shares (as defined in "Investment Restrictions") and, in either case, by a majority of the Trustees who are not parties to the Distribution Agreement or interested persons of any such party. The Distribution Agreement terminates automatically if it is assigned and may be terminated without penalty by either party on not more than 60 days' nor less than 30 days' notice.
4. PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are made by a portfolio manager who is an employee of the Adviser. Changes in the investments of the Fund are reviewed by the Board of Trustees. The Fund's portfolio manager may serve other clients of the Adviser or any subsidiary of the Adviser in a similar capacity.
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 which, and the broker-dealers through which, it seeks this result. 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. 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 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. From time to time soliciting dealer fees may be available to the Adviser on the tender of the Fund's portfolio securities in so-called tender or exchange offers. Such soliciting dealer fees will be in effect recaptured by the Fund to the extent possible. At present no other recapture arrangements are in effect.
Consistent with the foregoing primary consideration, the Rules of Fair Practice of the National Association of Securities Dealers, Inc. (the "NASD"), and such other policies as the Trustees may determine, the Adviser may consider sales of shares of the Fund and of the other investment company clients of MFD as a factor in the selection of broker-dealers to execute the Fund's portfolio transactions.
During the fiscal years ended January 31, 1993, 1994 and 1995, the Fund paid total brokerage commissions (which term includes underwriters' concessions on new issues of fixed income securities) of $41,069.00, $38,422 and $14,184, respectively.
In certain instances there may be securities which are suitable for the Fund's portfolio as well as for that of one or more of the other clients of the Adviser or any subsidiary of the Adviser. Investment decisions for the Fund and for such other clients are made with a view to achieving their respective investment objectives. It may develop that a particular security is bought or sold for only one client even though it might be held by, or bought or sold for, other clients. Likewise, a particular security may be bought for one or more clients when one or more other clients are selling that same security. Some simultaneous transactions are inevitable when several clients receive investment advice from the same investment adviser, particularly when the same security is suitable for the investment objectives of more than one client. When two or more clients are simultaneously engaged in the purchase or sale of the same security, the securities are allocated among clients in a manner believed to be equitable to each. It is recognized that in some cases this system could have a detrimental effect on the price or volume of the security as far as the Fund is concerned. In other cases, however, the Fund believes that its ability to participate in volume transactions will produce better executions for the Fund.
5. SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS -- The Fund makes available the following programs designed to enable shareholders to add to their investment or withdraw from it with a minimum of paper work. These are described below and, in certain cases, in the Fund's prospectus. The programs involve no extra charge to shareholders (other than a sales charge in the case of certain Class A share purchases) and may be changed or discontinued at any time by a shareholder or the Fund.
LETTER OF INTENT: If a shareholder (other than a group purchaser described below) anticipates purchasing $100,000 or more of Class A shares of the Fund alone or in combination with shares of Class B or Class C of the Fund or any of the classes of other MFS Funds or MFS Fixed Fund within a 13-month period (or 36-month period for 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 of Intent. Neither income dividends nor capital gain distributions taken in additional shares will apply toward the completion of the Letter of Intent. Dividends and distributions of other MFS Funds automatically reinvested in shares of the Fund pursuant to the Distribution Investment Program will also not apply toward completion of the Letter of Intent.
Out of the shareholder's initial purchase (or subsequent purchases if necessary), 5% of the dollar amount specified in the Letter of Intent application shall be held in escrow by the Shareholder Servicing Agent in the form of shares registered in the shareholder's name. All income dividends and capital gain distributions on escrowed shares will be paid to the shareholder or to his order. When the minimum investment so specified is completed (either prior to or by the end of the 13-month 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 that shareholder's new investment, together with the current offering price value of all holdings of all classes of shares of that shareholder in the MFS Funds or MFS Fixed Fund reaches a discount level. (See "Purchases" in the Prospectus for the sales charges on quantity purchases.) For example, if a shareholder owns shares valued at $75,000 and purchases an additional $25,000 of Class A shares of the Fund, the sales charge for the $25,000 purchase would be at the rate of 4% (the rate applicable to single transactions of $100,000). A shareholder must provide the Shareholder Servicing Agent (or his investment dealer must provide MFD) with information to verify that the quantity sales charge discount is applicable at the time the investment is made.
DISTRIBUTION INVESTMENT PROGRAM: Distributions of net investment income and capital gains made by the Fund with respect to a particular class of shares may be automatically invested in shares of the same class of one of the other MFS Funds, if shares of the fund are available for sale. Such investments will be subject to additional purchase minimums. Distributions will be invested at net asset value (without a sales charge) and not subject to any CDSC. Distributions will be invested at the close of business on the payable date for the distribution. A shareholder considering the Distribution Investment Program should obtain and read the prospectus of the other fund and consider the differences in objectives and policies before making any investment.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder Servicing
Agent to send him (or anyone he designates) regular periodic payments, as
designated on the Account Application and based upon the value of his account.
Each payment under a Systematic Withdrawal Plan ("SWP") must be at least $100,
except in certain limited circumstances. The aggregate withdrawals of Class B
shares in any year pursuant to a SWP generally are limited to 10% of the value
of the account at the time of establishment of the SWP. SWP payments are drawn
from the proceeds of share redemptions (which would be a return of principal
and, if reflecting a gain, would be taxable). Redemptions of Class B shares will
be made in the following order: (i) to the extent necessary, any "Free Amount";
(ii) any "Reinvested Shares"; and (iii) to the extent necessary the "Direct
Purchase" subject to the lowest CDSC (as such terms are defined in "Contingent
Deferred Sales Charge" in the Prospectus). The CDSC will be waived in the case
of redemptions of Class B shares pursuant to a SWP but will not be waived in the
case of SWP redemptions of Class A shares. To the extent that redemptions for
such periodic withdrawals exceed dividend income reinvested in the account, such
redemptions will reduce and may eventually exhaust the number of shares in the
shareholder's account. All dividend and capital gain distributions for an
account with a SWP will be reinvested in additional full and fractional shares
of the Fund at the net asset value in effect at the close of business on the
record date for such distributions. To initiate this service, shares generally
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 by written instruction to the Shareholder
Servicing Agent may deposit into the account additional shares of the Fund,
change the payee or change the dollar amount of each payment. The Shareholder
Servicing Agent may charge the account for services rendered and expenses
incurred beyond those normally assumed by the Fund with respect to the
liquidation of shares. No charge is currently assessed against the account, but
one could be instituted by the Shareholder Servicing Agent on 60 days' notice in
writing to the shareholder in the event that the Fund ceases to assume the cost
of these services. The Fund may terminate any SWP for an account if the value of
the account falls below $5,000 as a result of share redemptions (other than as a
result of a SWP) or an exchange of shares of the Fund for shares of another MFS
Fund. Any SWP may be terminated at any time by either the shareholder or the
Fund.
INVEST BY MAIL: Additional investments of $50 or more may be made at any time by mailing a check payable to the Fund directly to the Shareholder Servicing Agent. The shareholder's account number and the name of his investment dealer must be included with each investment.
GROUP PURCHASES: A bona fide group and all its members may be treated as a single purchaser and, under the Right of Accumulation (but not a Letter of Intent,) obtain quantity sales charge discounts on the purchase of Class A shares if the group (1) gives its endorsement or authorization to the investment program so it may be used by the investment dealer to facilitate solicitation of the membership, thus effecting economies of sales effort; (2) has been in existence for at least six months and has a legitimate purpose other than to purchase mutual fund shares at a discount; (3) is not a group of individuals whose sole organizational nexus is as credit cardholders of a company, policyholders of an insurance company, customers of a bank or broker-dealer, clients of an investment adviser or other similar groups; and (4) agrees to provide certification of membership of those members investing money in the MFS Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least $5,000 in any MFS Fund may exchange their shares for the same class of shares of the other MFS Funds, if available for sale, under the Automatic Exchange Plan, a dollar cost averaging program. The Automatic Exchange Plan provides for automatic exchanges of funds from the share- holder's account in an MFS Fund for investment in the same class of shares of other MFS Funds selected by the shareholder. Under the Automatic Exchange Plan, exchanges of at least $50 each may be made to up to four different funds effective on the seventh day of each month or of every third month, depending whether monthly or quarterly exchanges are elected by the shareholder. If the seventh day of the month is not a business day, the transaction will be processed on the next business day. Generally, the initial exchange will occur after receipt and processing by the Shareholder Servicing Agent of an application in good order. Exchanges will continue to be made from a shareholder's account in any MFS Fund, as long as the balance of the account is sufficient to complete the exchanges. Additional payments made to a shareholder's account will extend the period that exchanges will continue to be made under the Automatic Exchange Plan. However, if additional payments are added to an account subject to the Automatic Exchange Plan shortly before 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, exchanged shares of MFS Money Market Fund and 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 the Fund and shareholders of the other MFS Funds (except MFS Money Market Fund, MFS Government Money Market Fund and holders of Class A shares of MFS Cash Reserve Fund in the case where the shares are acquired through direct purchase or reinvested dividends) who have redeemed their shares have a one-time right to reinvest the redemption proceeds in 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 with any CDSC paid are then redeemed within six years of the initial purchase or within 12-months of the initial purchase in the case of certain Class A shares, such 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 any 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 and unless otherwise noted in the Prospectus of any of the other MFS Funds, some or all of the shares in an account with the Fund for which payment has been received by the Fund (i.e., an established account), may be exchanged for shares of the same class of any of the other MFS Funds at net asset value (if shares of the fund are available for sale). In addition, Class C shares may be exchanged for shares of MFS Money Market Fund at net asset value. Exchanges will be made only after instructions in writing or by telephone (an "Exchange Request") for an established account are received by the Shareholder Servicing Agent.
Each Exchange Request must be in proper form (i.e., if in writing -- signed by the record owner(s) exactly as the shares are registered; if by telephone -- proper account identification is given by the dealer or shareholder of record), and each exchange must involve either shares having an aggregate value of at least $1,000 or all the shares in the account (except that the minimum is $50 for accounts of retirement plan participants whose sponsoring organizations subscribe to the MFS FUNDamental 401(k) Plan or another similar 401(k) recordkeeping system made available by the Shareholder Servicing Agent). Each exchange involves the redemption of the shares of the Fund to be exchanged and the purchase at the net asset value (i.e., without a sales charge) of the 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 of the requirements set forth above have been complied with at the time. However, payment of the redemption proceeds by the Fund, and thus purchase of shares of the other MFS Fund, may be delayed for up to seven days if the Fund determines that such a delay would be in the best interest of all its shareholders. Investment dealers which have satisfied criteria established by MFD may also communicate a shareholder's Exchange Request to MFD by facsimile subject to the requirements set forth above.
No CDSC is imposed on exchanges, although liability for the CDSC is carried forward to the exchanged shares. For purposes of calculating the CDSC upon redemption of shares acquired in an exchange, the purchase of shares acquired in one or more exchanges is deemed to have occurred at the time of the original purchase of the exchanged shares. Any gain or loss on the redemption of the shares exchanged is reportable in the shareholders federal income tax return, unless such shares were held in a tax-deferred retirement plan.
Additional information with respect to any of the MFS Funds, including a copy of its current prospectus, may be obtained from investment dealers or the Shareholder Servicing Agent. A shareholder should obtain and read the prospectus of the other MFS Fund and consider the differences in objectives and policies before making any exchange. Shareholders in the other MFS Funds (except holders of shares of MFS Money Market Fund, MFS Government Money Market Fund and Class A shares of MFS Cash Reserve Fund acquired through direct purchase and dividends reinvested prior to June 1, 1992) have the right to exchange their shares for shares of the Fund, subject to the conditions, if any, set forth in their respective prospectuses. In addition, unitholders of the MFS Fixed Fund have the right to exchange their units (except units acquired through direct purchases) for shares of the Fund, subject to the conditions, if any, imposed upon such unitholders by the MFS Fixed Fund.
Any state income tax advantages for investment in shares of each state- specific series of MFS Municipal Series Trust may only benefit residents of such states. Investors should consult with their own tax advisers to be sure this is an appropriate investment, based on their residency and each state's income tax laws.
The exchange privilege (or any aspect of it) may be changed or discon- tinued and is subject to certain limitations (see "Purchases" in the Prospectus).
TAX-DEFERRED RETIREMENT PLANS -- Except as noted below, shares of the Fund may be purchased by all types of tax-deferred retirement plans. MFD makes available through investment dealers plans and/or custody agreements for the following:
Individual Retirement Accounts (IRAs) (for individuals and their non- employed spouses who desire to make limited contributions to a tax-deferred retirement program and, if eligible, to receive a federal income tax deduction for amounts contributed);
Simplified Employee Pension (SEP-IRA) Plans;
Retirement Plans Qualified under Section 401(k) of the Internal Revenue Code of 1986, as amended;
403(b) Plans (deferred compensation arrangements for employees of public school systems and certain non-profit organizations); and
Certain other qualified pension and profit-sharing plans.
The plan documents and forms provided by MFD designate a trustee or custodian (unless another trustee or custodian is designated by the individual or group establishing the plan) and contain specific information about the plans. Each plan provides that dividends and distributions will be reinvested automatically. For further details with respect to any plan, including fees charged by the trustee, custodian or MFD, tax consequences and redemption information, see the specific documents for that plan. Plan documents other than those provided by MFD may be used to establish any of the plans described above. Third party administrative services, available for some corporate plans, may limit or delay the processing of transactions.
Investors should consult with their tax advisers before establishing any of the tax-deferred retirement plans described above.
Class C shares are not currently available for purchase by any retirement plan qualified under Internal Revenue Code section 401(a) or 403(b) if the retirement plan and/or the sponsoring organization subscribe to the MFS FUNDamental 401(k) Plan or another similar 401(a) or 403(b) recordkeeping program made available by the Shareholder Servicing Agent.
6. TAX STATUS
The Fund has elected to be treated and intends to qualify each year as a "regulated investment company" under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), by meeting all applicable requirements of Subchapter M, including requirements as to the nature of the Fund's gross income, the amount of Fund distributions, and the composition and holding period of the Fund's portfolio assets. Because the Fund intends to distribute all of its net investment income and net realized capital gains in accordance with the timing requirements imposed by the Code, it is expected that the Fund will not be required to pay any federal income or excise taxes, although the Fund's foreign-source income may be subject to foreign withholding taxes. If the Fund should fail to qualify as a "regulated investment company" in any year, the Fund would incur a regular corporate federal income tax upon its taxable income and Fund distributions would generally be taxable as ordinary dividend income to the shareholders. As long as it qualifies as a "regulated investment company" under the Code, the Fund will not be required to pay Massachusetts income or excise taxes.
Shareholders of the Fund normally will have to pay federal income taxes, and any state or local taxes, on the dividends and capital gain distributions they receive from the Fund. Dividends from ordinary income and distributions from net short-term capital gains, whether paid in cash or reinvested in additional shares, are taxable to the Fund's shareholders as ordinary income for federal income tax purposes. Because the Fund's income will consist primarily of interest, its distributions are not, for the most part, expected to be eligible for the dividends-received deduction for corporations. Availability of the deduction for particular shareholders is subject to certain limitations and deducted amounts may be subject to the alternative minimum tax or result in certain basis adjustments. Distributions from net capital gains (i.e., the excess of net long-term capital gains over net short-term capital losses), whether paid in cash or invested in additional shares, are taxable to shareholders as long-term capital gains for federal income tax purposes without regard to the length of time shareholders have owned their shares. Fund dividends declared in October, November or December to shareholders of record in such a month and paid the following January will be taxable to shareholders as if received on December 31 of the year in which the dividends are declared. The Fund will notify its shareholders regarding the tax status of its distributions.
Any Fund distribution of net capital gains or net short-term capital gains will have the effect of reducing the per share net asset value of shares in the Fund by the amount of the distribution. Shareholders purchasing shares shortly before the record date of any such distribution may thus pay the full price for the shares and then effectively receive a portion of the purchase price back as a taxable distribution.
In general, any gain or loss realized upon a taxable disposition of shares of the Fund by a shareholder that holds such shares as a capital asset will be treated as 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. However, any loss realized upon a redemption of shares in the Fund held for six months or less will be treated as a long-term capital loss to the extent of any distributions of net capital gain made with respect to those shares. Any loss realized upon a redemption of shares may also be disallowed under rules relating to wash sales. Gain may be increased (or loss reduced) upon a redemption of Class A shares of the Fund within ninety days after their purchase followed by any purchase (including purchases by exchange or by reinvestment) without payment of an additional sales charge of Class A shares of the Fund or of another MFS Fund (or any other shares of an MFS Fund generally sold subject to a sales charge).
The Fund's current dividend and accounting policies will affect the amount, timing, and character of distributions to shareholders and may, under certain circumstances, make an economic return of capital taxable to shareholders. Any investment in zero coupon securities, certain stripped securities, securities calling for deferred interest or payment of interest in-kind and certain securities purchased at a market discount will cause the Fund to recognize income prior to the receipt of cash payments with respect to these securities. In order to distribute this income and avoid a tax on the Fund, the Fund may be required to liquidate portfolio securities that it might otherwise have continued to hold, potentially resulting in additional taxable gain or loss to the Fund. 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 investors.
The Fund's transactions in options, Futures Contracts and Forward Contracts will be subject to special tax rules that may affect the amount, timing and character of distributions to shareholders. For example, certain positions held by the Fund on the last business day of each taxable year will be marked to market (i.e., treated as if closed out) on such day, and any gain or loss associated with such positions will be treated as 60% long-term and 40% short-term capital gain or loss. Certain positions held by the Fund that substantially diminish its risk of loss with respect to other positions in its portfolio may constitute "straddles," which are subject to special tax rules that may 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. The Fund will limit its activities in options, Futures Contracts, Forward Contracts, and swaps and related transactions to the extent necessary to meet the requirements of Subchapter M of the Code.
Special tax considerations apply with respect to foreign investments of the Fund. Foreign exchange gains and losses realized by the Fund will generally be treated as ordinary income and losses. The holding of foreign currencies and investment by the Fund in certain "passive foreign investment companies" may be limited in order to avoid imposition of a tax on the Fund.
Investment income received by the Fund from sources within foreign countries may be subject to foreign income taxes withheld at the source; the Fund does not expect to be able to pass through to shareholders foreign tax credits and deductions with respect to such foreign taxes. The United States has entered into tax treaties with many foreign countries that may entitle the Fund to a reduced rate of tax or an exemption from tax on such income; the Fund intends to operate so as to qualify for treaty reduced rates where available. It is not possible, however, to determine the Fund's effective rate of foreign tax in advance since the amount of the Fund's assets to be invested within various countries is not known.
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%. The Fund intends to withhold U.S. federal income tax at the rate of 30% on any dividends and other payments made to Non-U.S. Persons that are subject to such withholding, regardless of whether a lower rate may be permitted under an applicable treaty. Any amounts overwithheld may be recovered by such persons by filing a claim for refund with the U.S. Internal Revenue Service within the time period appropriate to such claims. Distributions received from the Fund by Non-U.S. Persons may also be subject to tax under the laws of their own jurisdiction. The Fund is also required in certain circumstances to apply backup withholding at a rate of 31% on taxable dividends and redemption proceeds paid to any shareholder (including a Non-U.S. Person) who does not furnish to the Fund certain information and certifications or who is otherwise subject to backup withholding. However, backup withholding will not be applied to payments which have been subject to 30% withholding.
Fund distributions that are derived from interest on obligations of the U.S. Government and certain of its agencies and instrumentalities (but generally not from capital gains realized upon the disposition of such obligations) may be exempt from state and local taxes. The Fund intends to advise shareholders of the portion of its dividends which 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.
7. 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 series and to divide or combine the shares of any series into a greater or lesser number of shares without thereby changing the proportionate beneficial interests in that series. The Trustees have currently authorized shares of the Fund and 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 three classes of shares of the Fund, Class A, Class B and Class C shares. Each share of a class of the Fund represents an equal proportionate interest in the assets of the Fund allocable to that class. Upon liquidation of the Fund, shareholders of each class are entitled to share pro rata in the net assets of the Fund attributable to that class available for distribution to shareholders. The Trust has reserved the right to create and issue additional series or classes of shares, in which case the shares of each class of a series would participate equally in the earnings, dividends and assets allocable to that class of the particular series.
Shareholders are entitled to one vote for each share held and may vote in the election of Trustees and on other matters submitted to meetings of shareholders. Although Trustees are not elected annually by the shareholders, shareholders have under certain circumstances the right to remove one or more Trustees in accordance with the provisions of section 16(c) of the 1940 Act. No material amendment may be made to the Declaration of Trust without the affirmative vote of a majority of the Trust shares (as defined in "Investment Restrictions"). Shares have no pre-emptive or conversion rights (except as described in "Purchases -- Conversion of Class B Shares" in the Prospectus). Shares are fully paid and non-assessable. The Fund may be terminated (i) upon the merger or consolidation of the Fund with another organization or upon the sale of all or substantially all its assets if approved by the vote of the holders of two-thirds of its outstanding shares, except that if the Trustees recommend such merger, consolidation or sale, the approval by vote of the holders of a majority of the Fund's outstanding shares will be sufficient or (ii) upon liquidation and distribution of its assets, if approved by the vote of the holders of two-thirds of its outstanding shares. If not so terminated, the Fund will continue indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts business trust". Under Massachusetts law, shareholders of such a trust may, under certain circumstances, be held personally liable as partners for its obligations. However, the Declaration of Trust contains an express disclaimer of shareholder liability for acts or obligations of the Trust and provides for indemnification and reimbursement of expenses out of Trust property for any shareholder held personally liable for the obligations of the Trust. The Declaration of Trust also provides that it shall maintain appropriate insurance (for example, fidelity bonding and errors and omissions insurance) for the protection of the Trust, its shareholders, Trustees, officers, employees and agents covering possible tort or other liabilities. Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which both inadequate insurance existed and the Trust itself was unable to meet its obligations.
The Declaration of Trust further provides that obligations of the Trust are not binding upon the Trustees individually but only upon the property of the Trust and that the Trustees will not be liable for any action or failure to act, but nothing in the Declaration of Trust protects a Trustee against any liability to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office.
8. DETERMINATION OF NET ASSET VALUE AND PERFORMANCE
NET ASSET VALUE -- The net asset value per share of each class of the Fund is determined each day during which the Exchange is open for trading. (As of the date of this SAI, the Exchange is open for trading every weekday except for the following holidays or days on which they are observed: New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.) This determination is made once each day as of the close of regular trading on the Exchange by deducting the amount of the liabilities attributable to 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. Debt securities (other than short-term obligations), including listed issues, 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 institution-size trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics and other market data, without exclusive reliance upon exchange or over-the-counter prices, since such valuations are believed to reflect more accurately the fair value of such securities. Use of the pricing service has been approved by the Fund's Board of Trustees. Positions in listed options, Futures Contracts and Options on Futures Contracts will normally be valued at the settlement price on the exchange on which they are traded. Short-term obligations with a remaining maturity in excess of 60 days will be valued based upon dealer-supplied valuations. Other short-term obligations are valued at amortized cost, which constitutes fair value as determined by the Board of Trustees. If acquired, preferred stocks, common stocks and warrants will be valued at the last sale price on an exchange or at the last quoted bid price for unlisted securities. Portfolio securities for which there are no such quotations or valuations are valued at fair value as determined in good faith by or at the direction of the Board of Trustees. A share's net asset value is effective for orders received by the dealer prior to its calculation and received by MFD prior to the close of that business day.
PERFORMANCE INFORMATION
TOTAL RATE OF RETURN: The Fund will calculate its total rate of return for each
class of shares for certain periods by determining the average annual compounded
rates of return over those periods that would cause an investment of $1,000
(made with all distributions reinvested and reflecting the CDSC or the maximum
offering price) to reach the value of that investment at the end of the periods.
The Fund may also calculate (i) a total rate of return, which is not reduced by
the CDSC (4% maximum for Class B shares and therefore may result in a higher
rate of return, (ii) a total rate of return assuming an initial account value of
$1,000, which will result in a higher rate of return since the value of the
initial account will not be reduced by the maximum sales charge (currently
4.75%), and/or (iii) total rates of return which represent aggregate performance
over a period or year-by-year performance, and which may or may not reflect the
effect of the maximum or other sales charge or CDSC. The Fund's average annual
total rate of return for Class A shares reflecting the initial investment at the
current maximum public offering price for the one-year, five-year and ten-year
periods ended January 31, 1995 was -8.45%, 11.28% and 9.06%, respectively. The
Fund's average annual total rate of return for Class A shares not giving effect
to the sales charge on the initial investment for the one-year, five-year and
ten-year periods ended January 31, 1995 was -3.95%, 12.36% and 9.59%,
respectively. The Fund's average annual total rate of return for Class B shares
reflecting the CDSC for the one-year period ended January 31, 1995 and the
period from September 7, 1993 through January 31, 1995 was -8.29% and -1.52%,
respectively. The Fund's average annual total rate of return for Class B shares,
not giving effect to the CDSC, for the one-year period ended January 31, 1995
and the period from September 7, 1993 through January 31, 1995 was -4.77% and
1.45%, respectively. The Fund's average annual total rate of return for Class C
shares for the one-year period ended January 31, 1995 and the period from
January 3, 1994 through January 31, 1995 was -4.51% and -2.22%, respectively.
PERFORMANCE RESULTS: The performance results below, based on an assumed initial investment of $10,000 in Class A shares, cover the period from January 1, 1985 to December 31, 1994. It has been assumed that dividends and capital gain distributions were reinvested in additional shares. These performance results, as well as any yield or total rate of return quotation provided by the Fund, should not be considered as representative of the performance of the Fund in the future since the net asset value and public offering price of shares of the Fund will vary based not only on the type, quality and maturities of the securities held in the portfolio of the Fund, but also on changes in the current value of such securities and on changes in the Fund's expenses. These factors and possible differences in the methods used to calculate yields and total rates of return should be considered when comparing the yield and total rate of return to yields and total rates of return published for other investment companies or other investment vehicles. Total rate of return reflects the performance of both principal and income. Current net asset value as well as account balance information may be obtained by calling 1-800-MFS-TALK (637-8255).
MFS HIGH INCOME FUND-A
VALUE OF
VALUE OF REINVESTED VALUE OF
YEAR ENDED INITIAL $10,000 CAPITAL GAIN REINVESTED TOTAL
DECEMBER 31 INVESTMENT DISTRIBUTIONS DIVIDENDS VALUE
- ----------- --------------- ------------- ---------- -------
1985 $10,270 $ 0 $ 1,497 $11,767
1986 9,843 162 3,048 13,053
1987 8,563 141 4,386 13,090
1988 8,435 245 6,029 14,709
1989 7,240 210 6,967 14,417
1990 5,120 148 6,737 12,005
1991 6,671 193 11,011 17,875
1992 7,012 203 13,706 20,921
1993 7,681 223 17,075 24,979
1994 6,856 199 17,268 24,323
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EXPLANATORY NOTES: The results assume that the initial investment in the Fund on January 1, 1985 has been reduced by the current applicable sales charge. No adjustment has been made for any income taxes payable by shareholders.
YIELD: Any yield quotation of a class of shares of the Fund is based on the annualized net investment income per share allocated to that class over a 30- day period. The yield for each class of the Fund is calculated by dividing the net investment income allocated to that class earned during the period by the maximum offering price per share of that class of the Fund on the last day of that period. The resulting figure is then annualized. Net investment income per share of a class is determined by dividing (i) the dividends and interest allocated to that class during the period, minus accrued expenses of that class for the period by (ii) the average number of shares of the class entitled to receive dividends during the period multiplied by the maximum offering price per share on the last day of the period. The Fund's yield calculations for Class A shares assume a maximum sales charge of 4.75%. The yield for Class A shares of the Fund for the 30-day period ended January 31, 1995, was 9.78%. The yield for Class A shares for the 30-day period ended January 31, 1995 would have been 9.68% excluding certain fee waivers in effect. The yield for Class B shares of the Fund for the 30-day period ended January 31, 1995 was 9.43% (which includes the effect of the CDSC). The yield for Class C shares of the Fund for the 30-day period ended January 31, 1995 was 9.50%.
CURRENT DISTRIBUTION RATE: Yield, which is calculated according to a formula prescribed by the Securities and Exchange Commission, is not indicative of the amounts which were or will be paid to the Fund's shareholders. Amounts paid to shareholders of each class are reflected in the quoted "current distribution rate" for that class. The current distribution rate for a class is computed by dividing the total amount of dividends per share paid by the Fund to shareholders of that class during the past twelve months by the maximum public offering price of that class at the end of such period. Under certain circumstances, such as when there has been a change in the amount of dividend payout, or a fundamental change in investment policies, it might be appropriate to annualize the dividends paid over the period such policies were in effect, rather than using the dividends during the past twelve months. The current distribution rate differs from the yield computation because it may include distributions to shareholders from sources other than dividends and interest, such as premium income for option writing, short-term capital gains and return of invested capital, and is calculated over a different period of time. The Fund's current distribution rate calculation for Class A shares assumes a maximum sales charge of 4.75%. The Fund's current distribution rate calculation for Class B shares assumes no CDSC is paid. The current distribution rates for Class A, Class B and Class C shares of the Fund for the twelve-month period ended on January 31, 1995 was 9.08%, 8.19% and 8.26%, respectively.
From time to time each Fund may, as appropriate, quote Fund rankings or reprint
all or a portion of evaluations of fund performance and operations appearing in
various independent publications, including but not limited to the following:
Money, Fortune, U.S. News and World Report, Kiplinger's Personal Finance, The
Wall Street Journal, Barron's, Investors Business Daily, Newsweek, Financial
World, Financial Planning, Investment Advisor, USA Today, Pensions and
Investments, SmartMoney, Forbes, Global Finance, Registered Representative,
Institutional Investor, the Investment Company Institute, Johnson's Charts,
Morningstar, Lipper Analytical Services, Inc., CDA Wiesenberger, Shearson Lehman
and Salomon Bros. Indices, Ibbotson, Business Week, Lowry Associates, Media
General, Investment Company Data, The New York Times, Your Money, Strangers
Investment Advisor, Financial Planning on Wall Street, Standard and Poor's,
Individual Investor, The 100 Best Mutual Funds You Can Buy, by Gordon K.
Williamson, Consumer Price Index, and Sanford C. Bernstein & Co. Fund
performance may also be compared to the performance of other mutual funds
tracked by financial or business publications or periodicals.
The Fund may also quote evaluations mentioned in independent radio or television broadcasts.
From time to time, the Fund may use charts and graphs to illustrate the past performance of various indices such as those mentioned above and illustrations using hypothetical rates of return to illustrate the effects of compounding and tax-deferral.
The Fund may advertise examples of the effects of periodic investment plans, including the principle of dollar cost averaging. In such a program, an investor invests a fixed dollar amount in a fund at periodic intervals, thereby purchasing fewer shares when prices are high and more shares when prices are low. While such a strategy does not assure a profit or guard against a loss in a declining market, the investor's average cost per share can be lower than if fixed numbers of shares are purchased at the same intervals.
MFS FIRSTS: MFS has a long history of innovations.
- -- 1924 -- Massachusetts Investors Trust is established as the first
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 cash.
- -- 1976 -- MFS 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 World Governments Fund is established as America's first
globally diversified fixed-income mutual fund.
- -- 1984 -- MFS Municipal High Income Fund is the first open-end mutual
fund to seek high tax-free income from lower-rated municipal
securities.
- -- 1986 -- MFS Managed Sectors Fund becomes the first mutual fund to
target and shift investments among industry sectors for shareholders.
- -- 1986 -- MFS Municipal Income Trust is the first closed- end,
high-yield municipal bond fund traded on the New York Stock Exchange.
- -- 1987 -- MFS Multimarket Income Trust is the first closed-end,
multimarket high income fund listed on the New York Stock Exchange.
- -- 1989 -- MFS Regatta becomes America's first non-qualified market-value
adjusted fixed/variable annuity.
- -- 1990 -- MFS World Total Return Fund is the first global balanced fund.
- -- 1993 -- MFS World Growth Fund is the first global emerging markets
fund to offer the expertise of two sub-advisers.
- -- 1993-- MFS becomes money manager of MFS Union Standard Trust, the
first Trust to invest in companies deemed to be union-friendly by an
Advisory Board of senior labor officials, senior managers of companies
with significant labor contracts, academics and other national labor
leaders or experts.
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9. DISTRIBUTION PLANS
The Trustees have adopted a Distribution Plan for each of Class A, Class B and Class C shares (the "Distribution Plans") pursuant to Section 12(b) of the 1940 Act and Rule 12b-1 thereunder (the "Rule") after having concluded that there is a reasonable likelihood that each Distribution Plan would benefit the Fund and the respective class of shareholders. The Distribution Plans are designed to promote sales, thereby increasing the net assets of the Fund. Such an increase may reduce the expense ratio to the extent the Fund's fixed costs are spread over a larger net asset base. Also, an increase in net assets may lessen the adverse effects that could result were the Fund required to liquidate portfolio securities to meet redemptions. There is, however, no assurance that the net assets of the Fund will increase or that the other benefits referred to above will be realized.
CLASS A DISTRIBUTION PLAN: The Class A Distribution Plan provides that the Fund will pay MFD up to (but not necessarily all of) an aggregate of 0.35% of the average daily net assets attributable to the Class A shares annually in order that MFD may pay expenses on behalf of the Fund related to the distribution and servicing of its Class A shares. The expenses to be paid by MFD on behalf of the Fund include a service fee to securities dealers which enter into a sales agreement with MFD of up to 0.25% per annum of the portion of the Fund's average daily net assets attributable to the Class A shares owned by investors for whom that securities dealer is the holder or dealer of record. These payments are partial consideration for personal services and/or account maintenance performed by such dealers with respect to Class A shares. MFD may from time to time reduce the amount of the service fee for shares sold prior to a certain date. Currently, the service fee is reduced to 0.15% for shares purchased prior to March 1, 1991. MFD may also retain a distribution fee of 0.10% of the Fund's average daily net assets attributable to Class A shares as partial consideration for services performed and expenses incurred in the performance of MFD's obligations as to Class A shares under the Distribution Agreement with the Fund. MFD, however, is currently waiving this 0.10% distribution fee and will not accept payment of this fee unless it first obtains the approval of the Board of Trustees. Any remaining funds may be used to pay for other distribution related expenses as described in the Prospectus. Service fees may be reduced for a securities dealer that is the holder or dealer of record for an investor who owns shares of the Fund having a net asset value at or above a certain dollar level. No service fee will be paid (i) to any securities dealer who is the holder or dealer of record for investors who own Class A shares having an aggregate net asset value less than $750,000, or such other amount as may be determined from time to time by MFD (MFD, however, may waive this minimum amount requirement from time to time if the dealer satisfies certain criteria), or (ii) to any insurance company which has entered into an agreement with the Fund and MFD that permits such insurance company to purchase shares from the Fund at their net asset value in connection with annuity agreements issued in connection with the insurance company's separate accounts. Dealers may from time to time be required to meet certain other criteria in order to receive service fees. MFD or its affiliates are entitled to retain all service fees payable under the Class A Distribution Plan for which there is no dealer of record or for which qualification standards have not been met as partial consideration for personal services and/or account maintenance services performed by MFD or its affiliates for shareholder accounts. Certain banks and other financial institutions that have agency agreements with MFD will receive agency transaction and service fees that are the same as commissions and service fees to dealers. During the fiscal year ended January 31, 1995 the Fund incurred and subsequently waived expenses of $531,614 (equal to .10% of its average daily net assets) relating to the distribution and servicing of its Class A shares and securities dealers of the Fund and certain banks and other financial institutions received $1,173,013 (.22% of its average daily net assets attributable to Class A shares) and MFD retained $284,649.
CLASS B DISTRIBUTION PLAN: The Class B Distribution Plan relating to Class B shares (the "Class B Distribution Plan") provides that the Fund shall pay MFD, as the Fund's distributor for its Class B shares, a daily distribution fee equal on an annual basis to 0.75% of the Fund's average daily net assets attributable to Class B shares and will pay MFD a service fee of up to 0.25% per annum of the Fund's average daily net assets attributable to Class B shares (which MFD will in turn pay to securities dealers which enter into a sales agreement with MFD and which are the holders of record of the Fund's Class B shares). This service fee is intended to be additional consideration for all personal services and/or account maintenance services rendered by the dealer with respect to Class B shares. MFD will advance to dealers the first-year service fee at a rate equal to 0.25% of the amount invested. As compensation therefor, MFD may retain the service fee paid by the Fund with respect to such shares for the first year after purchase. Dealers will become eligible for additional service fees with respect to such shares commencing in the thirteenth month following purchase. Except in the case of the first year service fee, no service fee will be paid to any securities dealer who is the holder or dealer of record for investors who own Class B shares having an aggregate net asset value of less than $750,000 or such other amount as may be determined from time to time. MFD, however, may waive this minimum amount requirement from time to time if the dealer satisfies certain criteria. Dealers may from time to time be required to meet certain other criteria in order to receive service fees. MFD or its affiliates shall be entitled to receive any service fee payable under the Class B Distribution Plan for which there is no dealer of record or for which qualification standards have not been met as partial consideration for personal services and/or account maintenance services performed by MFD or its affiliates to shareholder accounts.
The purpose of distribution payments to MFD under the Class B Distribution Plan is to compensate MFD for its distribution services to the Fund. MFD pays commissions to dealers as well as expenses of printing prospectuses and reports used for sales purposes, expenses with respect to the preparation and printing of sales literature and other distribution related expenses, including, without limitation, the cost necessary to provide distribution- related services, or personnel, travel office expenses and equipment. The Class B Distribution Plan also provides that MFD will receive all CDSCs attributable to Class B shares (see "Distribution Plan" and "Purchase of Shares" in the Prospectus).
During the fiscal year ended January 31, 1995, the Fund incurred expenses of $2,960,079 (equal to 1.0% of its average daily net assets) relating to the distribution and servicing of its Class B shares, of which MFD received $2,221,974 (.75% of its averge daily net assets attributable to Class B shares) and securities dealers of the Fund and certain banks and other financial institutions received $738,105 (.25% of its average daily net assets attributable to Class B shares).
CLASS C DISTRIBUTION PLAN: The Distribution Plan relating to Class C shares (the "Class C Distribution Plan") provides that the Fund will pay MFD a distribution fee of up to 0.75% per annum of the Fund's average daily net assets attributable to Class C shares and will pay MFD a service fee of up to 0.25% per annum of the Fund's average daily net assets attibutable to Class C shares (which MFD will in turn pay to securities dealers which enter into a sales agreement with MFD at a rate of up to 0.25% per annum of the Fund's daily net assets attributable to Class C shares owned by investors for whom that securities dealer is the holder or dealer of record).
The distribution/service fees attributable to Class C shares are designed to permit an investor to purchase such shares through a broker-dealer without the assessment of an initial sales charge or a CDSC while allowing MFD to compensate broker-dealers in connection with the sale of such shares.
The service fee is intended to be additional consideration for all personal services and/or account maintenance services rendered by the dealer with respect to Class C shares. MFD or its affiliates are entitled to retain all service fees payable under the Class C Distribution Plan with respect to accounts for which there is no dealer of record as partial consideration for personal services and/or account maintenance services performed by MFD or its affiliates for shareholder accounts.
The purpose of the distribution payments to MFD under the Class C Distribution Plan is to compensate MFD for its distribution services to the Fund. Distribution payments under the Plan will be used by MFD to pay securities dealers a distribution fee in an amount equal on an annual basis to 0.75% of the Fund's average daily net assets attributable to Class C shares owned by investors for whom securities dealer is the holder or dealer of record. (Therefore, the total amount of distribution/service fees paid to a dealer on an annual basis is 1.00% of the Fund's average daily net assets attributable to Class C shares owned by investors for whom the securities dealer is the holder or dealer of record.) MFD also pays expenses of printing prospectuses and reports used for sales purposes, expenses with respect to the preparation and printing of sales literature and other distribution-related expenses, including, without limitation, the compensation of personnel and all costs of travel, office expense and equipment. Since MFD's compensation is not directly tied to its expenses, the amount of compensation received by MFD during any year may be more or less than its actual expenses. For this reason, this type of distribution fee arrangement is characterized by the staff of the SEC as being of the "compensation" variety. However, the Fund is not liable for any expenses incurred by MFD in excess of the amount of compensation it receives. Certain banks and other financial institutions that have agency agreements with MFD will receive agency transaction and service fees that are the same as distribution and service fees to dealers. Fees payable under the Class C Distribution Plan are charged to, and therefore reduce, income allocated to Class C shares.
During the fiscal year ended January 31, 1995, the Fund incurred expenses of $24,572 (equal to 1.0% of its average daily net assets) relating to the distribution and servicing of its Class C shares, all of which securities dealers of the Fund and certain banks and other financial institutions received $24,572 (1.0% of its average daily net assets attributable to Class C shares).
GENERAL: Each of the Distribution Plans will remain in effect until August 1, 1995, and will continue in effect thereafter only if such continuance is specifically approved at least annually by vote of both the Trustees and a majority of the Trustees who are not "interested persons" or financially interested parties to such Plan ("Distribution Plan Qualified Trustees"). Each of the Distribution Plans also requires that the Fund and MFD each shall provide to the Trustees, and the Trustees shall review, at least quarterly, a written report of the amounts expended (and purposes therefor) under such Plan. Each of the Distribution Plans may be terminated at any time by vote of a majority of the Distribution Plan Qualified Trustees or by vote of the holders of a majority of the respective class of the Fund's shares (as defined in "Investment Restrictions"). All agreements relating to any of the Distribution Plans entered into between the Fund or MFD and other organizations must be approved by the Board of Trustees, including a majority of the Distribution Plan Qualified Trustees. Agreements under any of the Distribution Plans must be in writing, will be terminated automatically if assigned, and may be terminated at any time without payment of any penalty, by vote of a majority of the Distribution Plan Qualified Trustees or by vote of the holders of a majority of the respective class of the Fund's shares. None of the Distribution Plans may be amended to increase materially the amount of permitted distribution expenses without the approval of a majority of the respective class of the Fund's shares (as defined in "Investment Restrictions") or may be materially amended in any case without a vote of the Trustees and a majority of the Distribution Plan Qualified Trustees. The selection and nomination of Distribution Plan Qualified Trustees shall be committed to the discretion of the non-interested Trustees then in office. No Trustee who is not an "interested person" has any financial interest in any of the Distribution Plans or in any related agreement.
10. INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS
Deloitte & Touche LLP are the Fund's independent certified public accountants.
The Portfolio of Investments at January 31, 1995, the Statement of Assets and Liabilities at January 31, 1995, the Statement of Operations for the year ended January 31, 1995, the Statement of Changes in Net Assets for each of the two years in the period ended January 31, 1995, the Notes to Financial Statements and the Independent Auditors' Report, each of which is included in the Annual Report to shareholders of the Fund, are incorporated by reference into this SAI and have been so incorporated in reliance upon the report of Deloitte & Touche, independent auditors, as experts in accounting and auditing. A copy of the Annual Report accompanies this SAI.
APPENDIX A
TRUSTEE COMPENSATION TABLE
RETIREMENT BENEFIT ESTIMATED TOTAL TRUSTEE FEES
TRUSTEE FEES ACCRUED AS PART OF CREDITED YEARS FROM FUND AND
TRUSTEE FROM FUND<F1> FUND EXPENSE<F1> OF SERVICE<F2> FUND COMPLEX<F3>
- ----------------------------------------------------------------------------------------------------------------------------------
Richard B. Bailey $4,455 $ 656 8 $226,221
Peter G. Harwood 4,755 238 5 105,812
J. Atwood Ives 4,755 669 17 106,482
Lawrence T. Perera 4,355 2,322 23 96,592
William Poorvu 4,755 2,316 23 106,482
Charles W. Schmidt 4,455 2,199 16 98,397
David B. Stone 4,655 1,122 11 104,007
Elaine R. Smith 4,455 639 27 98,397
<F1> For fiscal year ended January 31, 1995.
<F2> Based on normal retirement age of 73.
<F3> Information provided is provided for calendar year 1994. All Trustees served as Trustees of 20 funds within the MFS
fund complex (having aggregate net assets at December 31, 1994, of approximately $14,727,659,069) except Mr.
Bailey, who served as Trustee of 56 funds within the MFS fund complex (having aggregate net assets at December 31,
1994, of approximately $24,474,119,825).
|
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT<F4>
YEARS OF SERVICE
--------------------------------------------------------------------
AVERAGE TRUSTEE FEES 3 5 7 10 OR MORE
- -------------------------------------------------------------------------------------------------------------------------------
$3,900 $585 $ 975 $1,365 $1,950
4,160 624 1,040 1,456 2,080
4,420 663 1,105 1,547 2,210
4,680 702 1,170 1,638 2,340
4,940 741 1,235 1,729 2,470
5,200 780 1,300 1,820 2,600
<F4> Other funds in the MFS fund complex provide similar retirement benefits to the Trustees.
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INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617) 954-5000
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
CUSTODIAN AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800) 225-2606
MAILING ADDRESS:
P.O. Box 2281, Boston, MA 02107-9906
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
MFS(R)
HIGH INCOME
FUND
500 BOYLSTON STREET
BOSTON, MA 02116
[LOGO: M F S]
THE FIRST NAME IN MUTUAL FUNDS
MHI-13-6/95/500 18/218/318
[LOGO] Annual Report for Year Ended January 31, 1995
MFS(r) HIGH INCOME FUND
A 6 1.4" by 8 1/4" photo of gears.
MFS(R) HIGH INCOME FUND
TRUSTEES CUSTODIAN
A. Keith Brodkin* - Chairman and President State Street Bank and Trust Company
Richard B. Bailey* - Private Investor; AUDITORS
Former Chairman and Director (until 1991), Deloitte & Touche LLP
Massachusetts Financial Services Company
INVESTOR INFORMATION
Peter G. Harwood - Former Financial Vice For MFS stock and bond market outlooks,
President, Treasurer and Director (until 1988), call toll-free: 1-800-637-4458 anytime from
Loomis, Sayles & Co., Inc. a touch-tone telephone.
J. Atwood Ives - Chairman and Chief Executive For information on MFS mutual funds
Officer, Eastern Enterprises call your financial adviser or, for an
information kit, call toll-free:
Lawrence T. Perera - Partner, Hemenway & Barnes 1-800-637-2929 any business day from
9 a.m. to 5 p.m. Eastern time (or, leave
William J. Poorvu - Adjunct Professor, Harvard a message anytime).
University Graduate School of Business
Administration INVESTOR SERVICE
MFS Service Center, Inc.
Charles W. Schmidt - Private Investor; P.O. Box 2281
Former Senior Vice President and Group Executive Boston, MA 02107-9906
(until 1990), Raytheon Company
For current account service, call toll free:
Arnold D. Scott* - Senior Executive Vice President, 1-800-225-2606 any business day from
Massachusetts Financial Services Company 8 a.m. to 8 p.m. Eastern time.
Jeffrey L. Shames* - President and Chief Equity For service to speech- or hearing-impaired,
Officer, Massachusetts Financial Services Company call toll free: 1-800-637-6576 any business
day from 9 a.m. to 5 p.m. Eastern time.
Elaine R. Smith - Independent Consultant
For share prices, account balances and
David B. Stone - Chairman, North American exchanges, call toll free: 1-800-MFS-TALK
Management Corp. (Investment Advisers) (1-800-637-8255) anytime from a touch-tone
telephone.
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street
Boston, Massachusetts 02116-3741
PORTFOLIO MANAGER
Robert J. Manning*
TOP-RATED SERVICE
TREASURER
W. Thomas London* MFS was rated first when securities
firms evaluated the quality of service
ASSISTANT TREASURER they receive from 40 mutual fund
James O. Yost* companies. MFS got high marks for
answering calls quickly, processing
SECRETARY transactions accurately and sending
Stephen E. Cavan* statements out on time.
(Source: 1994 DALBAR Survey)
ASSISTANT SECRETARY
James R. Bordewick, Jr.*
Cover photo: Through their wide range of
investments, MFS mutual funds help you
*Affiliated with the Investment Adviser share in America's growth.
|
LETTER TO SHAREHOLDERS
Dear Shareholders:
During the fiscal year ended January 31, 1995, Class A shares of the Fund
provided a total return of -3.95%. Over the same period, the total returns of
Class B and Class C shares were -4.77% and -4.51%, respectively. All of these
returns assume the reinvestment of distributions but exclude the effects of any
sales charges. The Fund's results underperformed the Lehman Brothers Corporate
Bond Index (the Lehman Index), which returned -3.76% during this same period.
Because the Fund's portfolio generally consists of lower-quality issues, its
results will not necessarily mirror those of the Lehman Index, which is an
unmanaged market-value weighted index comprised of all public fixed-rate,
non-convertible, investment-grade corporate debt. A discussion of performance
during 1994 as well as our outlook for the months ahead may be found in the
Portfolio Performance and Strategy section below.
Economic Outlook
The economic expansion, entering its fifth year, gained firmer underpinnings in
1994 as employers significantly stepped up hiring levels. Increased employment,
stronger capital spending by businesses, and strengthening overseas economies
resulted in 4% real (adjusted for inflation) gross domestic product growth last
year. Interest rates rose substantially over the past year, which should help
restrain, but not curtail, the economic expansion. Based on improving economic
fundamentals both here and abroad, we expect the business expansion to continue
well into 1995.
Interest Rates
Despite a stronger economy, inflation at the consumer level has remained
relatively benign at 2.7% in 1994, the fourth straight year of 3.0% or less. Due
to a prolonged period of below-trend-line growth and continued pressure on
corporations to emphasize effective cost controls, wage growth and unit labor
costs have remained subdued. However, as the economy has exhibited continuing
strength, various industrial commodity prices have been rising substantially
faster than consumer prices. Nevertheless, businesses have had difficulty
passing these price increases on to the consumer. With the economy continuing to
expand, we expect some upward movement in inflation from below 3% to the 3 1/2%
range. The Federal Reserve Board has shown a willingness to raise short-term
rates to slow the economy to dampen inflationary pressures. Most recently, it
raised the federal funds rate 50 basis points (0.50%) after a 75 basis-point
(0.75%) increase in November. We expect the Federal Reserve to raise short-term
rates again in the coming months if it believes that current efforts have not
been sufficient to dampen inflationary expectations. Although we believe
fundamentals are favorable for lower long-term rates sometime in 1995, this may
not occur until the Federal Reserve is comfortable that its policy toward
slowing the economic expansion has been successful. Thus, we believe that
long-term yields may move moderately higher in the near term.
Portfolio Performance and Strategy
During the past year, yield spreads in the high-yield market remained at 375
basis points (3.75%) over comparable U.S. Treasuries, but interest rates rose
dramatically due to increased economic activity which caused the Federal Reserve
to raise the federal funds rate several times in an attempt to alleviate
inflationary pressures. On a relative basis, the high-yield market outperformed
high-grade bonds as well as Treasuries, although it is important to remember
that principal value and interest on Treasury securities are guaranteed by the
U.S. government if held to maturity. Technicals in the high-yield market remain
uncertain due to volatile cash flows experienced by high-yield mutual funds,
which account for roughly half the market's assets and more than two-thirds of
daily trading volume. As we move into 1995, the new-issue calendar stands
significantly below last year's levels due to the banking industry's
aggressiveness in trying to lend money to many companies which otherwise would
utilize the high-yield bond market for funds.
While new-issue quality declined last year, the average credit quality in the market improved as continued economic expansion created an environment for companies to pay down their debt by either increased cash flows or equity issuance. During the year, the portfolio remained significantly overweighted in economically sensitive companies (paper, metal or general industrial firms), and underweighted in industries with no pricing leverage due to excess capacity, or with a high exposure to consumer demand, such as general retailing, transportation and utilities companies. During 1995, we expect the economic climate to continue to be very healthy for the types of companies we own and, thus, we have not significantly changed our strategy. We will continue to focus on fundamental credit research, which is the main factor in determining our investment selection.
We appreciate your support and welcome any questions or comments you may have.
Respectfully,
A 1 1/2" by 1 5/8" photo of A. Keith Brodkin, Chairman and President.
A 1 1/2" by 1 5/8" photo of Robert J. Manning, Portfolio Manager.
A. Keith Brodkin Robert J. Manning Chairman and President Portfolio Manager
February 28, 1995
PORTFOLIO MANAGER PROFILE
Robert Manning began his career at MFS in 1984 as a Research Analyst in the High
Yield Bond Department. A graduate of the University of Lowell and Boston
College's Graduate School of Management, he was named Vice President -
Investments in 1988, Senior Vice President in 1993 and Portfolio Manager of MFS
High Income Fund in 1994.
OBJECTIVE AND POLICIES
The objective of the Fund is to provide high current income through investment
primarily in a professionally managed, diversified portfolio of fixed-income
securities. Capital growth, if any, is a consideration incidental to the
objective of high current income.
The Fund seeks to achieve this objective by investing primarily in fixed- income securities which are in the lower rating categories. The Fund may also invest in foreign fixed-income securities, purchase fixed-income securities on a "when-issued" basis and enter into options, futures transactions and forward foreign currency exchange contracts. The Fund will seek to reduce risk through full-time management of a broadly diversified portfolio, credit analysis and attention to current developments and trends in both the economy and financial markets.
PERFORMANCE
The information below and on the following page illustrates the historical
performance of MFS High Income Fund Class A shares in comparison to various
market indicators. Class A share results reflect the deduction of the 4.75%
maximum sales charge; benchmark comparisons are unmanaged and do not reflect any
fees or expenses. You cannot invest in an index. All results reflect the
reinvestment of all dividends and capital gains.
Class B shares were offered effective September 27, 1993. Information on Class B share performance appears on the next page.
Class C shares were offered effective January 3, 1994. Information on Class C share performance appears on the next page.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(Over the 5-Year Period Ended January 31, 1995)
Line graph representing the growth of a $10,000 investment for the 5-year period ended Janaury 31, 1995. The graph is scaled from $5,000 to $30,000 in $5,000 segments. The years are marked from 1990 to 1995. There are three lines drawn to scale. One is a solid line representing MFS High Income Fund (Class A), a second line of short dashes represents the Lehman Brothers corporate Bond Index, and a third line of long dashes represents the consumer Price Index.
MFS High Income Fund (Class A) $17,066 Lehman Brothers Corporate Bond Index $15,364 Consumer Price Index $11,797 |
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT (Over the 10-Year Period Ended January 31, 1995)
Line graph representing the growth of a $10,000 investment for the 10-year period ended Janaury 31, 1995. The graph is scaled from $5,000 to $30,000 in $5,000 segments. The years are marked from 1985 to 1995. There are three lines drawn to scale. One is a solid line representing MFS High Income Fund (Class A), a second line of short dashes represents the Lehman Brothers corporate Bond Index, and a third line of long dashes represents the consumer Price Index.
MFS High Income Fund (Class A) $23,811
Lehman Brothers Corporate Bond Index $27,242
Consumer Price Index $14,244
AVERAGE ANNUAL TOTAL RETURNS
1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------------------------------------
MFS High Income Fund (Class A)
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* For the period from the commencement of offering of Class B shares, September 27, 1993 to January 31, 1995.
+ The return reflects the current maximum Class B contingent deferred sales charge (CDSC) of 4%.
(S) The Consumer Price Index is a popular measure of change in prices.
** For the period from the commencement of offering of Class C shares, January 3, 1994 to January 31, 1995.
In the above table, we have included the average annual total returns of all high current yield funds (including the Fund) tracked by Lipper Analytical Services, Inc. (an independent firm which reports mutual fund performance) for the applicable time periods (94, 64, 61 and 32 funds for the 1-, 3-, 5- and 10-year periods ended January 31, 1995, respectively). Because these returns do not reflect any applicable sales charges, we have also included the Fund's results at net asset value (no sales charge) for comparison.
All results are historical and, therefore, are not an indication of future results. The principal value and income return of an investment in a mutual fund will vary with changes in market conditions, and shares, when redeemed, may be worth more or less than their original cost. Class C shares have no initial sales charge or CDSC but, along with Class B shares, have higher annual fees and expenses than Class A shares.
All Class A share results reflect the applicable expense subsidy which is explained in the Notes to Financial Statements. Had the subsidy not been in effect, the results would have been less favorable. The subsidy may be rescinded at any time.
TAX FORM SUMMARY
In January 1995, shareholders were mailed a Tax Form Summary reporting the
federal tax status of all distributions paid during the calendar year 1994.
PORTFOLIO OF INVESTMENTS - January 31, 1995
Non-Convertible Bonds - 85.6%
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
Financial Institutions - 3.4%
American Annuity Group, Inc., 11.125s, 2003 $ 5,600 $ 5,544,000
American Financial Corp., 9.75s, 2004 5,703 5,211,116
American Life Holdings Co., 11.25s, 2004 3,250 3,201,250
Americo Life, Inc., 9.25s, 2005 4,750 4,037,500
GPA Delaware, Inc., 8.75s, 1998 2,000 1,470,000
ICH Corp., 11.25s, 1996 2,000 1,360,000
Tiphook Finance Corp., 7.125s, 1998 1,000 730,000
Tiphook Finance Corp., 8s, 2000 8,353 6,097,690
-------------
$ 27,651,556
- -----------------------------------------------------------------------------
Foreign - Non-U.S. Dollar Denominated - 0.4%
United Kingdom
Mexico-United Mexican States, 16.5s, 2008|| GBP 950 $ 1,966,345
Pemex (Petroleau Mexicanos), 14.5s, 2006|| 800 1,398,641
-------------
$ 3,364,986
- -----------------------------------------------------------------------------
Foreign - U.S. Dollar Denominated - 0.5%
Mexico-United Mexican States, 6.69s, 2019 $ 5,750 $ 3,881,250
Republic of Argentina, Discounted Notes, due 2005 500 266,250
-------------
$ 4,147,500
- -----------------------------------------------------------------------------
Industrials - 78.1%
Apparel and Textiles - 0.1%
Guess, Inc., 9.5s, 2003 $ 1,000 $ 930,000
- -----------------------------------------------------------------------------
Automotive - 1.7%
Harvard Industries, Inc., 12s, 2004 $ 8,250 $ 8,311,875
SPX Corp., 11.75s, 2002 2,850 2,871,375
Venture Holdings Trust, 9.75s, 2004 3,000 2,535,000
-------------
$ 13,718,250
- -----------------------------------------------------------------------------
Building - 5.0%
American Standard, Inc., 0s, 2005 $16,625 $ 10,972,500
Atlantic Gulf Communities Corp., 12s, 1996 1,078 916,555
Atlantic Gulf Communities Corp., 13s, 1998 1,078 593,065
Congoleum Corp., 9s, 2001 2,300 2,127,500
Lone Star Industries, Inc., 10s, 2003 1,000 960,000
Nortek, Inc., 9.875s, 2004 8,750 7,743,750
Schuller International Group, 10.875s, 2004 5,250 5,387,813
UDC Homes, Inc., 11.75s, 2003# 3,650 2,336,000
USG Corp., 9.25s, 2001 10,250 9,840,000
-------------
$ 40,877,183
- -----------------------------------------------------------------------------
Chemicals - 5.5%
Arcadian Partners L.P., 10.75s, 2005## $ 5,350 $ 5,216,250
Huntsman Corp., 10.625s, 2001 6,750 6,918,750
Koppers Industries, Inc., 8.5s, 2004 1,500 1,320,000
NL Industries, Inc., 11.75s, 2003 7,100 7,135,500
OSI Specialties Holding Co., 0s, 2004 6,800 4,216,000
OSI Specialties, Inc., 9.25s, 2003 5,000 4,650,000
Rexene Corp., 11.75s, 2004 5,150 5,253,000
UCC Investors Holdings, Inc., 10.5s, 2002 3,250 3,205,313
UCC Investors Holdings, Inc., 0s, 2005 10,250 6,803,437
-------------
$ 44,718,250
- -----------------------------------------------------------------------------
Conglomerates - 0.6%
Bell & Howell Co., 10.75s, 2002 $ 3,800 $ 3,610,000
Figgie International, Inc., 9.875s, 1999 1,450 1,283,250
-------------
$ 4,893,250
- -----------------------------------------------------------------------------
|
PORTFOLIO OF INVESTMENTS - continued
Non-Convertible Bonds - continued
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
Industrials - continued
Construction Services - 0.1%
United States Home Corp., 9.75s, 2003 $ 1,300 $ 1,147,250
- -----------------------------------------------------------------------------
Consumer Goods and Services - 7.3%
ADT Operations, Inc., 9.25s, 2003 $ 1,550 $ 1,445,375
Bibb Co., 14s, 1999 3,088 1,605,760
Calmar Spraying Systems, Inc., 12s, 1997 2,025 2,045,250
Calmar Spraying Systems, Inc., 14s, 1999 8,900 8,989,000
Consolidated Cigar Corp., 10.5s, 2003 4,750 4,346,250
Fieldcrest Cannon, Inc., 11.25s, 2004 3,800 3,819,000
International Semi-Tech
Microelectronics, Inc., 0s, 2003 8,000 3,440,000
Ithaca Industries, Inc., 11.125s, 2002 3,800 3,496,000
MAFCO, Inc., 11.875s, 2002 200 188,500
Protection One Alarm, 12s, 2003 2,600 2,457,000
Remington Arms, Inc., 9.5s, 2003## 2,000 1,660,000
Revlon, Inc., 10.5s, 2003 13,350 11,748,000
Revlon Worldwide Corp., 0s, 1998 8,450 4,901,000
Sealy Corp., 9.5s, 2003 650 614,250
Westpoint Stevens, Inc., 9.375s, 2005 9,350 8,391,625
-------------
$ 59,147,010
- -----------------------------------------------------------------------------
Containers - 11.2%
Container Corp. of America, 10.75s, 2002 $ 7,000 $ 7,070,000
Gaylord Container Co., 0s, 2005 17,450 15,530,500
Ivex Packaging Corp., 12.5s, 2002 5,350 5,350,000
Owens-Illinois, Inc., 11s, 2003 6,300 6,599,250
Owens-Illinois, Inc., 9.75s, 2004 5,250 4,961,250
Owens-Illinois, Inc., 9.95s, 2004 500 477,500
Plastic Containers, Inc., 10.75s, 2001 6,750 6,699,375
Riverwood International Corp., 11.25s, 2002 9,950 10,323,125
S.D. Warren Co., 12s, 2004## 7,200 7,452,000
Silgan Corp., 11.75s, 2002 6,710 6,978,400
Stone Consolidated Corp., 10.25s, 2000 3,850 3,773,000
Stone Container Corp., 9.875s, 2001 16,350 15,328,125
Stone Container Corp., 10.75s, 2002 650 643,500
-------------
$ 91,186,025
- -----------------------------------------------------------------------------
Entertainment - 4.4%
ACT III Theatres, Inc., 11.875s, 2003 $ 3,300 $ 3,432,000
Ballys Grand, Inc., 10.375s, 2003 9,650 8,685,000
Casino America, Inc., 11.5s, 2001 3,250 2,860,000
Elsinore Corp., 12.5s, 2000 2,850 1,510,500
Elsinore Corp., 12.5s, 2000 1,000 522,500
Imax Corp., 7s, 2001 1,500 1,237,500
Maritime Group Ltd., 13.5s, 1997#**## 3,319 1,692,652
Resorts International, Inc., 0s, 2000 4,400 3,740,000
SCI Television, Inc., 11s, 2005 9,500 9,571,250
Sam Houston Race Park, Inc., 11.75s, 1999** 3,225 483,750
Spectravision, Inc., 0s, 2001 1,750 770,000
United Artist Theater Circuit, Inc., 11.5s, 2002 1,500 1,556,250
-------------
$ 36,061,402
- -----------------------------------------------------------------------------
|
PORTFOLIO OF INVESTMENTS - continued
Non-Convertible Bonds - continued
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
Industrials - continued
Food and Beverage Products - 2.1%
Amstar Corp., 11.375s, 1997 $ 1,300 $ 1,296,750
Envirodyne Industries, Inc., 10.25s, 2001 2,752 2,091,520
PMI Acquisition Corp., 10.25s, 2003 1,295 1,210,825
Specialty Foods Corp., 10.25s, 2001 8,000 7,320,000
Texas Bottling Group, Inc., 9s, 2003 5,750 5,088,750
-------------
$ 17,007,845
- -----------------------------------------------------------------------------
Forest and Paper Products - 1.4%
Fort Howard Corp., 11s, 2002 $ 2,529 $ 2,566,812
Pacific Lumber Co., 10.5s, 2003 9,500 8,835,000
-------------
$ 11,401,812
- -----------------------------------------------------------------------------
Machinery - 0.4%
Fairfield Manufacturing, 11.375s, 2001 $ 1,750 $ 1,627,500
Thermadyne Industries Holdings Corp.,
10.25s, 2002 2,000 1,900,000
-------------
$ 3,527,500
- -----------------------------------------------------------------------------
Medical and Health Technology and Services - 2.1%
Community Health System, 10.25s, 2003 $ 3,500 $ 3,473,750
Healthtrust, Inc., 10.25s, 2004 100 107,250
Integrated Health Services, Inc., 10.75s, 2004 5,000 5,075,000
OrNda Healthcorp., 12.25s, 2002 7,800 8,326,500
-------------
$ 16,982,500
- -----------------------------------------------------------------------------
Metals and Minerals - 1.4%
Easco Corp., 10s, 2001 $ 4,100 $ 3,813,000
Jorgensen (Earle M.) Co., 10.75s, 2000 4,200 4,095,000
Kaiser Aluminum & Chemical Corp., 9.875s, 2002 3,550 3,328,125
-------------
$ 11,236,125
- -----------------------------------------------------------------------------
Oil Services - 1.7%
Falcon Drilling, Inc., 9.75s, 2001# $ 3,100 $ 2,945,000
Ferrell Gas L.P., 10s, 2001 4,200 4,137,000
Giant Industries, Inc., 9.75s, 2003 3,500 3,185,000
Tuboscope Vetco International, Inc., 10.75s, 2003 3,200 3,184,000
-------------
$ 13,451,000
- -----------------------------------------------------------------------------
Oils - 1.5%
Gulf Canada, 9.25s, 2004 $ 6,000 $ 5,520,000
Mesa Capital Corp., 0s, 1998 7,650 6,665,063
-------------
$ 12,185,063
- -----------------------------------------------------------------------------
Printing and Publishing - 0.4%
Western Publishing Group, 7.65s, 2002 $ 350 $ 263,375
World Color Press, Inc., 9.125s, 2003 2,750 2,564,375
-------------
$ 2,827,750
- -----------------------------------------------------------------------------
Restaurants and Lodging - 2.0%
Casino America, Inc., 11.5s, 2001 $ 600 $ 550,500
Four Seasons Hotels, Inc., 9.125s, 2000## 7,750 7,207,500
Hacienda Resorts, Inc., 10.25s, 1998 2,000 1,900,000
Kloster, Inc., 13s, 2003 4,250 3,315,000
Station Casinos, Inc., 9.625s, 2003 3,750 3,150,000
-------------
$ 16,123,000
- -----------------------------------------------------------------------------
Special Products and Services - 10.0%
Alabama Outdoor Advertising, Inc., 10s, 1996+ $ 468 $ 350,957
Ampex Group, Inc., 13.25s, 1996** 2,300 138,000
Astrum International Corp., 11.5s, 2003 4,038 4,078,380
|
PORTFOLIO OF INVESTMENTS - continued
Non-Convertible Bonds - continued
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
Industrials - continued
Special Products and Services - continued
Buckeye Cellulose Corp., 10.25s, 2001 $ 2,700 $ 2,598,750
Eagle Industries, Inc., 0s, 2003 20,450 13,190,250
Gillett Holdings, Inc., 12.25s, 2002 7,496 7,646,376
IMO Industries, Inc., 12s, 2001 8,250 8,322,188
Idex Corp., 9.75s, 2002 1,260 1,222,200
Inter-City Products Corp., 9.75s, 2000 4,650 4,336,125
Interlake Corp., 8s, 1996 2,544 2,366,232
Interlake Corp., 12.125s, 2002 9,400 9,024,000
Interlake Revolver, 5.75s, 1997 2,639 2,401,714
K & F Industries, Inc., 11.875s, 2003 6,475 6,345,500
Maxxam, Inc., 12.5s, 1999 1,762 1,792,631
Newflo Corp., 13.25s, 2002 3,850 3,773,000
Polymer Group, Inc., 12.75s, 2002 6,750 6,615,000
Spendthrift Farm, Inc., 12.5s, 1999** 3,552 1,776
Spreckels Industries, Inc., 11.5s, 2000 3,900 3,783,000
Talley Manufacturing & Technology,
Inc., 10.75s, 2003 3,500 3,080,000
Wolverine Tube, Inc., 10.125s, 2002 400 406,000
-------------
$ 81,472,079
- -----------------------------------------------------------------------------
Steel - 4.0%
AK Steel Holdings Corp., 10.75s, 2004 $ 5,500 $ 5,486,250
Bayou Steel Corp., 10.25s, 2001 2,100 1,890,000
Geneva Steel Co., 9.5s, 2004 8,750 7,350,000
Sheffield Steel Corp., 12s, 2001 2,300 2,173,500
Stelco, Inc., 10.4s, 2009|| CAD 4,100 2,675,936
Ucar Global Enterprises, Inc., 12s, 2005## $ 8,500 8,712,500
Wheeling Pittsburgh, 9.375s, 2003 5,000 4,387,500
-------------
$ 32,675,686
- -----------------------------------------------------------------------------
Stores - 2.3%
Eckerd (Jack) Corp., 9.25s, 2004 $ 2,775 $ 2,691,750
Finlay Enterprises, Inc., 0s, 2005 5,700 3,420,000
Finlay Enterprises, Inc., 12s, 2005 4,450 2,714,500
Finlay Fine Jewelry, 10.625s, 2003 1,000 920,000
Payless Cashways, Inc., 9.125s, 2003 1,850 1,646,500
Thrifty Payless, Inc., 12.25s, 2004 600 562,500
Woodward & Lothrop, Inc., 12s, 1995** 3,996 2,797,485
Woodward & Lothrop, Inc., 14.75s, 1995** 12,600 3,591,000
-------------
$ 18,343,735
- -----------------------------------------------------------------------------
Supermarkets - 1.3%
Kroger Co., 9.25s, 2005 $ 3,800 $ 3,800,000
Pathmark Stores, Inc., 11.625s, 2002 700 675,500
Purity Supreme, Inc., 11.75s, 1999 2,000 1,650,000
Ralphs Grocery Co., 10.25s, 2002 1,850 1,785,250
Safeway Stores, Inc., 9.875s, 2007 2,750 2,832,500
-------------
$ 10,743,250
- -----------------------------------------------------------------------------
Telecommunications - 11.6%
ACT III Broadcasting, 9.625s, 2003 $ 1,925 $ 1,790,250
Albritton Communications Corp., 11.5s, 2004 7,600 7,600,000
American Telecasting, 0s, 2004* 5,200 2,223,000
C.F. Cable Television, 11.625s, 2005 3,000 3,000,000
Cablevision Industries Corp., 10.75s, 2002 8,900 9,033,500
Cablevision Systems Corp., 10.75s, 2004 6,705 6,772,050
|
PORTFOLIO OF INVESTMENTS - continued
Non-Convertible Bonds - continued
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
Industrials - continued
Telecommunications - continued
Century Communications Corp., 9.75s, 2002 $ 5,300 $ 5,114,500
Century Communications Corp., 0s, 2003 4,750 1,923,750
Century Communications Corp., 11.875s, 2003 2,250 2,334,375
Falcon Holdings Group, Inc., 11s, 2003 9,966 8,670,442
Infinity Broadcasting Corp., 10.375s, 2002 350 351,750
Jones Intercable, Inc., 11.5s, 2004 5,450 5,668,000
Jones Intercable, Inc., 10.5s, 2008 5,650 5,579,375
K-III Communications Corp., 10.625s, 2002 3,305 3,271,950
MFS Communications, Inc., 0s, 2004 13,500 8,285,625
Mobilemedia Communications, Inc., 0s, 2003 5,900 3,186,000
Paging Network, Inc., 8.875s, 2006 6,150 5,135,250
Rogers Cablesystems, Inc., 9.625s, 2002 3,500 3,333,750
Rogers Cablesystems, Inc., 10.125s, 2012 8,050 7,687,750
USA Mobile Communications, 9.5s, 2004 4,000 3,300,000
-------------
$ 94,261,317
- -----------------------------------------------------------------------------
Total Industrials $634,917,282
- -----------------------------------------------------------------------------
Mortgage-Backed Pass-Throughs - 0.4%
Merrill Lynch Mortgage Investors, Inc.,
1994-M1, "F", 8.227s, 2023+ $ 4,500 $ 3,076,740
- -----------------------------------------------------------------------------
Transportation - 0.4%
Continental Airlines, Inc., 11.75s, 1995** $ 5,250 $ 413,438
Continental Airlines, Inc., 12.125s, 1996** 10,000 575,000
Moran Transportation Co., 11.75s, 2004 2,300 2,190,750
Pan American World Airways, Inc., 13.5s, 2003** 9,484 0
-------------
$ 3,179,188
- -----------------------------------------------------------------------------
Utilities - Electric - 2.1%
Kenetech Corp., 12.75s, 2002 $ 8,250 $ 8,703,750
Midland Funding Corp., "A", 11.75s, 2005 7,600 6,995,344
Midland Funding Corp., "B", 13.25s, 2006 1,350 1,324,917
-------------
$ 17,024,011
- -----------------------------------------------------------------------------
Miscellaneous - 0.3%
Reeves Industries, Inc., 11s, 2002 $ 2,300 $ 2,323,000
- -----------------------------------------------------------------------------
|
PORTFOLIO OF INVESTMENTS - continued
Common Stocks and Warrants - continued
- -----------------------------------------------------------------------------
Issuer Shares Value
- -----------------------------------------------------------------------------
Consumer Goods and Services - 0.1%
Protection One, Warrants* 72,800 $ 273,000
Ranger Industries, Inc.*++ 266,768 33,346
-------------
$ 306,346
- -----------------------------------------------------------------------------
Entertainment - 0.1%
Casino America, Inc., Warrants* 1,958 $ 2
Elsinore Corp., Warrants* 192,682 0
Grand Palais Casinos, Inc., Warrants* 111,660 1,060,773
Hemmeter Entertainment, Warrants* 111,660 167,490
Sam Houston Race Park, Inc., Warrants* 12,900 0
-------------
$ 1,228,265
- -----------------------------------------------------------------------------
Medical and Health Products
Republic Health Corp., Warrants* 2,500 $ 625
- -----------------------------------------------------------------------------
Medical and Health Technology and Services - 0.5%
OrNda Healthcorp., Inc.* 312,252 $ 4,527,654
- -----------------------------------------------------------------------------
Oil Services - 0.1%
Digicon, Inc., Warrants* 21,287 $ 5,322
ICO, Inc., Warrants* 706,250 459,063
-------------
$ 464,385
- -----------------------------------------------------------------------------
Oils - 0.3%
Crystal Oil Co., $0.075, Warrants* 3,954,527 $ 40
Crystal Oil Co., $0.10, Warrants* 3,455,042 0
Crystal Oil Co., $0.125, Warrants* 4,107,411 0
Crystal Oil Co., $0.15, Warrants* 4,041,943 0
Crystal Oil Co., $0.25, Warrants* 4,041,943 0
Edisto Resources Corp.* 310,230 1,938,938
Forest Oil Corp., Warrants* 28,335 12,397
Ironstone Group, Inc.* 2,674 535
Reunion Resources Co.* 46,515 238,389
TGX Corp.* 24,931 1,558
Wolverine Exploration Co.* 135,041 31,650
-------------
$ 2,223,507
- -----------------------------------------------------------------------------
Pollution Control
Envirosource, Inc.*+ 1,666 $ 5,415
- -----------------------------------------------------------------------------
Printing and Publishing - 0.1%
Triton Group Ltd.* 588,876 $ 883,314
- -----------------------------------------------------------------------------
|
Special Products and Services - 1.3%
Alabama Outdoor Holdings, Inc.*+ 1,500 $ 15
Borg-Warner Security Corp.*+ 150,000 1,218,750
Gillett Holdings, Inc.*+ 85,019 1,742,889
Mayflower Group, Inc.*++ 783,919 7,251,251
Patrick Media Group Holdings, Inc.*+ 32,320 2,586
Thermadyne Industries Holdings Corp.* 21,463 254,873
Thermadyne Industries Holdings Corp., "B"*+ 336,000 3,360
-------------
$ 10,473,724
- -----------------------------------------------------------------------------
Stores
Federated Department Stores, Inc., Warrants* 118,723 $ 89,042
Thrifty Payless Holdings, "C"* 42,750 149,625
-------------
$ 238,667
- -----------------------------------------------------------------------------
Telecommunications
American Telecasting, Warrants* 26,000 $ 52,000
- -----------------------------------------------------------------------------
Total Common Stocks and Warrants
(Identified Cost, $51,023,643) $ 24,398,554
- -----------------------------------------------------------------------------
|
PORTFOLIO OF INVESTMENTS - continued
Preferred Stocks - 2.4%
- -----------------------------------------------------------------------------
Issuer Shares Value
- -----------------------------------------------------------------------------
Airlines
Eastern Airlines, Inc., $2.84* 75,493 $ 2,359
Eastern Airlines, Inc., $3.24* 24,940 249
-------------
$ 2,608
- -----------------------------------------------------------------------------
Special Products and Services - 0.9%
K-III Communications Corp.* 74,371 $ 7,046,631
UDC Homes, Inc., Cv.* 103,742 389,033
-------------
$ 7,435,664
- -----------------------------------------------------------------------------
Supermarkets - 1.5%
Supermarkets General Holdings Corp., $3.52* 569,098 $ 12,235,773
- -----------------------------------------------------------------------------
Total Preferred Stocks (Identified Cost,
$19,988,464) $ 19,674,045
- -----------------------------------------------------------------------------
Short-Term Obligations - 7.9%
- -----------------------------------------------------------------------------
Principal Amount
(000 Omitted)
- -----------------------------------------------------------------------------
Federal Home Loan Mortgage Corp., due
2/01/95 - 2/21/95 $24,230 $ 24,196,389
Federal National Mortgage Assn.,
due 2/01/95 - 3/03/95 18,100 18,054,522
Ford Motor Credit, due 2/17/95 - 2/24/95 21,860 21,792,135
- -----------------------------------------------------------------------------
Total Short-Term Obligations, at Amortized
Cost $ 64,043,046
- -----------------------------------------------------------------------------
Total Investments (Identified Cost,
$892,675,204) $804,264,908
Other Assets, Less Liabilities - 1.0% 8,587,564
- -----------------------------------------------------------------------------
Net Assets - 100.0% $812,852,472
- -----------------------------------------------------------------------------
|
* Non-income producing security.
** Non-income producing security - in default.
# Payment-in-kind security.
## SEC Rule 144A restriction.
+ Restricted security.
++ Affiliated issuers are those in which the Fund's holdings of an issuer
represent 5% or more of the outstanding voting securities of the issuer.
|| The principal amount of each non-U.S. dollar denominated security is stated
in the currency in which the bond is denominated. GBP = British Pounds.
CAD = Canadian Dollars.
See notes to financial statements.
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- ------------------------------------------------------------------------------
January 31, 1995
- ------------------------------------------------------------------------------
Assets:
Investments, at value -
Unaffiliated issuers (identified cost, $869,980,202) $ 795,473,229
Affiliated issuers (identified cost, $22,695,002) 8,791,679
--------------
Total investments, at value (identified
cost, $892,675,204) $ 804,264,908
Cash 39,155
Receivable for investments sold 6,017,492
Receivable for Fund shares sold 338,396
Interest receivable 17,824,366
Other assets 14,034
--------------
Total assets $ 828,498,351
--------------
Liabilities:
Distributions payable $ 2,452,348
Payable for investments purchased 11,574,597
Payable for Fund shares reacquired 1,114,608
Payable to affiliates -
Management fee 31,964
Shareholder servicing agent fee 11,500
Distribution fee 167,072
Accrued expenses and other liabilities 293,790
--------------
Total liabilities $ 15,645,879
--------------
Net assets $ 812,852,472
==============
Net assets consist of:
Paid-in capital $1,150,975,470
Unrealized depreciation on investments and translation of
assets and liabilities in foreign currencies (88,402,072)
Accumulated net realized loss on investments and foreign
currency transactions (249,658,152)
Accumulated distributions in excess of net
investment income (62,774)
--------------
Total $ 812,852,472
==============
Shares of beneficial interest outstanding 167,783,387
==============
Class A shares:
Net asset value and redemption price per share
(net assets of $523,625,676 / 108,084,812 shares of
beneficial interest outstanding) $4.84
=====
Offering price per share (100/95.25) $5.08
=====
Class B shares:
Net asset value, redemption price, and offering price per
share (net assets of $285,802,126 / 58,992,349 shares of
beneficial interest outstanding) $4.84
=====
Class C shares:
Net asset value, redemption price, and offering price per
share (net assets of $3,424,670 / 706,226 shares of
beneficial interest outstanding) $4.85
=====
|
On sales of $100,000 or more, the offering price of Class A shares is reduced. A contingent deferred sales charge may be imposed on redemptions of Class A and Class B shares.
See notes to financial statements
FINANCIAL STATEMENTS - continued
Statement of Operations
- ------------------------------------------------------------------------------
Year Ended January 31, 1995
- ------------------------------------------------------------------------------
Net investment income:
Income -
Interest $ 79,788,140
Dividends 170,746
-------------
Total investment income $ 79,958,886
-------------
Expenses -
Management fee $ 3,756,072
Trustees' compensation 56,278
Shareholder servicing agent fee (Class A) 789,656
Shareholder servicing agent fee (Class B) 651,780
Shareholder servicing agent fee (Class C) 3,689
Distribution and service fee (Class A) 1,704,627
Distribution and service fee (Class B) 2,960,079
Distribution and service fee (Class C) 24,572
Custodian fee 182,485
Postage 163,979
Auditing fees 93,045
Printing 85,269
Legal fees 65,361
Miscellaneous 763,170
-------------
Total expenses $ 11,300,062
Reduction of expenses by distributor (531,614)
-------------
Net expenses $ 10,768,448
-------------
Net investment income $ 69,190,438
-------------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions (including net loss of $449,882
from transactions with affiliated issuers) $ (24,472,882)
Foreign currency transactions 113,075
-------------
Net realized loss on investments $ (24,359,807)
=============
Change in unrealized appreciation (depreciation) -
Investments $ (82,743,050)
Translation of assets and liabilities in foreign
currencies (13,720)
-------------
Net unrealized loss on investments $ (82,756,770)
-------------
Net realized and unrealized loss on investments
and foreign currency $(107,116,577)
=============
Decrease in net assets from operations $ (37,926,139)
=============
|
See notes to financial statements
FINANCIAL STATEMENTS - continued
Statement of Changes in Net Assets
- ------------------------------------------------------------------------------
Year Ended January 31, 1995 1994
- ------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
Net investment income $ 69,190,438 $ 59,395,682
Net realized gain (loss) on
investments and foreign
currency transactions (24,359,807) 3,390,642
Net unrealized gain (loss) on
investments and foreign currency (82,756,770) 63,846,940
-------------- --------------
Increase (decrease) in net assets
from operations $ (37,926,139) $ 126,633,264
-------------- --------------
Distributions declared to shareholders -
From net investment income (Class A) $ (45,268,326) $ (50,801,002)
From net investment income (Class B) (22,704,630) (8,593,908)
From net investment income (Class C) (189,767) (772)
In excess of net investment income
(Class A) (929,038) (6,675,316)
In excess of net investment income
(Class B) (466,221) (592,977)
In excess of net investment income
(Class C) (3,895) (104)
-------------- --------------
Total distributions declared to
shareholders $ (69,561,877) $ (66,664,079)
-------------- --------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 394,133,456 $ 278,465,305
Net asset value of shares issued in
connection with the acquisition of
MFS Lifetime High Income Fund -- 323,106,233
Net asset value of shares issued to
shareholders in reinvestment of
distributions 36,319,705 37,118,854
Cost of shares reacquired (526,384,411) (267,850,701)
-------------- --------------
Increase (decrease) in net assets
from Fund share transactions $ (95,931,250) $ 370,839,691
-------------- --------------
Total increase (decrease) in
net assets $ (203,419,266) $ 430,808,876
Net assets:
At beginning of period 1,016,271,738 585,462,862
-------------- --------------
At end of period (including
accumulated distributions in
excess of net investment income of
$1,399,154 and $1,027,715,
respectively) $ 812,852,472 $1,016,271,738
============== ==============
|
See notes to financial statements
FINANCIAL STATEMENTS - continued
Financial Highlights
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended January 31, 1995 1994 1993 1992 1991 1990
- -----------------------------------------------------------------------------------------------------------------------------------
Class A
- -----------------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout
each period):
Net asset value- beginning of period $ 5.50 $ 5.11 $ 4.89 $ 3.71 $ 4.85 $ 6.04
------- ------- ------- ------- -------- -------
Income from investment operations<F3> -
Net investment income<F4> $ 0.44 $ 0.40 $ 0.51 $ 0.56 $ 0.65 $ 0.69
Net realized and unrealized gain (loss) on investments (0.66) 0.48 0.24 1.21 (1.08) (1.13)
------- ------- ------- ------- -------- -------
Total from investment operations $ (0.22) $ 0.88 $ 0.75 $ 1.77 $ (0.43) $ (0.44)
------- ------- ------- ------- -------- -------
Less distributions declared to shareholders -
From net investment income $ (0.43) $ (0.42) $ (0.51) $ (0.56) $ (0.71) $ (0.75)
In excess of net investment income (0.01) (0.07) -- -- -- --
From paid-in capital -- -- (0.02) (0.03) -- --<F2>
------- ------- ------- ------- -------- -------
Total distributions declared to shareholders $ (0.44) $ (0.49) $ (0.53) $ (0.59) $ (0.71) $ (0.75)
------- ------- ------- ------- -------- -------
Net asset value - end of period $ 4.84 $ 5.50 $ 5.11 $ 4.89 $ 3.71 $ 4.85
======= ======= ======= ======= ======== =======
Total return<F1> (3.95)% 18.13% 16.36% 49.64% (10.99)% (9.18)%
Ratios (to average net assets)/Supplemental data<F4>:
Expenses 0.99% 1.00% 1.03% 1.10% 1.05% 0.87%
Net investment income 8.65% 8.22% 10.21% 11.59% 14.97% 12.17%
Portfolio turnover 59% 68% 75% 28% 24% 25%
Net assets at end of period
(000,000 omitted) $ 524 $ 645 $ 585 $ 556 $ 380 $ 574
<F1> Total returns do not include the applicable sales charge (except for the
reinvestment of dividends prior to March 1, 1991). If the charge had been
included, the results would have been lower.
<F2> Includes a per share distribution from paid-in capital of $0.004.
<F3> Per share data for the period subsequent to January 31, 1994 is based on
average shares outstanding.
<F4> The distributor waived a portion of its distribution fee for the years
indicated. If this fee had been incurred by the Fund, the net investment
income per share and the ratios would have been:
Net investment income $ 0.43 $ 0.40 -- -- -- --
Ratios (to average net assets):
Expenses 1.09% 1.04% -- -- -- --
Net investment income 8.55% 8.18% -- -- -- --
|
See notes to financial statements
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended January 31, 1989 1988 1987 1986 1995 1994<F1> 1995 1994<F2>
- -----------------------------------------------------------------------------------------------------------------------------------
Class A Class B Class C
- -----------------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding
throughout each period):
Net asset value -
beginning of period $ 6.17 $ 7.11 $ 7.14 $ 6.84 $ 5.50 $ 5.27 $ 5.50 $ 5.41
------- ------- ------- ------- ------ ------- ------- --------
Income from investment
operations<F4> -
Net investment income $ 0.76 $ 0.77 $ 0.93 $ 0.87 $ 0.39 $ 0.15 $ 0.41 --
Net realized and unrealized
gain (loss) on investments (0.09) (0.83) 0.07 0.37 (0.65) 0.22 (0.66) 0.09
------- ------- ------- ------- ------ ------- ------- --------
Total from investment
operations $ 0.67 $ (0.06) $ 1.00 $ 1.24 $(0.26) $ 0.37 $ (0.25) $ 0.09
------- ------- ------- ------- ------ ------- ------- --------
Less distributions
declared to shareholders -
From net
investment income $ (0.75) $ (0.87) $ (0.93) $ (0.94) $(0.39) $(0.13) $ (0.39) $ --<F5>
In excess of net
investment income -- -- -- -- (0.01) (0.01) (0.01) --<F5>
From net realized
gain on investments (0.05) (0.01) (0.10) -- -- -- -- --
From paid-in capital --<F7> -- -- -- -- -- -- --
------- ------- ------- ------- ------ ------- ------- --------
Total distributions
declared to shareholders $ (0.80) $ (0.88) $ (1.03) $ (0.94) $(0.40) $(0.14) $ (0.40) --
------- ------- ------- ------- ------ ------- ------- --------
Net asset value -
end of period $ 6.04 $ 6.17 $ 7.11 $ 7.14 $ 4.84 $ 5.50 $ 4.85 $ 5.50
======= ======= ======= ======= ====== ======= ======= ========
Total return<F6> 10.68% (1.94)% 14.03% 18.34% (4.77)% 20.29%<F3> (4.51)% 20.94%<F3>
Ratios (to average net assets)/
Supplemental data:
Expenses 0.87% 0.75% 0.71% 0.80% 1.85% 1.79%<F3> 1.79% 1.36%<F3>
Net investment income 12.44% 11.49% 12.49% 12.47% 7.79% 6.94%<F3> 8.01% 5.92%<F3>
Portfolio turnover 34% 28% 46% 49% 59% 68% 59% 68%
Net assets at end of period
(000,000 omitted) $ 880 $ 1,001 $ 1,232 $ 581 $ 286 $ 371 $ 3 $ 1
<F1> For the period from the commencement of offering of Class B shares,
September 27, 1993 to January 31, 1994.
<F2> For the period from the commencement of offering of Class C shares, January
3, 1994 to January 31, 1994.
<F3> Annualized.
<F4> Per share data for the period subsequent to January 31, 1994 is based on
average shares outstanding.
<F5> Includes per share distributions from net investment income and in excess
of net investment income of $0.004 and $0.001, respectively.
<F6> Total returns for Class A shares do not include the applicable sales charge
(except for the reinvestment of dividends prior to March 1, 1991). If the
charge had been included, the results would have been lower.
<F7> Includes a per share distribution from paid-in capital of $0.0006.
|
See notes to financial statements
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization MFS High Income Fund (the Fund) is a diversified series of MFS Series Trust III (the Trust). The Trust is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company.
(2) Significant Accounting Policies Investment Valuations - Debt securities (other than short-term obligations which mature in 60 days or less), including listed issues and forward contracts, are valued on the basis of valuations furnished by dealers or by a pricing service with consideration given to factors such as institutional-size trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics and other market data, without exclusive reliance upon exchange or over-the-counter prices. Short-term obligations, which mature in 60 days or less, are valued at amortized cost, which approximates value. Non-U.S. dollar denominated short-term obligations are valued at amortized cost as calculated in the base currency and translated into U.S. dollars at the closing daily exchange rate. Futures contracts, options and options on futures contracts listed on commodities exchanges are valued at closing settlement prices. Over-the-counter options are valued by brokers through the use of a pricing model which takes into account closing bond valuations, implied volatility and short-term repurchase rates. Equity securities listed on securities exchanges or reported through the NASDAQ system are valued at last sale prices. Unlisted equity securities or listed equity securities for which last sale prices are not available are valued at last quoted bid prices. Securities for which there are no such quotations or valuations are valued at fair value as determined in good faith by or at the direction of the Trustees.
Repurchase Agreements - The Fund may enter into repurchase agreements with institutions that the Fund's investment adviser has determined are creditworthy. Each repurchase agreement is recorded at cost. The Fund requires that the securities purchased in a repurchase transaction be transferred to the custodian in a manner sufficient to enable the Fund to obtain those securities in the event of a default under the repurchase agreement. The Fund monitors, on a daily basis, the value of the securities transferred to ensure that the value, including accrued interest, of the securities under each repurchase agreement is greater than amounts owed to the Fund under each such repurchase agreement.
Foreign Currency Translation - Investment valuations, other assets, and liabilities initially expressed in foreign currencies are converted each business day into U.S. dollars based upon current exchange rates. Purchases and sales of foreign investments and income and expenses are converted into U.S. dollars based upon currency exchange rates prevailing on the respective dates of such transactions. Gains and losses attributable to foreign currency exchange rates are recorded for financial statement purposes as net realized gains and losses on investments. Gains and losses attributable to foreign exchange rate movements on income and expenses are recorded for financial statement purposes as foreign currency transaction gains and losses. That portion of both realized and unrealized gains and losses on investments that results from fluctuations in foreign currency exchange rates is not separately disclosed.
Written Options - The Fund may write covered call or put options for which
premiums are received and are recorded as liabilities, and are subsequently
adjusted to the current value of the options written. Premiums received from
writing options which expire are treated as realized gains. Premiums received
from writing options which are exercised or are closed are offset against the
proceeds or amount paid on the transaction to determine the realized gain or
loss. If a put option is exercised, the premium reduces the cost basis of the
securities purchased by the Fund. The Fund, as writer of an option, may have no
control over whether the underlying securities may be sold (call) or purchased
(put) and, as a result, bears the market risk of an unfavorable change in the
price of the securities underlying the written option. In general, written call
options may serve as a partial hedge against decreases in value in the
underlying securities to the extent of the premium received. Written options may
also be used as part of an income-producing strategy reflecting the view of the
Fund's management on the direction of interest rates.
Futures Contracts - The Fund may enter into financial futures contracts for the delayed delivery of securities, currency or contracts based on financial indices at a fixed price on a future date. In entering such contracts, the Fund is required to deposit either in cash or securities an amount equal to a certain percentage of the contract amount. Subsequent payments are made or received by the Fund each day, depending on the daily fluctuations in the value of the underlying security, and are recorded for financial statement purposes as unrealized gains or losses by the Fund. The Fund's investment in interest rate futures contracts is designed to hedge against anticipated future changes in interest rates. The Fund may also invest in exchange rate and securities futures contracts for non-hedging purposes. For example, interest rate futures may be used in modifying the duration of the portfolio without incurring the additional transaction costs involved in buying and selling the underlying securities. Should interest or exchange rates or securities prices move unexpectedly, the Fund may not achieve the anticipated benefits of the financial futures contracts and may realize a loss.
Security Loans - The Fund may lend its securities to member banks of the Federal Reserve System and to member firms of the New York Stock Exchange or subsidiaries thereof. The loans are collateralized at all times by cash or securities with a market value at least equal to the market value of securities loaned. As with other extensions of credit, the Fund may bear the risk of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities in the form of fees or from all or a portion of the income from investment of the collateral. The Fund would also continue to earn income on the securities loaned. At January 31, 1995, the Fund had no securities on loan.
Forward Foreign Currency Exchange Contracts - The Fund may enter into forward foreign currency exchange contracts for the purchase or sale of a specific foreign currency at a fixed price on a future date. Risks may arise upon entering these contracts from the potential inability of counterparties to meet the terms of their contracts and from unanticipated movements in the value of a foreign currency relative to the U.S. dollar. The Fund will enter into forward contracts for hedging purposes. The Fund may enter into contracts to deliver or receive foreign currency it will receive from or require for its normal investment activities. It may also use contracts in a manner intended to protect foreign currency denominated securities from declines in value due to unfavorable exchange rate movements. The forward foreign currency exchange contracts are adjusted by the daily exchange rate of the underlying currency and any gains or losses are recorded for financial statement purposes as unrealized until the contract settlement date.
Investment Transactions and Income - Investment transactions are recorded on the trade date. Interest income is recorded on the accrual basis. All premium and original issue discount are amortized or accreted for both financial statement and tax reporting purposes as required by federal income tax regulations. Dividend income is recorded on the ex-dividend date for dividends received in cash. Dividend and interest payments received in additional securities are recorded on the ex-dividend or ex-interest date in an amount equal to the value of the security on such date.
The Fund has approximately 86% of its portfolio invested in high-yield securities rated below investment grade. Investments in high-yield securities are accompanied by a greater degree of credit risk and the risk tends to be more sensitive to economic conditions than that of higher-rated securities.
The Fund uses the effective interest method for reporting interest income on payment-in-kind (PIK) bonds, whereby interest income on PIK bonds is recorded ratably by the Fund at a constant yield to maturity. Legal fees and other related expenses incurred to preserve and protect the value of a security owned are added to the cost of the security; other legal fees are expensed. Capital infusions, which are generally non-recurring, incurred to protect or enhance the value of high-yield debt securities, are reported as an addition to the cost basis of the security. Costs that are incurred to negotiate the terms or conditions of capital infusions or that are expected to result in a plan of reorganization are considered workout expenses and are reported as realized losses. Ongoing costs incurred to protect or enhance an investment, or costs incurred to pursue other claims or legal actions, are reported as operating expenses.
Tax Matters and Distributions - The Fund's policy is to comply with the provisions of the Internal Revenue Code (the Code) applicable to regulated investment companies and to distribute to shareholders all of its net taxable income, including any net realized gain on investments. Accordingly, no provision for federal income or excise tax is provided.
The Fund files a tax return annually using tax accounting methods required under provisions of the Code which may differ from generally accepted accounting principles, the basis on which these financial statements are prepared. Accordingly, the amount of net investment income and net realized gain reported on these financial statements may differ from that reported on the Fund's tax return and, consequently, the character of distributions to shareholders reported in the financial highlights may differ from that reported to shareholders on Form 1099-DIV. Foreign taxes have been provided for on interest and dividend income earned on foreign investments in accordance with the applicable country's tax rates and to the extent unrecoverable are recorded as a reduction of investment income.
Distributions to shareholders are recorded on the ex-dividend date. The Fund distinguishes between distributions on a tax basis and a financial reporting basis and requires that only distributions in excess of tax basis earnings and profits are reported in the financial statements as a return of capital. Differences in the recognition or classification of income between the financial statements and tax earnings and profits which result in temporary over-distributions for financial statement purposes, are classified as distributions in excess of net investment income or accumulated net realized gains. During the year ended January 31, 1995, accumulated net realized loss on investments and foreign currency transactions increased by $14,784,014, accumulated distributions in excess of net investment income decreased by $1,336,380, and paid-in capital decreased by $13,447,634 due to differences between book and tax accounting for non-income producing securities and capital losses acquired in fund mergers. This change had no effect on the net assets or net asset value per share. At January 31, 1995, cumulative tax-basis income exceeded book-basis income due to differences in accounting for non-income producing securities and losses deferred for tax purposes. These differences are considered temporary and are expected to reverse in future years.
Multiple Classes of Shares of Beneficial Interest - The Fund offers Class A, Class B and Class C shares. The three classes of shares differ in their respective shareholder servicing agent, distribution and service fees. Shareholders of each class also bear certain expenses that pertain only to that particular class. All shareholders bear the common expenses of the Fund pro rata based on the settled shares outstanding of each class, without distinction between share classes. Dividends are declared separately for each class. No class has preferential dividend rights; differences in per share dividend rates are generally due to differences in separate class expenses, including distribution and shareholder servicing fees.
(3) Transactions with Affiliates Investment Adviser - The Fund has an investment advisory agreement with Massachusetts Financial Services Company (MFS) to provide overall investment advisory and administrative services, and general office facilities. The management fee, computed daily and paid monthly at an effective annual rate of 0.20% of average daily net assets and 2.88% of investment income, amounted to $3,756,072.
The Fund pays no compensation directly to its Trustees who are officers of the investment adviser, or to officers of the Fund, all of whom receive remuneration for their services to the Fund from MFS. Certain of the officers and Trustees of the Fund are officers or directors of MFS, MFS Fund Distributors, Inc. (MFD) and MFS Service Center, Inc. (MFSC). The Fund has an unfunded defined benefit plan for all of its independent Trustees. Included in Trustees' compensation is a net periodic pension expense of $19,892 for the year ended January 31, 1995.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received $105,333 as its portion of the sales charge on sales of Class A shares of the Fund. The Trustees have adopted separate distribution plans for each class of shares pursuant to Rule 12b-1 of the Investment Company Act of 1940 as follows:
The Class A Distribution Plan provides that the Fund will pay MFD up to 0.35% of its average daily net assets attributable to Class A shares annually in order that MFD may pay expenses on behalf of the Fund related to the distribution and servicing of its shares. These expenses include a service fee to each securities dealer that enters into a sales agreement with MFD of up to 0.25% per annum (currently reduced to 0.15% for shares purchased prior to March 1, 1991) of the Fund's average daily net assets attributable to Class A shares which are attributable to that securities dealer, a distribution fee to MFD of up to 0.10% per annum of the Fund's average daily net assets attributable to Class A shares, commissions to dealers and payments to MFD wholesalers for sales at or above a certain dollar level, and other such distribution-related expenses that are approved by the Fund. MFD is currently waiving the 0.10% distribution fee for an indefinite period, which amounted to $531,614 and is shown as a reduction of expenses on the Statement of Operations. Fees incurred under the distribution plan during the year ended January 31, 1995, net of waiver, were 0.22% of average daily net assets attributable to Class A shares on an annualized basis and amounted to $1,173,013 (of which MFD retained $284,649).
The Class B and Class C Distribution Plans provide that the Fund will pay MFD a monthly distribution fee, equal to 0.75% per annum, and a quarterly service fee of up to 0.25% per annum, of the Fund's average daily net assets attributable to Class B and Class C shares. MFD will pay to each securities dealer that enters into a sales agreement with MFD all or a portion of the service fee attributable to Class B and Class C shares, and will pay to such securities dealers all of the distribution fee attributable to Class C shares. The service fee is intended to be additional consideration for services rendered by the dealer with respect to Class B and Class C shares. Fees incurred under the distribution plans during the year ended January 31, 1995 were 1.00% of average daily net assets attributable to Class B and Class C shares on an annualized basis and amounted to $2,960,079 and $24,572, respectively (of which MFD retained $83,028 and $759 for Class B and Class C shares, respectively).
A contingent deferred sales charge is imposed on shareholder redemptions of Class A shares, on purchases of $1 million or more, in the event of a share redemption within twelve months following the share purchase. A contingent deferred sales charge is imposed on shareholder redemptions of Class B shares in the event of a share redemption within six years of purchase. MFD receives all contingent deferred sales charges. Contingent deferred sales charges imposed during the year ended January 31, 1995 were $303 and $578,443 for Class A and Class B shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earned $789,656, $651,780 and $3,689 for Class A, Class B and Class C shares, respectively, for its services as shareholder servicing agent. The fee is calculated as a percentage of the average daily net assets of each class of shares at an effective annual rate of up to 0.15%, up to 0.22% and up to 0.15% attributable to Class A, Class B and Class C shares, respectively.
(4) Portfolio Securities Purchases and sales of investments, other than U.S. government securities, purchased option transactions and short-term obligations, aggregated $467,033,436 and $599,003,642, respectively.
The cost and unrealized appreciation or depreciation in value of the investments owned by the Fund, as computed on a federal income tax basis, are as follows:
Aggregate cost $ 892,675,204
--------------
Gross unrealized depreciation $(102,982,053)
Gross unrealized appreciation 14,571,757
--------------
Net unrealized depreciation $ (88,410,296)
==============
At January 31, 1995, the Fund, for federal income tax purposes, had a capital
loss carryforward of $236,557,241, which may be applied against any net taxable
realized gains of each succeeding year until the earlier of its utilization or
expiration. The Fund's carryforward losses expire as shown in the following
table.
Year Ending January 31, Amount
- ------------------------------------------------------------------------------
1997 $ 3,134,316
1998 30,407,582
1999 91,805,710
2000 64,105,312
2001 16,884,352
2003 30,219,969
------------
Total $236,557,241
============
|
(5) Shares of Beneficial Interest The Fund's Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Class A Shares
Year Ended 1995 1994
January 31, --------------------------- ---------------------------
Shares Amount Shares Amount
- ------------------------------------------------------------------------------
Shares sold 41,588,518 $ 207,747,317 36,435,001 $192,579,433
Shares issued to
shareholders in
reinvestment of
distributions 5,157,706 25,825,727 6,179,895 32,620,016
Shares reacquired (55,887,292) (285,808,664) (39,921,437) (211,136,348)
----------- ------------- ----------- ------------
Net increase
(decrease) (9,141,068) $ (52,235,620) 2,693,459 $ 14,063,101
=========== ============= =========== ============
Class B Shares
Year Ended 1995 1994*
January 31, --------------------------- ---------------------------
Shares Amount Shares Amount
- ------------------------------------------------------------------------------
Shares sold 35,621,772 $ 179,566,752 15,799,194 $ 84,858,031
Shares issued in
connection with
the acquisition
of MFS Lifetime
High Income Fund -- -- 61,287,768 323,106,233
Shares issued to
shareholders in
reinvestment of
distributions 2,069,901 10,362,543 830,692 4,498,106
Shares reacquired (46,104,410) (236,279,771) (10,512,568) (56,714,347)
----------- ------------- ----------- ------------
Net increase
(decrease) (8,412,737) $ (46,350,476) 67,405,086 $355,748,023
=========== ============= =========== ============
|
* For the period from the commencement of offering of Class B shares, September 27, 1993 to January 31, 1994.
Class C Shares
Year Ended 1995 1994+
January 31, --------------------------- ---------------------------
Shares Amount Shares Amount
- ------------------------------------------------------------------------------
Shares sold 1,348,486 $ 6,819,387 187,755 $ 1,027,841
Shares issued to
shareholders in
reinvestment of
distributions 26,459 131,435 133 732
Shares reacquired (856,606) (4,295,976) (1) (6)
----------- ------------- ----------- ------------
Net increase 518,339 $ 2,654,846 187,887 $ 1,028,567
=========== ============= =========== ============
|
+ For the period from the commencement of offering of Class C shares, January 3, 1994 to January 31, 1994.
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other funds managed by MFS, or an affiliate of MFS, in an unsecured line of credit with a bank which permits borrowings up to $300 million, collectively. Borrowings may be made to temporarily finance the repurchase of Fund shares. Interest is charged to each fund, based on its borrowings, at a rate equal to the bank's base rate. In addition, a commitment fee, based on the average daily unused portion of the line of credit, is allocated among the participating funds at the end of each quarter. The commitment fee allocated to the Fund for the year ended January 31, 1995 was $13,109.
(7) Transactions in Securities of Affiliated Issuers
Affiliated issuers, as defined under the Investment Company Act of 1940, are those in which the Fund's holdings of an issuer represent 5% or more of the outstanding voting securities of the issuer. A summary of the Fund's transactions in the securities of these issuers during the year ended January 31, 1995 is set forth below.
Acquisitions Dispositions Interest
Beginning ------------------- --------------------- Ending Realized and
Share Share Share Share Gain Dividend Ending
Affiliate Amount Amount Cost Amount Cost Amount (Loss) Income Value
- -----------------------------------------------------------------------------------------------------------------------------------
Calton, Inc. 1,822,240 271,804 $443,041 84,600 $ 233,159 2,009,444 $(149,032) $ -- $1,507,082
Mayflower Group, Inc. 915,919 -- -- 132,000 1,713,799 783,919 (300,850) -- 7,251,251
Ranger Industries, Inc. 266,768 -- -- -- -- 266,768 -- -- 33,346
-------- ----------- ---------- -------- ----------
$443,041 $ 1,946,958 $(449,882) $ 0 $8,791,679
======== =========== ========== ======== ==========
|
(8) Restricted Securities The Fund may invest not more than 15% of its net assets in securities which are subject to legal or contractual restrictions on resale. At January 31, 1995, the Fund owned the following restricted securities (constituting 5.0% of net assets) which may not be publicly sold without registration under the Securities Act of 1933. The Fund does not have the right to demand that such securities be registered. The value of these securities is determined by valuations supplied by a pricing service or brokers or, if not available, in good faith by or at the direction of the Trustees. Certain of these securities may be offered and sold to "qualified institutional buyers" under Rule 144A of the 1933 Act.
Date of Share/Par
Description Acquisition Amount Cost Value
- --------------------------------------------------------------------------------------------------
Alabama Outdoor Advertising, Inc., 10s, 1996 3/28/91 467,943 $ 423,639 $ 350,957
Alabama Outdoor Holdings, Inc. 3/28/91 1,500 15 15
Arcadian Partners L.P., 10.75s, 2005<F1> 5/9/93 5,350,000 5,311,850 5,216,250
Borg-Warner Automotive, Inc. 1/27/93 101,621 355,673 2,299,175
Borg-Warner Security Corp. 1/27/93 150,000 975,000 1,218,750
Envirosource, Inc. 5/15/91 1,666 7,289 5,415
Four Seasons Hotels, Inc., 9.125s, 2000<F1> 6/23/93 7,750,000 7,700,788 7,207,500
Gillett Holdings, Inc. 2/27/92 85,019 872,850 1,742,889
Maritime Group Ltd., 13.5s, 1997<F1> 2/9/94 3,318,926 3,000,000 1,692,652
Merill Lynch Mortgage Investors, Inc.,
1994-M1, 8.227s, 2023 6/22/94 4,500,000 3,119,063 3,076,740
Patrick Media Group Holdings, Inc. 3/28/91 32,320 1,616 2,586
Remington Arms, Inc., 9.5s, 2003<F1> 11/19/93 2,000,000 1,987,500 1,660,000
S.D. Warren Co., 12s, 2004<F1> 12/13/94 7,200,000 7,200,000 7,452,000
Thermadyne Industries Holdings Corp., "B" 4/12/89 336,000 241,920 3,360
Ucar Global Enterprises, Inc., 12s, 2005<F1> 1/20/95 8,500,000 8,500,000 8,712,500
-----------
$40,640,789
===========
<F1>SEC Rule 144A restriction.
|
(9) Acquisitions At close of business on September 24, 1993, the Fund acquired all of the assets and liabilities of MFS Lifetime High Income Fund (LHI). The acquisition was accomplished by a tax-free exchange of 61,287,768 Class B shares of the Fund (valued at $323,106,233) for 51,812,122 shares of LHI. LHI's net assets on that date ($323,106,233), including $4,314,234 of unrealized appreciation, were combined with those of the Fund. The aggregate net assets of the Fund and LHI immediately before the acquisition were $587,580,833 and $323,106,233, respectively. The aggregate net assets of the Fund immediatley after the acquisition were $910,687,066.
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Series Trust III and Shareholders of MFS High Income Fund:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS High Income Fund (one of the series constituting MFS Series Trust III) as of January 31, 1995, the related statement of operations for the year then ended, the statement of changes in net assets for the years ended January 31, 1995 and January 31, 1994, and the financial highlights for each of the years in the ten-year period ended January 31, 1995. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of the securities owned at January 31, 1995 by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present fairly, in all material respects, the financial position of MFS High Income Fund at January 31, 1995, the results of its operations, the changes in its net assets, and its financial highlights for the respective stated periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 3, 1995
MFS HIGH BULK RATE
INCOME FUND [LOGO] U.S. POSTAGE
PAID
500 Boylston Street PERMIT #55638
Boston, MA 02116 BOSTON, MA
|
[LOGO]
MHI-2 3/95 74M 18/218/318
PROSPECTUS
MFS(R) MUNICIPAL June 1, 1995
HIGH INCOME FUND Class A Shares of Beneficial Interest
(A member of the MFS Family of Funds(R)) Class B Shares of Beneficial Interest
- --------------------------------------------------------------------------------
Page
----
1. Expense Summary .................................................... 2
2. The Fund ........................................................... 3
3. Condensed Financial Information .................................... 4
4. Investment Objective and Policies .................................. 5
5. Risk Factors ....................................................... 9
6. Management of the Fund .............................................10
7. Information Concerning Shares of the Fund ..........................11
Purchases ......................................................11
Exchanges ......................................................17
Redemptions and Repurchases ....................................17
Distribution Plan ..............................................19
Distributions ..................................................20
Tax Status .....................................................20
Net Asset Value ................................................21
Description of Shares, Voting Rights and Liabilities ...........21
Performance Information ........................................22
8. Shareholder Services ...............................................22
Appendix A .....................................................25
Appendix B .....................................................25
Appendix C .....................................................29
|
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
MFS MUNICIPAL HIGH INCOME FUND 500 Boylston Street, Boston, MA 02116 (617) 954-5000
The investment objective of MFS Municipal High Income Fund (the "Fund") is to provide high current income exempt from federal income taxes. The Fund seeks to achieve this objective by investing its assets primarily in municipal bonds and notes which may be of medium and lower quality (see "Investment Objective and Policies"). The Fund is a non-diversified series of MFS Series Trust III (the "Trust"), an open-end investment company.
THE FUND MAY INVEST UP TO 65% OF ITS ASSETS IN LOWER RATED MUNICIPAL BONDS, COMMONLY KNOWN AS "JUNK BONDS," THAT ENTAIL GREATER RISKS, INCLUDING DEFAULT
RISKS, THAN THOSE FOUND IN HIGHER RATED SECURITIES. INVESTORS SHOULD CAREFULLY
CONSIDER THESE RISKS BEFORE INVESTING (SEE "RISK FACTORS").
The Fund's investment adviser and distributor are Massachusetts Financial Services Company ("MFS" or the "Adviser") and MFS Fund Distributors, Inc. ("MFD"), respectively, both of which are located at 500 Boylston Street, Boston, Massachusetts 02116.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
This Prospectus sets forth concisely the information concerning the Trust and the Fund that a prospective investor ought to know before investing. The Trust, on behalf of the Fund, has filed with the Securities and Exchange Commission (the "SEC") a Statement of Additional Information, dated June 1, 1995, which contains more detailed information about the Trust and the Fund and is incorporated into this Prospectus by reference. See page 24 for a further description of the information set forth in the Statement of Additional Information. A copy of the Statement of Additional Information may be obtained without charge by contacting the Shareholder Servicing Agent (see back cover for address and phone number).
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
1. EXPENSE SUMMARY
CLASS A CLASS B
SHAREHOLDER TRANSACTION EXPENSES: ------- -------
Maximum Initial Sales Charge Imposed on Purchases of Fund Shares
(as a percentage of offering price) ................................ 4.75% 0.00%
Maximum Contingent Deferred Sales Charge
(as a percentage of original purchase or redemption proceeds,
as applicable) ..................................................... See Below<F1> 4.00%
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees ..................................................... 0.70% 0.70%
Rule 12b-1 Fees ..................................................... 0% 1.00%<F2>
Other Expenses ...................................................... 0.34% 0.40%
----- ----
Total Operating Expenses ............................................ 1.04% 2.10%
- ----------
<F1>Purchases of $1 million or more are not subject to an initial sales charge; however, a CDSC of 1%
will be imposed on such purchases in the event of certain redemption transactions within 12 months
following such purchases (see "Purchases").
<F2>The Fund has adopted a Distribution Plan for its Class B shares in accordance with Rule 12b-1 under
the Investment Company Act of 1940, as amended (the "1940 Act"), which provides that it will pay
distribution/ service fees aggregating up to (but not necessarily all of) 1.00% per annum of the
average daily net assets attributable to the Class B shares (see "Distribution Plan"). After a
substantial period of time, distribution expenses paid under this Plan, together with any contingent
deferred sales charge ("CDSC"), may total more than the maximum sales charge that would have been
permissible if imposed entirely as an initial sales charge.
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PERIOD CLASS A CLASS B
------ ------- -------------------
<F1>
1 year .....................................................$ 58 $ 61 $ 21
3 years .................................................... 79 96 66
5 years .................................................... 102 133 113
10 years .................................................... 169 216<F2> 216<F2>
- ----------
<F1>Assumes no redemption.
<F2>Class B shares convert to Class A shares approximately eight years after purchase; therefore,
years nine and ten reflect Class A expenses.
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The purpose of the expense table provided above is to assist investors in
understanding the various costs and expenses that a shareholder of the Fund will
bear directly or indirectly. More complete descriptions of the following
expenses of the Fund are set forth in the following sections of the Prospectus:
(i) varying sales charges on share purchases -- "Purchases"; (ii) varying CDSCs
- -- "Purchases"; (iii) management fees -- "Investment Adviser"; and (iv) Rule
12b-1 (i.e., distribution plan) fees -- "Distribution Plan."
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
2. THE FUND The Fund is a non-diversified series of the Trust, an open-end management investment company which was organized as a business trust under the laws of The Commonwealth of Massachusetts in 1977. The Trust presently consists of two series, each of which represents a portfolio with separate investment policies. Two classes of shares of the Fund are offered to the general public. Class A shares are offered at net asset value plus an initial sales charge (or a CDSC in the case of certain purchases of $1 million or more). Class B shares are offered at net asset value without an initial sales charge but subject to a CDSC and a Distribution Plan providing for an annual distribution and service fee. Class B shares will convert to Class A shares approximately eight years after purchase. The Fund buys securities (primarily municipal bonds and notes that may be in the medium or lower rating categories or may be unrated, the interest on which is exempt from federal income tax) for its portfolio.
In June 1985, the Trust's Board of Trustees decided to terminate sales of Fund shares, other than to the Fund's shareholders, because the Fund had attained optimal size for management purposes. The Board of Trustees voted to re-open the Fund for sales to new shareholders for the period from March 1, 1989 to the close of business on March 23, 1989. During such period the Fund's net assets increased by approximately $109 million as a result of such additional investments. The Board of Trustees voted again to re-open the Fund for sales to new shareholders for the period from February 6, 1990 to the close of business on February 7, 1990. During such period, the Fund's net assets increased by approximately $205 million as a result of such additional investments. On February 28, 1990, the sale of Fund shares to existing shareholders (other than through the reinvestment of dividends and capital gains of the Fund) was terminated. On November 5, 1990, Fund shares were made available for sale to existing shareholders only. Upon a vote by the Board of Trustees, the Fund was again reopened for sales to new shareholders for one day, June 3, 1994. During such day, the Fund's net assets increased by approximately $189 million as a result of such additional investments.
The Trust's Board of Trustees provides broad supervision over the affairs of the Fund. MFS is the Fund's investment adviser. A majority of the Trustees are not affiliated with the Adviser. The Adviser is responsible for the management of the assets of the Fund and the officers of the Trust are responsible for the Fund's operations. The Adviser manages the Fund's portfolio from day to day in accordance with the investment objective and policies of the Fund. The selection of investments and the way they are managed depend on the conditions and trends in the economy and the financial marketplaces. The Fund also offers to buy back (redeem) its shares from its shareholders at any time at their net asset value, less any applicable CDSC.
3. CONDENSED FINANCIAL INFORMATION The following per share information has been audited and should be read in conjunction with financial statements included in the Fund's Annual Report to shareholders which are incorporated by reference into the Statement of Additional Information in reliance upon the report of the Fund's independent auditors. The Fund's current independent auditors are Ernst & Young LLP.
FINANCIAL HIGHLIGHTS
YEAR ENDED JANUARY 31,
----------------------------------------------------------------------------------
1995<F2> 1994 1993 1992 1991 1990
------ ---- ---- ---- ---- ----
CLASS A
-------
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -
beginning of period ........ $ 9.38 $ 9.26 $ 9.22 $ 9.09 $ 9.45 $ 9.55
------ ------ ------ ------ ------ ------
Income from investment
operations -
Net investment income .... $ 0.64 $ 0.77 $ 0.73 $ 0.73 $ 0.74 $ 0.85
Net realized and
unrealized gain (loss)
on investments .......... (0.75) 0.05 0.06 0.17 (0.32) (0.09)
------ ------ ------ ------ ------ ------
Total from
investment operations . $(0.11) $ 0.82 $ 0.79 $ 0.90 $ 0.42 $ 0.76
------ ------ ------ ------ ------ ------
Less distributions
declared to shareholders -
From net investment
income .................. $(0.67) $(0.70) $(0.75) $(0.77) $(0.78) $(0.81)
From net realized
gain on investments ... -- -- -- -- -- (0.04)
From paid-in capital...... -- -- -- -- -- (0.01)
------ ------ ------ ------ ------ ------
Total
distributions declared
to shareholders ....... $(0.67) $(0.70) $(0.75) $(0.77) $(0.78) $(0.86)
------ ------ ------ ------ ------ ------
Net asset value - end
of period ............ .... $ 8.60 $ 9.38 $ 9.26 $ 9.22 $ 9.09 $ 9.45
====== ====== ====== ====== ====== ======
Total return<F1>...... ..... (1.04)% 9.19% 9.02% 10.34% 4.65% 8.24%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses ........... ..... 1.04% 1.10% 1.00% 1.03% 1.05% 1.02%
Net investment income..... 7.27% 7.15% 7.95% 7.96% 8.17% 8.90%
PORTFOLIO TURNOVER ... ..... 32% 18% 10% 21% 41% 21%
NET ASSETS AT END OF
PERIOD (000 OMITTED) . .... $920,043 $809,957 $731,968 $648,043 $638,185 $485,037
<F1>Total returns for Class A shares do not include the applicable sales charge (except for reinvestment dividends
prior to October 1, 1989). If the sales charge had been included, the results would have been lower.
<F2>Per share data for the periods indicated are based on average shares outstanding.
|
FINANCIAL HIGHLIGHTS -- CONTINUED
YEAR ENDED JANUARY 31,
--------------------------------------------------------------------------------------
1989 1988 1987 1986 1995<F2> 1994<F4>
----- ----- ---- ---- ----- -----
CLASS A CLASS B
------- -------
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -
beginning of period ........ $ 9.68 $10.38 $10.49 $ 9.80 $ 9.38 $ 9.40
------ ------ ------ ------ ------ ------
Income from investment
operations -
Net investment
income .................. $ 0.88 $ 0.84 $ 0.99 $ 0.95 $ 0.57 $ 0.32
Net realized and
unrealized gain (loss)
on investments .......... (0.12) (0.67) (0.01) 0.71 (0.78) (0.14)
------ ------ ------ ------ ------ ------
Total from investment
operations ............ $ 0.76 $ 0.17 $ 0.98 $ 1.66 $(0.21) $ 0.18
------ ------ ------ ------ ------ ------
Less distributions declared
to shareholders -
From net investment
income .................. $(0.82) $(0.84) $(1.01) $(0.94) $(0.57) $(0.20)
From net realized
gain on investments ... (0.07) (0.03) (0.08) (0.03) -- --
------ ------ ------ ------ ------ ------
Total distributions
declared to
shareholders .......... $(0.89) $(0.87) $(1.09) $(0.97) $(0.57) $(0.20)
------ ------ ------ ------ ------ ------
Net asset value - end
of period ................. $ 9.55 $ 9.68 $10.38 $10.49 $ 8.60 $ 9.38
====== ====== ====== ====== ====== ======
Total return<F3>............ 8.32% 1.87% 10.00% 18.24% (2.13)% 1.89%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses ................. 0.65% 1.03% 1.00% 1.04% 2.10% 2.04%<F1>
Net investment
income .................. 9.27% 8.54% 9.54% 9.68% 6.32% 5.43%<F1>
PORTFOLIO TURNOVER ......... 23% 16% 9% 43% 32% 18%
NET ASSETS AT END OF
PERIOD (000 OMITTED) ...... $325,044 $349,655 $442,036 $294,056 $55,675 $1
<F1>Annualized.
<F2>Per share data for the periods indicated are based on average shares outstanding.
<F3>Total returns for Class A shares do not include the applicable sales charge (except for reinvestment dividends
prior to October 1, 1989). If the sales charge had been included, the results would have been lower.
<F4>For the period from the commencement of offering of Class B shares, September 7, 1993, to January 31, 1994.
|
4. INVESTMENT OBJECTIVE AND POLICIES INVESTMENT OBJECTIVE -- The investment objective of the Fund is to provide high current income exempt from federal income taxes. Any investment involves risk and there can be no assurance that the Fund will achieve its investment objective.
INVESTMENT POLICIES -- The Fund seeks to achieve its investment objective by investing primarily (i.e., at least 80% of its assets under normal circumstances) in debt securities issued by or on behalf of states, territories and possessions of the United States, the District of Columbia and their political subdivisions, agencies or instrumentalities, the interest on which is exempt from federal income tax ("Municipal Bonds" or "tax-exempt securities"). Under normal circumstances, the Fund will invest at least 65% of its total assets in tax-exempt securities which offer a current yield above that generally available on tax-exempt securities in the three highest rating categories of the recognized rating agencies (commonly known as "junk bonds" if rated below the four highest categories of recognized rating agencies). Such high risk securities generally involve greater volatility of price and greater risk of nonpayment of principal and interest (including the possibility of default by or bankruptcy of the issuers of such securities) than securities in higher rating categories. See "Risk Factors" below for a further description of the risks associated with these medium and lower rated securities. However, since available yields and yield differentials vary over time, no specific level of income or yield differential can ever be assured. Also, any income earned on portfolio securities would be reduced by the expenses of the Fund before it is distributed to shareholders.
The Fund may purchase Municipal Bonds, the interest on which may be subject to an alternative minimum tax (for the purpose of this Prospectus, the interest thereon is nonetheless considered to be tax-exempt). For a comparison of yields on Municipal Bonds and taxable securities, see Appendix A to this Prospectus; for a general discussion of Municipal Bonds and a description of Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings Group ("S&P") and Fitch Investors Service, Inc. ("Fitch") ratings of Municipal Bonds, see Appendix B to this Prospectus; and for a chart indicating the composition of the bond portion of the Fund's portfolio for its most recent fiscal year with the debt securities separated into rating categories, see Appendix C to this Prospectus.
The value of the tax-exempt securities that the Fund intends to purchase may be less sensitive to market factors than other securities; however, they may be more sensitive to changes in the perception of the credit quality of such securities, or of similar types of securities or of securities issued within the same geographical region. Changes in the value of securities subsequent to their acquisition will not affect income or yields to maturity of the Fund's portfolio securities but will be reflected in the net asset value of the shares of the Fund. In order to preserve or enhance the value of its investments, the Fund may, on occasion, make additional capital expenditures beyond the initial cost of an investment. The Fund will seek to reduce risk through diversification, credit analysis and attention to current developments and trends in both the economy and financial markets.
The net asset value of the shares of an open-end investment company, such as the Fund, which invests primarily in fixed income tax-exempt securities, changes as the general levels of interest rates fluctuate. When interest rates decline, the value of a portfolio invested at higher yields can be expected to rise. Conversely, when interest rates rise, the value of a portfolio invested at lower yields can be expected to decline.
When the Adviser believes that investing for defensive purposes is appropriate, such as during periods of unusual market conditions or at times when yield spreads are narrow and the higher yields do not justify the increased risk or if acceptable quantities of higher yielding securities are unavailable, the Fund may either invest in tax-exempt securities in the higher rating categories of recognized rating agencies (that is, ratings of A or higher by Moody's, S&P or Fitch or comparable unrated tax-exempt securities) or in cash or cash equivalent short-term obligations of similar quality (i.e., with ratings equivalent to A or better by Moody's, S&P or Fitch or comparable unrated tax-exempt securities) including, but not limited to, short-term municipal obligations, certificates of deposit, commercial paper, short-term notes, obligations issued or guaranteed by the U.S. Government or any of its agencies or instrumentalities and repurchase agreements. From time to time, a portion of the Fund's distributions will be taxable to shareholders (e.g., distributions of income from taxable obligations, from capital gains, from transactions in certain Municipal Bonds purchased at market discount and from certain other transactions).
The Fund may invest in a relatively high percentage of municipal bonds issued by entities having similar characteristics. The issuers may be located in the same geographic area, or may pay interest on their obligations from revenue of similar projects such as hospitals, electric utility systems, multi-family housing, nursing homes, commercial facilities (including hotels), steel companies or life care facilities. This may make the Fund more susceptible to similar economic, political or regulatory occurrences. As the similarity in issuers increases, the potential for fluctuation of the net asset value of shares of the Fund also increases.
The Fund reserves the right to invest more than 25% of its assets in industrial revenue bonds, including industrial revenue bonds issued for hospitals, electric utility systems, multi-family housing, nursing homes, commercial facilities (including hotels), steel companies and life care facilities. See the Statement of Additional Information for a discussion of the risks which these investments might entail. Certain of the bonds issued for these purposes provide financing for construction or rehabilitation of facilities as described above. As such they are susceptible to various construction related risks, including labor costs and environmental, zoning and site development considerations, as well as the ability of contractors to perform within time and cost constraints.
From time to time, proposals have been introduced before Congress for the purpose of restricting or eliminating the federal income tax exemption for interest on Municipal Bonds. See "Tax Status" below for the effect of current federal tax law on this exemption.
ZERO COUPON BONDS: Municipal Bonds in which the Fund may invest also include zero coupon bonds. Zero coupon bonds are debt obligations which are issued at a significant discount from face value and do not require the periodic payment of interest. 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. Zero coupon bonds benefit the issuer by mitigating its need for cash to meet debt service, but also require a higher rate of return to attract investors who are willing to defer receipt of such cash. Such investments may experience greater volatility in market value due to changes in interest rates than debt obligations which make regular payments of interest. The Fund will accrue income on such investments for tax and accounting purposes, 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. Because of the higher rates of return, such investments are regarded by the Fund as consistent with its investment objective.
INVERSE FLOATING RATE OBLIGATIONS: The Fund may invest in so called "inverse floating rate obligations" or "residual interest" bonds, or other obligations or certificates relating thereto structured to have similar features. Such obligations generally have floating or variable interest rates that move in the opposite direction of short-term interest rates and generally increase or decrease in value in response to changes in short-term interest rates at a rate which is a multiple (typically two) of the rate at which fixed-rate long-term tax-exempt securities increase or decrease in response to such changes. As a result, such obligations have the effect of providing investment leverage and may be more volatile than long-term fixed rate tax exempt obligations.
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements in order to earn additional income on available cash or as a temporary defensive measure. Under a repurchase agreement, the Fund acquires securities subject to the seller's agreement to repurchase at a specified time and price. If the seller becomes subject to a proceeding under the bankruptcy laws or its assets are otherwise subject to a stay order, the Fund's right to liquidate the securities may be restricted (during which time the value of the securities could decline). As discussed in the Statement of Additional Information, the Fund has adopted certain procedures intended to minimize risk.
LOANS AND OTHER DIRECT INDEBTEDNESS: The Fund may invest a portion of its assets in loans. By purchasing a loan, the Fund acquires some or all of the interest of a bank or other lending institution in a loan to a corporate borrower. Many such loans are secured, and most impose restrictive covenants which must be met by the borrower. These loans are made generally to finance internal growth, mergers, acquisitions, stock repurchases, leveraged buy-outs and other corporate activities. Such loans may be in default at the time of purchase. The Fund may also purchase trade or other claims against companies, which generally represent money owed by the company to a supplier of goods and services. These claims may also be purchased at a time when the company is in default. Certain of the loans acquired by the Fund may involve revolving credit facilities or other standby financing commitments which obligate the Fund to pay additional cash on a certain date or on demand.
The highly leveraged nature of many such loans may make such loans especially vulnerable to adverse changes in economic or market conditions. Loans and other direct investments may not be in the form of securities or may be subject to restrictions on transfer, and only limited opportunities may exist to resell such instruments. As a result, the Fund may be unable to sell such investments at an opportune time or may have to resell them at less than fair market value. For a further discussion of loans and the risks related to transactions therein, see the Statement of Additional Information.
"WHEN-ISSUED" SECURITIES: Some tax-exempt securities may be purchased on a "when-issued" or on a "forward delivery" basis, which means that the obligations will be delivered to the Fund at a future date, usually beyond customary settlement time. The commitment to purchase a security for which payment will be made on a future date may be deemed a separate security. Although the Fund is not limited as to the amount of tax-exempt securities for which it has such commitments, it is expected that under normal circumstances, the Fund will not commit more than 30% of its assets to such purchases. The Fund does not pay for the securities until received, and does not start earning interest on the securities until the contractual settlement date. In order to invest its assets immediately while awaiting delivery of securities purchased on such bases, the Fund will normally invest in short-term securities that offer same-day settlement and earnings, but that may bear interest at a lower rate than longer-term securities; however, the Fund also may invest in longer-term securities. It is the intention of the Fund that these investments will usually be in securities the interest on which is exempt from federal income tax. For additional information concerning the use, risks and costs of "when-issued" and "forward delivery" securities, see the Statement of Additional Information.
INDEXED SECURITIES: The Fund may invest in indexed securities whose value is linked to interest rates, commodities, indices or other financial indicators. Most indexed securities are short to intermediate term fixed-income securities whose values at maturity or interest rates rise or fall according to the change in one or more specified underlying instruments. Indexed securities may be positively or negatively indexed (i.e., their value may increase or decrease if the underlying instrument appreciates), and may have return characteristics similar to direct investments in the underlying instrument or to one or more options on the underlying instrument. Indexed securities may be more volatile than the underlying instrument itself.
OPTIONS: The Fund intends to write (sell) "covered" put and call options on fixed income securities. Call options written by the Fund give the holder the right to buy the underlying securities from the Fund at a fixed exercise price up to a stated expiration date or, in the case of certain options, on such date. Put options written by the Fund give the holder the right to sell the underlying securities to the Fund during the term of the option at a fixed exercise price up to a stated expiration date or, in the case of certain options, on such date. Call options are "covered" by the Fund, for example, when it owns the underlying securities, and put options are "covered" by the Fund, for example, when it has established a segregated account of cash or short-term money market instruments which can be liquidated promptly to satisfy any obligation of the Fund to purchase the underlying securities. The Fund may also write straddles (combinations of puts and calls on the same underlying security). Such transactions generate additional premium income but also include greater risk.
The Fund will receive a premium from writing a put or call option, which increases the Fund's gross income in the event the option expires unexercised or is closed out at a profit. The amount of the premium will reflect, among other things, the relationship of the exercise price to the market price and volatility of the underlying security, the remaining term of the option, supply and demand and interest rates. By writing a call option, the Fund limits its opportunity to profit from any increase in the market value of the underlying security above the exercise price of the option. By writing a put option, the Fund assumes the risk that it may be required to purchase the underlying security for an exercise price higher than its then-current market value, resulting in a potential capital loss unless the security subsequently appreciates in value.
The Fund may terminate an option that it has written prior to its expiration by entering into a closing purchase transaction in which it purchases an option having the same terms as the option written. It is possible, however, that illiquidity in the options markets may make it difficult from time to time for the Fund to close out its written option positions.
The Fund may also purchase put or call options in anticipation of changes in interest rates which may adversely affect the value of its portfolio or the prices of securities that the Fund wants to purchase at a later date. 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 of the option, and, unless the price of the underlying security changes sufficiently, the option may expire without value to the Fund.
The Fund intends to write and purchase options on securities for hedging purposes and also in an effort to increase current income. Options on securities that are written or purchased by the Fund will be traded on U.S. exchanges and over-the-counter.
The Fund may purchase detachable call options on municipal securities, which are options issued by an issuer of the underlying municipal securities giving the purchaser the right to purchase the securities at a fixed price, up to a stated time in the future, or in some cases, on a future date.
In addition, the Fund may purchase warrants on fixed income securities. A warrant on a fixed income security is a long-dated call option conveying to the holder of the warrant the right, but not the obligation, to purchase a fixed income security of a specific description (from the issuer) on a certain date or dates (the exercise date) at a fixed exercise price.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS: The Fund may purchase and sell futures contracts on fixed income securities or indices of such securities, including Municipal Bond indices and any other indices of fixed income securities which may become available for trading ("Futures Contracts"). The Fund may also purchase and write options on such Futures Contracts ("Options on Futures Contracts"). These instruments will be used to hedge against anticipated future changes in interest rates which otherwise might either adversely affect the value of the Fund's portfolio securities or adversely affect the prices of securities which the Fund intends to purchase at a later date. Should interest rates move in an unexpected manner, the Fund may not achieve the anticipated benefits of the hedging transactions and may realize a loss. Such transactions may also be entered into for non-hedging purposes to the extent permitted by applicable law, which involves greater risk and may result in losses which are not offset by gains on other portfolio assets.
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 Commodity Futures Trading Commission (the "CFTC") require that the Fund enter into transactions in Futures Contracts and Options on Futures Contracts only (i) for bona fide hedging purposes (as defined in CFTC regulations), or (ii) for non-hedging purposes, provided that the aggregate initial margin and premiums on such non-hedging positions does not exceed 5% of the liquidation value of the Fund's assets. In addition, the Fund must comply with the requirements of various state securities laws in connection with such transactions.
The Fund has adopted the additional restriction that it will not enter into a Futures Contract if, immediately thereafter, the value of securities and other obligations underlying all such Futures Contracts would exceed 50% of the value of the Fund's total assets. Moreover, the Fund will not purchase put and call options on securities or on Futures Contracts, if as a result, more than 5% of its total assets would be invested in such options.
Futures Contracts and Options on Futures Contracts that are entered into by the Fund will be traded on U.S. exchanges.
RISK FACTORS: Although the Fund will enter into certain transactions in options, Futures Contracts and Options on Futures Contracts for hedging purposes, such transactions nevertheless involve risks. For example, a lack of correlation between the instrument underlying an option or Futures Contract and the assets being hedged, or unexpected adverse price movements, could render the Fund's hedging strategy unsuccessful and could result in losses. The Fund also may enter into transactions in options, Futures Contracts and Options on Futures Contracts for other than hedging purposes, to the extent permitted by applicable law, which involves greater risk. In addition, there can be no assurance that a liquid secondary market will exist for any contract purchased or sold, and the Fund may be required to maintain a position until exercise or expiration, which could result in losses. The Statement of Additional Information contains a further description of options, Futures Contracts and Options on Futures Contracts, and a discussion of the risks related to transactions therein. Transactions entered into for non-hedging purposes involve greater risk and could result in losses which are not offset by gains on other portfolio assets.
Transactions in options may be entered into on U.S. exchanges regulated by the SEC and in the over-the-counter market, while Futures Contracts and Options on Futures Contracts may be entered into on U.S. commodities exchanges regulated by the CFTC. Over-the-counter transactions involve certain risks which may not be present in exchange-traded transactions.
Gains recognized from options and futures transactions engaged in by the Fund are taxable to shareholders upon distribution.
PORTFOLIO TRADING: The Fund intends to engage in portfolio trading rather than holding all portfolio securities to maturity. In trading portfolio securities, the Fund seeks to take advantage of market developments, yield disparities and variations in the creditworthiness of issuers.
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 Rules of Fair Practice of the National Association of Securities Dealers, Inc., (the "NASD") and such other policies as the Trustees may determine, the Adviser may consider sales of shares of the Fund and of the other investment company clients of MFD as a factor in the selection of broker-dealers to execute the portfolio transactions of the Fund. From time to time, the Adviser may direct certain portfolio transactions to broker-dealer firms which, in turn, have agreed to pay a portion of the Fund's operating expenses (e.g., fees charged by the custodian of the Fund's assets). For a further discussion of portfolio trading, see "Portfolio Trading" in the Fund's Statement of Additional Information.
The investment objective and policies of the Fund described above may be changed without shareholder approval.
The Statement of Additional Information includes a discussion of other investment policies and a listing of specific investment restrictions which govern the investment policies of the Fund. Except as otherwise indicated, the Fund's specific investment restrictions listed in the Statement of Additional Information may not be changed without the approval of the shareholders of the Fund.
The Fund's investment limitations and policies are adhered to at the time of purchase or utilization of assets; a subsequent change in circumstances will not be considered to result in a violation of policy.
5. RISK FACTORS Tax-exempt securities offering the high current income sought by the Fund are ordinarily in the medium and lower rating categories of recognized rating agencies or are unrated and, therefore, generally are high risk securities involving greater volatility of price (especially during periods of economic uncertainty or change) and risk of principal (including the possibility of default by or bankruptcy of the issuers of such securities) and income than securities in the higher rating categories and because yields vary over time, no specific level of income can ever be assured. No minimum rating is required by the Fund. In particular, securities rated BBB by S&P or Fitch or Baa by Moody's or comparable unrated securities, while normally exhibiting adequate protection parameters, have speculative characteristics and changes in economic conditions and other circumstances are more likely to lead to a weakened capacity to make principal and interest payments than in the case of higher grade Municipal Bonds. Securities rated lower than BBB by S&P or Fitch or Baa by Moody's or comparable unrated securities (high risk securities) are considered speculative. While such high risk securities may have some quality and protective characteristics, they can be expected to be outweighed by large uncertainties or major risk exposures to adverse conditions. These Municipal Bonds will be affected by the market's perception of their credit quality, economic changes and the outlook for economic growth to a greater extent than higher rated securities which react primarily to fluctuations in the general level of interest rates. Medium and lower rated Municipal Bonds are also affected by changes in interest rates, as noted in "Investment Objective and Policies" above. Furthermore, an economic downturn may result in a higher incidence of defaults by issuers of these securities. During certain periods, the higher yields on the Fund's lower rated high yielding fixed income securities are paid primarily because of the increased risk of loss of principal and income, arising from such factors as the heightened possibility of default or bankruptcy of the issuers of such securities. Due to the fixed income payments of these securities, the Fund may continue to earn the same level of interest income while its net asset value declines due to portfolio losses, which could result in an increase in the Fund's yield despite the actual loss of principal.
In addition, medium and lower rated or unrated tax-exempt securities are frequently traded only in markets where the number of potential purchasers and sellers, if any, is very limited. Furthermore, the liquidity of these securities may be affected by the market's perception of the issuer's credit quality. Therefore, judgment may at times play a greater role in valuing these securities than in the case of higher grade tax-exempt securities. This consideration may also have the effect of limiting the availability of such securities for the Fund to purchase and may also have the effect of limiting the ability of the Fund to sell such securities at their fair value either to meet redemption requests or to respond to changes in the economy or the financial markets.
While the Adviser may refer to ratings issued by established credit rating agencies, it is not the policy of the Fund to rely exclusively on ratings issued by these agencies, but rather to supplement such ratings with the Adviser's own independent and ongoing review of credit quality. The Fund's achievement of its investment objective may be more dependent on the Adviser's own credit analysis than in the case of an investment company investing in primarily higher quality bonds. With respect to those municipal bonds and notes which are not rated by a major rating agency, the Fund will be more reliant on the Adviser's judgment, analysis and experience than would be the case if such bonds and notes were rated. In evaluating the creditworthiness of an issuer, whether rated or unrated, the Adviser will take into consideration, among other things, the issuer's financial resources, its sensitivity to economic conditions and trends, any operating history of and the community support for the facility financed by the issue, the ability of the issuer's management and regulatory matters.
The Adviser will attempt to reduce the risks of investing in medium or lower rated or unrated tax-exempt securities to the greatest extent practicable through portfolio management techniques (see the Statement of Additional Information) and through the use of credit analysis and Futures Contracts.
The Fund has registered as a "non-diversified" investment company so that it will be able to invest more than 5% of its assets in the obligations of an issuer, subject to the diversification requirements of Subchapter M of the Internal Revenue Code of 1986, as amended. Since the Fund may invest a relatively high percentage of its assets in the obligations of a limited number of issuers, the Fund may be more susceptible to any single economic, political or regulatory occurrence than a diversified investment company.
For the above reasons, an investment in shares of the Fund should not constitute a complete investment program and may not be appropriate for investors who cannot assume the greater risk of capital depreciation or loss inherent in seeking higher tax-exempt yields.
6. MANAGEMENT OF THE FUND INVESTMENT ADVISER -- MFS manages the assets of the Fund pursuant to an Investment Advisory Agreement dated September 1, 1993. MFS provides the Fund with overall investment advisory and administrative services, as well as general office facilities. Cynthia M. Brown, a Senior Vice President of the Adviser, has been the Fund's portfolio manager since 1993 and has been employed by the Adviser since 1984. Subject to such policies as the Trustees may determine, MFS makes investment decisions for the Fund. For these services and facilities, MFS receives a management fee, computed and paid monthly, in an amount equal to the sum of 0.30% of the Fund's average daily net assets plus 4.75% of the Fund's gross income (i.e., income other than from the sale of securities), in each case on an annualized basis, for the Fund's then-current fiscal year.
For the Fund's fiscal year ended January 31, 1995, MFS received management fees under the Fund's Investment Advisory Agreement of $6,385,098.
MFS also serves as investment adviser to each of the other funds in the MFS Family of Funds (the "MFS Funds"), to MFS Municipal Income Trust, MFS Multimarket Income Trust, MFS Government Markets Income Trust, MFS Intermediate Income Trust, MFS Charter Income Trust, MFS Special Value Trust, MFS Institutional Trust, MFS Union Standard Trust, MFS Variable Insurance Trust, Sun Growth Variable Annuity Fund, Inc., MFS/Sun Life Series Trust and seven variable accounts, each of which is a registered investment company established by Sun Life Assurance Company of Canada (U.S.) ("Sun Life of Canada (U.S.)") in connection with the sale of Compass-2 and Compass-3 combination fixed/variable annuity contracts. MFS and its wholly owned subsidiary, MFS Asset Management, Inc., provide investment advice to substantial private clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor organizations have a history of money management dating from 1924 and the founding of the first mutual fund in the United States, Massachusetts Investors Trust. Net assets under the management of the MFS organization were approximately $35.4 billion on behalf of approximately 1.7 million investor accounts as of April 28, 1995. As of such date, the MFS organization managed approximately $6.5 billion of assets in municipal bond securities and approximately $19 billion of assets in fixed income securities. MFS is a wholly owned subsidiary of Sun Life of Canada (U.S.), which in turn is a wholly owned subsidiary of Sun Life Assurance Company of Canada ("Sun Life"). The Directors of MFS are A. Keith Brodkin, Jeffrey L. Shames, John R. Gardner, John D. McNeil and Arnold D. Scott. Mr. Brodkin is the Chairman, Mr. Shames is the President and Mr. Scott is a Senior Executive Vice President and the Secretary of MFS. Messrs. McNeil and Gardner are the Chairman and the President, respectively, of Sun Life. Sun Life, a mutual life insurance company, is one of the largest international life insurance companies and has been operating in the United States since 1895, establishing a headquarters office here in 1973. The executive officers of MFS report to the Chairman of Sun Life.
A. Keith Brodkin, the Chairman and a Director of MFS, is the Chairman and President of the Trust. Joan S. Batchelder, Cynthia M. Brown, Matthew N. Fontaine, Robert J. Manning, Bernard Scozzafava, James T. Swanson, W. Thomas London, James O. Yost, Stephen E. Cavan and James R. Bordewick, Jr., all of whom are officers of MFS, are officers of the Trust.
DISTRIBUTOR -- MFD, a wholly owned subsidiary of MFS, is the distributor of shares of the Fund and also serves as distributor for each of the other MFS Funds.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. ("Shareholder Servicing Agent"), a wholly owned subsidiary of MFS, performs transfer agency, certain dividend disbursing agency and other services for the Fund.
7. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Only existing shareholders of the Fund may purchase Class A and Class B shares.
Because of this restriction, certain dealers in the past have transferred and in
the future may transfer a share of the Fund to certain of their clients
interested in becoming shareholders of the Fund so that such clients will then
be able to buy additional shares of the Fund. Subject to the above restriction,
shares of the Fund may be purchased at the public offering price through any
securities dealer, certain banks and other financial institutions having selling
agreements with MFD, the Fund's principal underwriter. Non-securities dealer
financial institutions will receive transaction fees that are the same as
commissions to dealers. Securities dealers and other financial institutions may
also charge their customers service fees relating to investments in the Fund.
The Fund offers two classes of shares which bear sales charges and distribution fees in different forms and amounts:
CLASS A SHARES: Class A shares are offered at net asset value per share plus an initial sales charge (or CDSC in the case of certain purchases of $1 million or more) as follows:
- ---------------------------------------------------------------------------------------------------------------------------------
DEALER
SALES CHARGE<F1> AS ALLOWANCE
PERCENTAGE OF: AS A
-------------- PERCENTAGE
OFFERING NET AMOUNT OF OFFERING
AMOUNT OF PURCHASE PRICE INVESTED PRICE
Less than $100,000 ........................................................... 4.75% 4.99% 4.00%
$100,000 but less than $250,000 .............................................. 4.00 4.17 3.20
$250,000 but less than $500,000 .............................................. 2.95 3.04 2.25
$500,000 but less than $1,000,000 ............................................ 2.20 2.25 1.70
$1,000,000 or more ........................................................... None<F2> None<F2> See Below<F2>
- ----------
<F1>Because of rounding in the calculation of offering price, actual sales charges may be more or less than those calculated
using the percentages above.
<F2>A CDSC may apply in certain circumstances. MFD will pay a commission on purchases of $1 million or more.
|
If shares of the Fund are available for sale, no sales charge is payable at the time of purchase of Class A shares on investments of $1 million or more. However, a CDSC may be imposed on such investments in the event of a share redemption within 12 months following the share purchase, at the rate of 1% on the lesser of the value of the shares redeemed (exclusive of reinvested dividends and capital gain distributions) or the total cost of such shares.
In determining whether a CDSC on such Class A shares is payable, and, if so, the amount of the charge, it is assumed that shares not subject to the CDSC are the first redeemed followed by other shares held for the longest period of time. All investments made during a calendar month, regardless of when during the month the investment occurred, will age one month on the last day of the month and each subsequent month. Except as noted below, the CDSC on Class A shares will be waived in the case of: (i) exchanges (except that if the shares acquired by exchange were then redeemed within 12 months of the initial purchase (other than in connection with subsequent exchanges to other MFS Funds), the charge would not be waived); (ii) distributions to participants from a retirement plan qualified under section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code") (a "Retirement Plan") due to: (a) a loan from the plan (repayments of loans, however, will constitute new sales for purposes of assessing the CDSC); (b) "financial hardship" of the participant in the plan, as that term is defined in Treasury Regulation Section 1.401(k)-1 (d) (2), as amended from time to time; or (c) the death of a participant in such plans; (iii) distributions from a 403(b) plan or an Individual Retirement Account ("IRA") due to death, disability or attainment of age 59 1/2; (iv) tax-free returns of excess contributions to an IRA; (v) distributions by other employee benefit plans to pay benefits; and (vi) certain involuntary redemptions and redemptions in connection with certain automatic withdrawals from a qualified retirement plan. The CDSC on Class A shares will not be waived, however, if the Retirement Plan withdraws from the Fund except if that Retirement Plan has invested its assets in Class A shares of one or more of the MFS Funds for more than 10 years from the later to occur of (i) January 1, 1993 or (ii) the date such Retirement Plan first invests its assets in Class A shares of one or more of the MFS Funds, the CDSC on Class A shares will be waived in the case of a redemption of all of the Retirement Plan's shares (including shares of any other class) in all MFS Funds (i.e., all the assets of the Retirement Plan invested in the MFS Funds are withdrawn), unless, immediately prior to the redemption, the aggregate amount invested by the Retirement Plan in Class A shares of the MFS Funds (excluding the reinvestment of distributions) during the prior four year period equals 50% or more of the total value of the Retirement Plan's assets in the MFS Funds, in which case the CDSC will not be waived. The CDSC on Class A shares will be waived upon redemption by a Retirement Plan where the redemption proceeds are used to pay expenses of the Retirement Plan or certain expenses of participants under the Retirement Plan (e.g., participant account fees), provided that the Retirement Plan's sponsor subscribes to the MFS Fundamental 401(k) Plan\s/\m/ or another similar recordkeeping system made available by the Shareholder Servicing Agent. The CDSC on Class A shares will be waived upon the transfer of registration from shares held by a Retirement Plan through a single account maintained by the Shareholder Servicing Agent to multiple Class A share accounts maintained by the Shareholder Servicing Agent on behalf of individual participants in the Retirement Plan, provided that the Retirement Plan's sponsor subscribes to the MFS Fundamental 401(k) Plan\s/\m/ or another similar recordkeeping system made available by the Shareholder Servicing Agent. Any applicable CDSC will be deferred upon an exchange of Class A shares of the Fund for units of participation of the MFS Fixed Fund (a bank collective investment fund) (the "Units"), and the CDSC will be deducted from the redemption proceeds when such Units are subsequently redeemed (assuming the CDSC is then payable). No CDSC will be assessed upon an exchange of Units for Class A shares of the Fund. For purposes of calculating the CDSC payable upon redemption of Class A shares of the Fund or Units acquired pursuant to one or more exchanges, the period during which the Units are held will be aggregated with the period during which the Class A shares are held. MFD shall receive all CDSCs. which it intends to apply for the benefit of the Fund.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price as shown in the above table. In the case of the
maximum sales charge, the dealer retains 4% and MFD retains approximately 3/4 of
1% of the public offering price. In addition, MFD pays a commission to dealers
who initiate and are responsible for purchases of $1 million or more as follows:
1.00% on sales up to $5 million, plus 0.25% on the amount in excess of $5
million. Purchases of $1 million or more for each shareholder account will be
aggregated over a 12-month period (commencing from the date of the first such
purchase) for purposes of determining the level of commission to be paid during
that period with respect to such account. The sales charge may vary depending on
the number of shares of the Fund as well as certain MFS Funds and other funds
owned or being purchased, the existence of an agreement to purchase additional
shares during a 13-month period (or a 36-month period for purchases of $1
million or more) or other special purchase programs. A description of the Right
of Accumulation, Letter of Intent and Group Purchases privileges by which the
sales charge may be reduced is set forth in the Statement of Additional
Information.
If available for sale, Class A shares of the Fund may be sold at their net asset value to the officers of the Trust, to any of the subsidiary companies of Sun Life, to eligible Directors, officers, employees (including retired and former employees) and agents of MFS, Sun Life or any of their subsidiary companies, to any trust, pension, profit-sharing or any other benefit plan for such persons, to any trustees and retired trustees of any investment company for which MFD serves as distributor or principal underwriter, and to certain family members of such individuals and their spouses, provided the shares will not be resold except to the Fund. Class A shares of the Fund may be sold at net asset value to any employee, partner, officer or trustee of any sub-adviser to any MFS Fund and to certain family members of such individuals and their spouses, or to any trust, pension, profit-sharing or other retirement plan for the sole benefit of such employee or representative, provided such shares will not be resold except to the Fund. Class A shares, if available for sale, may be sold at their net asset value to any employee or registered representative of any dealer or other financial institution which has a sales agreement with MFD or its affiliates, to certain family members of such employees or representatives and their spouses, or to any trust, pension, profit-sharing or other retirement plan for the sole benefit of such employee or representative, as well as to clients of the MFS Asset Management, Inc.
If available for sale, Class A shares may be sold at net asset value, subject to appropriate documentation, through a dealer where the amount invested represents redemption proceeds from a registered open-end management investment company not distributed or managed by MFD or its affiliates if: (i) the redeemed shares were subject to an initial sales charge or a deferred sales charge (whether or not actually imposed); (ii) such redemption has occurred no more than 90 days prior to the purchase of Class A shares of the Fund; and (iii) the Fund, MFD or its affiliates have not agreed with such company or its affiliates, formally or informally, to sell Class A shares at net asset value or provide any other incentive with respect to such redemption and sale. In addition, Class A shares of the Fund may also be sold at net asset value where the amount invested represents redemption proceeds from the MFS Fixed Fund. Class A shares, if available for sale, may be sold at net asset value in connection with the acquisition or liquidation of the assets of other investment companies or personal holding companies. Insurance company separate accounts may purchase Class A shares of the Fund, if avaliable for sale, at their net asset value per share. Class A shares of the Fund if available for sale may be purchased at net asset value by Retirement Plans whose third party administrators have entered into an administrative services agreement with MFD or one or more of its affiliates to perform certain administrative services, subject to certain operational requirements specified from time to time by MFD or one or more of its affiliates. Class A shares of the Fund if available for sale may be purchased at net asset value through certain broker-dealers and other financial institutions which have entered into an agreement with MFD which includes a requirement that such shares be sold for the benefit of clients participating in a "wrap account" or a similar program under which such clients pay a fee to such broker-dealer or other financial institution.
Class A shares of the Fund may be purchased at net asset value by certain Retirement Plans subject to the Employee Retirement Income Security Act of 1974, as amended, subject to the following:
(i) The sponsoring organization must demonstrate to the satisfaction of MFD that either (a) the employer has at least 25 employees or (b) the aggregate purchases by the retirement plan of Class A shares of the MFS Funds will be in an amount of at least $250,000 within a reasonable period of time, as determined by MFD in its sole discretion; and
(ii) a CDSC of 1% will be imposed on such purchases in the event of certain redemption transactions within 12 months following such purchases.
Dealers who initiate and are responsible for purchases of Class A shares of the Fund in this manner will be paid a commission by MFD, as follows: 1.00% on sales up to $5 million, plus 0.25% on the amount in excess of $5 million; provided, however, that MFD may pay a commission, on sales in excess of $5 million to certain retirement plans, of 1.00% to certain dealers which, at MFD's invitation, enter into an agreement with MFD in which the dealer agrees to return any commission paid to it on the sale (or on a pro rata portion thereof) if the shareholder redeems his or her shares within a period of time after purchase as specified by MFD. Purchases of $1 million or more for each shareholder account will be aggregated over a 12-month period (commencing from the date of the first such purchase) for purposes of determining the level of commissions to be paid during that period with respect to such account.
Class A shares of the Fund if available for sale may be sold at net asset value through the automatic reinvestment of Class A and Class B distributions which constitute required withdrawals from qualified retirement plans. Furthermore, Class A shares of the Fund if available for sale may be sold at net asset value through the automatic reinvestment of distirbutions of dividends and capital gains of Class A shares of other MFS Funds pursuant to the Distribution Investment Program (see "Shareholder Services" in the Statement of Additional Information).
CLASS B SHARES: Class B shares are offered at net asset value without an initial sales charge but subject to a CDSC as a percentage of the lesser of the original purchase price or redemption proceeds as follows:
YEAR OF CONTINGENT REDEMPTION DEFERRED SALES AFTER PURCHASE CHARGE -------------- -------------- First .......................................................................... 4% Second ......................................................................... 4% Third .......................................................................... 3% Fourth ......................................................................... 3% Fifth .......................................................................... 2% Sixth .......................................................................... 1% Seventh and following .......................................................... 0% |
For Class B shares purchased prior to January 1, 1993, the Fund imposes a CDSC as a percentage of the lesser of the original purchase price or redemption proceeds as follows:
YEAR OF CONTINGENT REDEMPTION DEFERRED SALES AFTER PURCHASE CHARGE -------------- -------------- First .......................................................................... 6% Second ......................................................................... 5% Third .......................................................................... 4% Fourth ......................................................................... 3% Fifth .......................................................................... 2% Sixth .......................................................................... 1% Seventh and following .......................................................... 0% |
No CDSC is paid upon an exchange of shares. For purposes of calculating the CDSC upon redemption of shares acquired in an exchange, the purchase of shares acquired in one or more exchanges is deemed to have occurred at the time of the original purchase of the exchanged shares. See "Redemptions and Repurchases - Contingent Deferred Sales Charge" for further discussion of the CDSC.
The CDSC on Class B shares will be waived upon the death or disability (as defined in Section 72(m)(7) of the Code) of any investor, provided the account is registered (i) in the case of a deceased individual, solely in the deceased individual's name, (ii) in the case of a disabled individual, solely or jointly in the disabled individual's name or (iii) in the name of a living trust for the benefit of the deceased or disabled individual. The CDSC on Class B shares will also be waived in the case of redemptions of shares of the Fund pursuant to a Systematic Withdrawal Plan. In addition, the CDSC on Class B shares will be waived in the case of distributions from an IRA, SAR-SEP or any other retirement plan qualified under sections 401(a) or 403(b) of the Code due to death or disability, or in the case of required minimum distributions from any such Retirement Plan due to attainment of age 70 1/2. The CDSC on Class B shares will be waived in the case of distributions from a Retirement Plan due to (i) returns of excess contribution to the plan, (ii) retirement of a participant in the plan, (iii) a loan from the plan (repayments of loans, however, will constitute new sales for purposes of assessing the CDSC), (iv) "financial hardship" of the participant in the plan, as that term is defined in Treasury Regulation Section 1.401(k)-1(d)(2), as amended from time to time, and (v) termination of employment of the participant in the plan (excluding, however, a partial or other termination of the plan). The CDSC on Class B shares of the Fund will also be waived upon redemptions by (i) officers of the Trust, (ii) any of the subsidiary companies of Sun Life, (iii) eligible Directors, officers, employees (including retired and former employees) and agents of MFS, Sun Life or any of their subsidiary companies, (iv) any trust, pension, profit-sharing or any other benefit plan for such persons, (v) any trustees and retired trustees of any investment company for which MFD serves as distributor or principal underwriter, and (vi) certain family members of such individuals and their spouses, provided in each case that the shares will not be resold except to the Fund. The CDSC on Class B shares will also be waived in the case of redemptions by any employee or registered representative of any dealer which has a dealer agreement with MFD, by certain family members of any such employee or representative and his or her spouse or to any trust, pension, profit-sharing or other retirement plan for the sole benefit of such employee or representative and by clients of the MFS Asset Management, Inc. A Retirement Plan that has invested its assets in Class B shares of one or more of the MFS Funds for more than 10 years from the later to occur of (i) January 1, 1993 or (ii) the date the Retirement Plan first invests its assets in Class B shares of one or more of the MFS Funds will have the CDSC on Class B shares waived in the case of a redemption of all the Retirement Plan's shares (including shares of any other class) in all MFS Funds (i.e., all the assets of the Retirement Plan invested in the MFS Funds are withdrawn), except that if, immediately prior to the redemption, the aggregate amount invested by the Retirement Plan in Class B shares of the MFS Funds (excluding the reinvestment of distributions) during the prior four-year period equals 50% or more of the total value of the Retirement Plan's assets in the MFS Funds, then the CDSC will not be waived. The CDSC on Class B shares will be waived upon redemption by a Retirement Plan where the redemption proceeds are used to pay expenses of the Retirement Plan or certain expenses of participants under the Retirement Plan (e.g., participant account fees), provided that the Retirement Plan's sponsor subscribes to the MFS Fundamental 401(k) Plan\s/\m/ or another similar recordkeeping system made available by the Shareholder Servicing Agent. The CDSC on Class B shares will be waived upon the transfer of registration from shares held by a Retirement Plan through a single account maintained by the Shareholder Servicing Agent to multiple Class B share accounts provided that the Retirement Plan's sponsor subscribes to the MFS Fundamental 401(k) Plan\s/\m/ or another similar recordkeeping system made available by the Shareholder Servicing Agent. The CDSC on Class B shares may also be waived in connection with the acquisition or liquidation of the assets of other investment companies or personal holding companies.
CONVERSION OF CLASS B SHARES: Class B shares of the Fund that remain outstanding for approximately eight years after purchase. Shares purchased through the reinvestment of distributions paid in respect of Class B shares will be treated as Class B shares for purposes of the payment of the distribution and service fees under the Distribution Plan applicable to Class B shares. However, for purposes of conversion to Class A shares, all shares in a shareholder's account that were purchased through the reinvestment of dividends and distributions paid in respect of Class B shares (and which have not converted to Class A shares as provided in the following sentence) will be held in a separate sub-account. Each time any Class B shares in the shareholder's account (other than those in the sub-account) convert to Class A shares, a portion of the Class B shares then in the sub-account will also convert to Class A shares. The portion will be determined by the ratio that the shareholder's Class B shares not acquired through reinvestment of dividends and distributions that are converting to Class A shares bear to the shareholder's total Class B shares not acquired through reinvestment. The conversion of Class B shares to Class A shares is subject to the continuing availability of a ruling from the Internal Revenue Service or an opinion of counsel that such conversion will not constitute a taxable event for federal tax purposes. There can be no assurance that such ruling or opinion will be available, and the conversion of Class B shares to Class A shares will not occur if such ruling or opinion is not available. In such event, Class B shares would continue to be subject to higher expenses than Class A shares for an indefinite period.
GENERAL: If shares of the Fund are made available for sale, 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 participation in the Automatic Exchange Plan are subject to a $50 minimum on initial and additional investments per account. Any minimums may be changed at any time at the discretion of MFD. The Fund reserves the right to cease offering shares at any time.
For shareholders who elect to participate in certain investment programs (e.g., the Automatic Investment Plan) or other shareholder services, MFD or its affiliates may either (i) give a gift of nominal value, such as a hand-held calculator, or (ii) make a nominal charitable contribution on their behalf.
ALTHOUGH ALL MFS FUNDS ARE GENERALLY AVAILABLE AS AN INVESTMENT CHOICE FOR TAX-DEFERRED RETIREMENT PROGRAMS SUCH AS AN IRA OR A RETIREMENT PLAN (AS DEFINED ABOVE), MUNICIPAL BOND FUNDS, SUCH AS THE FUND, MAY NOT BE SUITABLE FOR INCLUSION IN SUCH PROGRAMS DUE TO THEIR TAX-EXEMPT NATURE. THE MINIMUM INITIAL INVESTMENT FOR IRAS IS $250 AND THE MINIMUM ADDITIONAL INVESTMENT IS $50 PER ACCOUNT. A SHAREHOLDER SHOULD CONSULT HIS OR HER FINANCIAL OR TAX ADVISER REGARDING ANY SUCH INVESTMENT.
A shareholder whose shares are held in the name of, or controlled by, an investment dealer might not receive many of the privileges and services from the Fund (such as Right of Accumulation, Letter of Intent and certain record-keeping services) that the Fund ordinarily provides.
Purchases and exchanges should be made for investment purposes only. The Fund and MFD each reserve the right to reject any specific purchase order or to restrict purchases by a particular purchaser (or group of related purchasers). The Fund or MFD may reject or restrict any purchases by a particular purchaser or group, for example, when such purchase is contrary to the best interests of the Fund's other shareholders or otherwise would disrupt the management of the Fund.
MFD may enter into an agreement with shareholders who intend to make exchanges among certain classes of certain MFS Funds (as determined by MFD) which follow a timing pattern, and with individuals or entities acting on such shareholders' behalf (collectively, "market timers"), setting forth the terms, procedures and restrictions with respect to such exchanges. In the absence of such an agreement, it is the policy of the Fund and MFD to reject or restrict purchases by market timers if (i) more than two exchange purchases are effected in a timed account in the same calendar quarter or (ii) a purchase would result in shares being held in timed accounts by market timers representing more than (x) one percent of the Fund's net assets or (y) specified dollar amounts in the case of certin MFS Funds which may include the Fund and which may change from time to time. The Fund and MFD each reserve the right to request market timers to redeem their shares at net asset value, less any applicable CDSC, if either of these restrictions is violated.
Securities dealers and other financial institutions may receive different compensation with respect to sales of Class A and Class B shares. In some instances, promotional incentives to dealers may be offered only to certain dealers who have sold or may sell significant amounts of Fund shares. 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 shares of certain specified MFS Funds sold by such dealer during a specified sales period. In addition, from time to time, MFD, at its expense, may provide additional commissions, compensation or promotional incentives ("concessions") to dealers which sell shares of the Fund. The staff of the SEC has indicated that dealers who receive more than 90% of the sales charge may be considered underwriters. Such concessions provided by MFD may include financial assistance to dealers in connection with preapproved conferences or seminars, sales or training programs for invited registered representatives, payment for travel expenses, including lodging, incurred by registered representatives and members of their families or other invited guests to various locations for such seminars or training programs, seminars for the public, advertising and sales campaigns regarding one or more MFS Funds, and/or other dealer-sponsored events. In some instances, these concessions may be offered to dealers or only to certain dealers who have sold or may sell, during specified periods, certain minimum amounts of shares of the Fund. From time-to-time, MFD may make expense reimbursements for special training of a dealer's registered representatives in group meetings or to help pay the expenses of sales contests. Other concessions may be offered to the extent not prohibited by the laws of the state or any self-regulatory agency, such as NASD.
The Glass-Steagall Act prohibits national banks from engaging in the business of underwriting, selling or distributing securities. Although the scope of the prohibition has not been clearly defined, FSI believes that such Act should not preclude banks from entering into agency agreements with FSI (as described above). If, however, a bank were prohibited from so acting, the Trustees would consider what actions, if any, would be necessary to continue to provide efficient and effective shareholder services. It is not expected that shareholders would suffer any adverse financial consequence as a result of these occurrences. In addition, state securities laws on this issue may differ from the interpretation of federal law expressed herein and banks and financial institutions may be required to register as broker-dealers pursuant to state law.
EXCHANGES
Subject to the requirements set forth below, some or all of the shares in an
account with the Fund for which payment has been received by the Fund (i.e., an
established account) may be exchanged for shares of the same class of any of the
other MFS Funds (if available for sale) at net asset value. Shares of one class
may not be exchanged for shares of any other class. Exchanges will be made only
after instructions in writing or by telephone (an "Exchange Request") are
received for an established account by the Shareholder Servicing Agent in proper
form (i.e., if in writing -- signed by the record owner(s) exactly as the shares
are registered; if by telephone -- proper account identification is given by the
dealer or shareholder of record) and each exchange must involve either shares
having an aggregate value of at least $1,000 ($50 in the case of retirement plan
participants whose sponsoring organizations subscribe to the MFS FUNDamental
401(k) Plan or another similar 401(k) recordkeeping system made available by the
Shareholder Servicing Agent) or all the shares in the account. If an Exchange
Request is received by the Shareholder Servicing Agent on any business day prior
to the close of regular trading on the New York Stock Exchange (the "Exchange"),
the exchange usually will occur on that day if all the restrictions set forth
above have been complied with at that time. No more than five exchanges may be
made in any one Exchange Request by telephone. Additional information concerning
this exchange privilege and prospectuses for any of the other MFS Funds may be
obtained from investment dealers or the Shareholder Servicing Agent. A
shareholder should read the prospectus of the other MFS Fund and consider the
differences in objectives and policies before making any exchange. For federal
and (generally) state income tax purposes, an exchange is treated as a sale of
the shares exchanged and, therefore, an exchange could result in a gain or loss
to the shareholder making the exchange. Exchanges by telephone are automatically
available to most non-retirement plan accounts and certain retirement plan
accounts. For further information regarding exchanges by telephone see
"Redemptions By Telephone". The exchange privilege (or any aspect of it) may be
changed or discontinued and is subject to certain limitations, including certain
restrictions on purchases by market timers. Special procedures, privileges and
restrictions with respect to exchanges may apply to market timers who enter into
an agreement with MFD, as set forth in such agreement (see "Purchases").
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the amount in his account on
any date on which the Fund is open for business by redeeming shares at their net
asset value or by selling such shares to the Fund through a dealer (a
repurchase). 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. Certain
purchases, however, may be subject to a CDSC in the event of certain redemption
transactions (see "Contingent Deferred Sales Charge" below). For the convenience
of shareholders, the Fund has arranged for different procedures for redemption
and repurchase. 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. Payment of
redemption process may be delayed for up to seven days from the redemption date
if the Fund determines that such a delay would be in the best interest of all
its shareholders.
A. REDEMPTION BY MAIL -- Each shareholder has the right to redeem all or any portion of the shares in his account by mailing or delivering to the Shareholder Servicing Agent (see back cover for address) a stock power with a written request for redemption or a letter of instruction, together with his share certificates (if any were issued), all in "good order" for transfer. "Good order" generally means that the stock power, written request for redemption, letter of instruction or share certificate must be endorsed by the record owner(s) exactly as the shares are registered and the signature(s) must be guaranteed in the manner set forth below under the caption "Signature Guarantee." In addition, in some cases "good order" may require the furnishing of additional documents. The Shareholder Servicing Agent may make certain de minimis exceptions to the above requirements for redemption. Within seven days after receipt of a redemption request in "good order" by the Shareholder Servicing Agent, the Fund will make payment in cash of the net asset value of the shares next determined after such redemption request was received, reduced by the amount of any applicable CDSC and the amount of any income tax required to be withheld, except during any period in which the right of redemption is suspended or date of payment is postponed because the Exchange is closed or trading on the Exchange is restricted or, to the extent otherwise permitted by the 1940 Act, if an emergency exists (see "Tax Status").
B. 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 commercial bank and account number to receive the proceeds of such redemption, and sign the Account Application Form with the signature(s) guaranteed in the manner set forth below under the caption "Signature Guarantee". The proceeds of such a redemption, reduced by the amount of any applicable CDSC described above and the amount of any income tax required to be withheld, are mailed by check to the designated account, without charge. As a special service, investors may arrange to have proceeds in excess of $1,000 wired in federal funds to the designated account. If a telephone redemption request is received by the Shareholder Servicing Agent by the close of regular trading on the Exchange on any business day, shares will be redeemed at the closing net asset value of the Fund on that day. Subject to the conditions described in this section, proceeds of a redemption are normally mailed or wired on the next business day following the date of receipt of the order for redemption. The Shareholder Servicing Agent will not be responsible for any losses resulting from unauthorized telephone transactions if it follows reasonable procedures designed to verify the identity of the caller. The Shareholder Servicing Agent will request personal or other information from the caller, and will normally also record calls. Shareholders should verify the accuracy of confirmation statements immediately after their receipt.
C. REPURCHASE THROUGH A DEALER -- If a shareholder desires to sell his shares at net asset value through his securities dealer (a repurchase), the shareholder can place a repurchase order with his dealer, who may charge the shareholder a fee. IF THE DEALER RECEIVES THE SHAREHOLDER'S ORDER PRIOR TO THE CLOSE OF REGULAR TRADING ON THE EXCHANGE AND COMMUNICATES IT TO MFD 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.
GENERAL: Shareholders of the Fund who have redeemed their shares have a one-time right to reinvest the redemption proceeds in the same class of shares of any of the MFS Funds (if shares of such Fund are available for sale) at net asset value (with a credit for any CDSC paid) within 90 days of the redemption pursuant to the Reinstatement Privilege. If the shares credited for any CDSC paid are then redeemed within six years of the initial purchase in the case of Class B shares, or within 12 months of the initial purchase for certain Class A share purchases, a CDSC will be imposed upon redemption. Such purchases under the Reinstatement Privilege are subject to all limitations in the Statement of Additional Information regarding this privilege.
Subject to the Fund's compliance with applicable regulations, the Fund has reserved the right to pay the redemption or repurchase price of shares of the Fund, either totally or partially, by a distribution in kind of securities (instead of cash) from the Fund's portfolio. The securities distributed in such a distribution would be valued at the same amount as that assigned to them in calculating the net asset value for the shares being sold. If a shareholder receives a distribution in kind, the shareholder could incur brokerage or transaction charges in converting the securities to cash.
Due to the relatively high cost of maintaining small accounts, the Fund reserves the right to redeem shares in any account for their then-current value (which will be promptly paid to the shareholder) if at any time the total investment in such account drops below $500 because of redemptions, except in the case of accounts established for monthly automatic investments and certain payroll savings programs and the Automatic Exchange Plan for which there is a lower minimum investment requirement (see "Purchases"). Shareholders will be notified that the value of their account is less than the minimum investment requirement and allowed 60 days to make an additional investment before the redemption is processed. No CDSC will be imposed with respect to such involuntary redemptions.
SIGNATURE GUARANTEE: In order to protect shareholders to the greatest extent possible against fraud, the Fund requires in certain instances as indicated above that the shareholder's signature be guaranteed. In these cases the shareholder's signature must be guaranteed by an eligible bank, broker, dealer, credit union, national securities exchange, registered securities association, clearing agency or savings association. Signature guarantees shall be accepted in accordance with policies established by the Shareholder Servicing Agent.
CONTINGENT DEFERRED SALES CHARGE. Investments ("Direct Purchases") will be subject to a CDSC for a period of 12 months (in the case of purchases of $1 million or more of Class A shares) or six years (in the case of purchases of Class B shares). Purchases of Class A shares made during a calendar month, regardless of when during the month the investment occurred, will age one month on the last day of the month and each subsequent month. Class B shares purchased on or after January 1, 1993 will be aggregated on a calendar month basis -- all transactions made during a calendar month, regardless of when during the month they have occurred, will age one year at the close of business on the last day of such month in the following calendar year and each subsequent year. For Class B shares of the Fund purchased prior to January 1, 1993, transactions will be aggregated on a calendar year basis -- all transactions made during a calendar year, regardless of when during the year they have occurred, will age one year at the close of business on December 31 of that year and each subsequent year. At the time of a redemption, the amount by which the value of a shareholder's account for a particular class represented by Direct Purchases exceeds the sum of the six calendar year aggregations (12 months in the case of purchases of $1 million or more of Class A shares) of Direct Purchases may be redeemed without charge ("Free Amount"). Moreover, no CDSC is ever assessed on additional shares acquired through the automatic reinvestment of dividends or capital gain distributions ("Reinvested Shares").
Therefore, at the time of redemption of shares of a particular class, (i) any Free Amount is not subject to the CDSC, and (ii) the amount of the redemption equal to the then-current value of Reinvested Shares is not subject to the CDSC, but (iii) any amount of the redemption in excess of the aggregate of the then-current value of Reinvested Shares and the Free Amount is subject to a CDSC. The CDSC will first be applied against the amount of Direct Purchases which will result in any such charge being imposed at the lowest possible rate. The CDSC to be imposed upon redemptions of shares will be calculated as set forth in "Purchases" above.
The applicability of a CDSC will be unaffected by exchanges or transfers of registration, except that, with respect to transfers of registration to an IRA rollover account, the CDSC will be waived if the shares being reregistered would have been eligible for a CDSC waiver had they been redeemed.
DISTRIBUTION PLAN
The Trustees have adopted a distribution plan for Class B shares pursuant to
Section 12(b) of the 1940 Act and Rule 12b-1 thereunder (the "Rule") after
having concluded that there is a reasonable likelihood that the plan would
benefit the Fund and the Class B shareholders. There is no distribution plan for
Class A shares.
CLASS B DISTRIBUTION PLAN. The Class B Distribution Plan provides that the Fund will pay MFD a daily distribution fee equal on an annual basis to 0.75% of the Fund's average daily net assets attributable to Class B shares and may annually pay MFD a service fee of up to 0.25% of the Fund's average daily net assets attributable to Class B shares (which MFD will in turn pay to securities dealers which enter into a sales agreement with MFD at a rate of up to 0.25% per annum of the Fund's average daily net assets attributable to Class B shares owned by investors for whom that securities dealer is the holder or dealer of record). This service fee is intended to be additional consideration for all personal services and/or account maintenance services rendered by the dealer with respect to Class B shares. Fees payable under the Class B Distribution Plan are charged to, and therefore reduce, income allocated to Class B shares. Except in the case of the first year service fee, no service fee will be paid. This elimination of the service fee may be amended or terminated without notice to shareholders. The first year service fee will be paid as noted below. The Class B Distribution Plan also provides that MFD will receive all CDSCs attributable to Class B shares which do not reduce the distribution fee. MFD will pay commissions to dealers of 3.75% of the purchase price of shares purchased through dealers. MFD will also advance to dealers the first year service fee at a rate equal to 0.25% per annum of the purchase price of such shares and, as compensation therefor, MFD may retain the service fee paid by the Fund with respect to such shares for the first year after purchase. Therefore, the total amount paid to a dealer upon the sale of shares is 4.00% of the purchase price of the shares (commission rate of 3.75% plus a service fee equal to 0.25% of the purchase price). Dealers will become eligible for additional service fees with respect to such shares commencing in the thirteenth month following purchase. Dealers may from time to time be required to meet certain criteria in order to receive service fees. MFD or its affiliates are entitled to retain all service fees payable under the Class B Distribution Plan for which there is no dealer of record or for which qualification standards have not been met as partial consideration for personal services and/or account maintenance services performed by MFD or its affiliates for shareholder accounts. The purpose of the distribution payments to MFD under the Class B Distribution Plan is to compensate MFD for its distribution services to the Fund. Since MFD's compensation is not directly tied to its expenses, the amount of compensation received by MFD during any year may be more or less than its actual expenses. For this reason, this type of distribution fee arrangement is characterized by the staff of the SEC as being of the "compensation" variety. However, the Fund is not liable for any expenses incurred by MFD in excess of the amount of compensation it receives. The expenses incurred by MFD, including commissions to dealers, are likely to be greater than the distribution fees for the next several years, but thereafter such expenses may be less than the amount of the distribution fees. Certain banks and other financial institutions that have agency agreements with MFD will receive agency transaction and service fees that are the same as commissions and service fees to dealers.
DISTRIBUTIONS
The Fund intends to pay substantially all of its net investment income to its
shareholders as dividends on a monthly basis. In determining the net investment
income available for distributions, the Fund may rely on projections of its
anticipated net investment income over a longer term, rather than its actual net
investment income for the period in order to provide more stable periodic
distributions. The Fund may make one or more distributions during the calendar
year to its shareholders from any long-term capital gains and may also make one
or more distributions during the calendar year to its shareholders from
short-term capital gains. Shareholders may elect to receive dividends and
capital gain distributions in either cash or additional shares of the same class
with respect to which a distribution is made. (See "Tax Status" and "Shareholder
Services -- Distribution Options" below.) Distributions paid by the Fund with
respect to Class A shares will generally be greater than those paid with respect
to Class B shares because expenses attributable to Class B shares will generally
be higher.
TAX STATUS
The Fund is treated as an entity separate from the other series of the Trust for
federal income tax purposes. In order to minimize the taxes the Fund would
otherwise be required to pay, the Fund intends to qualify each year as a
"regulated investment company" under Subchapter M of the Code, and to make
distributions to its shareholders in accordance with the timing requirements
imposed by the Code. It is expected that the Fund will not be required to pay
any entity level federal income or excise taxes. Because the Fund intends to
satisfy certain requirements of the Code, the Fund expects to pay dividends to
shareholders from interest on Municipal Bonds that are generally exempt from
federal income tax. From time to time a portion of the Fund's distributions will
be taxable to shareholders (e.g., distributions of income from investments in
taxable securities, including repurchase agreements and income from transactions
in certain Municipal Bonds purchased at a market discount and distribution of
capital gains realized by the Fund, including gains recognized from options and
futures transactions, whether paid in cash or reinvested in additional shares).
Depending on the nature of the distribution and the residence of the
shareholder, certain Fund distributions may be subject to state and local income
taxes; shareholders should consult with their own tax advisors in this regard.
Shortly after the end of each calendar year, each shareholder will be sent a statement setting forth the federal income status of all dividends and distributions for that year, including any portion taxable as ordinary income, the portion exempted from federal income tax as "exempt-interest dividends," any portion that is a tax preference item for purposes of the alternative minimum tax, any portion taxable as long-term capital gains, the portion, if any, representing a return of capital (which is generally free of taxes, but results in a basis reduction), and the amount, if any, of federal income tax withheld.
Current federal tax law limits the types and volume of bonds qualifying for the federal income tax exemption of interest and makes interest on certain tax-exempt bonds and distributions by the Fund of such interest a tax preference item for purposes of the individual and corporate alternative minimum tax. All exempt-interest dividends may affect a corporate shareholder's alternative minimum tax liability.
Interest on indebtedness incurred by shareholders to purchase or carry shares of the Fund will not be deductible for federal income tax purposes. Exempt- interest dividends are taken into account in calculating the amount of social security and railroad retirement benefits that may be subject to federal income tax. Entities or persons who are "substantial users" (or persons related to "substantial users") of facilities financed by certain private activity bonds should consult their tax advisers before purchasing shares of the Fund. "Substantial user" is defined generally as including a "non-exempt person" who regularly uses in trade or business a part of a facility financed from the proceeds of certain private activity bonds.
Fund distributions will reduce the Fund's net asset value per share. Shareholders who buy shares just before the Fund makes a distribution of taxable income may thus pay the full price for the shares and then effectively receive a portion of the purchase price back as a taxable distribution.
The Fund intends to withhold U.S. federal income tax at the rate of 30% on any taxable dividends and other payments that are subject to such withholding and that are made to persons who are neither citizens nor residents of the U.S., regardless of whether a lower rate may be permitted under an applicable treaty. The Fund is also required in certain circumstances to apply backup withholding at a rate of 31% on taxable dividends and redemption proceeds paid to any shareholder (including a shareholder who is neither a citizen nor a resident of the U.S.) who does not furnish to the Fund certain information and certifications or who is otherwise subject to backup withholding. However, backup withholding will not be applied to payments which have been subject to 30% withholding.
Prospective investors should read the Fund's Account Application for additional information regarding backup withholding of federal income tax and should consult their own tax advisers as to the tax consequences to them of an investment in the Fund.
NET ASSET VALUE
The net asset value per share of each class of shares of the Fund is determined
each day during which the Exchange is open for trading. This determination is
made once during each such day as of the close of regular trading on the
Exchange by deducting the amount of the liabilities attributable to the class
from the value of the Fund's assets attributable to the class and dividing the
difference by the number of shares of the class outstanding. Assets in the
Fund's portfolio are valued on the basis of their market or other fair value, as
described in the Statement of Additional Information. The net asset value of
each class of shares is effective for orders received by the dealer prior to its
calculation and received by MFD prior to the close of business on that day.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund, one of two series of the Trust, has two classes of shares, entitled
Class A and Class B Shares of Beneficial Interest (without par value). The Trust
has reserved the right to create and issue additional classes and series of
shares, in which case each class of shares of a series would participate equally
in the earnings, dividends and assets attributable to that class of that
particular series. Shareholders are entitled to one vote for each share held and
shares of each series would be entitled to vote separately to approve investment
advisory agreements or changes in investment restrictions, but shares of all
series would vote together in the election of Trustees and ratification of
selection of accountants. Additionally, each class of shares of a series will
vote separately on any material increases in the fees under its Rule 12b-1 plan
(in the case of Class B shares) or on any other matter that affects solely that
class of shares, but will otherwise vote together with all other classes of
shares of the series on all other matters. The Trust does not intend to hold
annual shareholder meetings. The Declaration of Trust provides that a Trustee
may be removed from office in certain instances (see "Description of Shares,
Voting Rights and Liabilities" in the Statement of Additional Information).
Each share of a class of the Fund represents an equal proportionate interest in the Fund with each other class share, subject to the liabilities of the particular class. Shares have no pre-emptive or conversion rights (except as set forth above in "Purchases -- Conversion of Class B Shares"). Shares of the Fund are fully paid and non-assessable. Should the Fund be liquidated, shareholders of each class would be entitled to share pro rata in the net assets attributable to that class available for distribution to shareholders. Shares will remain on deposit with the Shareholder Servicing Agent and certificates will not be issued except in connection with pledges and assignments and in certain other limited circumstances.
The Trust is an entity of the type commonly known as a "Massachusetts business trust". Under Massachusetts law, shareholders of such a trust may, under certain circumstances, be held personally liable as partners for its obligations. However, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which both inadequate insurance existed (e.g., fidelity bonding and errors and omission insurance) and the Trust itself was unable to meet its obligations.
PERFORMANCE INFORMATION
From time to time, the Fund will provide yield, current distribution rate,
tax-equivalent yield and total rate of return quotations for each class of
shares and may also quote fund rankings in the relevant fund category from
various sources, such as the Lipper Analytical Services, Inc. and Wiesenberger
Investment Companies Service. Any yield and tax-equivalent yield quotations are
based on the annualized net investment income per share allocated to each class
of the 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 shares assume no CDSC is paid. The current distribution rate for
each class is generally based upon the total amount of dividends per share paid
by the Fund to shareholders of that class during the past twelve months and is
computed by dividing the amount of such dividends by the maximum public offering
price of that class at the end of such period. Current distribution rate
calculations for Class B shares assume no CDSC is paid. The current distribution
rate differs from the yield calculation because it may include distributions to
shareholders from sources other than dividends and interest, such as premium
income from option writing, short-term capital gains, and return of invested
capital, and is calculated over a different period of time. Total rate of return
quotations reflect the average annual percentage change over stated periods in
the value of an investment in each class of shares of the Fund made at the
maximum public offering price of the shares of that class with all distributions
reinvested and which, if quoted for periods of six years or less, will give
effect to the imposition of the CDSC assessed upon redemptions of the Fund's
Class B shares. Such total rate of return quotations may be accompanied by
quotations which do not reflect the reduction in value of the initial investment
due to the sales charge or the deduction of a CDSC, and which will thus be
higher. All performance quotations are based on historical performance and are
not intended to indicate future performance. Yield and tax-equivalent yield
reflect only net portfolio income allocable to a class as of a stated time and
current distribution rate reflects only the rate of distributions paid by the
Fund over a stated period of time while total rate of return reflects all
components of investment return over a stated period of time. The Fund's
quotations may from time to time be used in advertisements, shareholder reports
or other communications to shareholders. For a discussion of the manner in which
the Fund will calculate its yield, current distribution rate, tax-equivalent
yield and total rate of return, see the Statement of Additional Information. For
further information about the Fund's performance for the fiscal year ended
January 31, 1995, please see the Fund's Annual Report. A copy of the Annual
Report may be obtained without charge by contacting the Shareholder Servicing
Agent (see back cover for address and phone number). In addition to information
provided in shareholder reports, the Fund may, in its discretion, from time to
time, make a list of all or a portion of its holdings available to investors
upon request.
8. SHAREHOLDER SERVICES Shareholders with questions concerning the shareholder services described below or concerning other aspects of the Fund should contact the Shareholder Servicing Agent (see back cover for address and phone number).
ACCOUNT AND CONFIRMATION STATEMENTS -- Each shareholder will receive confirmation statements showing the transaction activity in his account. At the end of each calendar year each shareholder will receive income tax information regarding the tax status of all reportable dividends and distributions for that year.
DISTRIBUTION OPTIONS -- The following options are available to all accounts (except Systematic Withdrawal Plan accounts) and may be changed as often as desired by notifying the Shareholder Servicing Agent:
-- Dividends and capital gain distributions reinvested in additional shares.
This option will be assigned if no other option is specified.
-- Dividends in cash; capital gain distributions reinvested in additional shares.
-- Dividends and capital gain distributions in cash.
Reinvestments (net of any tax withholding) of dividends and capital gain distributions will be made in additional full and fractional shares of the same class of shares of the Fund at the net asset value in effect at the close of business on the record date. Dividends and capital gains distributions in amounts less than $10 will automatically be reinvested in additional shares of the Fund. If a shareholder has elected to receive dividends and/or capital gain distributions in cash and the postal or other delivery service is unable to deliver checks to the shareholder's address of record, such shareholder's distribution option will automatically be converted to having all dividends and other distributions reinvested in additional shares. Any request for an option change must be received by the Shareholder Servicing Agent by the record date for a dividend or distribution in order to be effective for that dividend or distribution. No interest will accrue on amounts represented by uncashed distribution or redemption checks.
INVESTMENT AND WITHDRAWAL PROGRAMS -- For the convenience of shareholders, the Fund makes available the following programs designed to enable shareholders to add to their investment in an account with the Fund or withdraw from it with a minimum of paper work. The programs involve no extra charge to shareholders (other than a sales charge in the case of certain Class A share purchases) and may be changed or discontinued at any time by a shareholder or the Fund.
LETTER OF INTENT: If a shareholder (other than a group purchaser as described in the Statement of Additional Information) anticipates purchasing $100,000 or more of Class A shares of the Fund alone or in combination with Class B shares of the Fund or any of the classes of other MFS Funds or MFS Fixed Fund within a 13-month period (or 36-month period for purchases of $1 million or more), the shareholder may obtain such shares of the Fund at the same reduced sales charge as though the total quantity were invested in one lump sum, subject to escrow agreements and the appointment of an attorney for redemptions from the escrow amount if the intended purchases are not completed, by completing the Letter of Intent section of the Account Application.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity discounts on purchases of Class A shares when his new investment, together with the current offering price value of all holdings of all classes of shares of that shareholder in the MFS Funds or MFS Fixed Fund reaches a discount level.
DISTRIBUTION INVESTMENT PROGRAM: Shares of a particular class of the Fund may be sold at net asset value (and without any applicable CDSC) through the automatic reinvestment of distributions of dividends and capital gains from the same class of another MFS Fund. Furthermore, distributions made by the Fund may be automatically invested at net asset value in shares of the same class of any other MFS Fund, if shares of such Fund are available for sale (without any applicable CDSC).
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder Servicing Agent to send him (or anyone he designates) regular periodic payments, as designated on the Account Application and based upon the value of his account. Each payment under a Systematic Withdrawal Plan (a "SWP") must be at least $100, except in certain limited circumstances. The aggregate withdrawals of Class B shares in any year pursuant to a SWP will not be subject to a CDSC and generally are limited to 10% of the value of the account at the time of the establishment of the SWP. The CDSC will not be waived in the case of SWP redemptions of Class A shares which are subject to a CDSC.
DOLLAR COST AVERAGING PROGRAMS --
AUTOMATIC INVESTMENT PLAN: Cash investments of $50 or more may be made
through a shareholder's checking account twice monthly, monthly or quarterly.
Required forms are available from the Shareholder Servicing Agent or investment
dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least $5,000 in any MFS Fund may exchange their shares for shares of the same class of shares of the other MFS Funds under the Automatic Exchange Plan if such shares are available for sale. The Automatic Exchange Plan provides for automatic exchanges of funds from the shareholder's account in an MFS Fund for investment in the same class of shares of other MFS Funds selected by the shareholder. Under the Automatic Exchange Plan, exchanges of at least $50 each may be made to up to four different funds. 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 and Class A shares of MFS Cash Reserve Fund will be subject to any applicable sales charge. For federal and (generally) state income tax purposes, an exchange is treated as a sale of the shares exchanged and, therefore, could result in a capital gain or loss to the shareholder making the exchange. See the Statement of Additional Information for further information concerning the Automatic Exchange Plan. Investors should consult their tax advisers for information regarding the potential capital gain and loss consequences of transactions under the Automatic Exchange Plan.
Because a dollar cost averaging program involves periodic purchases of shares regardless of fluctuating share offering prices, a shareholder should consider his financial ability to continue his purchase through periods of low price levels. Maintaining a dollar cost averaging program concurrently with a withdrawal program could be disadvantageous because of the sales charges included in share purchases.
The Statement of Additional Information, dated June 1, 1995, contains more detailed information about the Trust and the Fund including, but not limited to, information related to (i) investment objective, policies and restrictions, (ii) the Trustees, officers and investment adviser, (iii) portfolio transactions and brokerage commissions, (iv) the method used to calculate yield, tax-equivalent yield and total rate of return quotations of the Fund, (v) the Distribution Plan and (vi) various services and privileges provided by the Fund for the benefit of its shareholders, including additional information with respect to the exchange privilege.
APPENDIX A
TAXABLE EQUIVALENT YIELD TABLE
(UNDER FEDERAL INCOME TAX LAW AND RATES FOR 1995)
The table below shows the approximate taxable bond yields which are equivalent to tax-exempt bond yields from 3% to 8% under federal income tax laws that apply to 1995. (Such yields may differ under the laws applicable to subsequent years.) Separate calculations, showing the applicable taxable income brackets, are provided for investors who file joint returns and for those investors who file individual returns.
SINGLE RETURN JOINT RETURN INCOME TAX-EXEMPT YIELD
- ------------- ------------ TAX -------------------------------------------------------------
(TAXABLE INCOME)* BRACKET 3% 4% 5% 6% 7% 8%
- ------------------------------------------- ------- -------------------------------------------------------------
1995 1995 EQUIVALENT TAXABLE YIELD
---- ----
$ 0 - $ 23,350 $ 0 - $ 39,000 0.15% 3.53% 4.71% 5.88% 7.06% 8.24% 9.41%
$ 23,350 - $ 56,550 $ 39,000 - $ 94,250 0.28 4.17 5.56 6.94 8.33 9.72 11.11
$ 56,550 - $117,950 $ 94,250 - $143,600 0.31 4.35 5.80 7.25 8.70 10.14 11.59
%117,950 - $256,500 $143,600 - $256,500 0.36 4.69 6.25 7.81 9.38 10.94 12.50
$256,500 & Over $256,500 & Over 0.396 4.97 6.62 8.28 9.93 11.59 13.25
*Net amount subject to Federal personal income tax after deductions and exemptions.
**Effective combined federal tax bracket.
***Federal rate assumes itemization of state tax deduction.
|
APPENDIX B
DESCRIPTION OF MUNICIPAL BONDS
Municipal Bonds include debt obligations issued to obtain funds for various public purposes, including the construction of a wide range of public facilities such as bridges, highways, housing, hospitals, mass transportation, schools, streets and water and sewer works. Other public purposes for which Municipal Bonds may be issued include refunding outstanding obligations, obtaining funds for general operating expenses, and obtaining funds to loan to other public institutions and facilities. In addition, certain types of industrial development bonds are issued by or on behalf of public authorities to obtain funds to provide privately-operated housing facilities, sports facilities, convention or trade show facilities, airport, mass transit, port or parking facilities, air or water pollution control facilities and certain local facilities for water supply, gas, electricity or sewage or solid waste disposal. Such obligations are included within the term Municipal Bonds if the interest paid thereon qualifies as exempt from federal income taxes. Other types of industrial development bonds, the proceeds of which are used for the construction, equipment, repair or improvement of privately operated industrial or commercial facilities, may constitute Municipal Bonds, although the current federal tax laws place substantial limitations on the size of such issues.
The two principal classifications of Municipal Bonds are "general obligation" and "revenue" bonds. General obligation bonds are secured by the issuer's pledge of its good faith, credit and taxing power for the payment of principal and interest. The payment of such bonds may be dependent upon an appropriation by the issuer's legislative body. The characteristics and enforcement of general obligation bonds vary according to the law applicable to the particular issuer. Revenue bonds are payable only from the revenues derived from a particular facility or class of facilities or, in some cases, from the proceeds of a special excise or other specific revenue source. Industrial development bonds which are Municipal Bonds are in most cases revenue bonds and do not generally constitute the pledge of the credit of the issuer of such bonds. Municipal Bonds also include participations in municipal leases. These are undivided interests in a portion of an obligation in the form of a lease or installment purchase which is issued by state and local governments to acquire equipment and facilities. Municipal leases frequently have special risks not normally associated with general obligation or revenue bonds. Leases and installment purchase or conditional sale contracts (which normally provide for title to the leased asset to pass eventually to the governmental issuer) have evolved as a means for governmental issuers to acquire property and equipment without meeting the constitutional and statutory requirements for the issuance of debt. The debt-issuance limitations are deemed to be inapplicable because of the inclusion in many leases or contracts of "non-appropriation" clauses that provide that the governmental issuer has no obligation to make future payments under the lease or contract unless money is appropriated for such purpose by the appropriate legislative body on a yearly or other periodic basis. Although the obligations will be secured by the leased equipment or facilities, the disposition of the underlying property in the event of non-appropriation or foreclosure might, in some cases, prove difficult. In light of these concerns, the staff of the SEC has advised investment companies to adopt and follow procedures for determining whether municipal lease securities purchased are liquid and for monitoring the liquidity of municipal lease securities held in such company's portfolio. The Board of Trustees has adopted such procedures and has delegated to the Adviser the authority to make determinations on the liquidity of municipal lease securities in accordance with the procedures. The procedures require that the Adviser use a number of factors in calculating the liquidity of a municipal lease security, including, the frequency of trades and quotes for the security, the number of dealers willing to purchase or sell the security and the number of other potential purchasers, the willingness of dealers to undertake to make a market in the security, the nature of the marketplace in which the security trades, the credit quality of the security and other factors which the Adviser may deem relevant. There are, of course, variations in the security of Municipal Bonds, both within a particular classification and between classifications, depending on numerous factors.
The yields on Municipal Bonds are dependent on a variety of factors, including general money market conditions, supply and demand and general conditions of the Municipal Bond market, size of a particular offering, the maturity of the obligation and rating of the issue.
DESCRIPTION OF MUNICIPAL BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the quality of various debt instruments.
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing.
Con. (...): Bonds for which the security depends upon the completion of some act or the fulfillment of some condition are rated conditionally. These are bonds secured by (a) earnings of projects under construction, (b) earnings of projects unseasoned in operation experience, (c) rentals which begin when facilities are completed, or (d) payments to which some other limiting condition attaches. Parenthetical rating denotes probable credit stature upon completion of construction or elimination of basis of condition.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has been suspended or withdrawn, it may be for reasons unrelated to the quality of the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the effects of which preclude satisfactory analysis; if there is no longer available reasonable up-to-date data to permit a judgment to be formed; if a bond is called for redemption; or for other reasons.
NOTE: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes possess the strongest investment attributes are designated by the symbols Aa1, A1, Baa1, Ba1 and B1.
STANDARD & POOR'S RATINGS GROUP
AAA: Debt rated "AAA" has the highest rating assigned by S&P. Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated "AA" has a very strong capacity to pay interest and repay principal and differ from the higher rated issues only in small degree.
A: Debt rated "A" has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated "BBB" is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher rated categories.
BB: Debt rated "BB" has less near-term vulnerability to default than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to inadequate capacity to meet timely interest and principal payments. The "BB" rating catgegory 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: Bonds 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 payment is jeopardized.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories.
NR: Indicates that no public rating has been requested, that there is insufficient information on which to base a rating, or that S&P does not rate a particular type of obligation as a matter of policy.
FITCH INVESTORS SERVICE, INC.
AAA: Bonds considered to be investment grade and of the highest credit quality. The obligor has an exceptionally strong ability to pay interest and repay principal, which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality. The obligor's ability to pay interest and repay principal is very strong, although not quite as strong as bonds rated "AAA". Because bonds rated in the "AAA" and "AA" categories are not significantly vulnerable to foreseeble future developments, short-term debt of these issuers is generally rated "F-1+".
A: Bonds considered to be investment grade and of 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 wih higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay interest and repay principal may be affected over time by adverse economic changes. However, business and financial alternatives can be identified which could assist the obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are currently meeting debt service requirements, the probability of continued timely payment of principal and interest reflects the obligor's limited margin 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 immiment 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 indadequate for rating purposes.
WITHDRAWN A rating will be withdrawn when an issue matures or is called or refinanced, and, at Fitch's discretion, when an issuer fails to furnish proper and timely information.
FITCHALERT Ratings are placed on FitchAlert to notify investors of an occurrence that is likely to result in a rating change and the likely direction of such change. These are designated as "Positive", indicating a potential upgrade, "Negative", for potential downgrade, or "Evolving", where ratings may be raised or lowered. FitchAlert is relatively short-term, and should be resolved within 12 months.
APPENDIX C
PORTFOLIO COMPOSITION CHART
MFS MUNICIPAL HIGH INCOME FUND
JANUARY 31, 1995
The table below shows the percentages of the Fund's assets at January 31, 1995 invested in bonds assigned to the various rating categories by S&P, Moody's (provided only for securities not rated by S&P) and Fitch (provided only for securities not rated by S&P or Moody's) and in unrated securities determined by MFS to be of comparable quality. For a split rated issue, the S&P rating is used, and when an S&P rating is unavailable, Moody's is used.
UNRATED
SECURITIES OF
RATED COMPARABLE
RATING SECURITIES QUALITY TOTAL
- ------ ---------- ------- -----
AAA/Aaa 12.41% 1.24% 13.65%
AA/Aa 7.94% 0.34% 8.28%
A/A 7.01% 2.22% 9.23%
BBB/Baa 7.17% 7.25% 14.42%
BB/Ba 11.33% 23.23% 34.56%
B/B 0.12% 10.78% 10.90%
CCC/Caa 0.00% 5.55% 5.55%
CC/Ca 0.00% 0.00% 0.00%
C/C 0.00% 1.04% 1.04%
D 0.11% 2.43% 2.54%
-------
Total 46.09% 54.07% 100.16%
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The chart does not necessarily indicate what the composition of the Fund's portfolio will be in subsequent years. Rather, the Fund's investment objective, policies and restrictions indicate the extent to which the Fund may purchase securities in the various categories.
THE MFS FAMILY OF FUNDS(R) -- AMERICA'S OLDEST MUTUAL FUND GROUP
The members of the MFS Family of Funds are grouped below according to the types of securities in their portfolios. For free prospectuses containing more complete information, including the exchange privilege and all charges and expenses, please contact your financial adviser or call the MFS Service Center at 1-800-225-2606 any business day from 8 a.m. to 8 p.m. Eastern time. This material should be read carefully before investing or sending money.
STOCK LIMITED MATURITY BOND
Massachusetts Investors Trust MFS(r) Government Limited Maturity Fund
Massachusetts Investors Growth Stock Fund MFS(r) Limited Maturity Fund
MFS(r) Capital Growth Fund MFS(r) Municipal Limited Maturity Fund
MFS(r) Emerging Growth Fund WORLD
MFS(r) Gold & Natural Resources Fund MFS(r) World Asset Allocation Fund
MFS(r) Growth Opportunities Fund MFS(r) World Equity Fund
MFS(r) Managed Sectors Fund MFS(r) World Governments Fund
MFS(r) OTC Fund MFS(r) World Growth Fund
MFS(r) Research Fund MFS(r) World Total Return Fund
MFS(r) Value Fund NATIONAL TAX-FREE BOND
STOCK AND BOND MFS(r) Municipal Bond Fund
MFS(r) Total Return Fund MFS(r) Municipal High Income Fund
MFS(r) Utilities Fund (closed to new investors)
BOND MFS(r) Municipal Income Fund
MFS(r) Bond Fund STATE TAX-FREE BOND
MFS(r) Government Mortgage Fund Alabama, Arkansas, California, Florida,
MFS(r) Government Securities Fund Georgia, Louisiana, Maryland, Massachusetts,
MFS(r) High Income Fund Mississippi, New York, North Carolina,
MFS(r) Intermediate Income Fund Pennsylvania, South Carolina Tennessee, Texas,
MFS(r) Strategic Income Fund Virginia, Washington, West Virginia
(formerly MFS(r) Income & Opportunity Fund) MONEY MARKET
MFS(r) Cash Reserve Fund
MFS(r) Government Money Market Fund
MFS(r) Money Market Fund
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INVESTMENT ADVISER
Massachusetts Financial
Services Company
500 Boylston Street
Boston, MA 02116
(617) 954-5000
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street,
Boston, MA 02116
(617) 954-5000
CUSTODIAN AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116
Toll-free: (800) 225-2606
MAILING ADDRESS
P.O. Box 2281
Boston, MA 02107-9906
INDEPENDENT AUDITORS
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116
LOGO
THE FIRST NAME IN MUTUAL FUNDS
MFS(R) MUNICIPAL HIGH
INCOME FUND
500 Boylston Street
Boston, MA 02116
MMH-1/6/95/74.5M 25/225
LOGO
THE FIRST NAME IN MUTUAL FUNDS
MFS(R) MUNICIPAL HIGH
INCOME FUND
500 Boylston Street
Boston, MA 02116
PROSPECTUS
JUNE 1, 1995
MFS(R) MUNICIPAL STATEMENT OF HIGH INCOME FUND ADDITIONAL INFORMATION (A member of the MFS Family of Funds(R)) June 1, 1995 - ------------------------------------------------------------------------------- |
Page
- ----
1. Definitions ....................................................................................2
2. Investment Objective, Policies and Restrictions ................................................2
3. Management of the Fund .........................................................................9
Trustees ....................................................................................9
Officers ....................................................................................9
Investment Adviser ..........................................................................10
Custodian ...................................................................................10
Shareholder Servicing Agent .................................................................10
Distributor .................................................................................11
4. Portfolio Transactions and Brokerage Commissions ...............................................11
5. Shareholder Services ...........................................................................12
Investment and Withdrawal Programs ..........................................................12
Exchange Privilege ..........................................................................14
6. Tax Status .....................................................................................14
7. Determination of Net Asset Value and Performance ...............................................16
8. Distribution Plan ..............................................................................18
9. Description of Shares, Voting Rights and Liabilities ...........................................18
10. Independent Auditors and Financial Statements ..................................................19
Appendix A ..........................................................................................20
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MFS MUNICIPAL HIGH INCOME FUND
A Series of MFS Series Trust III
500 Boylston Street, Boston, Massachusetts 02116
(617) 954-5000
This Statement of Additional Information (the "SAI") sets forth information which may be of interest to investors but which is not necessarily included in the Fund's Prospectus, dated June 1, 1995. This SAI should be read in conjunction with the Prospectus, a copy of which may be obtained without charge by contacting the Shareholder Servicing Agent (see last page for address and phone number).
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
1. DEFINITIONS
"Fund"
-- MFS(R) Municipal High Income Fund, a series
of MFS Series Trust III (the "Trust"), a
Massachusetts business trust. The Trust was
previously known as Massachusetts Financial
High Income Trust until its name was
changed on August 20, 1993. The Fund is the
successor to MFS High Yield Municipal Bond
Fund which was reorganized as a series of
the Trust on September 7, 1993.
"MFS" or the "Adviser" -- Massachusetts Financial Services Company, a
Delaware corporation.
"MFD" -- MFS Fund Distributors, Inc., a Delaware
corporation.
"Prospectus" -- The Prospectus, dated June 1, 1995, of the
Fund.
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2. INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS INVESTMENT OBJECTIVE. The investment objective of the Fund is to provide high current income exempt from federal income taxes. Any investment involves risk and there can be no assurance that the Fund will achieve its investment objective.
INVESTMENT POLICIES. The Fund seeks to achieve its investment objective by investing primarily (i.e., at least 80% of its assets under normal circumstances) in debt securities issued by or on behalf of states, territories and possessions of the United States, the District of Columbia, and their political subdivisions, agencies or instrumentalities, the interest on which is exempt from federal income tax ("Municipal Bonds" or "tax-exempt securities"). Under normal circumstances, the Fund will invest at least 65% of its total assets in tax-exempt securities which offer a current yield above that generally available on tax-exempt securities in the three highest rating categories of the recognized rating agencies (commonly known as "junk bonds" if rated below the four highest categories of recognized rating agencies). Such high risk securities generally involve greater volatility of price and greater risk of nonpayment of principal and interest (including the possibility of default by or bankruptcy of the issuers of such securities) than securities in higher rating categories. However, since available yields and yield differentials vary over time, no specific level of income or yield differential can ever be assured. Also, any income earned on portfolio securities would be reduced by the Fund's expenses before it is distributed to shareholders.
The Fund may invest in a relatively high percentage of municipal bonds issued by entities having similar characteristics. The issuers may be located in the same geographic area, or may pay their interest obligations from revenue of similar projects such as hospitals, electric utility systems, multi-family housing, nursing homes, commercial facilities (including hotels), steel companies or life care facilities. This may make the Fund more susceptible to similar economic, political, or regulatory occurrences. As the similarity in issuers increases, the potential for fluctuation of the net asset value of shares of the Fund also increases.
The Fund reserves the right to invest more than 25% of its assets in industrial revenue bonds such as industrial revenue bonds issued for electric utility systems, multi-family housing, health care facilities, and steel companies. Industrial revenue bonds are issued by various state and local agencies to finance various projects. These investments might entail risks as described below.
Electric utility systems face problems in financing large construction programs in an inflationary period, cost increases and delay occasioned by environmental considerations (particularly with respect to nuclear facilities), difficulty in obtaining fuel at reasonable prices, the cost of competing fuel sources, difficulty in obtaining sufficient rate increases and other regulatory problems, the effect of energy conservation and difficulty of the capital market to absorb utility debt.
The financing of multi-family housing projects is affected by a variety of factors, including satisfactory completion of construction within cost constraints, the achievement and maintenance of a sufficient level of occupancy, sound management of the developments, timely and adequate increases in rents to cover increases in operating expenses, including taxes, utility rates and maintenance costs, changes in applicable laws and governmental regulations and social and economic trends.
Healthcare facilities include lifecare facilities, nursing homes and hospitals. Lifecare facilities and nursing homes are alternative forms of long-term housing for the elderly which offer residents the independence of condominium life style and, if needed, the comprehensive care of nursing home services. Bonds to finance lifecare facilities have been issued by various state industrial development authorities. Since the bonds are secured only by the revenues of each facility and not by state or local government tax payments, they are subject to a wide variety of risks. Primarily, the projects must maintain adequate occupancy levels to be able to provide revenues adequate to maintain debt service payments. Moreover, in the case of life care facilities, since a portion of housing, medical care and other services may be financed by an initial deposit, there may be risk if the facility does not maintain adequate financial reserves to secure estimated actuarial liabilities. The ability of management to forecast inflationary cost pressures accurately weighs importantly in this process. The facilities may also be impacted by regulatory cost restrictions applied to health care delivery in general, particularly state regulations or changes in Medicare and Medicaid payments or qualifications, or restrictions imposed by medical insurance companies. They may also face competition from alternative health care or conventional housing facilities in the private or public sector. Hospital bond ratings are often based on feasibility studies which contain projections of expenses, revenues and occupancy levels. A hospital's gross receipts and net income available to service its debt are influenced by demand for hospital services, the ability of the hospital to provide the services required, management and medical capabilities, economic developments in the service area, efforts by insurers and government agencies to limit rates and expenses, confidence in the hospital, service area economic developments, competition, availability and expense of malpractice insurance, Medicaid and Medicare funding, and possible federal legislation limiting the rates of increase of hospital charges.
The Fund may also invest in bonds for other commercial facilities (including hotels) and industrial projects. Financing for such projects will be subject to inflation and other general economic factors as well as construction risks including labor problems, difficulties with construction sites and the ability of contractors to meet specifications in a timely manner.
If a revenue bond is secured by payments generated from a project, and the revenue bond is also secured by a lien on the real estate comprising the project, foreclosure by the indenture trustee on the lien for the benefit of the bondholders creates additional risks associated with owning real estate, including environmental risks.
REPURCHASE AGREEMENTS: As described in the Prospectus, the Fund may enter into repurchase agreements with sellers who are member firms (or a subsidiary thereof) of the New York Stock Exchange (the "Exchange"), members of the Federal Reserve System, recognized primary U.S. Government securities dealers or institutions which the Adviser has determined to be of comparable creditworthiness. The securities that the Fund purchases and holds through its agent are U.S. Government securities, the values of which are equal to or greater than the repurchase price agreed to be paid by the seller. The repurchase price may be higher than the purchase price, the difference being income to the Fund, or the purchase and repurchase prices may be the same, with interest at a standard rate due to the Fund together with the repurchase price on repurchase. In either case, the income to the Fund is unrelated to the interest rate on the U.S. Government securities.
The repurchase agreement provides that in the event the seller fails to pay the price agreed upon on the agreed upon delivery date or upon demand, as the case may be, the Fund will have the right to liquidate the securities. If at the time the Fund is contractually entitled to exercise its right to liquidate the securities, the seller is subject to a proceeding under the bankruptcy laws or its assets are otherwise subject to a stay order, the Fund's exercise of its right to liquidate the securities may be delayed and result in certain losses and costs to the Fund. The Fund has adopted and follows procedures which are intended to minimize the risks of repurchase agreements. For example, the Fund only enters into repurchase agreements after the Adviser has determined that the seller is creditworthy, and the Adviser monitors that seller's creditworthiness on an ongoing basis. Moreover, under such agreements, the value of the securities (which are marked to market every business day) is required to be greater than the repurchase price, and the Fund has the right to make margin calls at any time if the value of the securities falls below the agreed upon margin.
LOANS AND OTHER DIRECT INDEBTEDNESS: The Fund may purchase loans and other direct claims against a borrower. In purchasing loans, the Fund acquires some or all of the interest of a bank or other lending institution in a loan to a corporate borrower. Many such loans are secured, although some may be unsecured. Such loans may be in default at the time of purchase. Loans that are fully secured offer the Fund more protection than an unsecured loan in the event of non-payment of scheduled interest or principal. However, there is no assurance that the liquidation of collateral from a secured loan would satisfy the corporate borrower's obligation, or that the collateral can be liquidated.
These loans are made generally to finance internal growth, mergers, acquisitions, stock repurchases, leveraged buy-outs and other corporate activities. Such loans are typically made by a syndicate of lending institutions, represented by an agent lending institution which has negotiated and structured the loan and is responsible for collecting interest, principal and other amounts due on its own behalf and on behalf of the others in the syndicate, and for enforcing its and their other rights against the borrower. Alternatively, such loans may be structured as a novation, pursuant to which the Fund would assume all of the rights of the lending institution in a loan, or as an assignment, pursuant to which the Fund would purchase an assignment of a portion of a lender's interest in a loan either directly from the lender or through an intermediary. The Fund may also purchase trade or other claims against companies, which generally represent money owed by the company to a supplier of goods or services. These claims may also be purchased at a time when the company is in default.
Certain of the loans acquired by the Fund may involve revolving credit facilities or other standby financing commitments which obligate the Fund to pay additional cash on a certain date or on demand. These commitments may have the effect of requiring the Fund to increase its investment in a company at a time when the Fund might not otherwise decide to do so (including at a time when the company's financial condition makes it unlikely that such amounts will be repaid). To the extent that the Fund is committed to advance additional funds, it will at all times hold and maintain in a segregated account cash or other high grade debt obligations in an amount sufficient to meet such commitments.
The Fund's ability to receive payments of principal, interest and other amounts due in connection with these investments will depend primarily on the financial condition of the borrower. In selecting the loans and other direct investments which the Fund will purchase, the Adviser will rely upon its (and not that of the original lending institution's) own credit analysis of the borrower. As the Fund may be required to rely upon another lending institution to collect and pass on to the Fund amounts payable with respect to the loan and to enforce the Fund's rights under the loan, an insolvency, bankruptcy or reorganization of the lending institution may delay or prevent the Fund from receiving such amounts. In such cases, the Fund will evaluate as well the creditworthiness of the lending institution and will treat both the borrower and the lending institution as an "issuer" of the loans for purposes of certain investment restrictions pertaining to the diversification of the Fund's portfolio investments. The highly leveraged nature of many such loans may make such loans especially vulnerable to adverse changes in economic or market conditions. Investments in such loans may involve additional risks to the Fund. For example, if a loan is foreclosed, the Fund could become part owner of any collateral, and would bear the costs and liabilities associated with owning and disposing of the collateral. In addition, it is conceivable that under emerging legal theories of lender liability, the Fund could be held liable as a co-lender. It is unclear whether loans and other forms of direct indebtedness offer securities law protections against fraud and misrepresentation. In the absence of definitive regulatory guidance, the Fund relies on the Adviser's research in an attempt to avoid situations where fraud or misrepresentation could adversely affect the Fund. In addition, loans and other direct investments may not be in the form of securities or may be subject to restrictions on transfer, and only limited opportunities may exist to resell such instruments. As a result, the Fund may be unable to sell such investments at an opportune time or may have to resell them at less than fair market value. To the extent that the Adviser determines that any such investments are illiquid, the Fund will include them in the investment limitations described below.
"WHEN-ISSUED" SECURITIES: The Fund may purchase securities on a "when-issued" or on a "forward delivery" basis. When the Fund commits to purchase a security on a "when-issued" or "forward delivery" basis, it will set up procedures consistent with the General Statement of Policy of the Securities and Exchange Commission (the "SEC") concerning such purchases. Since that policy currently recommends that an amount of the Fund's assets equal to the amount of the purchase be held aside or segregated to be used to pay for the commitment, the Fund will always have cash, cash equivalents or high quality debt securities sufficient to cover any commitments or to limit any potential risk. However, although the Fund does not intend to make such purchases for speculative purposes and intends to adhere to the provisions of the SEC policy, purchases of securities on such bases may involve more risk than other types of purchases. For example, the Fund may have to sell assets which have been set aside in order to meet redemptions. Also, if the Fund determines it is necessary to sell the "when-issued" or "forward delivery" securities before delivery, it may incur a loss because of market fluctuations since the time the commitment to purchase such securities was made and any gain or loss would not be tax-exempt.
INVERSE FLOATING RATE OBLIGATIONS: The Fund may invest in so called "inverse floating rate obligations" or "residual interest" bonds or certificates structured to have similar features. In creating such an obligation, a municipality issues a certain amount of debt and pays a fixed interest rate. A portion of the debt is issued as variable rate short-term obligations, the interest rate of which is reset at short intervals, typically ranging from thirty-five days to one year. The other half of the debt is issued as inverse floating rate obligations, the interest rate of which is calculated based on the difference between the entire amount of interest paid by the issuer on all of the debt and the interest paid on the short-term obligation. Under usual circumstances, the holder of the inverse floating rate obligation can generally purchase an equal principal amount of the short-term obligation and link the two obligations in order to create long-term fixed-rate bonds. Because the interest rate on the inverse floating rate obligation is determined by subtracting the short-term rate from a fixed amount, the interest rate will decrease as the short-term rate increases and will increase as the short-term rate decreases. The magnitude of increases and decreases in the market value of inverse floating rate obligations may be approximately twice as large (or more if the inverse instrument is issued in principal amount greater than the principal amount of the short-term piece) as the comparable change in the market value of an equal principal amount of long-term bonds which bear interest at the rate paid by the issuer and have similar credit quality, redemption and maturity provisions.
INDEXED SECURITIES: The Fund may purchase securities whose prices are indexed to the prices of other securities, securities indices, precious metals or other commodities, or other financial indicators. Indexed securities typically, but not always, are debt securities or deposits whose value at maturity or coupon rate is determined by reference to a specific instrument or statistic. Gold-indexed securities, for example, typically provide for a maturity value that depends on the price of gold, resulting in a security whose price tends to rise and fall together with gold prices.
The performance of indexed securities depends to a great extent on the performance of the security or other instrument to which they are indexed, and may also be influenced by interest rate changes in the U.S. and abroad. At the same time, indexed securities are subject to the credit risks associated with the issuer of the security, and their values may decline substantially if the issuer's creditworthiness deteriorates. Recent issuers of indexed securities have included banks, corporations, and certain U.S. government agencies.
OPTIONS: The Fund intends to write covered put and call options and purchase put and call options on fixed income securities that are traded on U.S. securities exchanges and over-the-counter. Call options written by the Fund give the holder the right to buy the underlying securities from the Fund at a fixed exercise price; put options written by the Fund give the holder the right to sell the underlying securities to the Fund at a fixed exercise price. A call option written by the Fund is "covered" if the Fund owns the underlying security covered by the call or has an absolute and immediate right to acquire that security without additional cash consideration (or for additional cash consideration held in a segregated account by its custodian) upon conversion or exchange of other securities held in its portfolio. A call option is also covered if the Fund holds a call on the same security and in the same principal amount as the call written where the exercise price of the call held (a) is equal to or less than the exercise price of the call written or (b) is greater than the exercise price of the call written if the difference is maintained by the Fund in cash or securities in a segregated account with its custodian. A put option written by the Fund is "covered" if the Fund maintains cash or short-term money market instruments with a value equal to the exercise price in a segregated account with its custodian, or else holds a put on the same security and in the same principal amount as the put written where the exercise price of the put held is equal to or greater than the exercise price of the put written or is less than the exercise price of the put written if the difference is maintained by the Fund in cash or short-term money market instruments in a segregated account with its custodian. Put and call options written by the Fund may also be covered in such other manner as may be in accordance with the requirements of the exchange on which, or the counter party with which, the option is traded, and applicable laws and regulations. The writer of an option may have no control over when the underlying securities must be sold, in the case of a call option, or purchased, in the case of a put option, since with regard to certain options, the writer may be assigned an exercise notice at any time prior to the expiration of the option.
Effecting a closing transaction in the case of a written call option will permit the Fund to write another call option on the underlying security with either a different exercise price or expiration date or both, or in the case of a written put option will permit the Fund to write another put option to the extent that the exercise price thereof is secured by deposited cash or short-term money market instruments. Such transactions permit the Fund to generate additional premium income, which will partially offset declines in the value of portfolio securities or increases in the cost of securities to be acquired. Also, effecting a closing transaction will permit the cash or proceeds from the concurrent sale of any securities subject to the option to be used for other Fund investments. If the Fund desires to sell a particular security from its portfolio on which it has written a call option, it will effect a closing transaction prior to or concurrent with the sale of the security.
The Fund will realize a profit from a closing transaction if the price of the transaction is less than the premium received from writing the option or is more than the premium paid to purchase the option; the Fund will realize a loss from a closing transaction if the price of the transaction is more than the premium received from writing the option or is less than the premium paid to purchase the option. Because increases in the market price of a call option will generally reflect increases in the market price of the underlying security, any loss resulting from the closing out of a call option is likely to be offset in whole or in part by appreciation of the underlying security owned by the Fund.
An option position may be closed out only where there exists a secondary market for an option of the same series. If a secondary market does not exist, it might not be possible to effect closing transactions in particular options with the result that the Fund would have to exercise options purchased in order to realize any profit or maintain options written until exercise or expiration. If the Fund is unable to effect a closing purchase transaction in a secondary market, it will not be able to sell the underlying security until the option expires or it delivers the underlying security upon exercise. Reasons for the absence of a liquid secondary market include the following: (i) there may be insufficient trading interest in certain options; (ii) restrictions may be imposed by a national securities exchange on opening transactions or closing transactions or both; (iii) trading halts, suspensions or other restrictions may be imposed with respect to particular classes or series of options or underlying securities; (iv) unusual or unforeseen circumstances may interrupt normal operations on an exchange; (v) the facilities of an exchange or the Options Clearing Corporation (the "OCC") may not at all times be adequate to handle current trading volume; or (vi) one or more exchanges could, for economic or other reasons, decide or be compelled at some future date to discontinue the trading of options (or a particular class or series of options), in which event the secondary market on that exchange (or in that class or series of options) would cease to exist, although outstanding options on that exchange that had been issued by the OCC as a result of trades on that exchange would continue to be exercisable in accordance with their terms.
The Fund may write options in connection with buy-and-write transactions (i.e., the Fund may purchase a security and then write a call option against that security). The exercise price of the call the Fund determines to write will depend upon the expected price movement of the underlying security. The exercise price of a call option may be below ("in-the-money"), equal to ("at-the-money") or above ("out-of-the-money") the current value of the underlying security at the time the option is written. If the call options are exercised in such transactions, the Fund's maximum gain will be the premium received by it for writing the option, adjusted upwards or downwards by the difference between the Fund's purchase price of the security and the exercise price. 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. Put options may be used by the Fund in the same market environments that call options are used in equivalent buy-and-write transactions.
The Fund may write combinations of put and call options on the same security, a practice known as a "straddle." By writing a straddle, the Fund undertakes a simultaneous obligation to sell 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 in part, by the premiums received on the writing of the two options. Conversely, if the price of the security declines by a sufficient amount, the put will likely be exercised. The writing of straddles will likely be effective, therefore, only where the price of a security remains stable and neither the call nor the put is exercised. In an instance where one of the options is exercised, the loss on the purchase or sale of the underlying security may exceed the amount of the premiums received.
The Fund may purchase put options to hedge against a decline in the value of its portfolio. By using put options in this way, the Fund will reduce any profit it might otherwise have realized in the underlying security by the amount of the premium paid for the put option and by transaction costs.
The Fund may purchase call options to hedge against an increase in the price of securities that the Fund anticipates purchasing in the future. The premium paid for the call option plus any transaction costs will reduce the benefit, if any, realized by the Fund upon exercise of the option, and, unless the price of the underlying security rises sufficiently, the option may expire worthless to the Fund.
The Fund may also purchase warrants on fixed income securities. A warrant on a fixed income security is a long-dated call option that provides the holder with the right, but not the obligation, to purchase from an issuer a fixed income security with a specified par value, coupon, and maturity at a fixed exercise price on a specified date or between specified dates. Typically, the fixed income securities that are deliverable pursuant to the warrant will be noncallable securities. Warrants may be issued as entirely separate securities or they may be attached to, but subsequently detachable from, a fixed income security of the same issuer.
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 (the "SEC illiquidity ceiling") of the Fund's assets. Although the Adviser disagrees with this position, the Adviser intends to limit the Fund's writing of over-the-counter options in accordance with the following procedure. Except as provided below, the Fund intends to write over-the-counter options only with primary U.S. Government securities dealers recognized by the Federal Reserve Bank of New York. Also, the contracts 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 the Fund for writing the option, plus the amount, if any, of the option's intrinsic value (i.e., the amount that the option is in-the-money). The formula may also include a factor to account for the difference between the price of the security and the strike price of the option if the option is written out-of-the-money. The Fund will treat all or a portion of the formula price as illiquid for purposes of the SEC illiquidity ceiling imposed by the SEC staff. The Fund may also write over-the-counter options with non-primary dealers and will treat the assets used to cover these options as illiquid for purposes of such SEC illiquidity ceiling.
The Fund may purchase detachable call options on municipal securities, which are options issued by an issuer of the underlying municipal securities giving the purchaser the right to purchase the securities at a fixed price, up to a stated time in the future or, in some cases, on a future date. The Fund may purchase detachable call options either in connection with its purchase of the underlying municipal securities or in separate transactions unrelated to purchases of the underlying municipal securities. In general, however, the Fund will only purchase detachable call options that are issued at the same time as the underlying municipal securities. The Fund may or may not purchase the underlying municipal securities. Because detachable call options may be long term instruments, their value could be subject to greater volatility and, if the Fund seeks to sell an option it has purchased, it could sustain a loss of all or a portion of the amount paid to purchase the option. In this regard, detachable call options have only recently been introduced and there is not yet an established market for the sale of such instruments. In addition, depending on changes in the value of the underlying municipal security, it may not be profitable for the Fund to exercise an option it has purchased. In that event, the Fund will lose the amount of the purchase price paid for the option.
FUTURES CONTRACTS: The Fund may enter into contracts for the purchase or sale for future delivery of fixed income securities or contracts based on municipal bond or other financial indices, including any index of fixed income securities, as such contracts become available for trading ("Futures Contracts"). A "sale" of a Futures Contract means a contractual obligation to deliver the securities called for by the contract at a specified price in a fixed delivery month or, in the case of a Futures Contract on an index of securities, to make or receive a cash settlement. A "purchase" of a Futures Contract means a contractual obligation to acquire the securities called for by the contract at a specified price in a fixed delivery month or, in the case of a Futures Contract on an index of securities, to make or receive a cash settlement. Futures Contracts have been designed by exchanges which have been designated as "contract markets" by the Commodity Futures Trading Commission (the "CFTC"), and must be executed through a futures commission merchant, or brokerage firm, which is a member of the relevant contract market. Existing contract markets include the Chicago Board of Trade and the International Monetary Market of the Chicago Mercantile Exchange. Futures Contracts are traded on these markets, and, through their clearing corporations, the exchanges guarantee performance of the contracts as between the clearing members of the exchange.
At the same time a Futures Contract is purchased or sold, the Fund must allocate cash or securities as a deposit payment ("initial deposit"). The initial deposit varies but may be as low as 5% or less of the value of the contract. Daily thereafter, the Futures Contract is valued and the payment of "variation margin" may be required since each day the Fund would provide or receive cash that reflects any decline or increase in the contract's value.
At the time of delivery of securities pursuant to a Futures Contract based on fixed income securities, adjustments are made to recognize differences in value arising from the delivery of securities with a different interest rate from that specified in the contract. In some (but not many) cases, securities called for by a Futures Contract may not have been issued when the contract was written.
A Futures Contract based on an index of securities, such as a municipal bond index Futures Contract, provides for a cash payment, equal to the amount, if any, by which the value of the index at maturity is above or below the value of the index at the time the contract was entered into, times a fixed index "multiplier". The index underlying such a Futures Contract is generally a broad based index of securities designed to reflect movements in the relevant market as a whole. The index assigns weighted values to the securities included in the index, and its composition is changed periodically.
Although Futures Contracts call for the actual delivery of securities or, in the case of Futures Contracts based on an index, the making or acceptance of a cash settlement at a specified future time, the contractual obligation is usually fulfilled before such date by buying or selling, as the case may be, on a commodities exchange, an identical Futures Contract calling for settlement in the same month, subject to the availability of a liquid secondary market. The Fund incurs brokerage fees when it purchases and sells Futures Contracts.
The purpose of the purchase or sale of a Futures Contract entered into for hedging purposes, in the case of a portfolio such as that of the Fund, which holds or intends to acquire long-term fixed income securities, is to attempt to protect the Fund from fluctuations in interest rates without actually buying or selling long-term fixed income securities. For example, if the Fund owns long-term bonds, and interest rates were expected to increase, the Fund might enter into Futures Contracts for the sale of debt securities. Such a sale would have much the same effect as selling an equivalent value of the long-term bonds owned by the Fund. If interest rates did increase, the value of the debt securities in the portfolio would decline, but the value of the Futures Contracts would increase at approximately the same rate, thereby keeping the net asset value of the Fund from declining as much as it otherwise would have. The Fund could accomplish similar results by selling bonds with long maturities and investing in bonds with short maturities when interest rates are expected to increase. However, the use of Futures Contracts as an investment technique allows the Fund to maintain a hedging position without having to sell its portfolio securities.
Similarly, when it is expected that interest rates may decline, Futures Contracts may be purchased to attempt to hedge against anticipated purchases of long-term bonds at higher prices. Since the fluctuations in the value of Futures Contracts should be similar to that of long-term bonds, the Fund could take advantage of the anticipated rise in the value of long-term bonds without actually buying them until the market had stabilized. At that time, the Futures Contracts could be liquidated and the Fund could then buy long-term bonds on the cash market. To the extent the Fund enters into Futures Contracts for this purpose, the assets in the segregated asset account maintained to cover the Fund's obligations with respect to such Futures Contracts will consist of cash, cash equivalents or short-term money market instruments from its portfolio in an amount equal to the difference between the fluctuating market value of such Futures Contracts and the aggregate value of the initial and variation margin payments made by the Fund with respect to such Futures Contracts.
The ordinary spreads between prices in the cash and futures markets, due to differences in the natures of those markets, are subject to distortions. First, all participants in the futures market are subject to initial deposit and variation margin requirements. Rather than meeting additional variation margin requirements, investors may close out Futures Contracts through offsetting transactions which could distort the normal relationship between the cash and futures markets. Second, the liquidity of the futures market depends on participants entering into offsetting transactions rather than making or taking delivery. To the extent participants decide to make or take delivery, liquidity in the futures market could be reduced, thus producing distortion. Third, from the point of view of speculators, the margin deposit requirements in the futures market are less onerous than margin requirements in the securities market. Therefore, increased participation by speculators in the futures market may cause temporary price distortions. Due to the possibility of distortion, a correct forecast of general interest rate trends by the Adviser may still not result in a successful transaction.
In addition, Futures Contracts entail risks. Although the Fund believes that use of such contracts will benefit the Fund, if the Adviser's investment judgment about the general direction of interest rates is incorrect, the Fund's overall performance would be poorer than if it had not entered into any such contract. For example, if the Fund has hedged against the possibility of an increase in interest rates which would adversely affect the price of bonds held in its portfolio and interest rates decrease instead, the Fund will lose part or all of the benefit of the increased value of its bonds which it has hedged because it will have offsetting losses in its futures positions. In addition, in such situations, if the Fund has insufficient cash, it may have to sell bonds from its portfolio to meet daily variation margin requirements. Such sales of bonds may be, but will not necessarily be, at increased prices which reflect the rising market. The Fund may have to sell securities at a time when it may be disadvantageous to do so. The Fund may also enter into transactions in Futures Contracts for non-hedging purposes, to the extent permitted by applicable law, which involves greater risks.
OPTIONS ON FUTURES CONTRACTS: The Fund may purchase and write options on Futures Contracts ("Options on Futures Contracts") for hedging purposes and for non-hedging purposes, to the extent permitted by 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. Such Options on Futures Contracts will be traded on contract markets regulated by the CFTC. Depending on the pricing of the option compared to either the price of the Futures Contract upon which it is based or the price of the underlying debt securities, it may or may not be less risky than ownership of the Futures Contract or underlying debt securities. As with the purchase of Futures Contracts, when the Fund is not fully invested, it may purchase a call Option on a Futures Contract to hedge against a market advance due to declining interest rates.
The writing of a call Option on a Futures Contract constitutes a partial hedge against declining prices of the securities which are deliverable upon exercise of the Futures Contract. If the futures price at expiration of the option is below the exercise price, the Fund will retain the full amount of the option premium 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 which are deliverable upon exercise of the Futures Contract. If the futures price at expiration of the option is higher than the exercise price, the Fund will retain the full amount of the option premium, less related transaction costs, which provides a partial hedge against any increase in the price of securities which the Fund intends to purchase. If a put or call option the Fund has written is exercised, the Fund will incur a loss which will be reduced by the amount of the premium it receives, less related transaction costs. Depending on the degree of correlation between changes in the value of its portfolio securities and changes in the value of its futures positions, the Fund's losses from existing Options on Futures Contracts may to some extent be reduced or increased by changes in the value of portfolio securities. The writer of an Option on a Futures Contract is subject to the requirement of initial and variation margin payments.
The Fund may cover the writing of call Options on Futures Contracts (a) through
purchases of the underlying Futures Contract, (b) through ownership of the
security, or securities included in the index, underlying the Futures Contract,
or (c) through the holding of a call on the same Futures Contract and in the
same principal amount as the call written where the exercise price of the call
held (i) is equal to or less than the exercise price of the call written or (ii)
is greater than the exercise price of the call written if the difference is
maintained by the Fund in cash or securities in a segregated account with its
custodian. The Fund may cover the writing of put Options on Futures Contracts
(a) through sales of the underlying Futures Contract, (b) through segregation of
cash or securities in an amount equal to the value of the security or index
underlying the Futures Contract, or (c) through the holding of a put on the same
Futures Contract and in the same principal amount as the put written where the
exercise price of the put held is equal to or greater than the exercise price of
the put written or is less than the exercise price of the put written if the
difference is maintained by the Fund in cash or securities in a segregated
account with its custodian. Put and call Options on Futures Contracts written by
the Fund may also be covered in such other manner as may be in accordance with
the requirements of the exchange on which they are traded and applicable laws
and regulations.
The purchase of a put Option on a Futures Contract is similar in some respects to the purchase of protective put options on portfolio securities. The Fund will purchase a put Option on a Futures Contract to hedge the Fund's portfolio against the risk of rising interest rates.
The amount of risk the Fund assumes when it purchases an Option on a Futures Contract is the premium paid for the option plus related transaction costs, although in order to realize a profit it may be necessary to exercise the option and close out the underlying Futures Contract. In addition to the correlation risks discussed above, the purchase of an option also entails the risk that changes in the value of the underlying Futures Contract will not be fully reflected in the value of the option purchased.
ADDITIONAL RISKS OF OPTIONS ON SECURITIES, FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS: Various additional risks exist with respect to the trading of options and futures. For example, the Fund's ability effectively to hedge all or a portion of its portfolio through transactions in such instruments will depend on the degree to which price movements in the underlying index or instrument correlate with price movements in the relevant portion of the Fund's portfolio. The trading of futures and options entails the additional risk of imperfect correlation between movements in the futures or option price and the price of the underlying index or obligation, while the trading of options also entails the risk of imperfect correlation between securities used to cover options written and the securities underlying such options. The anticipated spread between the prices may be distorted because of various factors, which are set forth under "Futures Contracts" above. The Fund may also enter into transactions in such instruments for non-hedging purposes, which involves greater risks and could result in losses which are not offset by gains on other portfolio assets.
The Fund's ability to engage in options and futures strategies will also depend on the availability of liquid markets in such instruments. "Options" above sets forth certain reasons why a liquid secondary market may not exist.
The liquidity of a secondary market in a Futures Contract or option thereon may be adversely affected by "daily price fluctuation limits" established by exchanges which limit the amount of fluctuation in the price of a contract during a single trading day and prohibit trading beyond such limit. In addition, the exchanges on which futures and options are traded may impose limitations governing the maximum number of positions on the same side of the market and involving the same underlying instrument which may be held by a single investor, whether acting alone or in concert with others (regardless of whether such contracts are held on the same or different exchanges or held or written in one or more accounts or through one or more brokers).
Options on securities may be traded over-the-counter. In an over-the-counter trading environment, many of the protections afforded to exchange participants will not be available. For example, there are no clearing house performance guarantees. In addition, there are no daily price fluctuation limits, and adverse market movements could therefore continue to an unlimited extent over a period of time. Although the purchaser of an option cannot lose more than the amount of the premium plus related transaction costs, this entire amount could be lost. ----------------
The investment objective and policies described above and the policies with respect to portfolio management described below may be changed without shareholder approval.
PORTFOLIO MANAGEMENT: Although in many cases the Fund will hold securities (particularly, those which are unrated or which are in the medium and lower rating categories) until maturity, the Fund intends to manage its portfolio by buying and selling securities to the fullest extent practicable.
In managing its portfolio, the Fund seeks to take advantage of market developments and yield disparities, which may include use of the following strategies:
(1) shortening the average maturity of its portfolio in anticipation of a rise in interest rates so as to minimize depreciation of principal;
(2) lengthening the average maturity of its portfolio in anticipation of a decline in interest rates so as to maximize tax-exempt yield;
(3) selling one type of debt security (e.g., revenue bonds) and buying another (e.g., general obligation bonds) when disparities arise in the relative values of each; and
(4) changing from one debt security to an essentially similar debt security when their respective yields are distorted due to market factors.
INVESTMENT RESTRICTIONS. The Fund has adopted the following restrictions which cannot be changed without the approval of the holders of a majority of the shares of the Fund (which means the lesser of (i) more than 50% of its outstanding shares of the Trust or a series or class, as applicable, or (ii) 67% or more of the outstanding shares of the Trust or a series or class, as applicable, present at a meeting at which holders of more than 50% of the outstanding shares of the Trust or a series or class, as applicable, are represented in person or by proxy):
The Fund may not:
(1) borrow money or pledge, mortgage or hypothecate in excess of of its assets, except as a temporary measure for extraordinary or emergency purposes (the Fund intends to borrow money only from banks and only to accommodate requests for the repurchase of shares of the Fund while effecting an orderly liquidation of portfolio securities) (for the purpose of this restriction, collateral arrangements with respect to options on fixed income securities, Futures Contracts and Options on Futures Contracts and payments of initial and variation margin in connection therewith are not considered a pledge of assets);
(2) purchase any security or evidence of interest therein on margin, except that the Fund may obtain such short-term credit as may be necessary for the clearance of purchases and sales of securities and except that the Fund may make deposits on margin in connection with options on fixed income securities, Futures Contracts and Options on Futures Contracts;
(3) purchase or sell any put or call option or any combination thereof, provided that this shall not prevent the writing, purchasing and selling of puts, calls or combinations thereof with respect to securities and Futures Contracts;
(4) underwrite securities issued by other persons except insofar as the Fund may technically be deemed an underwriter under the Securities Act of 1933, as amended, in selling a portfolio security;
(5) purchase or sell real estate (including limited partnership interests but excluding securities secured by real estate or interests therein), interests in oil, gas or mineral leases, commodities or commodity contracts (except Futures Contracts and Options on Futures Contracts) in the ordinary course of the business of the Fund (the Fund reserves the freedom of action to hold and to sell real estate acquired as a result of the ownership of securities);
(6) purchase securities of any issuer if such purchase at the time thereof would cause more than 10% of the voting securities of such issuer to be held by the Fund;
(7) issue any senior security (as that term is defined in the Investment Company Act of 1940, as amended (the "1940 Act")), if such issuance is specifically prohibited by the 1940 Act or the rules and regulations promulgated thereunder; and
(8) make loans to other persons except through the use of repurchase agreements, the purchase of commercial paper or the purchase of all or a portion of an issue of debt securities in accordance with its investment objective, policies and restrictions, and provided that not more than 10% of the Fund's assets will be invested in repurchase agreements maturing in more than seven days.
As a matter of non-fundamental policy, the Fund may not knowingly invest in securities (other than repurchase agreements), which are subject to legal or contractual restrictions on resale unless the Board of Trustees has determined that such securities are liquid based upon trading markets for the specific security, if more than 15% of the Fund's total assets (taken at market value) would be so invested.
For purposes of the investment restrictions described above and the state and federal restrictions described below, the issuer of a tax-exempt security is deemed to be the entity (public or private) ultimately responsible for the payment of the principal of and interest on the security.
STATE AND FEDERAL RESTRICTIONS: In order to comply with certain state and federal statutes, the Fund will not, as a matter of operating policy, (i) invest more than 5% of its total assets at the time of investment in unsecured obligations of issuers which, including predecessors, controlling persons, general partners and guarantors, have a record of less than three years' continuous business operation or relevant business experience, (ii) purchase or retain in its portfolio any securities issued by an issuer any of whose officers, directors, trustees or security holders is an officer or Trustee of the Fund, or is a member, partner, officer or Director of the Adviser if, after the purchase of the securities of such issuer by the Fund, one or more of such persons owns beneficially more than 1/2 of 1% of the shares or securities, or both, (all taken at market value) of such issuer and such persons owning more than 1/2 of 1% of such shares or securities together own beneficially more than 5% of such shares or securities, or both, (all taken at market value), (iii) sell any security which it does not own unless by virtue of its ownership of other securities the Fund has at the time of sale a right to obtain securities, without payment of further consideration, equivalent in kind and amount to the securities sold and provided that if such right is conditional the sale is made upon the same conditions, (iv) invest for the purpose of exercising control or management, or (v) purchase securities issued by any registered investment company except by purchase in the open market where no commission or profit to a sponsor or dealer results from such purchase other than the customary broker's commission, or except when such purchase, though not made in the open market, is part of a plan of merger or consolidation, provided, however, that the Fund shall not purchase the securities of any registered investment company if such purchase at the time thereof would cause more than 10% of the total assets of the Fund (taken at market value) to be invested in the securities of such issuers or would cause more than 3% of the outstanding voting securities of any such issuer to be held by the Fund, and provided further, that the Fund shall not purchase securities issued by any open-end investment company. These policies are not fundamental and may be changed by the Fund without shareholder approval in response to changes in the various state and federal requirements.
Except for investment restriction (1) above, these investment restrictions are adhered to at the time of purchase or utilization of assets; a subsequent change in circumstances will not be considered to result in a violation of policy.
3. MANAGEMENT OF THE FUND The Board of Trustees provides broad supervision over the affairs of the Fund. The Adviser is responsible for the management of the Fund's assets, and the officers of the Trust are responsible for its operations. The Trustees and officers of the Trust are listed below, together with their principal occupations during the past five years (their titles may have varied during that period).
TRUSTEES
A. KEITH BRODKIN,* Chairman and President
Massachusetts Financial Services Company, Chairman
RICHARD B. BAILEY*
Private investor; Massachusetts Financial Services Company, former Chairman
and Director (until September 30, 1991)
PETER G. HARWOOD
Private Investor
Address: 211 Lindsay Pond Road, Concord, Massachusetts
J. ATWOOD IVES
Eastern Enterprises (diversified holding company), Chairman and Chief Executive
Officer (since December 1991); General Cinema Corporation, Vice Chairman and
Chief Financial Officer (until December 1991); The Neiman Marcus Group, Inc.,
Vice Chairman and Chief Financial Officer (from August 1987 to December 1991);
United States Filter Corporation, Director
Address: 9 Riverside Road, Weston, Massachusetts
LAWRENCE T. PERERA
Hemenway & Barnes (attorneys), Partner
Address: 60 State Street, Boston, Massachusetts
WILLIAM J. POORVU
Harvard University Graduate School of Business Administration, Adjunct
Professor; CBL & Associates Properties, Inc. (a real estate investment trust),
Director; The Baupost Fund (a registered investment company), Vice Chairman
(since November 1993), Chairman and Trustee (from June 1990 until November
1993)
Address: Harvard Business School, Soldiers Field Road, Cambridge,
Massachusetts
CHARLES W. SCHMIDT
Private investor; Raytheon Company (diversified electronics manufacturer),
Senior Vice President and Group Executive (until December 1990); OHM
Corporation, Director; The Boston Company, Director; Boston Safe Deposit and
Trust Company, Director
Address: 30 Colpitts Road, Weston, Massachusetts
ARNOLD D. SCOTT*
Massachusetts Financial Services Company, Senior Executive Vice President and
Secretary
JEFFREY L. SHAMES*
Massachusetts Financial Services Company, President
ELAINE R. SMITH
Independent consultant; Brigham and Women's Hospital, Executive Vice President
and Chief Operating Officer (from August 1990 to September 1992); Ernst &
Young (Accountants), Consultant (from February to July 1990)
Address: Weston, Massachusetts
DAVID B. STONE
North American Management Corp. (Investment Advisers), Chairman
Address: 10 Post Office Square, Suite 300, Boston, Massachusetts
OFFICERS
JOAN S. BATCHELDER,* Vice President
Massachusetts Financial Services Company, Senior Vice President
CYNTHIA M. BROWN,* Vice President
Massachusetts Financial Services Company, Senior Vice President
MATTHEW N. FONTAINE,* Vice President
Massachusetts Financial Services Company, Assistant Vice President
ROBERT J. MANNING,* Vice President
Massachusetts Financial Services Company, Senior Vice President
BERNARD SCOZZAFAVA,* Vice President
Massachusetts Financial Services Company, Vice President
JAMES T. SWANSON,* Vice President
Massachusetts Financial Services Company, Senior Vice President
STEPHEN E. CAVAN,* Secretary and Clerk
Massachusetts Financial Services Company, Senior Vice President, General Counsel
and Assistant Secretary
W. THOMAS LONDON,* Treasurer
Massachusetts Financial Services Company, Senior Vice President
JAMES R. BORDEWICK, JR.,* Assistant Secretary Massachusetts Financial Services Company, Vice President and Associate General Counsel (since September 1990); associated with major law firm (prior to August 1990)
Each Trustee and officer holds comparable positions with certain MFS affiliates or with certain other funds of which MFS or a subsidiary of MFS is the investment adviser or distributor. Mr. Brodkin, the Chairman of MFD, Messrs. Shames and Scott, Directors of MFD and Mr. Cavan, the Secretary of MFD, hold similar positions with certain other MFS affiliates. Mr. Bailey is a Director of Sun Life Assurance Company of Canada (U.S.) ("Sun Life of Canada (U.S.)"), the corporate parent of MFS.
The Fund pays the compensation of non-interested Trustees and Mr. Bailey (who currently receive a fee of $1,250 per year plus $225 per meeting and committee meeting attended, together with such Trustees' out-of-pocket expenses) and has adopted a retirement plan for non-interested Trustees and Mr. Bailey. Under this plan, a Trustee will retire upon reaching age 73 and if the Trustee has completed at least five years of service, he would be entitled to annual payments during his lifetime of up to 50% of such Trustee's average annual compensation (based on the three years prior to his retirement) depending on his length of service. A Trustee may also retire prior to age 73 and receive reduced payments if he has completed at least five years of service. Under the plan, a Trustee (or his beneficiaries) will also receive benefits for a period of time in the event the Trustee is disabled or dies. These benefits will also be based on the Trustee's average annual compensation and length of service. There is no retirement plan provided by the Trust for the interested Trustees (except Mr. Bailey). The Fund will accrue its allocable share of compensation expenses each year to cover current year's service and amortize past service cost.
Set forth in Appendix A hereto is certain information concerning the cash compensation paid to non-interested Trustees and Mr. Bailey and benefits accrued, and estimated benefits payable, under the retirement plan.
As of May 1, 1995, all Trustees and officers as a group owned less than 1% of the outstanding shares of the Fund. As of May 1, 1995, Merrill Lynch, Pierce, Fenner & Smith, P.O. Box 45286, Jacksonville, FL was the record owner of approximately 15.4% of the total outstanding Class A shares of the Fund, and was the record owner of approximately 20.22% of the total outstanding Class B shares of the Fund.
The Declaration of Trust provides that the Trust will indemnify its Trustees and officers against liabilities and expenses incurred in connection with litigation in which they may be involved because of their offices with the Trust, unless, as to liabilities to the Trust or its shareholders, it is finally adjudicated that they engaged in willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in their offices, or with respect to any matter, unless it is adjudicated that they did not act in good faith in the reasonable belief that their actions were in the best interest of the Trust. In the case of settlement, such indemnification will not be provided unless it has been determined, pursuant to the Declaration of Trust, that such officers or Trustees have not engaged in willful misfeasance, bad faith, gross negligence or reckless disregard of their duties.
INVESTMENT ADVISER
MFS and its predecessor organizations have a history of money management dating
from 1924. MFS is a subsidiary of Sun Life of Canada (U.S.) which in turn is a
subsidiary of Sun Life Assurance Company of Canada ("Sun Life"). The Prospectus
contains information with respect to the management of the Adviser and other
investment companies for which MFS serves as investment adviser.
The Adviser manages the assets of the Fund pursuant to an Investment Advisory Agreement, dated September 1, 1993 (the "Advisory Agreement"). The Adviser provides the Fund with overall investment advisory and administrative services, as well as general office facilities. Subject to such policies as the Trustees may determine, the Adviser makes investment decisions for the Fund. For these services and facilities, under the Advisory Agreement, the Adviser receives a management fee, computed and paid monthly, in an amount equal to the sum of 0.30% of the Fund's average daily net assets plus 4.75% of the Fund's gross income (i.e., income other than gains from the sale of securities), in each case on an annualized basis, for the Fund's then-current fiscal year.
For the fiscal years ended January 31, 1993, 1994 and 1995 management fees amounted to $4,921,173, $5,400,831 and $6,385,098, respectively. In order to comply with the expense limitations of certain state securities commissions, the Adviser will reduce its management fee or otherwise reimburse the Fund for any expense, exclusive of interest, taxes and brokerage commissions, incurred by the Fund in any fiscal year to the extent such expenses exceed the most restrictive of such state expense limitations. The Adviser will make appropriate adjustments to such reimbursements in response to any amendment or rescission of the various state requirements.
The Fund pays all of its expenses (other than those assumed by MFS or MFD), including: Trustee fees discussed above, governmental fees; interest charges; taxes; membership dues in the Investment Company Institute allocable to the Fund; fees and expenses of independent auditors, of legal counsel, and of any transfer agent, registrar or dividend disbursing agent of the Fund; expenses of repurchasing and redeeming shares; expenses of preparing, printing and mailing share certificates, shareholder reports, notices, proxy statements to shareholders and reports to governmental officers and commissions; brokerage and other expenses connected with the execution, recording and settlement of portfolio security transactions; insurance premiums; fees and expenses of State Street Bank and Trust Company, the Fund's custodian, for all services to the Fund, including safekeeping of funds and securities and maintaining required books and accounts; expenses of calculating the net asset value of the Fund's shares; and expenses of shareholder meetings. Expenses relating to the issuance, registration and qualification of shares of the Fund and the preparation, printing and mailing of prospectuses for such purposes are borne by the Fund except that the Fund's Distribution Agreement with MFD requires MFD to pay for prospectuses that are to be used for sales purposes. Expenses of the Trust which are not attributable to a specific series are allocated among the series in a manner believed by management of the Trust to be fair and equitable. For a list of the Fund's expenses, including the compensation paid to the Trustees who are not officers of MFS, for the fiscal year ended January 31, 1995, see "Statement of Operations" in the Fund's Annual Report to shareholders incorporated by reference into this SAI.
MFS pays the compensation of the Trust's officers and of any Trustee who is an officer of MFS. The Adviser also furnishes at its own expense all necessary administrative services, including office space, equipment, clerical personnel, investment advisory facilities, and all executive and supervisory personnel necessary for managing the investments of the Fund, effecting the portfolio transactions of the Fund and, in general, administering the affairs of the Fund.
The Advisory Agreement will remain in effect until August 1, 1995, and will continue in effect thereafter only if such continuance is specifically approved at least annually by the Board of Trustees or by vote of a majority of the shares of the Fund (as defined in "Investment Restrictions") and, in either case, by a majority of the Trustees who are not parties to the Advisory Agreement or interested persons of any such party. The Advisory Agreement terminates automatically if assigned and may be terminated without penalty by vote of a majority of the shares of the Fund (as defined in "Investment Restrictions") or by either party to the Advisory Agreement on not more than 60 days' nor less than 30 days' written notice. The Advisory Agreement provides that if MFS ceases to serve as the Adviser to the Fund, the Fund will change its name so as to delete the initials "MFS". The Advisory Agreement further provides that MFS may render services to others and may permit fund clients in addition to the Fund to use the initials "MFS" in their names. The Advisory Agreement also provides that neither the Adviser nor its personnel shall be liable for any error of judgment or mistake of law or for any loss arising out of any investment or for any act or omission in the execution and management of the Fund, except for willful misfeasance, bad faith or gross negligence in the performance of its or their duties or by reason of reckless disregard of its or their obligations and duties under the Advisory Agreement.
CUSTODIAN
State Street Bank and Trust Company (the "Custodian") is the custodian of the
Fund's assets. The Custodian's responsibilities include safekeeping and
controlling the Fund's cash and securities, handling the receipt and delivery of
securities, determining income and collecting interest and dividends on the
Fund's investments, maintaining books of original entry for portfolio and trust
accounting and other required books and accounts, and calculating the daily net
asset value of each class of shares of the Fund. The Custodian does not
determine the investment policies of the Fund or decide which securities the
Fund will buy or sell. The Fund may, however, invest in securities, including
repurchase agreements, issued by the Custodian and may deal with the Custodian
as principal in securities transactions. The Custodian also acts as the dividend
disbursing agent of the Fund. The Custodian has contracted with the Adviser to
perform certain accounting functions related to options transactions for which
the Adviser receives remuneration on a cost basis.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (the "Shareholder Servicing Agent"), a wholly owned
subsidiary of MFS, is the Fund's shareholder servicing agent, pursuant to a
Shareholder Servicing Agent Agreement, effective August 1, 1985 (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 the shares of each class of the Fund. For these services, the
Shareholder Servicing Agent will receive a fee based on the net assets of each
class of shares of the Fund, computed and paid monthly. In addition, the
Shareholder Servicing Agent will be reimbursed by the Fund for certain expenses
incurred by the Shareholder Servicing Agent on behalf of the Fund. For the
fiscal year ended January 31, 1995, the Fund paid the Shareholder Servicing
Agent $1,295,301 for services rendered under the Agency Agreement. State Street
Bank and Trust Company, the dividend and distribution disbursing agent of the
Fund, has contracted with the Shareholder Servicing Agent to administer and
perform certain dividend and distribution disbursing functions for the Fund.
DISTRIBUTOR
MFD, a wholly owned subsidiary of MFS, serves as distributor for the continuous
offering of shares of the Fund pursuant to a Distribution Agreement, dated
January 1, 1995 (the "Distribution Agreement"), with the Trust. Prior to January
1, 1995, MFS Financial Services, Inc. ("FSI"), another wholly owned subsidiary
of MFS, was the Fund's distributor. Where this SAI refers to MFD in relation to
the receipt or payment of money with respect to a period or periods prior to
January 1, 1995, such reference shall be deemed to include FSI, as the
predecessor in interest to MFD. Prior to that date, MFS served as the Fund's
principal underwriter pursuant to a distribution agreement, dated January 18,
1984, with the Fund's predecessor. Except for the periods from March 1, 1989 to
the close of business on March 23, 1989, February 6, 1990 to the close of
business on February 7, 1990, and on June 3, 1994 only shareholders of the Fund
have been permitted to purchase additional Fund shares since June, 1985. As of
the close of business on February 28, 1990, through November 4, 1990, shares of
the Fund were also not available for sale to existing shareholders (except
through the reinvestment of dividends and capital gains of the Fund).
CLASS A SHARES: MFD acts as agent in selling Class A shares of the Fund to dealers. The public offering price of Class A shares of the Fund is their net asset value next computed after the sale plus a sales charge which varies based upon the quantity purchased. The public offering price of a Class A share of the Fund is calculated by dividing net asset value of a Class A share by the difference (expressed as a decimal) between 100% and the sales charge percentage of offering price applicable to the purchase (see "Purchases" in the Prospectus). The sales charge scale set forth in the Prospectus applies to purchases of Class A shares of the Fund alone or in combination with shares of all classes of certain other funds in the MFS Family of Funds (the "MFS Funds") and other funds (as noted under Right of Accumulation) by any person, including members of a family unit (e.g., husband, wife, and minor children) and bona fide trustees, and also applies to purchases made under the Right of Accumulation or a Letter of Intent (see "Investment and Withdrawal Programs" below). A group might qualify to obtain quantity sales charge discounts (see "Investment and Withdrawal Programs" below).
If shares of the Fund are made available for sale, Class A shares may be sold at their net asset value to certain persons or in certain circumstances as described in the Prospectus. Such sales are made without a sales charge to promote good will with employees and others with whom MFS, MFD and/or the Fund have business relationships, and because the sales effort, if any, involved in making such sales is negligible.
MFD allows discounts to dealers (which are alike for all dealers) from the applicable public offering price of the Class A shares. Dealer allowances expressed as a percentage of offering price for all offering prices are set forth in the Prospectus (see "Purchases" in the Prospectus). The difference between the total amount invested and the sum of (a) the net proceeds to the Fund and (b) the dealer commission is the commission paid to the distributor. Because of rounding in the computation of offering price, the portion of the sales charge paid to the distributor may vary and the total sales charge may be more or less than the sales charge calculated using the sales charge expressed as a percentage of the offering price or as a percentage of the net amount invested as listed in the Prospectus. In the case of the maximum sales charge, the dealer retains 4% and MFD retains approximately 3/4 of 1% of the public offering price. In addition, MFD, on behalf of the 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: MFD acts as agent in selling Class B shares of the Fund to dealers. The public offering price of Class B shares is their net asset value next computed after the sale (see "Purchases" in the Prospectus).
GENERAL: Neither MFD nor dealers are permitted to delay the placement of orders to benefit themselves by a price change. On occasion, MFD may obtain brokers loans from various banks, including the custodian banks for the MFS Funds, to facilitate the settlement of sales of shares of the Fund to dealers. MFD may benefit from its temporary holding of funds paid to it by investment dealers for the purchase of Fund shares.
For the Fund's fiscal year ended January 31, 1995, gross sales charges on sales of shares of the Fund amounted to $9,569,708, of which $1,576,774 was retained by MFD and $7,992,934 by dealers, banks and certain other financial institutions. The Fund received $288,599,775, representing the aggregate net asset value of such shares. For the Fund's fiscal year ended January 31, 1994, gross sales charges on sales of shares of the Fund amounted to $4,318,254, of which $765,746 was retained by MFD and $3,552,508 by dealers, banks and certain other financial institutions. The Fund received $144,059,470, representing the aggregate net asset value of such shares. For the Fund's fiscal year ended January 31, 1993, gross sales charges on sales of shares of the Fund amounted to $4,557,935, of which $807,014 was retained by MFD and $3,750,921 by dealers, banks and certain other financial institutions. The Fund received $143,499,644, representing the aggregate net asset value of such shares.
For the Fund's fiscal year ended January 31, 1995 and for the period from September 7, 1993 through January 31, 1994, the CDSC imposed on redemption of Class B shares was $57,796 and $0, respectively.
The Distribution Agreement will remain in effect until August 1, 1996, and will continue in effect thereafter only if such continuance is specifically approved at least annually by the Board of Trustees or by vote of a majority of the Trust's shares (as defined in "Investment Restrictions") and, in either case, by a majority of the Trustees who are not parties to the Distribution Agreement or interested persons of any such party. The Distribution Agreement terminates automatically if it is assigned and may be terminated without penalty by either party on not more than 60 days' nor less than 30 days' notice.
4. PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS Specific decisions to purchase or sell securities for the Fund are made by a portfolio committee consisting of employees of the Adviser who are appointed and supervised by its senior officers. Changes in the investments of the Fund are reviewed by its Board of Trustees. Members of the Fund's portfolio committee may serve other clients of the Adviser or any subsidiary of the Adviser in a similar capacity.
The primary consideration in portfolio security transactions for the Fund is execution at the most favorable prices. The Adviser has complete freedom as to the markets in which, and the broker-dealers through which, it seeks this result. Municipal Bonds and other 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. 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 unless, in its opinion, better prices are available elsewhere. Subject to the requirement of seeking execution at the most favorable 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 or who have sold shares of funds for which MFS serves as investment adviser. At present no arrangements to recapture commission payments are in effect.
In certain instances there may be securities which are suitable for the Fund's portfolio as well as for that of one or more of the other clients of the Adviser or any subsidiary of the Adviser. Investment decisions for the Fund and for such other clients are made with a view to achieving their respective investment objectives. It may develop that a particular security is bought or sold for only one client even though it might be held by, or bought or sold for, other clients. Likewise, a particular security may be bought for one or more clients when one or more other clients are selling that same security. Some simultaneous transactions are inevitable when several clients receive investment advice from the same investment adviser, particularly when the same security is suitable for the investment objectives of more than one client. When two or more clients are simultaneously engaged in the purchase or sale of the same security, the securities are allocated among clients in a manner believed to be equitable to each. It is recognized that in some cases this system could have a detrimental effect on the price or volume of the security as far as the Fund is concerned. In other cases, however, the Fund believes that its ability to participate in volume transactions will produce better executions for the Fund.
5. SHAREHOLDER SERVICES INVESTMENT AND WITHDRAWAL PROGRAMS -- The Fund makes available the following programs designed to enable shareholders to add to their investment or withdraw from it with a minimum of paper work. These are described below and, in certain cases, in the Fund's prospectus. The programs involve no extra charge to shareholders (other than a sales charge in the case of certain Class A share purchases) and may be changed or discontinued at any time by a shareholder or the Fund.
LETTER OF INTENT: If a shareholder (other than a group purchaser described below) anticipates purchasing $100,000 or more of Class A shares of the Fund alone or in combination with shares of Class B of the Fund or any of the classes of other MFS Funds or MFS Fixed Fund within a 13-month period (or 36-month period, in the cases of purchases of $1 million or more), the shareholder may obtain Class A shares of the Fund at the same reduced sales charge as though the total quantity were invested in one lump sum by completing the Letter of Intent section of the Fund's Account Application or filing a separate Letter of Intent application (available from the Shareholder Servicing Agent) within 90 days of the commencement of purchases. Subject to acceptance by MFD and the conditions mentioned below, each purchase will be made at a public offering price applicable to a single transaction of the dollar amount specified in the Letter of Intent application. The shareholder or his dealer must inform MFD that the Letter of Intent is in effect each time shares are purchased. The shareholder makes no commitment to purchase additional shares, but if his purchases within 13 months (or 36 months in the case of purchases of $1 million or more) plus the value of shares credited toward completion of the Letter of Intent do not total the sum specified, he will pay the increased amount of the sales charge as described below. Instructions for issuance of shares in the name of a person other than the person signing the Letter of Intent application must be accompanied by a written statement from the dealer stating that the shares were paid for by the person signing such Letter. Neither income dividends nor capital gain distributions taken in additional shares will apply toward the completion of the Letter of Intent. Dividends and distributions of other MFS Funds automatically reinvested in shares of the Fund at net asset value pursuant to the Distribution Investment Program will also not apply toward completion of the Letter of Intent.
Out of the shareholder's initial purchase (or subsequent purchases if necessary), 5% of the dollar amount specified in the Letter of Intent application shall be held in escrow by the Shareholder Servicing Agent in the form of shares registered in the shareholder's name. All income dividends and capital gain distributions on escrowed shares will be paid to the shareholder or to his order. When the minimum investment so specified is completed (either prior to or by the end of the 13-month or 36-month period, as applicable), the shareholder will be notified and the escrowed shares will be released.
If the intended investment is not completed, the Shareholder Servicing Agent will redeem an appropriate number of the escrowed shares in order to realize such difference. Shares remaining after any such redemption will be released by the Shareholder Servicing Agent. By completing and signing the Account Application or separate Letter of Intent application, the shareholder irrevocably appoints the Shareholder Servicing Agent his attorney to surrender for redemption any or all escrowed shares with full power of substitution in the premises.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity discounts on the purchase of Class A shares when that shareholder's new investment, together with the current offering price value of all holdings of all classes of shares of that shareholder in the MFS Funds or MFS Fixed Fund reaches a discount level. See "Purchases" in the Prospectus for the sales charges on quantity purchases. For example, if a shareholder owns shares valued at $75,000 and purchases $25,000 of Class A shares of the Fund, the sales charge for the $25,000 purchase would be at the rate of 4% (the rate applicable to single transactions of $100,000). A shareholder must provide the Shareholder Servicing Agent (or his investment dealer must provide MFD) with information to verify that the quantity sales charge discount is applicable at the time the investment is made.
DISTRIBUTION INVESTMENT PROGRAM: Distributions of dividends and capital gains made by the Fund with respect to a particular class of shares may be automatically invested in shares of the same class of one of the other MFS Funds, if shares of such fund are available for sale. Such investments will be subject to additional purchase minimums. Distributions will be invested at net asset value (exclusive of any sales charge) and not subject to any CDSC. Distributions will be invested at the close of business of the payable date for distribution. A shareholder considering the Distribution Investment Program should obtain and read the prospectus of the other MFS fund and consider the differences in objectives and policies before making any investment.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder Servicing
Agent to send him (or anyone he designates) regular periodic payments, as
designated on the Account Application and based upon the value of his account.
Each payment under a Systematic Withdrawal Plan ("SWP") must be at least $100
except in certain limited circumstances. The aggregate withdrawals of Class B
shares in any year pursuant to a SWP generally are limited to 10% of the value
of the account at the time of establishment of the SWP. SWP payments are drawn
from the proceeds of share redemptions (which would be a return of principal
and, if reflecting a gain, would be taxable). Redemptions of Class B shares will
be made in the following order: (i) to the extent necessary, any "Free Amount";
(ii) any "Reinvested Shares"; (iii) to the extent necessary, the "Direct
Purchase" subject to the lowest CDSC (as such terms are defined in "Contingent
Deferred Sales Charge" in the Prospectus). The CDSC will be waived in the case
of redemptions of Class B shares pursuant to a SWP, but will not be waived in
the case of SWP redemptions of Class A shares which are subject to a CDSC. To
the extent that redemptions for such periodic withdrawals exceed dividend income
reinvested in the account, such redemptions will reduce and may eventually
exhaust the number of shares in the shareholder's account. All dividend and
capital gain distributions for an account with a SWP will be reinvested in full
and fractional shares of the Fund at the net asset value in effect as of the
close of business on the record date for such distributions. To initiate this
service, shares generally 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 by written
instruction to the Shareholder Servicing Agent may deposit into the account
additional shares of the Fund, change the payee or change the dollar amount of
each payment. The Shareholder Servicing Agent may charge the account for
services rendered and expenses incurred beyond those normally assumed by the
Fund with respect to the liquidation of shares. No charge is currently assessed
against the account, but one could be instituted by the Shareholder Servicing
Agent on 60 days' notice in writing to the shareholder in the event that the
Fund ceases to assume the cost of these services. The Fund may terminate any SWP
for an account if the value of the account falls below $5,000 as a result of
share redemptions (other than as a result of a SWP) or an exchange of shares of
the Fund for shares of another MFS Fund. Any SWP may be terminated at any time
by either the shareholder or the Fund.
INVEST BY MAIL: Additional investments of $50 or more may be made at any time by mailing a check payable to the Fund directly to the Shareholder Servicing Agent. The shareholder's account number and the name of his investment dealer must be included with each investment.
GROUP PURCHASES: A bona fide group and all of its members may be treated as a single purchaser and, under the Right of Accumulation (but not a Letter of Intent), obtain quantity sales charge discounts on the purchase of Class A shares if the group (1) gives its endorsement or authorization to the investment program so it may be used by the investment dealer to facilitate solicitation of the membership, thus effecting economies of sales effort; (2) has been in existence for at least six months and has a legitimate purpose other than to purchase mutual fund shares at a discount; (3) is not a group of individuals whose sole organizational nexus is as credit cardholders of a company, policyholders of an insurance company, customers of a bank or broker-dealer, clients of an investment adviser or other similar group; and (4) agrees to provide certification of membership of those members investing money in the MFS Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least $5,000 in any MFS Fund may exchange their shares for the same class of shares of other MFS Funds, if available for sale, under the Automatic Exchange Plan. The Automatic Exchange Plan provides for automatic exchanges of funds from the shareholder's account in an MFS Fund for investment in the same class of shares of other MFS Funds selected by the shareholder. Under the Automatic Exchange Plan, exchanges of at least $50 each may be made to up to four different funds effective on the seventh day of each month or of every third month, depending whether monthly or quarterly exchanges are elected by the shareholder. If the seventh day of the month is not a business day, the transaction will be processed on the next business day. Generally, the initial exchange will occur after receipt and processing by the Shareholder Servicing Agent of an application in good order. Exchanges will continue to be made from a shareholder's account in any MFS Fund, as long as the balance of the account is sufficient to complete the exchanges. Additional payments made to a shareholder's account will extend the period that exchanges will continue to be made under the Automatic Exchange Plan. However, if additional payments are added to an account subject to the Automatic Exchange Plan shortly before 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 of the Fund are registered; if by telephone -- proper account identification is given by the dealer or shareholder of record). Each Exchange Change Request (other than termination of participation in the program) must involve at least $50. Generally, if an Exchange Change Request is received before the close of business on the last business day of a month, the Exchange Change Request will be effective for the following month's exchange.
A shareholder's right to make additional investments in any of the MFS Funds, to make exchanges of shares from one MFS Fund to another and to withdraw from an MFS Fund, as well as a shareholder's other rights and privileges are not affected by a shareholder's participation in the Automatic Exchange Plan.
The Automatic Exchange Plan is part of the exchange privilege. For additional information regarding the Automatic Exchange Plan, including the treatment of any CDSC, see "Exchange Privilege" below.
REINSTATEMENT PRIVILEGE: Shareholders of the Fund and shareholders of the other MFS Funds (except MFS Money Market Fund, MFS Government Money Market Fund and holders of Class A shares of MFS Cash Reserve Fund in the case where such shares are acquired through direct purchase or reinvested dividends) who have redeemed their shares have a one-time right to reinvest the redemption proceeds in the same class of shares of any of the MFS Funds (if shares of the fund are available for sale) at net asset value (without a sales charge) and, if applicable, with credit for any CDSC paid; however, only shareholders who are also shareholders of the Fund may reinvest their proceeds in the Fund (if available for sale). In the case of proceeds reinvested in shares of MFS Money Market Fund, MFS Government Money Market Fund and Class A shares of MFS Cash Reserve Fund, the shareholder has the right to exchange the acquired shares for shares of another MFS Fund at net asset value pursuant to the exchange privilege described below. Such a reinvestment must be made within 90 days of the redemption and is limited to the amount of the redemption proceeds. If the shares credited for any CDSC paid are then redeemed within six years of the initial purchase for Class B shares (or within 12 months of the initial purchase of certain Class A shares), a CDSC will be imposed upon redemption. Although redemptions and repurchases of shares are taxable events, a reinvestment within 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 any 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 for which payment has been received by the Fund (i.e., an established account) may be exchanged for shares of the same class of any of the other MFS Funds (if available for sale) at their net asset value. 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 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) record keeping 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. No more than five exchanges may be made in any one Exchange Request by telephone. If an Exchange Request is received by the Shareholder Servicing Agent prior to the close of regular trading on the Exchange, the exchange usually will occur on that day if all the requirements set forth above have been complied with at that time. However, payment of the redemption proceeds by the Fund, and thus the purchase of shares of the other MFS Fund, may be delayed for up to seven days if the Fund determines that such a delay would be in the best interest of all its shareholders. Investment dealers which have satisfied criteria established by MFD may also communicate a shareholder's Exchange Request to MFD by facsimile subject to the requirements set forth above.
No CDSC is imposed on exchanges among the MFS Funds, although liability for the CDSC is carried forward to the exchanged shares. For purposes of calculating the CDSC upon redemption of shares acquired in an exchange, the purchase of shares acquired in one or more exchanges is deemed to have occurred at the time of the original purchase of the exchanged shares.
Additional information with respect to any of the MFS Funds, including a copy of its current prospectus, may be obtained from investment dealers or the Shareholder Servicing Agent. A shareholder considering an exchange should obtain and read the prospectus of the other MFS Fund and consider the differences in objectives and policies before making any exchange. Shareholders of the other MFS Funds who are shareholders of the Fund (except holders of shares of MFS Money Market Fund, MFS Government Market Fund, and Class A shares of the Cash Reserve Fund acquired through direct purchase and dividends reinvested prior to June 1, 1992) have the right to exchange their shares for Class A shares of the 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 the Fund, subject to the conditions, if any, imposed upon such withholders by the MFS Fixed Fund.
Any state income tax advantages for investment in state-specific shares of each series of MFS Municipal Series Trust may only benefit residents of such states. Investors should consult with their own tax advisers to be sure this is an appropriate investment, based on their residency and each state's income tax laws.
The exchange privilege (or any aspect of it) may be changed or discontinued and is subject to certain limitations, including certain restrictions on purchases by market timer accounts (see "Purchases" in the Prospectus).
6. TAX STATUS
FEDERAL TAXES
The Fund has elected to be treated and intends to qualify each year as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"), by meeting all applicable Code requirements,
including requirements as to the nature of the Fund's gross income, the amount
of Fund distributions (as a percentage of both the Fund's overall income and its
tax-exempt income), and the composition and holding period of the Fund's
portfolio assets. Because the Fund intends to distribute all of its net
investment income and net realized capital gains to its shareholders in
accordance with the timing requirements imposed by the Code, it is not expected
that the Fund will be required to pay any federal income or excise taxes. If the
Fund should fail to qualify as a "regulated investment company" in any year, the
Fund would incur a regular corporate federal income tax upon its taxable income
and Fund distributions would generally be taxable as ordinary dividend income to
the shareholders.
That part of the Fund's distributions of net investment income which is attributable to interest from tax-exempt securities will be designated by the Fund as an "exempt-interest dividend" under the Code and will generally be exempt from federal income tax in the hands of the shareholders so long as at least 50% of the total value of the Fund's assets consists of tax-exempt securities at the close of each quarter of the Fund's taxable year. Distributions of tax-exempt interest earned from certain securities may, however, be treated as shareholder tax preference items for purposes of the alternative minimum tax, and all such distributions may increase a corporate shareholder's alternative minimum tax. The percentage of income designated as tax-exempt will be based on the ratio of the Fund's tax-exempt income to total income for the entire fiscal year and is applied uniformly to all distributions made during each fiscal year. This percentage, thus, may differ from the actual tax exempt percentage for any particular months's distribution. This tax-exempt interest ratio is determined and reported to shareholders after the close of each fiscal year. Shareholders are required to report exempt-interest dividends on their federal income tax returns.
The Fund may realize capital gains and/or losses as the result of market transactions (including options and futures transactions). Any distributions from net realized short-term capital gains, and any distributions from net investment income not designated as an exempt-interest dividend (such as income from investments in taxable securities, including repurchase agreements, and discount on bonds purchased at a market discount), whether paid in cash or invested in additional shares, are taxable to shareholders as ordinary income. Distributions from net capital gains (i.e., the excess of net long-term capital gains over short-term capital losses), whether paid in cash or additional shares, are taxable to shareholders as long-term capital gains for federal income tax purposes without regard to the length of time the shareholders have held their shares. Any Fund dividend that is declared in October, November, or December of any calendar year that is payable to shareholders of record in such a month, and that is paid the following January will be treated as if received by the shareholders on December 31 of the year in which the dividend is declared. The federal income tax status of all distributions will be reported to shareholders annually.
Since all of the income of the Fund is expected to arise from interest and capital gains, no part of the distributions to its shareholders will qualify for the dividends-received deduction for corporations.
Any dividend or distribution will have the effect of reducing the per share net asset value of shares in the Fund by the amount of the dividend or distribution. Shareholders purchasing shares shortly before the record date of any taxable dividend or other taxable 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 addition, shareholders disposing of shares after tax-exempt income has been accrued but not yet declared as a dividend should be aware that a portion of the sales proceeds realized upon disposition of the shares may reflect the existence of such accrued tax-exempt income, and that such portion of the proceeds may be subject to tax as a capital gain even though it would have been tax-exempt had it been declared as a dividend prior to the disposition. Redemptions of shares of the Fund can be effected with the least adverse tax consequences immediately after the third business day of any month (the time at which the dividend representing substantially all the income accrued for that month is declared).
In general, any gain or loss realized upon a taxable disposition of shares of the Fund by a shareholder that holds such shares as a capital asset will be treated as long-term capital gain or loss if the shares have been held for more than twelve months and otherwise as a short-term capital gain or loss. However, any loss realized upon a disposition of shares in the Fund held for six months or less will be disallowed to the extent of any exempt-interest dividends received with respect to those shares and, if not disallowed, any such loss will be treated as a long-term capital loss to the extent of any distributions of net capital gain made with respect to those shares. Any loss realized upon a disposition of shares may also be disallowed under rules relating to wash sales. Gain may be increased (or loss reduced) upon a redemption of Class A shares of the Fund within ninety days after their purchase followed by any purchase (including purchases by exchange or by reinvestment) without payment of an additional sales charge of Class A shares of the Fund or of another MFS Fund (or any other shares of an MFS Fund generally sold subject to a sales charge).
Exempt-interest dividends are taken into account in calculating the amount of social security and railroad retirement benefits that may be subject to federal income tax.
Interest on indebtedness incurred (directly or indirectly) by shareholders to purchase or carry shares of the Fund will not be deductible for federal income tax purposes. Further, persons who are "substantial users" (or persons related thereto) of facilities financed by certain private activity bonds should consult their own tax advisers before purchasing shares of the Fund. "Substantial user" is defined generally as including a "non-exempt person" who regularly uses in a trade or business a part of a facility financed from the proceeds of certain private activity bonds.
The Fund's transactions in options and Futures Contracts will be subject to special tax rules that may affect the amount, timing, and character of Fund income and distributions to shareholders. For example, certain positions held by the Fund on the last business day of each taxable year will be marked to market (i.e., treated as if closed out) on such day, and any gain or loss associated with the positions will be treated as 60% long-term and 40% short-term capital gain or loss. Certain positions held by the Fund that substantially diminish its risk of loss with respect to other positions in its portfolio may constitute "straddles," and may be subject to special tax rules that would cause deferral of Fund losses, adjustments in the holding periods of Fund securities, and conversion of short-term into long-term capital losses. Certain tax elections exist for straddles that may alter the effects of these rules. The Fund will limit its activities in options and Futures Contracts to the extent necessary to meet the requirements of Subchapter M of the Code.
The Fund's current dividend and accounting policies may affect the amount, timing, and character of distributions to shareholders and may, under certain circumstances, make an economic return of capital taxable to shareholders. The Fund's investment in zero coupon securities, certain stripped tax-exempt obligations, and certain securities purchased at a market discount will cause it to realize income prior to the receipt of cash payments with respect to these securities. In order to distribute this income and avoid a tax on the Fund, the Fund may be required to liquidate portfolio securities that it might otherwise have continued to hold, potentially resulting in additional taxable gain or loss to the Fund.
Dividends and certain other payments to persons who are not citizens or residents of the United States or U.S. entities ("Non-U.S. Persons") are generally subject to U.S. tax withholding at the rate of 30%. The Fund intends to withhold tax at the rate of 30% on any such dividends and payments made to Non-U.S. Persons that are subject to such withholding, regardless of whether a lower treaty rate may be permitted. Any amounts overwithheld may be recovered by such persons by filing a claim for refund with the U.S. Internal Revenue Service within the time period applicable to such claims. Non-U.S. Persons may also be subject to tax under the laws of their own jurisdiction.
The Fund is also required in certain circumstances to apply backup withholding at a rate of 31% on taxable dividends and redemption proceeds paid to any shareholder (including a Non-U.S. Person) who does not furnish to the Fund certain information and certifications or who is otherwise subject to backup withholding. However, backup withholding will not be applied to payments which have been subject to 30% withholding.
STATE AND LOCAL TAXES
As long as it qualifies as a regulated investment company under the Code, the
Fund will not be required to pay Massachusetts income or excise taxes. The
exemption of exempt-interest dividends for federal income tax purposes does not
necessarily result in exemption under the tax laws of any state or local taxing
authority. Some states do exempt from tax that portion of an exempt-interest
dividend which represents interest received by a regulated investment company on
its holdings of Municipal Bonds of that state and its political subdivisions and
instrumentalities. Therefore, the Fund will report annually to its shareholders
the percentage of interest income earned by the Fund during the preceding year
from Municipal Bonds indicating, on a state-by-state basis only, the source of
such income. Each shareholder is advised to consult his own tax adviser
regarding the exemption of exempt-interest dividends under applicable state and
local law.
7. DETERMINATION OF NET ASSET VALUE AND PERFORMANCE
NET ASSET VALUE: The net asset value per share of each class of the Fund is determined each day during which the Exchange is open for trading. (As of the date of this SAI, the Exchange is open for trading every weekday except for the following holidays or the day on which they are observed: New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.) This determination is made once during each 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. Debt securities (other than short-term obligations), including listed issues, are valued on the basis of valuations furnished by 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 exchange or over-the-counter prices, since such valuations are believed to reflect the fair value of such securities. Use of the pricing services has been approved by the Board of Trustees. Positions in listed options, Futures Contracts and Options on Futures Contracts will normally be valued at the closing settlement price on the exchange on which they are primarily traded. Short-term obligations with a remaining maturity in excess of 60 days will be valued based upon dealer supplied valuations. Other short-term obligations are valued at amortized cost, unless the Board of Trustees determines that this does not constitute fair value. Positions in over-the-counter options will be valued using dealer supplied valuations. Portfolio securities for which there are no such valuations are valued at fair value as determined in good faith by or at the direction of the Board of Trustees.
PERFORMANCE INFORMATION
TOTAL RATE OF RETURN: The Fund will calculate its total rate of return for each
class of shares for certain periods by determining the average annual compounded
rates of return over those periods that would cause an investment of $1,000
(made with all distributions reinvested and reflecting the CDSC or the maximum
offering price) to reach the value of that investment at the end of the periods.
The Fund may also calculate (i) a total rate of return, which is not reduced by
the CDSC (4% maximum for Class B shares purchased on and after September 1,
1993) and therefore may result in a higher rate of return, (ii) a total rate of
return assuming an initial account value of $1,000, which will result in a
higher rate of return since the value of the initial account will not be reduced
by the current maximum sales charge (currently 4.75%), and/or (iii) total rates
of return which represent aggregate performance over a period or year-by-year
performance, and which may or may not reflect the effect of the maximum or other
sales charge or CDSC. The Fund's average annual total rate of return for Class A
shares, reflecting the initial investment at the maximum public offering price,
for the one-year, five-year and ten-year periods ended January 31, 1995 was,
- -5.76%, 5.32% and 7.25%, respectively. The Fund's average annual total rate of
return, not giving effect to the sales charge on the initial investment, for the
one-year, five-year and ten-year periods ended January 31, 1995, was, -1.04%,
6.35% and 7.77%, respectively. The Fund's average annual total rate of return
for Class B shares reflecting the CDSC for the one-year period ended January 31,
1995 and for the period September 7, 1993 through the Fund's fiscal year ended
January 31, 1995 was -5.79% and -2.83%, respectively. The Fund's average annual
total rate of return for Class B shares, not giving effect to the CDSC for the
one-year period ended January 31, 1995 and for the period September 7, 1993
through the Fund's fiscal year ended January 31, 1995 was -2.13% and -0.20%,
respectively.
PERFORMANCE RESULTS: The performance results for Class A shares below, based on an assumed initial investment of $10,000 in Class A shares, cover the period from January 1, 1985 to December 31, 1994. It has been assumed that dividends and capital gain distributions were reinvested in additional shares. These performance results, as well as any yield, tax-equivalent yield or total rate of return quotation provided by the Fund, should not be considered as representative of the performance of the Fund in the future since the net asset value and public offering price of shares of the Fund will vary based not only on the type, quality and maturities of the securities held in the Fund's portfolio, but also on changes in the current value of such securities and on changes in the expenses of the Fund. These factors and possible differences in the methods used to calculate yields, tax-equivalent yields and total rates of return should be considered when comparing the yield, tax-equivalent yield and total rate of return of the Fund to yields, tax-equivalent yields and total rates of return published for other investment companies or other investment vehicles. Total rate of return reflects the performance of both principal and income. Current net asset value of shares of the Fund as well as account balance information may be obtained by calling 1-800-MFS-TALK (637-8255).
MFS MUNICIPAL HIGH INCOME FUND -- A
VALUE OF
VALUE OF REINVESTED VALUE OF
YEAR ENDED INITIAL $10,000 CAPITAL GAIN REINVESTED TOTAL
DECEMBER 31 INVESTMENT DISTRIBUTIONS DIVIDENDS VALUE
- ----------- -------------- ------------- ---------- -----
1985 $10,088 $ 33 $ 1,031 $11,152
1986 10,187 118 2,221 12,526
1987 9,466 149 3,106 12,721
1988 9,407 251 4,223 13,881
1989 9,515 327 5,520 15,362
1990 9,021 310 6,516 15,847
1991 9,160 315 8,028 17,503
1992 9,110 313 9,480 18,903
1993 9,268 318 11,155 20,741
1994 8,339 286 11,511 20,136
|
EXPLANATORY NOTES: The results shown in the table assume that the initial investment in the Fund was made on January 1, 1985. The results also assume that the initial investment in the Fund was reduced by the current maximum sales charge (4.75%). No adjustment has been made for any income taxes payable by shareholders.
YIELD: Any yield quotation for a class of shares of the Fund is based on the annualized net investment income per share of that class of the Fund over a 30-day period. The yield for each class of the Fund is calculated by dividing the net investment income allocated to that class earned during the period by the maximum offering price per share of that class of the Fund on the last day of that period. The resulting figure is then annualized. Net investment income per share of a class is determined by dividing (i) the dividends and interest allocated to that class during the period, minus accrued expenses of that class for the period, by (ii) the average number of shares of the class entitled to receive dividends during the period multiplied by the maximum offering price per share of such class on the last day of the period. The Fund's yield calculations for Class A shares assume a maximum sales charge of 4.75%. The yield calculation for Class B shares assumes no CDSC is paid. The Fund's yield for Class A shares for the 30-day period ended January 31, 1995 was 7.13%. The yield for Class B shares of the Fund for the 30-day period ended January 31, 1995 was 6.41%.
TAX-EQUIVALENT YIELD: The Fund's tax-equivalent yield for each class is calculated by determining the rate of return that would have to be achieved on a fully taxable investment to produce the after-tax equivalent of the yield for that class. In calculating tax-equivalent yield, the Fund assumes certain federal tax brackets for shareholders and does not take into account state taxes. The Fund's tax-equivalent yield for Class A shares for the 30-day period ended January 31, 1995 was 9.90% (assuming a tax bracket of 28%) and 10.33% (assuming a tax bracket of 31%). The tax-equivalent yield for Class B shares of the Fund for the 30-day period ended January 31, 1995 was 8.90% (assuming a tax bracket of 28%) and 9.29% (assuming a tax bracket of 31%).
CURRENT DISTRIBUTION RATE: Yield, which is calculated according to a formula prescribed by the Securities and Exchange Commission, is not indicative of the amounts which were or will be paid to the Fund's shareholders. Amounts paid to shareholders of each class are reflected in the quoted "current distribution rate" for that class. The current distribution rate for a class is computed by dividing the total amount of dividends per share paid by the Fund to shareholders of that class during the past twelve months by the maximum public offering price of that class at the end of such period. Under certain circumstances, such as when there has been a change in the amount of dividend payout, or a fundamental change in investment policies, it might be appropriate to annualize the dividends paid over the period such policies were in effect, rather than using the dividends during the past twelve months. The current distribution rate differs from the yield computation because it may include distributions to shareholders from sources other than dividends and interest, such as premium income for option writing, short-term capital gains and return of invested capital, and is calculated over a different period of time. The Fund's current distribution rate calculation for Class A shares assumes a maximum sales charge of 4.75%. The Fund's current distribution rate calculation for Class B shares assumes no CDSC is paid. The current distribution rate for Class A shares of the Fund for the twelve-month period ended on January 31, 1995 was 7.81%. The current distribution rate for Class B shares of the Fund for the twelve-month period ended January 31, 1995 was 6.68%.
From time to time the Fund may, as appropriate, quote Fund rankings or reprint
all or a portion of evaluations of fund performance and operations appearing in
various independent publications, including but not limited to the following:
Money, Fortune, U.S. News and World Report, Kiplinger's Personal Finance, The
Wall Street Journal, Barron's, Investors Business Daily, Newsweek, Financial
World, Financial Planning, Investment Advisor, USA Today, Pensions and
Investments, SmartMoney, Forbes, Global Finance, Registered Representative,
Institutional Investor, the Investment Company Institute, Johnson's Charts,
Morningstar, Lipper Analytical Services, Inc., CDA Wiesenberger, Shearson Lehman
and Salomon Bros. Indices, Ibbotson, Business Week, Lowry Associates, Media
General, Investment Company Data, The New York Times, Your Money, Strangers
Investment Advisor, Financial Planning on Wall Street, Standard and Poor's,
Individual Investor, The 100 Best Mutual Funds You Can Buy, by Gordon K.
Williamson, Consumer Price Index, and Sanford C. Bernstein & Co. Fund
performance may also be compared to the performance of other mutual funds
tracked by financial or business publications or periodicals. The Fund may also
quote evaluations mentioned in independent radio or television broadcasts, and
use charts and graphs to illustrate the past performance of various indices such
as those mentioned above and illustrations using hypothetical rates of return to
illustrate the effects of compounding and tax-deferral. The Fund may advertise
examples of the effects of periodic investment plans, including the principle of
dollar cost averaging. In such a program, an investor invests a fixed dollar
amount in a fund at periodic intervals, thereby purchasing fewer shares when
prices are high and more shares when prices are low. While such a strategy does
not assure a profit or guard against a loss in a declining market, the
investor's average cost per share can be lower than if fixed numbers of shares
are purchased at the same intervals.
MFS FIRSTS: MFS has a long history of innovations.
-- 1924 -- Massachusetts Investors Trust is established as the first open-end mutual fund in America.
-- 1924 -- Massachusetts Investors Trust is the first mutual fund to make full public disclosure of its operations in shareholder reports.
-- 1932 -- One of the first internal research departments is established to provide in-house analytical capability for an investment management firm.
-- 1933 -- Massachusetts Investors Trust is the first mutual fund to register under the Securities Act of 1933 ("Truth in Securities Act" or "Full Disclosure Act").
-- 1936 -- Massachusetts Investors Trust is the first mutual fund to allow shareholders to take capital gain distributions either in additional shares or cash.
-- 1976 -- MFS 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 World Governments Fund is established as America's first globally diversified fixed/income mutual fund.
-- 1984 -- MFS Municipal High Income Fund is the first open-end mutual fund to seek high tax-free income from lower-rated municipal securities.
-- 1986 -- MFS Managed Sectors Fund becomes the first mutual fund to target and shift investments among industry sectors for shareholders.
-- 1986 -- MFS Municipal Income Trust is the first closed-end, high-yield municipal bond fund traded on the New York Stock Exchange.
-- 1987 -- MFS Multimarket Income Trust is the first closed-end, multimarket high income fund listed on the New York Stock Exchange.
-- 1989 -- MFS Regatta becomes America's first non-qualified market-value-adjusted fixed/variable annuity.
-- 1990 -- MFS World Total Return Fund is the first global balanced fund.
-- 1993 -- MFS World Growth Fund is the first global emerging markets fund to offer the expertise of two sub-advisers.
-- 1993 -- MFS becomes money manager of MFS Union Standard Trust, the first trust to invest in companies deemed to be union-friendly by an advisory board of senior labor officials, senior managers of companies with significant labor contracts, academics and other national labor leaders or experts.
8. DISTRIBUTION PLAN CLASS B DISTRIBUTION PLAN: The Trustees have adopted a Distribution Plan relating to Class B shares (the "Class B Distribution Plan") pursuant to Section 12(b) of the 1940 Act and Rule 12b-1 thereunder (the "Rule"), after having concluded that there was a reasonable likelihood that the Class B Distribution Plan would benefit the Fund and its Class B shareholders. The Class B Distribution Plan is designed to promote sales, thereby increasing the net assets of the Fund. Such an increase may reduce the expense ratio to the extent the Fund's fixed costs are spread over a larger net asset base. Also, an increase in net assets may lessen the adverse effects that could result were the Fund required to liquidate portfolio securities to meet redemptions. There is, however, no assurance that the net assets of the Fund will increase or that the other benefits referred to above will be realized.
The Class B Distribution Plan provides that the Fund will pay MFD, as the Fund's distributor for its Class B shares, a daily distribution fee equal on an annual basis to 0.75% of the Fund's average daily net assets attributable to Class B shares and may pay MFD an annual service fee of up to 0.25% of the Fund's average daily net assets attributable to Class B shares (which MFD will in turn pay to securities dealers which enter into a sales agreement with MFD at a rate of up to 0.25% per annum of the Fund's average daily net assets attributable to Class B shares owned by investors for whom that securities dealer is the holder or dealer of record). This service fee is intended to be additional consideration for all personal services and/or account maintenance services rendered by the dealer with respect to Class B shares. Except in the case of the first year service fee, no service fee will be paid. This elimination of the service fee may be amended or terminated without notice to shareholders. MFD will advance to dealers the first-year service fee at a rate equal to 0.25% per annum of the amount invested. As compensation therefor, MFD may retain the service fee paid by the Fund with respect to such shares for the first year after purchase. Dealers will become eligible for additional service fees with respect to such shares commencing in the thirteenth month following purchase. Except in the case of the first year service fee, no service fee will be paid to any securities dealer who is the holder or dealer of record for investors who own Class B shares having an aggregate net asset value of less than $750,000, or such other amount as may be determined from time to time by MFD. MFD, however, may waive this minimum amount requirement from time to time if the dealer satisfies certain criteria. Dealers may from time to time be required to meet certain other criteria in order to receive service fees. MFD or its affiliates are entitled to retain all service fees payable under the Class B Distribution Plan for which there is no dealer of record or for which qualification standards have not been met as partial consideration for personal services and/or account maintenance services performed by MFD or its affiliates for shareholder accounts.
The purpose of distribution payments to MFD under the Class B Distribution Plan is to compensate MFD for its distribution services to the Fund. MFD pays commissions to dealers as well as expenses of printing prospectuses and reports used for sales purposes, expenses with respect to the preparation and printing of sales literature and other distribution related expenses, including, without limitation, the cost necessary to provide distribution-related services, or personnel, travel office expenses and equipment. The Class B Distribution Plan also provides that MFD will receive all CDSCs attributable to Class B shares. (See "Distribution Plan" and "Purchases" in the Prospectus.) For the Fund's fiscal year ended January 31, 1995 and for the period September 7, 1993 through January 31, 1995, the Fund paid Class B distribution and service fees of $335,495 and $335,548, respectively (equal to 0.99% and 1.00%, respectively, of the Fund's average daily net assets attributable to Class B shares).
In accordance with the Rule, all agreements relating to the Class B 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 Trustees who are not "interested persons" (as defined in the 1940 Act) and who have no direct or indirect financial interest in the operation of the Class B Distribution Plan or in any agreement related to such Plan ("Class B Distribution Plan Qualified Trustees"). The Class B Distribution Plan further provides that the selection and nomination of Class B Distribution Plan Qualified Trustees shall be committed to the discretion of the non-interested Trustees then in office.
The Class B Distribution Plan will remain in effect until August 1, 1995, and will continue in effect thereafter only if such continuance is specifically approved at least annually by vote of the Trustees and a majority of the Class B Distribution Plan Qualified Trustees. The Class B Distribution Plan requires that the Fund and MFD shall provide to the Trustees, and the Trustees shall review, at least quarterly, a written report of the amounts expended (and purposes therefor) under such Plan. The Class B Distribution Plan may be terminated at any time by vote of a majority of the Class B Distribution Plan Qualified Trustees or by vote of the holders of a majority of the Class B shares of the Fund (as defined in "Investment Restrictions" above). The Class B Distribution Plan may not be amended to increase materially the amount of permitted distribution expenses without the approval of Class B shareholders and may not be materially amended in any case without a vote of the majority of both the Trustees and the Class B Distribution Plan Qualified Trustees. No Trustee who is not an interested person of the Fund has any financial interest in the Class B Distribution Plan or in any related agreement.
9. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional Shares of Beneficial Interest (without par value) of one or more separate series and to divide or combine the shares of any series into a greater or lesser number of shares without thereby changing the proportionate beneficial interests in that series. The Trustees have currently authorized shares of the Fund and 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 three classes of shares of the Fund, Class A shares, Class B shares and Class C shares. Each share of a class of the Fund represents an equal proportionate interest in the assets of the Fund allocable to that class. Upon liquidation of the Fund, shareholders of each class of the Fund are entitled to share pro rata in the net assets of the Fund allocable to such class available for distribution to its shareholders. The Trust reserves the right to create and issue additional classes or series of shares, in which case the shares of each class or series would participate equally in the earnings, dividends and assets allocable to that class of the particular series.
Shareholders are entitled to one vote for each share held and may vote in the election of Trustees and on other matters submitted to meetings of shareholders. Although Trustees are not elected annually by the shareholders, shareholders have under certain circumstances the right to remove one or more Trustees in accordance with the provisions of section 16(c) of the 1940 Act. No material amendment may be made to the Trust's Declaration of Trust without the affirmative vote of a majority of the shares of the Trust or by an instrument in writing without a meeting signed by a majority of Trustees and consented to by more than 50% of the shares of the Fund. Shares have no pre-emptive or conversion rights (except as described in "Purchases -- Conversion of Class B Shares" in the Prospectus). Shares are fully paid and non-assessable. The Trust may enter into a merger or consolidation, or sell all or substantially all of its assets (or all or substantially all of the assets belonging to any series of the Trust), if approved by the vote of the holders of two-thirds of the Trust's outstanding shares voting as a single class, or of the affected series of the Trust, as the case may be, except that if the Trustees of the Trust recommend such merger, consolidation or sale, the approval by vote of the holders of a majority of the Trust's or the affected series' outstanding shares (as defined in "Investment Restrictions") will be sufficient. The Trust or any series of the Trust may also be terminated (i) upon liquidation and distribution of its assets, if approved by the vote of the holders of two-thirds of its outstanding shares, or (ii) by the Trustees by written notice to the shareholders of the Trust or the affected series. If not so terminated the Trust will continue indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts business trust". Under Massachusetts law, shareholders of such a trust may, under certain circumstances, be held personally liable as partners for its obligations. However, the Declaration of Trust contains an express disclaimer of shareholder liability for acts or obligations of the Trust and provides for indemnification and reimbursement of expenses out of the 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, its shareholders, Trustees, officers, employees and agents 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 willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office.
10. INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS
Ernst & Young LLP are the Fund's independent auditors, providing audit services, tax return preparation, and assistance and consultation with respect to the preparation of filings with the SEC.
The Portfolio of Investments and Statement of Assets and Liabilities at January 31, 1995, the Statement of Operations, Statement of Changes in Net Assets for the year ended January 31, 1995, the Notes to Financial Statements and the Independent Auditors' Report, each of which is included in the Annual Report to shareholders of the Fund, are incorporated by reference into this SAI and have been so incorporated in reliance upon the report of Ernst & Young LLP, independent auditors, as experts in accounting and auditing.
The Fund's Statement of Changes in Net Assets for the year ended January 31, 1994, which is included in the Annual Report to shareholders of the Fund, is incorporated by reference into this SAI in reliance upon the report of Coopers & Lybrand LLP, independent auditors, as experts in accounting and auditing.
APPENDIX A
TRUSTEE COMPENSATION TABLE
TOTAL TRUSTEE
RETIREMENT BENEFIT ESTIMATED FEES
TRUSTEE FEES ACCRUED AS PART OF CREDIT YEARS FROM FUND AND
TRUSTEE FROM FUND<F1> FUND EXPENSE<F1> OF SERVICE<F2> FUND COMPLEX<F3>
- -----------------------------------------------------------------------------------------------------------------------------------
Richard B. Bailey $4,455 $ 656 8 $226,221
Peter G. Harwood 4,755 238 5 105,812
J. Atwood Ives 4,755 674 17 106,482
Lawrence T. Perera 4,355 2,338 23 96,592
William Poorvu 4,755 2,332 23 106,482
Charles W. Schmidt 4,455 2,199 16 98,397
David B. Stone 4,655 1,130 11 104,007
Elaine R. Smith 4,455 639 27 98,397
<F1>For fiscal year ended January 31, 1995.
<F2>Based on normal retirement age of 73.
<F3>Information provided is provided for calendar year 1994. All Trustees served as Trustees of 20 funds within the MFS fund
complex (having aggregate net assets at December 31, 1994, of approximately $14,727,659,069) except Mr. Bailey, who served as
Trustee of 56 funds within the MFS fund complex (havng aggregate net assets at December 31, 1994, of approximately
$24,474,119,825).
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT<F4>
YEARS OF SERVICE
-----------------------------------------------------------------------
AVERAGE TRUSTEE FEES 3 5 7 10 OR MORE
- -----------------------------------------------------------------------------------------------------------------------------------
$3,900 $585 $ 975 $1,365 $1,950
4,160 624 1,040 1,456 2,080
4,420 663 1,105 1,547 2,210
4,680 702 1,170 1,638 2,340
4,940 741 1,235 1,729 2,470
5,200 780 1,300 1,820 2,600
<F4>Other funds in the MFS fund complex provide similar retirement benefits to
the Trustees.
|
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617) 954-5000
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
CUSTODIAN AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800) 225-2606
MAILING ADDRESS:
P.O. Box 2281, Boston, MA 02107-9906
INDEPENDENT AUDITORS
Ernst & Young LLP
200 Clarendon Street, Boston, MA 02116
MFS(R)
MUNICIPAL HIGH
INCOME FUND
500 BOYLSTON STREET
BOSTON, MA 02116
MFS(SM)
THE FIRST NAME IN MUTUAL FUNDS
MMH-13-6/95/.5M 25/225
[Logo] Annual Report for
THE FIRST NAME IN MUTUAL FUNDS Year Ended
January 31, 1995
MFS(R) MUNICIPAL HIGH INCOME FUND
Front Cover: A 6 1/4" by 8 1/4" photo of a highway
|
MFS(R) MUNICIPAL HIGH INCOME FUND
TRUSTEES CUSTODIAN
A. Keith Brodkin<F1> - Chairman and President State Street Bank and Trust Company
Richard B. Bailey<F1> - Private Investor; AUDITORS
Former Chairman and Director (until 1991), Ernst & Young LLP
Massachusetts Financial Services Company
INVESTOR INFORMATION
Peter G. Harwood - Former Financial Vice For MFS stock and bond market outlooks,
President, Treasurer and Director (until 1988), call toll-free: 1-800-637-4458 anytime from
Loomis, Sayles & Co., Inc. a touch-tone telephone.
J. Atwood Ives - Chairman and Chief Executive For information on MFS mutual funds
Officer, Eastern Enterprises call your financial adviser or, for an
information kit, call toll-free:
Lawrence T. Perera - Partner, Hemenway & Barnes 1-800-637-2929 any business day from
9 a.m. to 5 p.m. Eastern time (or, leave
William J. Poorvu - Adjunct Professor, Harvard a message anytime).
University Graduate School of Business
Administration INVESTOR SERVICE
MFS Service Center, Inc.
Charles W. Schmidt - Private Investor; P.O. Box 2281
Former Senior Vice President and Group Executive Boston, MA 02107-9906
(until 1990), Raytheon Company
For current account service, call toll free:
Arnold D. Scott<F1> - Senior Executive Vice President, 1-800-225-2606 any business day from
Massachusetts Financial Services Company 8 a.m. to 8 p.m. Eastern time.
Jeffrey L. Shames<F1> - President and Chief Equity For service to speech- or hearing-impaired,
Officer, Massachusetts Financial Services Company call toll free: 1-800-637-6576 any business
day from 9 a.m. to 5 p.m. Eastern time.
Elaine R. Smith - Independent Consultant
For share prices, account balances and
David B. Stone - Chairman, North American exchanges, call toll free: 1-800-MFS-TALK
Management Corp. (Investment Advisers) (1-800-637-8255) anytime from a touch-tone
telephone.
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street
Boston, Massachusetts 02116-3741
TOP-RATED SERVICE
PORTFOLIO MANAGER (NO. 1) MFS was rated first when
Cynthia M. Brown<F1> securities firms evaluated the
quality of service they receive
TREASURER from 40 mutual fund companies.
W. Thomas London<F1> MFS got high marks for answering
calls quickly, processing transactions
ASSISTANT TREASURER accurately and sending statements
James O. Yost<F1> out on time.
SECRETARY (Source: 1994 DALBAR survey)
Stephen E. Cavan<F1>
ASSISTANT SECRETARY
James R. Bordewick, Jr.<F1>
Cover photo: Through their wide range of
investments, MFS mutual funds help you
share in America's growth.
<F1> Affiliated with the Investment Adviser
|
LETTER TO SHAREHOLDERS
Dear Shareholders:
During the fiscal year ended January 31, 1995, Class A shares of the Fund
provided a total return of -1.04%, while Class B shares had a total return of
- -2.13%. Both of these figures assume the reinvestment of distributions but
exclude the effects of any sales charges. The Fund's performance over this
period was quite favorable relative to the -3.56% return of the Lehman Brothers
Municipal Bond Index. However, it is important to note that the Lehman Index
represents an unmanaged index of investment-grade municipal bonds rated Baa or
higher, while the Fund invests primarily in lower-quality municipal issues which
are rated Baa or below, or are unrated. A discussion of the Fund's results
relative to the Lehman Index may be found in the Portfolio Performance and
Strategy section below.
Economic Outlook
The economic expansion, entering its fifth year, gained firmer underpinnings in
1994 as employers significantly stepped up hiring levels. Increased employment,
stronger capital spending by businesses, and strengthening overseas economies
resulted in 4% real (adjusted for inflation) gross domestic product growth last
year. Interest rates rose substantially over the past year, which should help
restrain, but not curtail, the economic expansion. Based on improving economic
fundamentals both here and abroad, we expect the business expansion to continue
well into 1995.
Interest Rates
Despite a stronger economy, inflation at the consumer level has remained
relatively benign at 2.7% in 1994, the fourth straight year of 3.0% or less. Due
to a prolonged period of below-trend-line growth and continued pressure on
corporations to emphasize effective cost controls, wage growth and unit labor
costs have remained subdued. However, as the economy has exhibited continuing
strength, various industrial commodity prices have been rising substantially
faster than consumer prices. Nevertheless, businesses have had difficulty
passing these price increases on to the consumer. With the economy continuing to
expand, we expect some upward movement in inflation from below 3% to the 3 1/2%
range. The Federal Reserve Board has shown a willingness to raise short-term
rates to slow the economy to dampen inflationary pressures. Most recently, it
raised the federal funds rate 50 basis points (0.50%) after a 75 basis-point
(0.75%) increase in November. We expect the Federal Reserve to raise short-term
rates again in the coming months if it believes its current efforts have failed
to dampen inflationary expectations. Although we believe fundamentals are
favorable for lower long-term rates sometime in 1995, this may not occur until
the Federal Reserve feels that its policy toward slowing the economic expansion
has been successful. Thus, we believe that long-term yields may move moderately
higher in the near term.
Municipal Bond Market
The municipal bond market ended the calendar year on an unsettling note because
of the bankruptcy filing of Orange County, California and the uncertain effect
this will have on other tax-exempt bonds. Although the Fund had no direct
exposure to Orange County itself, 1.5% of total Fund assets is invested in two
issues of the San Joaquin Transportation Corridor Agency. This Agency has
invested one-half of its construction funds and all of its construction
contingency funds with the County. It is now up to the bankruptcy court to
determine the plan of disbursement of funds held within the County's investment
pool. We will closely monitor this situation but, at this time, we do not
believe it will adversely impact the Fund.
LETTER TO SHAREHOLDERS - continued
The supply of municipal bonds in 1994 decreased 44% from the record-breaking
issuance in 1993, and is not expected to increase in 1995. Selling pressures
which plagued municipal bond performance during the year as a result of
market-related and tax-related transactions are expected to abate. So far in
1995, the supply picture has not improved. Issuance during the month of January
was 40% of that in January of 1994. The anti-big government, tax- cutting
sentiment, which played an important role in the November elections, should
hamper growth in municipal capital spending in the near term. This shortage of
supply, combined with the anticipated return to bond funds of retail buyers
unable to purchase individual bonds, in our opinion bodes well for municipal
bond funds during the year ahead.
Portfolio Performance and Strategy
The Fund's outperformance relative to the Lehman Index during the fiscal year
ended January 31, 1995 can be attributed to its high concentration of bonds with
higher-than-market stated coupons, which are associated with lower-rated bonds.
Generally, these securities are less price sensitive in a volatile interest rate
environment and provide less price fluctuation during these periods. This
portfolio structure is consistent with the Fund's investment objective of
providing a high level of current tax-exempt income through generally
lower-rated or unrated securities. Based on our outlook for interest rates in
1995, capital appreciation in the Fund over the coming year is likely to be
minimal, and interest income should make up a significant component of the
Fund's total return.
Our efforts remain focused on research and preservation of high current tax-exempt income. We continue to closely monitor our holdings and seek out new opportunities for investment. This past year has seen credit concerns regarding Orange County and the much anticipated opening of the new Denver International Airport, as well as a plethora of financings for de-inked paper facilities and co-generation power plants. Diversification of credit risk and liquidity factors remain important components of the Fund's overall strategy.
We appreciate your support and welcome any questions or comments you may have.
Respectfully,
A 1 1/2" by 1 5/8" photo of A. Kieth Brodkin, Chairman and President
A 1 1/2" by 1 5/8" photo of Cynthia M. Brown, Portfolio Manager.
A. Keith Brodkin Cynthia M. Brown Chairman and President Portfolio Manager
February 28, 1995
PORTFOLIO MANAGER PROFILE
Cynthia Brown began her career at MFS in 1986 in the Fixed Income Department. A
graduate of Boston University, she was named Investment Officer in 1986,
Assistant Vice President in 1987, Vice President in 1989 and Senior Vice
President in 1994. In addition to managing MFS Municipal High Income Fund, she
oversees MFS(R) Municipal Income Trust. Ms. Brown is a member of the Boston
Municipal Analysts Group.
OBJECTIVE AND POLICY
The Fund's investment objective is to provide high current income exempt from
federal income taxes.
The Fund's investment policy is to invest primarily in debt securities, the interest on which is exempt from federal income tax. Generally, these securities are in the medium- and lower-rated categories or are unrated. The Fund may enter into futures contracts and options on futures contracts to protect against anticipated changes in interest rates. The Fund may also enter into options transactions and purchase securities on a "when-issued" basis.
TAX FORM SUMMARY
In January 1995, shareholders were mailed a Tax Form Summary reporting the
federal tax status of all distributions paid during the calendar year 1994. For
the year ended January 31, 1995, the distributions from investment income of
Class A and Class B shares were $0.67 and $0.57, respectively.
For federal income tax purposes, 100% of the total dividends paid by the Fund from net investment income during the year ended January 31, 1995 is designated as an exempt-interest dividend.
PERFORMANCE
The information on the following page illustrates the historical performance of
MFS Municipal High Income Fund Class A shares in comparison to various market
indicators. Class A share results reflect the deduction of the 4.75% maximum
sales charge; benchmark comparisons are unmanaged and do not reflect any fees or
expenses. You cannot invest in an index. All results reflect the reinvestment of
all dividends and capital gains.
Please note that effective September 7, 1993, Class B shares were offered. Information on Class B share performance appears on the next page.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT (For the 5-Year Period Ended January 31, 1995)
Line graph representing the growth of a $10,000 investment for the 5-year period
ended January 31, 1995. The graph is scaled from $8,000 to $18,000 in $2,000
segments. The years are marked from 1990 to 1995. There are three lines drawn to
scale. One is a solid line representing MFS Municipal High Income Fund (Class
A), a second line of short dashes represents the Lehman Brothers Municipal Bond
Index, and a third line of long dashes represents the Consumer Price Index.
MFS Municipal High Income Fund (Class A) $12,958 Lehman Brothers Municipal Bond Index $14,407 Consumer Price Index $11,797 |
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT (For the 10-Year Period Ended January 31, 1995)
Line graph representing the growth of a $10,000 investment for the 10-year period ended January 31, 1995. The graph is scaled from $5,000 to $30,000 in $5,000 segments. The years are marked from 1985 to 1995. There are three lines drawn to scale. One is a solid line representing MFS Municipal High Income Fund (Class A), a second line of short dashes represents the Lehman Brothers Municipal Bond Index, and a third line of long dashes represents the Consumer Price Index.
MFS Municipal High Income Fund (Class A) $20,127
Lehman Brothers Municipal Bond Index $24,050
Consumer Price Index $14,244
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------------------------------------
MFS Municipal High Income Fund
(Class A) including 4.75%
|
* For the period from the commencement of offering of Class B shares,
September 7, 1993 to January 31, 1995.
+ These returns reflect the current maximum Class B contingent deferred sales
charge (CDSC) of 4%.
(S) The Consumer Price Index is a popular measure of change in prices.
PORTFOLIO OF INVESTMENTS - January 31, 1995
Municipal Bonds - 100.1%
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
Student Loan Revenue - 2.1%
Arizona Student Loan Acquisition
Authority, 7.25s, 2010 $ 2,970 $ 2,959,367
Arizona Student Loan Acquisition
Authority, 7.625s, 2010 4,610 4,874,522
Nebraska Higher Education Loan Rev., 6.45s, 2018 11,000 10,316,460
Pennsylvania Higher Education Assistance
Agency, AMBAC, RIBS, 7.316s, 2022 2,700 2,229,471
-------------
$ 20,379,820
- -----------------------------------------------------------------------------
General Obligations - 2.0%
City of Markham, Cook County, IL, 9s, 2012 $ 2,700 $ 2,825,766
New Lenox Illinois Community, 8.25s, 2014 4,205 4,095,123
New York City, NY, 6.875s, 2003 1,000 1,018,060
New York City, NY, 7.1s, 2011 1,000 991,190
New York City, NY, 6.5s, 2012 3,000 2,772,390
New York City, NY, 7s, 2022 1,700 1,771,434
State of California, 0s, 2009 5,800 2,267,452
Virgin Islands Public Financing
Authority, 7.25s, 2018 2,000 2,013,760
West Warwick, RI, 6.8s, 1998 655 653,965
West Warwick, RI, 7s, 2002 210 209,101
West Warwick, RI, 7.3s, 2008 200 201,438
West Warwick, RI, 7.45s, 2013 570 548,289
-------------
$ 19,367,968
- -----------------------------------------------------------------------------
State and Local Appropriations - 1.8%
District of Columbia, Certificates of
Participation, 7.3s, 2013 $ 2,500 $ 2,313,675
San Bernardino, CA, Certificates of
Participation (Short Rites), MBIA, 8.66s, 2016 5,000 4,253,100
South Tucson, AZ, Municipal Property
Corp., 8.75s, 2010 865 923,041
State of California Public Works, 5.625s, 2018 5,000 4,278,800
Troy, NY, Certificates of Participation,
Recreational Facilities Rev., 9.75s, 2010 2,805 2,929,318
Williamsburg County, SC, School District,
Public Facilities Rev., 7.5s, 1995 60 59,866
Williamsburg County, SC, School District,
Public Facilities Rev.,
7.5s, 1996 65 64,382
Williamsburg County, SC, School District,
Public Facilities Rev.,
7.5s, 1997 70 68,852
Williamsburg County, SC, School District,
Public Facilities Rev.,
7.5s, 1998 75 73,293
Williamsburg County, SC, School District,
Public Facilities Rev.,
7.5s, 1999 80 77,649
Williamsburg County, SC, School District,
Public Facilities Rev.,
7.5s, 2000 85 82,070
Williamsburg County, SC, School District,
Public Facilities Rev.,
7.5s, 2001 95 91,281
Williamsburg County, SC, School District,
Public Facilities Rev.,
7.5s, 2002 115 110,001
Williamsburg County, SC, School District,
Public Facilities Rev.,
7.5s, 2003 130 123,831
Williamsburg County, SC, School District,
Public Facilities Rev.,
7.5s, 2004 150 142,331
|
PORTFOLIO OF INVESTMENTS - continued
Municipal Bonds - continued
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
State and Local Appropriations - continued
Williamsburg County, SC, School District,
Public Facilities Rev.,
7.5s, 2005 $ 165 $ 156,006
Williamsburg County, SC, School District,
Public Facilities Rev.,
7.5s, 2010 235 212,456
Williamsburg County, SC, School District,
Public Facilities Rev.,
7.5s, 2011 250 225,298
Williamsburg County, SC, School District,
Public Facilities Rev.,
7.5s, 2013 290 259,869
Williamsburg County, SC, School District,
Public Facilities Rev.,
7.5s, 2015 335 298,753
Williamsburg County, SC, School District,
Public Facilities Rev.,
7.5s, 2016 360 320,364
Williamsburg County, SC, School District,
Public Facilities Rev.,
7.5s, 2017 390 346,382
-------------
$ 17,410,618
- -----------------------------------------------------------------------------
Refunded and Special Obligations - 12.1%
Austin, TX, Combined Utilities System
Rev., 10.25s, 2012 $ 2,681 $ 2,844,943
Austin, TX, Combined Utilities System
Rev., 10.75s, 2015 1,780 2,197,784
Daphne, AL, Special Care Facilities
Financing Authority, First Mortgage
Rev., 0s, 2028 4,500 1,914,120
Daphne, AL, Special Care Facilities
Financing Authority, Second
Mortgage Rev., 0s, 2028 89,975 38,524,596
Daphne, AL, Special Care Facilities
Financing Authority, Subordinated
Note, 0s, 2018 48,475 5,769,495
Davenport, IA, Health Facilities Rev.
(Ridgecrest Retirement Village),
12.75s, 2005 5,000 5,219,550
Dayton, OH, Special Facilities Rev.
(Emery Air Freight), "A",
12.5s, 2009 950 1,085,004
Highland Park, MI, Hospital Finance
Authority, 12.75s, 2011 3,885 4,016,507
Maine Health & Higher Education
Facilities Authority (St. Mary's
General Hospital), 8.625s, 2022 5,140 5,823,414
Massachusetts Industrial Finance Agency
(Evanswood Bethzatha Corp.), 9s, 2020 1,300 1,306,474
Mesa County, CO, Residual Rev., 0s, 2012 25,125 6,760,133
Mississippi Hospital Equipment &
Facilities Authority Rev.
(Rush Medical Center), 8.75s, 2016 2,800 3,000,256
New York Local Government Assistance
Corp., 7s, 2021 800 875,472
South Carolina Public Service Authority,
7.1s, 2021 2,000 2,198,780
Spirit Lake, IA, Industrial Development
Rev. (Crystal Tips, Inc.),
0s, 2016 3,284 4,149,826
Texas Turnpike Authority (Houston Ship
Channel Bridge), 0s, 2020 21,090 27,319,775
|
PORTFOLIO OF INVESTMENTS - continued
Municipal Bonds - continued
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
Refunded and Special Obligations - continued
Washington Public Power Supply System,
Project #1, 14.375s, 2001 $ 1,000 $ 1,357,050
Washington Public Power Supply System,
Project #1, 15s, 2017 1,830 2,121,611
Washington Public Power Supply System,
Project #3, 15s, 2018 1,350 1,565,122
-------------
$118,049,912
- -----------------------------------------------------------------------------
Single Family Housing Revenue - 10.5%
Alaska Housing Finance Corp., 6.5s, 2034 $ 1,900 $ 1,773,137
Arkansas Housing Development Agency
Residential Mortgage Rev.,
0s, 2015 14,000 1,560,300
Berkeley, Brookes, & Fayette Counties,
WV, 0s, 2016 22,285 2,213,346
California Housing Finance Authority,
7.4s, 2026# 17,240 17,948,737
Chicago, IL, Single Family Residence, 0s,
2017 23,135 1,958,378
Colorado Housing Finance Authority, 8s,
2016 3,000 3,048,720
Cook County, IL, Single Family Housing,
0s, 2015 7,245 784,416
Corpus Christi, TX, Housing Finance
Corp., 0s, 2011 3,395 700,355
Delaware State Housing Authority, 6.75s,
2024 3,220 3,135,346
Denver, CO, City & County Rev., 0s, 2015 2,665 242,515
East Baton Rouge, LA, 0s, 2010 29,500 5,520,925
El Paso, TX, Housing Finance Corp.,
8.75s, 2011 1,085 1,173,135
Florida Housing Finance Agency, 0s, 2012 1,025 177,991
Florida Housing Finance Agency, 0s, 2016 10,800 1,303,344
Harris County, TX, Housing Finance Corp.,
9.875s, 2014 1,005 991,412
Jefferson County, CO, 8.875s, 2013 605 647,810
Jefferson County, TX, Health Facilities
Rev., 0s, 2015 6,560 732,293
Maine Housing Authority, Mortgage
Purchase, 8.2s, 2019 1,820 1,844,861
Maine Housing Authority, Mortgage
Purchase, 6.35s, 2022 75 69,211
Maine Housing Authority, Mortgage
Purchase, 8.2s, 2022 5,980 6,061,687
Mississippi Home Corp., 9.25s, 2012 335 360,239
Nebraska Investment Finance Authority,
0s, 2016 8,570 709,168
Nevada Housing Division, 0s, 2015 7,536 995,933
New Castle County, DE, 0s, 2016 2,255 253,146
New Hampshire Housing Finance Authority,
0s, 2011 2,140 384,087
New Hampshire Housing Finance Authority,
8.5s, 2014 4,005 4,174,492
New Mexico Mortgage Finance Authority,
12s, 2011 80 80,803
New Mexico Mortgage Finance Authority,
6.9s, 2024 3,750 3,753,113
North Dakota Housing Finance Agency,
8.3s, 2012 550 570,356
North Dakota Housing Finance Agency,
6.8s, 2023 955 953,778
Ohio Housing Finance Agency, GNMA, RIBS,
9.223s, 2031 1,850 1,901,745
Reno County, KS, Mortgage Rev., 0s, 2014 11,900 1,307,572
|
PORTFOLIO OF INVESTMENTS - continued
Municipal Bonds - continued
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
Single Family Housing Revenue - continued
Rhode Island Housing & Mortgage Finance
Corp., 8.4s, 2021 $ 6,100 $ 6,298,799
State of Texas, 7s, 2025 4,150 4,172,202
Tennessee Housing Development Agency,
Homeownership Program,
8.125s, 2021 4,295 4,429,219
Texas Housing Agency, 8.2s, 2016 1,125 1,169,708
Texas Housing Agency, Residential
Mortgage Rev., 8.4s, 2020 2,115 2,213,517
Utah Housing Finance Agency, 10.75s, 2008 25 25,574
Utah Housing Finance Agency, 0s, 2016 29,695 3,367,426
Vermont Housing Finance Agency, Home
Mortgage Purchase, "B",
8.1s, 2022 1,735 1,798,727
Virginia Housing & Development Authority,
7.125s, 2022 9,505 9,659,646
Wisconsin Housing & Economic Development
Authority, Home
Ownership Rev., 0s, 2016 2,535 307,901
Wisconsin Housing & Economic Development
Authority, Home
Ownership Rev., 9.581s, 2022 1,800 1,850,724
-------------
$102,625,794
- -----------------------------------------------------------------------------
Multi-Family Housing Revenue - 3.4%
Alexandria, VA, Redevelopment & Housing
Authority (Jefferson Village
Apartments), 9s, 2018 $ 2,000 $ 2,036,460
Broward County, FL, Housing Finance
Authority (Deerfield
Beach Apartments), 13s, 2000* 3,438 2,406,637
Dallas, TX, Housing Finance Corp., 8.5s,
2011 3,450 3,499,991
Escondido, CA, Community Development
Authority (Las Villas
del Norte), 8.875s, 2005 1,860 1,798,639
Fairfax County, VA, Redevelopment &
Housing Authority
(Little River Glen), 8.95s, 2020 2,060 2,097,410
Florida Housing Finance Agency (Mutual
Benefit Life), 7s, 2004 720 612,000
Florida Housing Finance Agency (South
Lake Apartments), 8.7s, 2021 3,500 3,467,940
Indianapolis, IN, Economic Development
Authority
(Buckingham/Balmoral), 10.5s,
2015*+ 4,385 1,315,500
Maplewood Terrace, RI, Housing
Development Corp., 6.9s, 2025 4,040 4,029,819
Massachusetts Housing Finance Agency,
8.5s, 2020 15 15,296
Memphis, TN, Health, Education & Housing
Facilities Board
(Wesley Highland Terrace), 12.75s,
2015+ 6,300 5,355,000
Montgomery, PA, Redevelopment Authority
(KBF Associates),
6.5s, 2025 7,750 6,942,063
-------------
$ 33,576,755
- -----------------------------------------------------------------------------
|
PORTFOLIO OF INVESTMENTS - continued
Municipal Bonds - continued
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
Insured Health Care Revenue - 1.9%
Clermont County, OH, Hospital Facilities
Rev. (Mercy Health System), AMBAC,
MVRIC, 9.031s, 2021 $ 1,300 $ 1,360,372
Desert Hospital District, CA, Hospital
Rev. (Desert Hospital), CG, COP,
MVRIC, 8.859s, 2020 4,000 3,949,120
North Central Texas, Health Facilities
Development Corp. (Presbyterian
Hospital), MBIA, RITES, 9.72s, 2021 4,000 4,030,000
Quincy, MA, Rev. (Quincy Hospital), 6.12s, 2011 5,000 3,890,300
Salt Lake City, UT, Hospital Rev. (Intermountain
Health Care), AMBAC, INFLO, 10.632s, 2020 1,250 1,300,200
State of Montana Health Facilities
Authority, 9.042s, 2016 4,000 4,042,600
-------------
$ 18,572,592
- -----------------------------------------------------------------------------
Health Care Revenue - 16.1%
Arkansas Development Finance Authority,
Economic Development Rev. (Southwest
Homes), 10.8s, 2018 $ 985 $ 1,041,303
Bell County, TX, Health Facilities Authority
(Kings Daughters Hospital), 9.25s, 2008 1,305 1,427,539
Berlin, MD, Hospital Rev. (Atlantic
General Hospital), 8.375s, 2022 1,390 1,419,121
Brentwood, TN, Industrial Development
Board, 8.5s, 1995+ 50 25,000
Brentwood, TN, Industrial Development
Board, 9s, 1997+ 15 7,500
Brentwood, TN, Industrial Development
Board, 10s, 2001+ 1,650 825,000
Brevard County, FL, Health Facilities
Authority (Beverly Enterprises), 10s, 2010 1,405 1,550,656
Cambria County, PA, Industrial Development
Authority (Beverly Enterprises), 10s, 2012 1,260 1,469,853
Chester County, PA, Industrial
Development Authority (RHA/PA
Nursing Home, Inc.), 10.125s, 2019 2,000 2,013,100
Colorado Health Facilities Authority Rev.
(Gericare, Inc./Denver), 10.5s, 2019+ 5,000 4,500,000
Colorado Health Facilities Authority Rev.
(Rocky Mountain Adventist), 6.625s, 2013 2,500 2,256,825
Connecticut Development Authority
(Greenwich Woods), 12.5s, 2015 2,000 2,086,020
Connecticut Development Authority
(Waterbury Health), 13.5s, 2014 2,765 2,862,687
Connecticut Health & Educational
Facilities (Johnson Evergreen Corp.), 8.5s, 2014 1,350 1,379,444
Daphne, AL, Special Care Facilities Financing
Authority (Westminster Village), 8.25s, 2026* 12,500 9,000,000
District of Columbia, Hospital Rev.
(Hospital for Sick Children), 8.875s, 2021 980 1,032,783
District of Columbia, Hospital Rev.
(Washington Hospital), 7.125s, 2019 1,750 1,670,568
Doylestown, PA, Hospital Authority
(Doylestown Hospital), 7.2s, 2023 2,200 1,990,010
Fairfax, Fauquier & Loudoun Counties, VA,
Health Center Commission, Nursing
Home Rev., 9s, 2020 1,930 1,948,142
Fulton County, GA, Residential Care
Facilities, Elderly Authority Rev.
(Lenbrook Square Foundation), 9.75s, 2017 3,580 3,681,350
Grand Junction, CO, Hospital Rev.
(Lincoln Park Osteopathic Hospital),
6.9s, 2019 2,900 2,523,348
|
PORTFOLIO OF INVESTMENTS - continued
Municipal Bonds - continued
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
Health Care Revenue - continued
Guntersville, AL, Medical Clinic Board
Rev. (Barfield Health Care), 12s, 2010 $ 1,000 $ 1,000,130
Hannibal, MO, Industrial Development
Authority (Hannibal Regional Health
Care System, Inc.), 9.5s, 2022 3,000 3,405,870
Hobbs, NM, Health Facilities Rev.
(Nemecal Associates), 9.5s, 2014 1,790 1,853,294
Hopewell County, VA, Hospital Authority
(John Randolph Hospital), 8.85s, 2013 975 979,046
Illinois Health Facilities Rev. (Memorial
Hospital), 7.25s, 2022 1,500 1,382,820
Jacksonville, FL, Health Facilities
Authority (National Benevolent), 7s, 2022 1,000 940,390
Jacksonville, FL, Industrial Development
Rev. (Beverly Enterprises), 9.75s, 2011 1,015 1,114,287
Jefferson County, KY, Health Facilities
Rev. (Beverly Enterprises), 10.125s, 2008 2,350 2,577,621
Kansas City, MO, Industrial Development
Authority, Retirement Facilities, 9s, 2013 5,450 5,606,688
Lee County, FL, Industrial Development
Authority (Beverly Enterprises), 10s, 2010 955 1,059,429
Lexington-Fayette Counties, KY, Health Care
Facilities Rev. (Sayre Christian Village),
10s, 2012 980 996,983
Louisiana Public Facilities Authority
(Southwest Medical Center), 11s, 2006 1,597 975,150
Luzerne County, PA, Industrial Development
Authority (Beverly Enterprises), 10.125s, 2008 1,375 1,517,546
Martin County, FL, Industrial Development
Authority (Beverly Enterprises), 9.8s, 2010 2,950 3,247,449
Massachusetts Health & Education
Facilities Authority (Fairview
Extended Care Facility), 10.25s, 2021 3,000 3,240,150
Massachusetts Industrial Finance Agency,
Health Care Rev. (Evanswood Bethzatha
Corp.), "B", 9s, 2020 860 864,283
Massachusetts Industrial Finance Agency
(Martha's Vineyard Long-Term Care), 9.25s, 2022 3,410 3,296,583
Meridian, MI, Economic Development Corp.
(Burcham Hills), 9.625s, 2019 2,410 2,518,016
Michigan Strategic Fund Ltd. Obligation
Rev. (River Valley Recovery
Center), 12.875s, 2015+ 1,042 1,138,285
Montgomery County, OH, Hospital Rev.
(Kettering Convalescent Center), 10s, 2020 5,200 5,278,000
Montgomery County, PA, Higher Education &
Health Authority Rev. (AHF/Montgomery,
Inc.), 10.5s, 2020 2,500 2,538,375
Nebraska Investment Finance Authority
(Centennial Park), 10.5s, 2016 2,200 2,283,336
New Hampshire Industrial Development
Authority (Tall Pines), 11.25s, 2016 2,400 2,639,568
New Jersey Economic Development Authority
(Burnt Tavern Convalescent Center), 9s, 2013 1,700 1,716,847
New Jersey Economic Development Authority
(Courthouse Convalescent Center), 8.7s, 2014 1,350 1,349,230
New Jersey Economic Development Authority
(Dover), 13.375s, 2014+ 1,835 917,500
New Jersey Economic Development Authority (Geriatric
& Medical Services), 9.625s, 2004 540 567,319
New Jersey Economic Development Authority
(Geriatric & Medical
Services), 9.625s, 2022 1,350 1,421,199
New Jersey Economic Development Authority
(Gerimed Care Inn), 10.5s, 2020 3,000 3,231,780
|
PORTFOLIO OF INVESTMENTS - continued
Municipal Bonds - continued
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
Health Care Revenue - continued
New Jersey Economic Development Authority
(Greenwood Health Care), 9.75s, 2011 $ 3,215 $ 3,126,105
New Jersey Economic Development Authority
(Wanaque Convalescent Center), 8.5s, 2009 700 675,787
New Jersey Economic Development Authority
(Wanaque Convalescent Center), 8.6s, 2011 1,000 963,560
North Carolina Medical Care Commission,
Hospital Rev. (Valdese General Hospital),
8.75s, 2016 2,000 2,038,280
North Central Texas, Health Facilities
Development Corp. (Baylor University
Medical Center), INFLO, 8.66s, 2016 4,300 4,481,546
Okaloosa County, FL, Retirement Rental
Housing Rev. (Beverly Enterprises),
10.75s, 2003 3,045 3,328,733
Osceola County, FL, Industrial
Development Rev. (Community Provider),
7.75s, 2017 2,700 2,566,566
Owensboro, KY (Children's Regional
Hospital), 13s, 2010 3,480 3,602,392
Portsmouth, VA, Industrial Development
Authority (Beverly
Enterprises), 10s, 2011 2,145 2,385,605
Prince William County, VA, Industrial
Development Authority, Residential Care
(Westminster at Lake Ridge), 10s, 2022 3,500 3,685,675
Rochester, MN (Mayo Foundation/Mayo
Medical Foundation), FIRS, 8.07s, 2021 2,000 1,973,320
Santa Fe, NM, Industrial Development Rev.
(Casa Real Nursing Home), 9.75s, 2013 1,920 1,960,992
Seminole County, FL, Industrial
Development Authority (Friendly
Village of Florida), 10s, 2011 905 941,508
St. Charles County, MO, Industrial
Development Authority (Garden
View Care Center), 10s, 2016 1,815 1,841,263
St. Petersburg, FL, Health Facilities
Rev. (Swanholm Nursing), 10s, 2022 1,630 1,708,599
Suffolk County, NY, Industrial
Development Agency (A Planned
Program for Life Enrichment, Inc.), 9.75s, 2015 3,840 3,648,000
Tyler, TX, Health Facilities Development
Corp. (Park Place), 12.5s, 2018++ 4,905 5,094,284
Vincennes, IN, Economic Development
Authority (Lodge of the
Wabash), 12.5s, 2015 1,130 1,107,400
Waterford Township, MI, Economic
Development Rev. (Canterbury
Health Care), 8.375s, 2023 3,100 3,144,454
Westerville, OH, Industrial Development
Rev. (Health Care Corp.), 10s, 2008 555 566,810
Westside Habilitation Center,
Cheneyville, LA, 8.375s, 2013 2,800 2,607,052
Wilkins Area, PA, Industrial Development
Authority (Beverly Enterprises), 10s, 2011 1,175 1,307,893
-------------
$157,123,247
- -----------------------------------------------------------------------------
|
PORTFOLIO OF INVESTMENTS - continued
Municipal Bonds - continued
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
Electric and Gas Utility Revenue - 10.8%
Beaver County, PA, Industrial Development
Authority (Toledo Edison), 12.25s, 2015 $ 5,610 $ 5,863,628
Brazos River Authority, TX, Pollution
Control Rev. (Texas Utilities
Electric Co.), 8.25s, 2016 3,500 3,662,680
Claiborne County, MS, Pollution Control
Rev. (Middle South Energy, Inc.), 9.5s,
2016 2,350 2,505,875
Clark County, NV (Nevada Power), FGIC,
6.7s, 2022 4,000 4,002,680
Georgia Municipal Electric Authority,
Power Rev., 8.426s, 2022 9,900 8,851,887
Intermountain Power, GA, 0s, 2017 5,000 1,057,450
Lake Charles, LA, Port Facilities Rev.
(Truckline LNG), 7.75s, 2022 3,500 3,610,600
Los Angeles, CA, Department of Water,
Electric Plant Rev., 5.375s, 2023 3,000 2,493,090
Midland Michigan Environmental
Development Authority, Pollution
Control Rev. (Midland Cogeneration),
9.5s, 2009 3,000 3,156,330
Montana Board of Investment Resources
Recovery Rev. (Yellowstone
Energy), 7s, 2019 6,500 5,850,065
New Jersey Economic Development Authority
(Vineland Cogeneration), 7.875s, 2019 3,000 3,046,140
New York Energy Research & Development
Authority, 7.15s, 2020 13,000 11,964,940
New York Energy Research & Development
Authority, 7.5s, 2026 4,750 4,926,462
Palm Beach County, FL, Solid Waste
Development, 6.95s, 2022 6,650 6,090,802
Pennsylvania Economic Development,
Fingauth Research Recovery,
6.6s, 2019 16,950 14,949,392
Pittsylvania County, VA, Industrial
Development Authority,
7.55s, 2019** 10,000 9,747,100
Southern California Public Power
Authority, Transmission Project, RIBS,
8.012s, 2012 1,350 1,266,678
Swanton Village, VT, Electric System
Rev., 6.7s, 2023 1,750 1,695,943
Washington Public Power Supply System,
Project #1, 7.57s, 2012 5,000 3,604,050
West Feliciana Parish, LA, Pollution
Control Rev. (Gulf States
Utilities Co.), 9s, 2015 2,500 2,745,325
West Feliciana Parish, LA, Pollution
Control Rev. (Gulf States
Utilities Co.), 8s, 2024 4,000 4,157,160
-------------
$105,248,277
- -----------------------------------------------------------------------------
|
PORTFOLIO OF INVESTMENTS - continued
Municipal Bonds - continued
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
Turnpike Revenue - 3.0%
Florida Mid-Bay Bridge Authority Rev.,
"B", 8.5s, 2022 $ 2,500 $ 2,687,875
Massachusetts Industrial Finance Agency,
Tunnel Rev. (Massachusetts
Turnpike), 9s, 2020 11,295 11,983,882
San Joaquin Hills, CA, Transportation
Corridor Agency, Toll Road Rev., 0s,
2001 9,100 5,491,395
San Joaquin Hills, CA, Transportation
Corridor Agency, Toll Road Rev., 0s,
2005 1,500 630,960
San Joaquin Hills, CA, Transportation
Corridor Agency, Toll Road Rev., 0s,
2007 4,000 1,412,560
San Joaquin Hills, CA, Transportation
Corridor Agency, Toll Road Rev., 0s,
2008 5,400 1,747,170
San Joaquin Hills, CA, Transportation
Corridor Agency, Toll Road Rev., 0s,
2011 13,400 3,258,478
San Joaquin Hills, CA, Transportation
Corridor Agency, Toll Road Rev., 0s,
2026 5,765 488,468
San Joaquin Hills, CA, Transportation
Corridor Agency, Toll Road Rev., 0s,
2028 11,750 592,670
West Virginia Parkways, Economic
Development & Tourism Authority,
7.17s, 2019 1,200 1,023,192
-------------
$ 29,316,650
- -----------------------------------------------------------------------------
Airport and Port Revenue - 10.1%
Chicago, IL, O'Hare International
Airport, Special Facilities Rev.
(United Airlines), 8.4s, 2018 $ 2,760 $ 2,882,378
Chicago, IL, O'Hare International
Airport, Special Facilities Rev.
(United Airlines), 8.5s, 2018 4,500 4,697,190
Chicago, IL, O'Hare International
Airport, Special Facilities Rev.
(United Airlines), 8.85s, 2018 6,170 6,678,223
Cleveland, OH, Airport Special Facilities
Rev. (Continental Airlines),
9s, 2019 9,120 9,262,090
Dallas-Fort Worth, TX, International
Airport Facility Improvement
Corp. (American Airlines), 7.625s, 2021 4,500 4,459,995
|
PORTFOLIO OF INVESTMENTS - continued
Municipal Bonds - continued
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
Airport and Port Revenue - continued
Denver, CO, City & County Airport Rev.,
8.875s, 2012 $ 5,000 $ 5,371,950
Denver, CO, City & County Airport Rev.,
7.75s, 2021 7,050 7,106,682
Denver, CO, City & County Airport Rev.,
8.5s, 2023 2,950 3,064,371
Denver, CO, City & County Airport Rev.,
8.75s, 2023 5,770 6,105,179
Denver, CO, City & County Airport Rev.,
8s, 2025 1,140 1,154,762
Denver, CO, City & County Airport Rev.,
6.875s, 2032 6,640 5,952,428
Hillsborough County, FL, Aviation
Authority Rev. (US Air), 8.6s, 2022 1,350 1,175,566
Kenton County, KY, Airport Board Special
Facilities (Delta Airlines),
7.5s, 2020 16,570 16,198,832
Texas Port Development Corp., Industrial
Development Rev.
(Agricultural Export), 14.25s, 2001* 11,975 8,741,750
Tulsa, OK, Municipal Airport Trust Rev.,
7.375s, 2020 2,000 1,933,120
Tulsa, OK, Municipal Airport Trust Rev.,
7.6s, 2030 14,210 13,999,834
-------------
$ 98,784,350
- -----------------------------------------------------------------------------
Sales and Excise Tax Revenue - 0.4%
Denver, CO, Urban Renewal Authority, Tax
Increment Rev., 8.5s, 2013 $ 1,450 $ 1,289,891
Denver, CO, Urban Renewal Authority, Tax
Increment Rev. (Downtown Denver),
7.25s, 2017 1,250 1,267,263
Denver, CO, Urban Renewal Authority, Tax
Increment Rev. (Musicland), 8.5s, 2017 950 838,518
-------------
$ 3,395,672
- -----------------------------------------------------------------------------
Industrial Revenue (Corporate Guarantee) - 13.1%
Baltimore County, MD, Pollution Control
(Bethlehem Steel),
7.55s, 2017 $ 1,000 $ 986,710
Burns Harbor, IN, Solid Waste Disposal
Facilities Rev. (Bethlehem Steel), 8s,
2024 10,455 10,554,322
Butler, AL, Industrial Development Rev.,
8s, 2028 4,500 4,594,635
Courtland, AL, Industrial Development
Board, Solid Waste Disposal
Rev., 6.375s, 2029 4,325 3,882,855
DeQueen, AR, Industrial Development Board
(Weyerhaeuser Co.),
9s, 2006 1,000 1,027,100
Eastern Band Cherokee Indian Community,
NC (Carolina Mirror Co.),
10.25s, 2009 3,515 3,708,290
Eastern Band Cherokee Indian Community,
NC (Carolina Mirror Co.),
11s, 2012 950 1,012,510
El Paso, TX, Industrial Development
Authority (Popular Dry Goods
Co.), 9.875s, 2016 800 816,087
Hernando County, FL, Industrial
Development Rev. (Crushed Stone Co.),
8.5s, 2014 8,000 8,200,320
|
PORTFOLIO OF INVESTMENTS - continued
Municipal Bonds - continued
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
Industrial Revenue (Corporate Guarantee) - continued
Hodge Village, LA, Utilities Rev. (Stone
Container Corp.), 9s, 2010 $ 6,800 $ 7,073,360
Hunt County, TX, Industrial Development
Rev. (Household
Manufacturing), 10.236s, 2003 6,000 5,716,020
Lawrenceburg, TN, Industrial Development
Board (Tridon, Inc.),
9.625s, 2006 2,800 2,784,823
Maine Finance Authority (Bowater, Inc.),
7.75s, 2022 8,500 8,715,475
Massachusetts Industrial Financing Agency
(Solid Waste Disposal Rev.), 8.25s,
2014 4,000 3,891,760
McMinn County, TN, Industrial Development
Board (Bowater, Inc.),
7.4s, 2022 7,000 7,157,920
Mesa County, CO (Joy Technologies), 8.5s,
2006 1,350 1,389,501
New Hampshire Industrial Development
Authority (Rockingham Park), 13.5s,
1999 1,270 1,308,964
Perry County, KY, Solid Waste (T.J.
International), 7s, 2024 11,000 10,248,480
Port of New Orleans, LA (Continental
Grain Co.), 7.5s, 2013 2,000 1,932,880
Port of New Orleans, LA, Industrial
Development (Avondale Industries),
8.5s, 2014 22,550 22,933,801
Sweetwater County, WY, Solid Waste, 6.9s,
2024 3,000 2,806,410
Sweetwater County, WY, Solid Waste (FMC
Corp.),
7s, 2024 8,725 8,266,327
Valdez, AK, Marine Terminal, 5.65s, 2028 5,000 4,212,250
Walton, GA, Industrial Development
Authority (Ultima Rubber
Products, Inc.), 10s, 2010 4,680 4,848,199
-------------
$128,068,999
- -----------------------------------------------------------------------------
Universities - 0.5%
Massachusetts Industrial Finance Agency
(Curry College), 8s, 2014 $ 1,500 $ 1,433,955
Massachusetts Industrial Finance Agency
(Emerson College), 8.9s, 2018 3,000 3,271,800
-------------
$ 4,705,755
- -----------------------------------------------------------------------------
|
PORTFOLIO OF INVESTMENTS - continued
Municipal Bonds - continued
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
Miscellaneous Revenue - 12.1%
Atlanta, GA, Downtown Development
Authority (Garnett Station),
11.5s, 2015*+ $ 2,343 $ 703,046
Austell, GA, Downtown Development
Authority, Junior Rev. (Threadmill),
"B", 11s, 2006*+ 1,847 18,473
Austell, GA, Downtown Development
Authority, Senior Rev. (Threadmill),
"A", 11s, 2006*+ 5,542 1,080,647
Bristol, CT, Resource Recovery
Facilities, 6.5s, 2014# 7,000 6,398,840
Brush, CO, Industrial Development Rev.
(Training Centers
International), 12s, 2015 4,735 5,434,027
Brush, CO, Industrial Development Rev.
(Training Centers
International), "A", 12s, 2015 2,135 2,180,155
Brush, CO, Industrial Development Rev.
(Training Centers
International), "B", 12s, 2015 2,320 2,344,290
Connecticut Industrial Development
Authority (Nutmeg Partners),
12.75s, 2015*+** 7,135 2,497,250
Danville, VA, Industrial Development
Authority (Piedmont Mall
Project), 2.75s, 2017 8,280 7,687,069
District of Columbia (National Public
Radio), 7.7s, 2023 3,500 3,575,950
Eastern Connecticut Resources Recovery,
5.5s, 2020 2,000 1,588,240
Fond du Lac, WI, 11s, 2003*+** 2,883 1,758,520
Marion County, WV, Solid Waste Rev., 9s,
2011# 7,000 7,021,280
Martha's Vineyard, MA, Land Bank, 8.125s,
2011 3,000 2,973,360
Maryland Energy Financing Administration
(Solid Waste), 9s, 2016 26,300 26,530,916
Massachusetts Health & Education
Facilities Authority (Learning Center
for Deaf Children), 9.25s, 2014 1,000 1,054,180
Michigan Strategic Fund, 10.25s, 2016 10,000 10,283,000
Michigan Strategic Fund (Blue Water
Fiber), 8s, 2012** 11,000 10,501,370
Pennsylvania Convention, 6.75s, 2019 5,370 4,912,745
Retema, TX, Special Facilities Rev.
(Retema Park Racetrack Project),
8.75s, 2018 10,000 9,893,900
St. Louis County, MO, Industrial
Development Authority (Eagle Golf
Enterprises, Inc.), 10s, 2005 2,200 2,387,528
St. Louis County, MO, Industrial
Development Authority (Kiel Center
Arena), 7.875s, 2024 1,000 988,810
Telluride Gondola Transit Co., CO, Real
Estate Transfer Assessment Rev., 11.5s,
2012 6,000 6,230,880
-------------
$118,044,476
- -----------------------------------------------------------------------------
|
PORTFOLIO OF INVESTMENTS - continued
Municipal Bonds - continued
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
Special Assessment District - 0.2%
Indianapolis, IN, Public Improvement
Bond, 6.5s, 2022 $ 2,000 $ 1,921,359
- -----------------------------------------------------------------------------
Total Municipal Bonds (Identified Cost,
$997,158,171) $976,592,244
- -----------------------------------------------------------------------------
Floating Rate Demand Notes - 0.8%
- -----------------------------------------------------------------------------
Hillsborough County, FL, Pollution
Control Rev. (Tampa Electric Co.),
due 2018 $ 2,600 $ 2,600,000
Lincoln County, WY, Pollution Control,
due 2014 1,100 1,100,000
Lincoln County, WY, Pollution Control
(Exxon), due 2014 2,300 2,300,000
Lubbock, TX, Health Facilities (St.
Joseph's), due 2013 100 100,000
Peninsula Ports Authority, VA (Shell Oil
Co.), due 2005 100 100,000
Perry County, MS, Pollution Control Rev.,
due 2002 400 400,000
Uinta County, WY, Pollution Control Rev.
(Chevron), due 2020 1,400 1,400,000
- -----------------------------------------------------------------------------
Total Floating Rate Demand Notes, at
Identified Cost $ 8,000,000
- -----------------------------------------------------------------------------
Total Investments (Identified Cost,
$1,005,158,171) $984,592,244
Other Assets, Less Liabilities - (0.9)% (8,874,397)
- -----------------------------------------------------------------------------
Net Assets - 100.0% $975,717,847
- -----------------------------------------------------------------------------
|
* Security valued by or at the direction of the Trustees.
** Restricted security.
+ Non-income producing security - in default.
++ Security accruing partial interest - in default.
# When-issued security.
See notes to financial statements
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- ------------------------------------------------------------------------------
January 31, 1995
- ------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $1,005,158,171) $ 984,592,244
Cash 38,525
Receivable for investments sold 4,983,346
Receivable for Fund shares sold 2,461,393
Interest receivable 16,911,364
Other assets 10,608
--------------
Total assets $1,008,997,480
--------------
Liabilities:
Payable for investments purchased $ 31,240,000
Payable for Fund shares reacquired 1,427,726
Payable to affiliates -
Management fee 55,550
Distribution fee 15,690
Shareholder servicing agent fee 11,214
Accrued expenses and other liabilities 529,453
--------------
Total liabilities $ 33,279,633
--------------
Net assets $ 975,717,847
--------------
Net assets consist of:
Paid-in capital $1,074,349,204
Unrealized depreciation on investments (20,565,927)
Accumulated net realized loss on investments (79,164,299)
Accumulated undistributed net investment income 1,098,869
--------------
Total $ 975,717,847
--------------
Shares of beneficial interest outstanding 113,496,608
--------------
Class A shares:
Net asset value and redemption price per share
(net assets of $920,042,721 / 107,020,050 shares of
beneficial interest outstanding) $8.60
-----
Offering price per share (100/95.25 of net asset value
per share) $9.03
-----
Class B shares:
Net asset value, redemption price and offering price per
share (net assets of $55,675,126 / 6,476,558 shares of
beneficial interest outstanding) $8.60
-----
|
On sales of $100,000 or more, the offering price of Class A shares is reduced. A contingent deferred sales charge may be imposed on redemptions of Class A and Class B shares.
See notes to financial statements
FINANCIAL STATEMENTS - continued
Statement of Operations
- ------------------------------------------------------------------------------
Year Ended January 31, 1995
- ------------------------------------------------------------------------------
Net investment income:
Interest income $ 76,354,946
------------
Expenses -
Management fee $ 6,385,098
Trustees' compensation 51,656
Shareholder servicing agent fee (Class A) 1,221,491
Shareholder servicing agent fee (Class B) 73,810
Distribution and service fee (Class B) 335,495
Workout expenditures 603,293
Custodian fees 291,487
Legal fees 109,348
Postage 107,626
Auditing fees 77,459
Printing 72,470
Miscellaneous 583,883
------------
Total expenses $ 9,913,116
------------
Net investment income $ 66,441,830
------------
Realized and unrealized loss on investments:
Realized loss (identified cost basis) -
Investment transactions $(34,044,867)
Change in unrealized appreciation (depreciation) -
Investments (41,635,823)
------------
Net realized and unrealized loss on investments $(75,680,690)
------------
Decrease in net assets from operations $ (9,238,860)
------------
See notes to financial statements
|
FINANCIAL STATEMENTS - continued
Statement of Changes in Net Assets
- ------------------------------------------------------------------------------
Year Ended January 31, 1995 1994
- ------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
Net investment income $ 66,441,830 $ 55,673,229
Net realized loss on investments (34,044,867) (13,247,478)
Net unrealized gain (loss) on
investments (41,635,823) 25,804,847
------------ ------------
Increase (decrease) in net assets
from operations $ (9,238,860) $ 68,230,598
------------ ------------
Distributions declared to shareholders --
From net investment income (Class A) $(66,774,251) $(58,106,409)
From net investment income (Class B) (1,978,622) (23)
------------ ------------
Total distributions declared to
shareholders $(68,752,873) $(58,106,432)
------------ ------------
Fund share (principal) transactions -
Net proceeds from sale of shares $345,765,914 $133,406,228
Net asset value of shares issued to
shareholders in reinvestment of
distributions 24,997,370 20,164,884
Cost of shares reacquired (127,012,254) (85,704,557)
------------ ------------
Increase in net assets from Fund
share transactions $243,751,030 $ 67,866,555
------------ ------------
Total increase in net assets $165,759,297 $ 77,990,721
Net assets:
At beginning of year 809,958,550 731,967,829
------------ ------------
At end of year (including
undistributed net investment
income of $1,098,869 and
$1,095,222, respectively) $975,717,847 $809,958,550
------------ ------------
|
See notes to financial statements
FINANCIAL STATEMENTS - continued
Financial Highlights
- ----------------------------------------------------------------------------------------------------------------------
Year Ended January 31, 1995<F2> 1994 1993 1992 1991 1990
- ----------------------------------------------------------------------------------------------------------------------
Class A
- ----------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
Net asset value - beginning
of period $ 9.38 $ 9.26 $ 9.22 $ 9.09 $ 9.45 $ 9.55
------ ------ ------ ------ ------ ------
Income from investment operations -
Net investment income $ 0.64 $ 0.77 $ 0.73 $ 0.73 $ 0.74 $ 0.85
Net realized and
unrealized gain (loss) on
investments (0.75) 0.05 0.06 0.17 (0.32) (0.09)
------ ------ ------ ------ ------ ------
Total from investment
operations $(0.11) $ 0.82 $ 0.79 $ 0.90 $ 0.42 $ 0.76
------ ------ ------ ------ ------ ------
Less distributions declared
to shareholders -
From net investment income $(0.67) $(0.70) $(0.75) $(0.77) $(0.78) $(0.81)
From net realized gain on
investments -- -- -- -- -- (0.04)
From paid-in capital -- -- -- -- -- (0.01)
------ ------ ------ ------ ------ ------
Total distributions
declared to
shareholders $(0.67) $(0.70) $(0.75) $(0.77) $(0.78) $(0.86)
------ ------ ------ ------ ------ ------
Net asset value - end of
period $ 8.60 $ 9.38 $ 9.26 $ 9.22 $ 9.09 $ 9.45
------ ------ ------ ------ ------ ------
Total return<F1> (1.04)% 9.19% 9.02% 10.34% 4.65% 8.24%
Ratios (to average net assets)/
Supplemental data:
Expenses 1.04% 1.10% 1.00% 1.03% 1.05% 1.02%
Net investment income 7.27% 7.15% 7.95% 7.96% 8.17% 8.90%
Portfolio turnover 32% 18% 10% 21% 41% 21%
Net assets at end of period
(000 omitted) $920,043 $809,957 $731,968 $648,043 $638,185 $485,037
<F1> Total returns for Class A shares do not include the applicable sales charge
(except for reinvested dividends prior to October 1, 1989). If the sales
charge had been included, the results would have been lower.
<F2> Per share data for the periods indicated are based on average shares
outstanding.
|
See notes to financial statements
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
- ---------------------------------------------------------------------------------------------------------------------
Year Ended January 31, 1995<F2> 1989 1988 1987 1986 1995<F2> 1994<F4>
- ----------------------------------------------------------------------------------------------------------------------
Class A Class B
- ----------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
Net asset value - beginning
of period $ 9.68 $10.38 $10.49 $ 9.80 $ 9.38 $ 9.40
------ ------ ------ ------ ------ ------
Income from investment operations -
Net investment income $ 0.88 $ 0.84 $ 0.99 $ 0.95 $ 0.57 $ 0.32
Net realized and
unrealized gain (loss) on
investments (0.12) (0.67) (0.01) 0.71 (0.78) (0.14)
------ ------ ------ ------ ------ ------
Total from investment
operations $ 0.76 $ 0.17 $ 0.98 $ 1.66 $(0.21) $ 0.18
------ ------ ------ ------ ------ ------
Less distributions declared
to shareholders -
From net investment income $(0.82) $(0.84) $(1.01) $(0.94) $(0.57) $(0.20)
From net realized gain on
investments (0.07) (0.03) (0.08) (0.03) -- --
------ ------ ------ ------ ------ ------
Total distributions
declared to
shareholders $(0.89) $(0.87) $(1.09) $(0.97) $(0.57) $(0.20)
------ ------ ------ ------ ------ ------
Net asset value - end of
period $ 9.55 $ 9.68 $10.38 $10.49 $ 8.60 $ 9.38
------ ------ ------ ------ ------ ------
Total return<F1> 8.32% 1.87% 10.00% 18.24% (2.13)% 1.89%
Ratios (to average net assets)/
Supplemental data:
Expenses 0.65% 1.03% 1.00% 1.04% 2.10% 2.04%<F1>
Net investment income 9.27% 8.54% 9.54% 9.68% 6.32% 5.43%<F1>
Portfolio turnover 23% 16% 9% 43% 32% 18%
Net assets at end of period
(000 omitted) $325,044 $349,655 $442,036 $294,056 $55,675 $1
<F1> Annualized.
<F2> Per share data for the periods indicated are based on average shares
outstanding.
<F3> Total returns for Class A shares do not include the applicable sales charge
(except for reinvested dividends prior to October 1, 1989). If the sales
charge had been included, the results would have been lower.
<F4> For the period from the commencement of offering of Class B shares,
September 7, 1993 to January 31, 1994.
|
See notes to financial statements
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Municipal High Income Fund (the Fund) is a non-diversified series of MFS
Series Trust III (the Trust). The Trust is organized as a Massachusetts business
trust and is registered under the Investment Company Act of 1940, as amended, as
an open-end management investment company.
(2) Significant Accounting Policies Investment Valuations - Debt securities (other than short-term obligations which mature in 60 days or less), including listed issues, are valued on the basis of valuations furnished by dealers or by a pricing service with consideration to factors such as institutional-size trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics and other market data, without exclusive reliance upon exchange or over-the-counter prices. Short-term obligations, which mature in 60 days or less, are valued at amortized cost, which approximates market value. Futures contracts, options and options on futures contracts listed on commodities exchanges are valued at closing settlement prices. Over-the- counter options are valued by brokers through the use of a pricing model which takes into account closing bond valuations, implied volatility and short-term repurchase rates. Securities for which there are no such quotations or valuations are valued at fair value as determined in good faith by or at the direction of the Trustees.
Repurchase Agreements - The Fund may enter into repurchase agreements with institutions that the Fund's investment adviser has determined are creditworthy. Each repurchase agreement is recorded at cost. The Fund requires that the securities purchased in a repurchase transaction be transferred to the custodian in a manner sufficient to enable the Fund to obtain those securities in the event of a default under the repurchase agreement. The Fund monitors, on a daily basis, the value of the securities transferred to ensure that the value, including accrued interest, of the securities under each repurchase agreement is greater than amounts owed to the Fund under each such repurchase agreement.
Written Options - The Fund may write covered call or put options for which
premiums are received and are recorded as liabilities, and are subsequently
adjusted to the current value of the options written. Premiums received from
writing options which expire are treated as realized gains. Premiums received
from writing options which are exercised or are closed are offset against the
proceeds or amount paid on the transaction to determine the realized gain or
loss. If a put option is exercised, the premium reduces the cost basis of the
securities purchased by the Fund. The Fund, as writer of an option, may have no
control over whether the underlying securities may be sold (call) or purchased
(put) and, as a result, bears the market risk of an unfavorable change in the
price of the securities underlying the written option.
NOTES TO FINANCIAL STATEMENTS - continued
Futures Contracts - The Fund may enter into financial futures contracts for the
delayed delivery of securities, currency or contracts based on financial indices
at a fixed price on a future date. In entering such contracts, the Fund is
required to deposit either in cash or securities an amount equal to a certain
percentage of the contract amount. Subsequent payments are made or received by
the Fund each day, dependent on the daily fluctuations in the value of the
underlying security, and are recorded for financial statement purposes as
unrealized gains or losses by the Fund. The Fund's investment in financial
futures contracts is designed to hedge against anticipated future changes in
interest or exchange rates or securities prices. The Fund may also invest in
financial futures contracts for non-hedging purposes. Should interest or
exchange rates or securities prices move unexpectedly, the Fund may not achieve
the anticipated benefits of the financial futures contracts and may realize a
loss.
Investment Transactions and Income - Investment transactions are recorded on the trade date. Interest income is recorded on the accrual basis. All premium and original issue discount are amortized or accreted for both financial statement and tax reporting purposes as required by federal income tax regulations. Interest payments received in additional securities are recorded on the ex-interest date in an amount equal to the value of the security on such date.
The Fund has approximately 60.8% of its portfolio invested in high-yield securities rated below investment grade. Investments in high-yield securities are accompanied by a greater degree of credit risk and the risk tends to be more sensitive to economic conditions than that of higher-rated securities.
The Fund uses the effective interest method for reporting interest income on payment-in-kind (PIK) bonds, whereby interest income on PIK bonds is recorded ratably by the Fund at a constant yield to maturity. Legal fees and other related expenses incurred to preserve and protect the value of a security owned are added to the cost of the security; other legal fees are expensed. Capital infusions, which are generally non-recurring, incurred to protect or enhance the value of high-yield debt securities, are reported as an addition to the cost basis of the security. Costs that are incurred to negotiate the terms or conditions of capital infusions or that are expected to result in a plan of reorganization are considered workout expenses and are reported as realized losses. Ongoing costs incurred to protect or enhance an investment or costs incurred to pursue other claims or legal actions, are reported as operating expenses.
Tax Matters and Distributions - The Fund's policy is to comply with the provisions of the Internal Revenue Code (the Code) applicable to regulated investment companies and to distribute to shareholders all of its net income, including any net realized gain on investments. Accordingly, no provision for federal income or excise tax is provided. The Fund files a tax return annually using tax accounting methods required under provisions of the Code which may differ from generally accepted accounting principles, the basis on which these financial statements are prepared. Accordingly, the amount of net investment income and net realized gain reported on these financial statements may differ from that reported on the Fund's tax return and, consequently, the character of distributions to shareholders reported in the financial highlights may differ from that reported to shareholders on Form 1099-DIV. Accumulated net realized loss on investments is different for tax purposes because of deferred recognition of tax losses occurring after October 31st of the current fiscal year.
NOTES TO FINANCIAL STATEMENTS - continued
Distributions paid by the Fund from net interest received on tax-exempt
municipal bonds are not includable by shareholders as gross income for federal
income tax purposes because the Fund intends to meet certain requirements of the
Code applicable to regulated investment companies, which will enable the Fund to
pay exempt-interest dividends. The portion of such interest, if any, earned on
private activity bonds issued after August 7, 1986 may be considered a
tax-preference item to shareholders. Distributions to shareholders are recorded
on the ex-dividend date.
The Fund distinguishes between distributions on a tax basis and a financial reporting basis and requires that only distributions in excess of tax basis earnings and profits are reported in the financial statements as a return of capital. Differences in the recognition or classification of income between the financial statements and tax earnings and profits which result in temporary over-distributions for financial statement purposes, are classified as distributions in excess of net investment income or accumulated net realized gains. During the year ended January 31, 1995, accumulated undistributed net investment income was increased by $2,314,690, accumulated net realized loss was increased by $2,311,955 and paid-in capital was decreased by $2,735 due to differences between book and tax accounting for income recognition on certain bonds and differences in the cost of securities. This change had no effect on the net assets or net asset value per share.
Multiple Classes of Shares of Beneficial Interest - The Fund offers both Class A and Class B shares. Class B shares were first offered to the public on September 7, 1993. The two classes of shares differ in their shareholder servicing agent, distribution and service fees. Shareholders of each class also bear certain expenses that pertain only to that particular class. All shareholders bear the common expenses of the Fund pro rata, without distinction between share classes. Dividends are declared separately for each class. No class has preferential dividend rights; differences in per share dividend rates are generally due to differences in separate class expenses, including distribution and shareholder service fees.
(3) Transactions with Affiliates Investment Adviser - The Fund has an investment advisory agreement with Massachusetts Financial Services Company (MFS) to provide overall investment advisory and administrative services, and general office facilities. The management fee, computed daily and paid monthly at an effective annual rate of 0.30% of average daily net assets and 4.75% of gross income, amounted to $6,385,098 for the year ended January 31, 1995. The Fund pays no compensation directly to its Trustees who are officers of the investment adviser or to officers of the Fund, all of whom receive remuneration for their services to the Fund from MFS. Certain of the officers and Trustees of the Fund are officers and directors of MFS, MFS Fund Distributors, Inc. (MFD, previously known as MFS Financial Services, Inc.) and MFS Service Center, Inc. (MFSC). The Fund has an unfunded defined benefit plan for all of its independent Trustees. Included in Trustees' compensation is a net periodic pension expense of $15,016 for the year ended January 31, 1995.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received $1,576,774 as its portion of the sales charge on sales of Class A shares of the Fund. The Trustees have adopted a distribution plan relating solely to Class B shares pursuant to Rule 12b-1 of the Investment Company Act of 1940 as follows:
The Class B Distribution Plan provides that the Fund will pay MFD a monthly distribution fee, equal to 0.75% per annum, and a quarterly service fee of up to 0.25% per annum, of the Fund's average daily net assets attributable to Class B shares. MFD will pay to securities dealers that enter into a sales agreement with MFD, all or a portion of the service fee attributable to Class B shares. The service fee is intended to be additional consideration for services rendered by the dealer with respect to Class B shares. Fees incurred under the distribution plan during the year ended January 31, 1995 were 1.00% of average daily net assets attributable to Class B shares and amounted to $335,495.
A contingent deferred sales charge is imposed on shareholder redemptions of Class A shares, on purchases of $1 million or more, in the event of a share redemption within 12 months following the share purchase. A contingent deferred sales charge is imposed on shareholder redemptions of Class B shares in the event of a share redemption within six years of purchase. MFD receives all contingent deferred sales charges. Contingent deferred sales charges imposed during the year ended January 31, 1995 were $57,796 for Class B shares.
NOTES TO FINANCIAL STATEMENTS - continued
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earned
$1,221,491 and $73,810 for Class A and Class B shares, respectively, for its
services as shareholder servicing agent. The fee for Class A shares is
calculated as 0.15% of the first $500 million and 0.12% of the next $500 million
of the average daily net assets of the Fund. The fee for Class B shares is
calculated as 0.22% of the first $500 million and 0.18% of the next $500 million
of the average daily net assets of the Fund.
(4) Portfolio Securities Purchases and sales of investments, other than short-term obligations, aggregated $535,519,780 and $294,793,737, respectively.
The cost and unrealized appreciation or depreciation in value of the investments owned by the Fund, as computed on a federal income tax basis, are as follows:
Aggregate cost $1,005,158,171
--------------
Gross unrealized depreciation $ (56,564,238)
Gross unrealized appreciation 35,998,311
--------------
Net unrealized depreciation $ (20,565,927)
--------------
|
At January 31, 1995, the Fund, for federal income tax purposes, had a capital loss carryforward of $68,805,964, which may be applied against any net taxable realized gains of each succeeding year until the earlier of its utilization or expiration on January 31, 1998 ($2,344,797), January 31, 1999 ($2,433,909), January 31, 2000 ($4,786,449), January 31, 2001 ($5,199,093), January 31, 2002 ($26,863,497), and January 31, 2003 ($27,178,219).
(5) Shares of Beneficial Interest The Fund's Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Class A Shares
1995 1994
--------------------------- --------------------------
Year Ended January 31, Shares Amount Shares Amount
- --------------------------------------------------------------------------------
Shares sold 32,283,057 $286,032,399 14,267,320 $133,405,068
Shares issued to
shareholders in
reinvestment of
distributions 2,760,128 24,132,344 2,165,121 20,164,862
Shares reacquired (14,365,883) (123,961,674) (9,163,024) (85,704,545)
----------- ------------ ---------- -------------
Net increase 20,677,302 $186,203,069 7,269,417 $ 67,865,385
----------- ------------ ---------- -------------
Class B Shares
1995 1994*
--------------------------- ------------------------
Year Ended January 31, Shares Amount Shares Amount
- -------------------------------------------------------------------------------
Shares sold 6,732,579 $59,733,515 124 $1,160
Shares issued to
shareholders in
reinvestment of
distributions 100,403 865,026 2 22
Shares reacquired (356,549) (3,050,580) (1) (12)
-------- ---------- --- -----
Net increase 6,476,433 $57,547,961 125 $1,170
--------- ----------- --- ------
|
* For the period from the commencement of offering of Class B shares, September 7, 1993 to January 31, 1994.
(6) Line of Credit The Fund entered into an agreement which enables it to participate with other funds managed by MFS, or an affiliate of MFS, in an unsecured line of credit with a bank which permits borrowings up to $300 million, collectively. Borrowings may be made to temporarily finance the acquisition of Fund shares.
Interest is charged to each fund, based on its borrowings, at a rate equal to
the bank's base rate. In addition, a commitment fee, based on the average daily
unused portion of the line of credit, is allocated among the participating funds
at the end of each quarter. The commitment fee allocated to the Fund for the
year ended January 31, 1995 was $16,879.
NOTES TO FINANCIAL STATEMENTS - continued
(7) Restricted Securities
The Fund may invest not more than 15% of its net assets in securities which are
subject to legal or contractual restrictions on resale. At January 31, 1995, the
Fund owned the following restricted securities (constituting 2.5% of net assets)
which may not be publicly sold without registration under the Securities Act of
1933. The Fund does not have the right to demand that such securities be
registered. The value of these securities is determined by valuations supplied
by a pricing service or brokers or, if not available, in good faith by or at the
direction of the Trustees.
Date of
Description Acquisition Par Amount Cost Value
- -------------------------------------------------------------------------------
Connecticut Industrial
Development Authority
(Nutmeg Partners),
12.75s, 2015 5/31/85 $ 7,135,000 $ 6,992,300 $ 2,497,250
Fond du Lac, WI,
11s, 2003 9/21/89 2,882,000 2,676,848 1,758,520
Michigan Strategic
Fund (Blue Water
Fiber), 8s, 2012 3/28/94 11,000,000 10,741,750 10,501,370
Pittsylvania County,
VA, Industrial
Development
Authority,
7.55s, 2019 5/16/94 10,000,000 10,000,000 9,747,100
-----------
$24,504,240
===========
|
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Trustees of MFS Series Trust III and Shareholders of MFS Municipal High
Income Fund:
We have audited the accompanying statement of assets and liabilities of MFS Municipal High Income Fund, including the schedule of portfolio investments, as of January 31, 1995, and the related statements of operations, changes in net assets and financial highlights for the year then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audit. The financial statements of MFS Municipal High Income Fund for the year ended January 31, 1994, and the financial highlights for each of the nine years in the period ended January 31, 1994 for Class A shares, and for the period from September 7, 1993 (commencement of operations) to January 31, 1994 for Class B shares, were audited by other auditors whose report dated March 16, 1994 expressed an unqualified opinion on those statements and financial highlights.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of January 31, 1995, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS Municipal High Income Fund as of January 31, 1995, and the results of its operations, the changes in its net assets, and the financial highlights for the year then ended, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 24, 1995
|
MFS(R)
MUNICIPAL NO. 1 BULK RATE
HIGH DALBAR U.S. POSTAGE
INCOME RATING P A I D
FUND PERMIT #55638
BOSTON, MA
|
500 Boylston Street
Boston, MA 02116
MMH-2 3/95 67.5M 25/225
PART C
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS INCLUDED IN PART A:
For each of the years in the ten-year period ended January 31,
1995:
Financial Highlights
FINANCIAL STATEMENTS INCLUDED IN PART B:
At January 31, 1995:
Statement of Assets and Liabilities* Portfolio of Investments*
For the year ended January 31, 1995:
Statement of Operations*
(B) EXHIBITS
1 Amended and Restated Declaration of Trust, dated February 17, 1995; filed herewith.
2 Amended and Restated By-Laws, dated December 21, 1994; filed herewith.
3 Not Applicable.
4 (a) Form of Share Certificate (for certificates produced prior to DST system). (2)
(b) Form of Share Certificate (for certificates produced after DST system). (6)
(c) Form of Share Certificate for MFS High Income Fund for A, B and C Shares. (7)
(d) Form of Share Certificate for MFS Municipal High Income Fund for A and B Shares. (8)
5 (a) Investment Advisory Agreement for MFS High Income Fund, dated May 20, 1987; filed herewith.
(b) Investment Advisory Agreement for MFS Municipal High
Income Fund dated September 1, 1993. (8)
6 (a) Dealer Agreement between MFS Fund Distributors, Inc.
("MFD"), and a dealer dated December 28, 1994 and the
Mutual Fund Agreement between MFD and a bank or NASD
affiliate, dated December 28, 1994. (9)
(b) Distribution Agreement, dated January 1, 1995; filed
herewith.
7 Retirement Plan for Non-Interested Person Trustees,
dated February 1, 1991. (6)
8 (a) Custodian Agreement, dated May 24, 1988. (3)
(b) Amendment to Custodian Agreement, dated May 24, 1988.
(3)
(c) Amendment to Custodian Agreement, dated October 1,
1989. (3)
(d) Amendment to Custodian Agreement, dated September 17,
1991. (5)
9 (a) Shareholder Servicing Agent Agreement, dated August 1,
1985. (1)
(b) Amendment to the Shareholder Servicing Agreement dated
December 31, 1992. (6)
(c) Amendment to the Shareholder Servicing Agreement dated
September 7, 1993. (8)
(d) Amendment to the Shareholder Servicing Agreement dated
December 28, 1993. (8)
(e) Exchange Privilege Agreement, dated February 8, 1989
as amended through September 1, 1993. (8)
(f) 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. (10)
(g) Dividend Disbursing Agency Agreement, dated February
1, 1986. (5)
10 Consent and Opinion of Counsel; filed with
Registrant's Rule 24f-2 Notice for the fiscal year
ended January 31, 1995 on March 30, 1995.
11 (a) Consent of Deloitte & Touche - MFS High Income Fund;
filed herewith.
(b) Consent of Ernst & Young - MFS Municipal High Income
Fund; filed herewith.
(c) Consent of Coopers & Lybrand - MFS Municipal High
Income Fund; filed herewith.
12 Not Applicable.
13 Investment Representation Letters.
14 (a) Forms for Individual Retirement Account Disclosure
|
Statement as currently in effect. (4)
(b) Forms for MFS 403(b) Custodial Account Agreement as
currently in effect. (4)
(c) Forms for MFS Prototype Paired Defined Contribution
Plans and Trust Agreement as currently in effect. (4)
15 (a) Amended and Restated Distribution Plan for Class A
shares of MFS High Income Fund, dated December 21,
1994; filed herewith.
(b) Distribution Plan for Class B shares of MFS High
Income Fund, dated December 21, 1994; filed herewith.
(c) Distribution Plan for Class C shares of MFS High
Income Fund, dated December 21, 1994; filed herewith.
(d) Distribution Plan for Class B shares of MFS Municipal
High Income Fund, dated December 21, 1994; filed
herewith.
16 Schedule of Computation for Performance Quotations -
Yield, Distribution Rate, Total Rate of Return - MFS
High Income Fund; and Yield, Distribution Rate, Tax-
Equivalent Yield and Total Return - MFS Municipal
High Income Fund. (8)
17 Financial Data Schedules for each class of each
series; filed herewith.
|
Power of Attorney, dated September 21, 1994; filed herewith.
- -----------------------------
(1) Incorporated by reference to Post-Effective Amendment No. 6 filed with the SEC on June 1, 1983.
(2) Incorporated by reference to Post-Effective Amendment No. 10 filed with the SEC on March 30, 1987.
(3) Incorporated by reference to Post-Effective Amendment No. 13 filed with the SEC on March 30, 1990.
(4) Incorporated by reference to Post-Effective Amendment No. 14 filed with the SEC on March 29, 1991.
(5) Incorporated by reference to Post-Effective Amendment No. 15 filed with the SEC on March 31, 1992.
(6) Incorporated by reference to Post-Effective Amendment No. 16 filed with the SEC on May 28, 1993.
(7) Incorporated by reference to Post-Effective Amendment No. 18 filed with the SEC on October 29, 1993.
(8) Incorporated by reference to Post-Effective Amendment No. 19 filed with the SEC on April 1, 1994.
(9) Incorporated by reference to MFS Municipal Series Trust (File Nos. 2-92915 and 811-4096) Post-Effective
Amendment No. 26 filed with the SEC on February 22, 1995.
(10) Incorporated by reference to Amendment No. 8 on Form N-2 for MFS Municipal Income Trust (File No.
811-4841) filed with the SEC on February 28, 1995.
|
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Not Applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
FOR MFS HIGH INCOME FUND
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Class A Shares of Beneficial Interest 114,245,065
(without par value) (as of May 1, 1995)
Class B Shares of Beneficial Interest 60,880,223
(without par value) (as of May 1, 1995)
Class C Shares of Beneficial Interest 1,535,079
(without par value) (as of May 1, 1995)
FOR MFS MUNICIPAL HIGH INCOME FUND
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Class A Shares of Beneficial Interest 10,429,806
(without par value) (as of May 1, 1995)
Class B Shares of Beneficial Interest 7,334,374
(without par value) (as of May 1, 1995)
|
ITEM 27. INDEMNIFICATION
Reference is hereby made to (a) Article V of Registrant's Declaration of Trust, filed herewith as Exhibit 1 to this Post-Effective Amendment No. 20 to the Registrant's Registration Statement on Form N-1A; (b) Section 4 of the Distribution Agreement between the Registrant and MFS Fund Distributors, Inc., filed herewith as Exhibit 6(b) to this Post-Effective Amendment No. 20 to the Registrant's Registration Statement on Form N-1A; and (c) the undertaking of the Registrant regarding indemnification set forth in its Registration Statement on Form S-5.
The Trustees and Officers of the Registrant and the personnel of the Registrant's investment adviser and principal underwriter are insured under an errors and omissions liability insurance policy. The Registrant and its officers are also insured under the fidelity bond required by Rule 17g-1 under the Investment Company Act of 1940.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Massachusetts Financial Services Company ("MFS") serves as investment
adviser to the following open-end funds comprising the MFS Family of Funds:
Massachusetts Investors Trust, Massachusetts Investors Growth Stock Fund, MFS
Growth Opportunities Fund, MFS Government Securities Fund, MFS Government
Mortgage Fund, MFS Government Limited Maturity Fund, MFS Series Trust I (which
has three series: MFS Managed Sectors Fund, MFS Cash Reserve Fund and MFS World
Asset Allocation Fund), MFS Series Trust II (which has four series: MFS Emerging
Growth Fund, MFS Capital Growth Fund, MFS Intermediate Income Fund and MFS Gold
& Natural Resources Fund), MFS Series Trust III (which has two series: MFS High
Income Fund and MFS Municipal High Income Fund), MFS Series Trust IV (which has
four series: MFS Money Market Fund, MFS Government Money Market Fund, MFS
Municipal Bond Fund and MFS OTC Fund), MFS Series Trust V (which has two series:
MFS Total Return Fund and MFS Research Fund), MFS Series Trust VI (which has
three series: MFS World Total Return Fund, MFS Utilities Fund and MFS World
Equity Fund), MFS Series Trust VII (which has two series: MFS World Governments
Fund and MFS Value Fund), MFS Series Trust VIII (which has two series: MFS
Strategic Income Fund and MFS World Growth Fund), MFS Municipal Series Trust
(which has 19 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 Louisiana 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 Texas Municipal Bond
Fund, MFS Virginia Municipal Bond Fund, MFS Washington Municipal Bond Fund, MFS
West Virginia Municipal Bond Fund and MFS Municipal Income Fund) and MFS Series
Trust IX (which has three series: MFS Bond Fund, MFS Limited Maturity Fund and
MFS Municipal Limited Maturity Fund) (the "MFS Funds"). The principal business
address of each of the aforementioned funds is 500 Boylston Street, Boston,
Massachusetts 02116.
MFS also serves as investment adviser of the following no-load, open-end funds: MFS Institutional Trust ("MFSIT") (which has two series), MFS Variable Insurance Trust ("MVI") (which has twelve series) and MFS Union Standard Trust ("UST") (which has two 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 aforementioned funds is 500 Boylston Street, Boston, Massachusetts 02116.
Lastly, MFS serves as investment adviser to MFS/Sun Life Series Trust ("MFS/SL"), Sun Growth Variable Annuity Fund, Inc. ("SGVAF"), Money Market Variable Account, High Yield Variable Account, Capital Appreciation Variable Account, Government Securities Variable Account, World Governments Variable Account, Total Return Variable Account and Managed Sectors Variable Account. The principal business address of each is One Sun Life Executive Park, Wellesley Hills, Massachusetts 02181.
MFS International Ltd. ("MIL"), a limited liability company organized under the laws of the Republic of Ireland and a subsidiary of MFS, whose principal business address is 41-45 St. Stephen's Green, Dublin 2, Ireland, serves as investment adviser to and distributor for MFS International Funds (which has four portfolios: MFS International Funds-U.S. Equity Fund, MFS International Funds-U.S. Emerging Growth Fund, MFS International Funds-International Governments Fund and MFS International Fund-Charter Income Fund) (the "MIL Funds"). The MIL Funds are organized in Luxembourg and qualify as an undertaking for collective investments in transferable securities (UCITS). The principal business address of the MIL Funds is 47, Boulevard Royal, L-2449 Luxembourg.
MIL also serves as investment adviser to and distributor for MFS Meridian U.S. Government Bond Fund, MFS Meridian Charter Income Fund, MFS Meridian Global Government Fund, MFS Meridian U.S. Emerging Growth Fund, MFS Meridian Global Equity Fund, MFS Meridian Limited Maturity Fund, MFS Meridian World Growth Fund, MFS Meridian Money Market Fund and MFS Meridian U.S. Equity 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 Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary of MFS, serves as distributor for the MFS Funds, MVI, UST and MFSIT.
Clarendon Insurance Agency, Inc. ("CIAI"), a wholly owned subsidiary of MFS, serves as distributor for certain life insurance and annuity contracts issued by Sun Life Assurance Company of Canada (U.S.).
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of MFS, serves as shareholder servicing agent to the MFS Funds, the MFS Closed-End Funds, MFS Institutional Trust, MFS Variable Insurance Trust and MFS Union Standard Trust.
MFS Asset Management, Inc. ("AMI"), a wholly owned subsidiary of MFS, provides investment advice to substantial private clients.
MFS Retirement Services, Inc. ("RSI"), a wholly owned subsidiary of MFS, markets MFS products to retirement plans and provides administrative and record keeping services for retirement plans.
MFS
The Directors of MFS are A. Keith Brodkin, Jeffrey L. Shames, Arnold D.
Scott, John R. Gardner and John D. McNeil. Mr. Brodkin is the Chairman, Mr.
Shames is the President, Mr. Scott is a Senior Executive Vice President and
Secretary, James E. Russell is a Senior Vice President and the Treasurer,
Stephen E. Cavan is a Senior Vice President, General Counsel and an Assistant
Secretary, and Robert T. Burns is a Vice President and an Assistant Secretary of
MFS.
MASSACHUSETTS INVESTORS TRUST
MASSACHUSETTS INVESTORS GROWTH STOCK FUND
MFS GROWTH OPPORTUNITIES FUND
MFS GOVERNMENT SECURITIES FUND
MFS GOVERNMENT MORTGAGE FUND
MFS SERIES TRUST I
MFS SERIES TRUST V
MFS GOVERNMENT LIMITED MATURITY FUND
MFS SERIES TRUST VI
A. Keith Brodkin is the Chairman and President, Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost, Vice President of MFS, is Assistant Treasurer, James R. Bordewick, Jr., Vice President and Associate General Counsel of MFS, is Assistant Secretary.
MFS SERIES TRUST II
A. Keith Brodkin is the Chairman and President, Leslie J. Nanberg, Senior Vice President of MFS, is a Vice President, Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost is Assistant Treasurer, and James R. Bordewick, Jr., is Assistant Secretary.
MFS GOVERNMENT MARKETS INCOME TRUST
MFS INTERMEDIATE INCOME TRUST
A. Keith Brodkin is the Chairman and President, Patricia A. Zlotin, Executive Vice President of MFS and Leslie J. Nanberg, Senior Vice President of MFS, are Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost is Assistant Treasurer, and James R. Bordewick, Jr., is the Assistant Secretary.
MFS SERIES TRUST III
A. Keith Brodkin is the Chairman and President, James T. Swanson, Robert J. Manning, Cynthia M. Brown and Joan S. Batchelder, Senior Vice Presidents of MFS, Bernard Scozzafava, Vice President of MFS, and Matthew Fontaine, Assistant Vice President of MFS, are Vice Presidents, Sheila Burns-Magnan and Daniel E. McManus, Assistant Vice Presidents of MFS, are Assistant Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost is Assistant Treasurer, and James R. Bordewick, Jr., is Assistant Secretary.
MFS SERIES TRUST IV
MFS SERIES TRUST IX
A. Keith Brodkin is the Chairman and President, Robert A. Dennis and Geoffrey L. Kurinsky, Senior Vice Presidents of MFS, are Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost is Assistant Treasurer and James R. Bordewick, Jr., is Assistant Secretary.
MFS SERIES TRUST VII
A. Keith Brodkin is the Chairman and President, Leslie J. Nanberg and Stephen C. Bryant, Senior Vice Presidents of MFS, are Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost is Assistant Treasurer and James R. Bordewick, Jr., is Assistant Secretary.
MFS SERIES TRUST VIII
A. Keith Brodkin is the Chairman and President, Jeffrey L. Shames, Leslie J. Nanberg, Patricia A. Zlotin, James T. Swanson and John D. Laupheimer, Jr., Vice President of MFS, are Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost is Assistant Treasurer and James R. Bordewick, Jr., is Assistant Secretary.
MFS MUNICIPAL SERIES TRUST
A. Keith Brodkin is the Chairman and President, Cynthia M. Brown and Robert
A. Dennis are Vice Presidents, David B. Smith, Geoffrey L. Schechter and David
R. King, Vice Presidents of MFS, are Vice Presidents, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost is Assistant
Treasurer and James R. Bordewick, Jr., is Assistant Secretary.
MFS VARIABLE INSURANCE TRUST
MFS INSTITUTIONAL TRUST
A. Keith Brodkin is the Chairman and President, Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost is the Assistant Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
MFS UNION STANDARD TRUST
A. Keith Brodkin is the Chairman and President, Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost and Karen C. Jordan are Assistant Treasurers and James R. Bordewick, Jr., is the Assistant Secretary.
MFS MUNICIPAL INCOME TRUST
A. Keith Brodkin is the Chairman and President, Cynthia M. Brown and Robert J. Manning are Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost, is Assistant Treasurer and James R. Bordewick, Jr., is Assistant Secretary.
MFS MULTIMARKET INCOME TRUST
MFS CHARTER INCOME TRUST
A. Keith Brodkin is the Chairman and President, Patricia A. Zlotin, Leslie
J. Nanberg and James T. Swanson are Vice Presidents, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost, Vice President of
MFS, is Assistant Treasurer and James R. Bordewick, Jr., is Assistant Secretary.
MFS SPECIAL VALUE TRUST
A. Keith Brodkin is the Chairman and President, Jeffrey L. Shames, Patricia
A. Zlotin and Robert J. Manning are Vice Presidents, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, and James O. Yost, is Assistant
Treasurer and James R. Bordewick, Jr., is Assistant Secretary.
SGVAF
W. Thomas London is the Treasurer.
MIL
A. Keith Brodkin is a Director and the President, Arnold D. Scott, Jeffrey
L. Shames are Directors, Ziad Malek, Senior Vice President of MFS, is a Senior
Vice President and Managing Director, Thomas J. Cashman, Jr., a Vice President
of MFS, is a Senior Vice President, Stanley T. Kwok is a Vice President, Anthony
F. Clarizio is an Assistant Vice President, Stephen E. Cavan is a Director,
Senior Vice President and the Clerk, James R. Bordewick, Jr. is a Director,
Senior Vice President and an Assistant Clerk, Robert T. Burns is an Assistant
Clerk and James E. Russell is the Treasurer.
MIL FUNDS
A. Keith Brodkin is the Chairman, President and a Director, Arnold D. Scott and Jeffrey L. Shames are Directors, Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost is the Assistant Treasurer and James R. Bordewick, Jr., is the Assistant Secretary, and Ziad Malek is a Senior Vice President.
MFS MERIDIAN FUNDS
A. Keith Brodkin is the Chairman, President and a Director, Arnold D. Scott and Jeffrey L. Shames are Directors, Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James R. Bordewick, Jr., is the Assistant Secretary and Ziad Malek is a Senior Vice President.
MFD
A. Keith Brodkin is the Chairman, 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, and James E. Russell is the Treasurer.
CIAI
A. Keith Brodkin is the Chairman, Arnold D. Scott and Jeffrey L. Shames are Directors, Cynthia Orcott is President, Bruce C. Avery, Executive Vice President of MFS, is the Vice President, James E. Russell is the Treasurer, Stephen E. Cavan is the Secretary, and Robert T. Burns is the Assistant Secretary.
MFSC
A. Keith Brodkin is the Chairman, Arnold D. Scott and Jeffrey L. Shames are Directors, Joseph A. Recomendes, Senior Vice President of MFS, is the President, James E. Russell is the Treasurer, Stephen E. Cavan is the Secretary, and Robert T. Burns is the Assistant Secretary.
AMI
A. Keith Brodkin is the Chairman and a Director, Jeffrey L. Shames, Leslie J. Nanberg and Arnold D. Scott are Directors, Thomas J. Cashman is the President and a Director, James E. Russell is the Treasurer and Robert T. Burns is the Secretary.
RSI
William W. Scott, Jr., Joseph A. Recomendes and Bruce C. Avery are
Directors, Arnold D. Scott is the Chairman, Douglas C. Grip, a Senior Vice
President of MFS, is the President, James E. Russell is the Treasurer, Stephen
E. Cavan is the Secretary, Robert T. Burns is the Assistant Secretary and Henry
A. Shea is an Executive Vice President.
In addition, the following persons, Directors or officers of MFS, have the affiliations indicated:
A. Keith Brodkin Director, Sun Life Assurance Company of Canada
(U.S.), One Sun Life Executive Park,
Wellesley Hills, Massachusetts Director, Sun
Life Insurance and Annuity Company of New
York, 67 Broad Street, New York, New York
John R. Gardner President and a Director, Sun Life Assurance
Company of Canada, Sun Life Centre, 150 King
Street West, Toronto, Ontario, Canada (Mr.
Gardner 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)
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ITEM 29. PRINCIPAL UNDERWRITERS
(a) Reference is hereby made to Item 28 above.
(b) Reference is hereby made to Item 28 above.
(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 Services 500 Boylston Street
Company (investment adviser) Boston, MA 02116
MFS Fund Distributors, Inc. 500 Boylston Street
(principal underwriter) Boston, MA 02116
State Street Bank and Trust Company State Street South
(custodian) 5-West
North Quincy, MA 02171
MFS Service Center, Inc. 500 Boylston Street
(transfer agent) Boston, MA 02116
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ITEM 31. MANAGEMENT SERVICES
Not Applicable.
ITEM 32. UNDERTAKINGS
(a) Not Applicable.
(b) Not Applicable.
(c) Registrant undertakes to furnish each person to whom a prospectus is delivered with a copy of its latest annual report to shareholders upon request and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant certifies that it meets all of the requirements for effectiveness of this Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused this Post-Effective Amendment to the Registration Statement to be signed on its behalf by the undersigned, thereto duly authorized, in the City of Boston and The Commonwealth of Massachusetts on the 26th day of May, 1995.
MFS SERIES TRUST III
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 May 26, 1995.
SIGNATURE TITLE
A. KEITH BRODKIN* Chairman, President (Principal
- ------------------------------- Executive Officer) and Trustee
A. Keith Brodkin
W. THOMAS LONDON* Treasurer (Principal Financial Officer
- ------------------------------- and Principal Accounting Officer)
W. Thomas London
RICHARD B. BAILEY* Trustee
- ------------------------------
Richard B. Bailey
PETER G. HARWOOD* Trustee
- ------------------------------
Peter G. Harwood
J. ATWOOD IVES* Trustee
- ------------------------------
J. Atwood Ives
LAWRENCE T. PERERA* Trustee
- ------------------------------
Lawrence T. Perera
WILLIAM J. POORVU* Trustee
- ------------------------------
William J. Poorvu
CHARLES W. SCHMIDT* Trustee
- ------------------------------
Charles W. Schmidt
ARNOLD D. SCOTT* Trustee
- ------------------------------
Arnold D. Scott
JEFFREY L. SHAMES* Trustee
- ------------------------------
Jeffrey L. Shames
ELAINE R. SMITH* Trustee
- ------------------------------
Elaine R. Smith
DAVID B. STONE* Trustee
- ------------------------------
David B. Stone
*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
September 21, 1994; filed herewith.
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POWER OF ATTORNEY
MFS SERIES TRUST III
The undersigned, Trustees and officers of MFS Series Trust III (the "Registrant"), hereby severally constitute and appoint A. Keith Brodkin, W. Thomas London, Stephen E. Cavan and James R. Bordewick, Jr., and each of them singly, as true and lawful attorneys, with full power to them and each of them to sign for each of the undersigned, in the names of, and in the capacities indicated below, any Registration Statement and any and all amendments thereto and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission for the purpose of registering the Registrant as a management investment company under the Investment Company Act of 1940 and/or the shares issued by the Registrant under the Securities Act of 1933 granting unto our said attorneys, and each of them, acting alone, full power and authority to do and perform each and every act and thing requisite or necessary or desirable to be done in the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys or any of them may lawfully do or cause to be done by virtue thereof.
In WITNESS WHEREOF, the undersigned have hereunto set their hand on this 21st day of September, 1994.
SIGNATURES TITLE
A. KEITH BRODKIN* Chairman of the Board; Trustee; and
- ------------------------------- Principal Executive Officer
A. Keith Brodkin
RICHARD B. BAILEY Trustee
- -------------------------------
Richard B. Bailey
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J. ATWOOD IVES Trustee - ------------------------------- J. Atwood Ives LAWRENCE T. PERERA Trustee - ------------------------------- Lawrence T. Perera |
W. THOMAS LONDON Principal Financial and - ------------------------------- Accounting Officer W. Thomas London |
MFS SERIES TRUST III
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO.
1 Amended and Restated Declaration of Trust, dated February 17, 1995.
2 Amended and Restated By-Laws, dated December 21, 1994.
5 (a) Investment Advisory Agreement for MFS High Income Fund, dated
May 20, 1987.
6 (b) Distribution Agreement, dated January 1, 1995.
11 (a) Consent of Deloitte & Touche - MFS High Income Fund.
(b) Consent of Ernst & Young - MFS Municipal High Income Fund.
(c) Consent of Coopers & Lybrand - MFS Municipal High Income Fund.
15 (a) Amended and Restated Distribution Plan for Class A Shares of MFS
High Income Fund, dated December 21, 1994.
(b) Distribution Plan for Class B Shares of MFS High
Income Fund, dated December 21, 1994.
(c) Distribution Plan for Class C Shares of MFS High
Income Fund, dated December 21, 1994.
(d) Distribution Plan for Class B Shares of MFS Municipal High
Income Fund, dated December 21, 1994.
27 Financial Data Schedules for each class of each series.
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EXHIBIT NO. 99.1
AMENDED AND RESTATED
DECLARATION OF TRUST
FEBRUARY 15, 1995
TABLE OF CONTENTS
PAGE
----
ARTICLE I - NAME AND DEFINITIONS
Section 1.1 Name 1
Section 1.2 Definitions 2
ARTICLE II - TRUSTEES
Section 2.1 Number of Trustees 3
Section 2.2 Election and Term 3
Section 2.3 Resignation and Removal 3
Section 2.4 Vacancies 4
Section 2.5 Reallocation of Power to Other Trustees 4
ARTICLE III - POWERS OF TRUSTEES
Section 3.1 General 4
Section 3.2 Investments 5
Section 3.3 Legal Title 6
Section 3.4 Issuance and Repurchase of Securities 6
Section 3.5 Borrowing Money; Lending Trust Assets 6
Section 3.6 Delegation; Committees 6
Section 3.7 Collection and Payment 7
Section 3.8 Expenses 7
Section 3.9 Manner of Acting; By-Laws 7
Section 3.10 Miscellaneous Powers 7
Section 3.11 Principal Transactions 8
Section 3.12 Trustees and Officers as Shareholders 8
ARTICLE IV - INVESTMENT ADVISER, DISTRIBUTOR AND TRANSFER AGENT
Section 4.1 Investment Adviser 9
Section 4.2 Distributor 10
Section 4.3 Transfer Agent 10
Section 4.4 Parties to Contract 10
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TABLE OF CONTENTS (CONTINUED)
PAGE
ARTICLE V - LIMITATIONS OF LIABILITY OF SHAREHOLDERS, ----
TRUSTEES AND OTHERS
Section 5.1 No Personal Liability of Shareholders,
Trustees, etc. 11
Section 5.2 Non-Liability of Trustees, etc. 11
Section 5.3 Mandatory Indemnification 11
Section 5.4 No Bond Required of Trustees 13
Section 5.5 No Duty of Investigation; Notice
in Trust Instruments, etc. 13
Section 5.6 Reliance on Experts, etc. 14
ARTICLE VI - SHARES OF BENEFICIAL INTEREST
Section 6.1 Beneficial Interest 14
Section 6.2 Rights of Shareholders 14
Section 6.3 Trust only 15
Section 6.4 Issuance of Shares 15
Section 6.5 Register of Shares 15
Section 6.6 Transfer of Shares 15
Section 6.7 Notices 16
Section 6.8 Voting Powers 16
Section 6.9 Series Designation 17
Section 6.10 Class Designation 17
ARTICLE VII - REDEMPTIONS
Section 7.1 Redemptions 17
Section 7.2 Suspension of Right of Redemption 18
Section 7.3 Redemption of Shares; Disclosure of Holding 18
Section 7.4 Redemptions in Kind 19
ARTICLE VIII - DETERMINATION OF NET ASSET VALUE,
NET INCOME AND DISTRIBUTIONS 19
ARTICLE IX - DURATION; TERMINATION OF TRUST; AMENDMENT MERGERS, ETC.
Section 9.1 Duration 19
Section 9.2 Termination of Trust 20
Section 9.3 Amendment Procedure 20
Section 9.4 Merger, Consolidation and Sale of Assets 21
Section 9.5 Incorporation 22
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TABLE OF CONTENTS (CONTINUED)
PAGE
----
ARTICLE X - REPORTS TO SHAREHOLDERS 22
ARTICLE XI - MISCELLANEOUS
Section 11.1 Filing 22
Section 11.2 Governing Law 23
Section 11.3 Counterparts 23
Section 11.4 Reliance by Third Parties 23
Section 11.5 Provisions in Conflict with Law or
Regulations 23
ANNEX A 25
ANNEX B 26
SIGNATURE PAGE 28
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AMENDED AND RESTATED
DECLARATION OF TRUST
OF
MFS SERIES TRUST III
500 Boylston Street
Boston, Massachusetts 02116
AMENDED AND RESTATED DECLARATION OF TRUST, made as of this 15th day of February, 1995 by the Trustees hereunder.
WHEREAS, the Trust was established pursuant to a Declaration of Trust dated December 15, 1977 for the investment and reinvestment of funds contributed thereto; and
WHEREAS, the Trustees desire that the beneficial interest in the trust assets continue to be divided into transferable Shares of Beneficial Interest (without par value) issued in one or more series, as hereinafter provided; and
WHEREAS, the Declaration of Trust has been, from time to time, amended in accordance with the provisions of the Declaration; and
WHEREAS, the Trustees now desire further to amend and to restate the Declaration of Trust and hereby certify, as provided in Section 11.1 of the Declaration, that this Amended and Restated Declaration of Trust has been further amended and restated in accordance with the provisions of the Declaration;
NOW THEREFORE, the Trustees hereby confirm that all money and property contributed to the trust established hereunder shall be held and managed in trust for the benefit of holders, from time to time, of the Shares of Beneficial Interest (without par value) issued hereunder and subject to the provisions hereof.
ARTICLE I
NAME AND DEFINITIONS
Section 1.1 - Name. The name of the trust created hereby is the MFS Series Trust III, the current address of which is 500 Boylston Street, Boston, Massachusetts 02116.
Section 1.2 - Definitions. Wherever they are used herein, the following terms have the following respective meanings:
(a) "By-Laws" means the By-Laws referred to in Section 3.9 hereof, as from time to time amended.
(b) the terms "Commission," "Interested Person," and "Majority
Shareholder Vote" (the 67% or 50% requirement of the third sentence of Section
2(a) (42) of the 1940 Act, whichever may be applicable) have the meaning given
them in the 1940 Act.
(c) "Declaration" means this Declaration of Trust as amended from time to time. Reference in this Declaration of Trust to "Declaration," "hereof," "herein," and "hereunder" shall be deemed to refer to this Declaration rather than the article or section in which such words appear.
(d) "Distributor" means the party, other than the Trust, to the contract described in Section 4.2 hereof.
(e) "Investment Adviser" means the party, other than the Trust, to the contract described in Section 4.1 hereof.
(f) the "1940 Act" means the Investment Company Act of 1940 and the Rules and Regulations thereunder, as amended from time to time.
(g) "Person" means and includes individuals, corporations, partnerships, trusts, associations, joint ventures and other entities, whether or not legal entities, and governments and agencies and political subdivisions thereof.
(h) "Shareholder" means a record owner of outstanding Shares.
(i) "Shares" means the equal proportionate units of interest into which the beneficial interest in the Trust shall be divided from time to time and includes fractions of Shares as well as whole Shares.
(j) "Transfer Agent" means the party, other than the Trust, to the contract described in Section 4.3 hereof.
(k) the "Trust" means MFS Series Trust III.
(l) the "Trust Property" means any and all property, real or personal, tangible or intangible, which is owned or held by or for the account of the Trust or the Trustees.
(m) the "Trustees" means the persons who signed the Declaration, so long as they shall continue in office in accordance with the terms hereof, and all other persons who may from time to time be duly elected, qualified and serving as Trustees in accordance with the provisions hereof, and reference herein to a Trustee or the Trustees shall refer to such person or persons in their capacity as trustees hereunder.
ARTICLE II
TRUSTEES
Section 2.1 - Number of Trustees. The number of Trustees shall be such number as shall be fixed from time to time by a written instrument signed by a majority of the Trustees, provided, however, that the number of Trustees shall in no event be less than three (3) nor more than fifteen (15).
Section 2.2 - Election and Term. Except for the Trustees named herein or appointed to fill vacancies pursuant to Section 2.4 hereof, the Trustees shall be elected by the Shareholders at the annual meeting of the Shareholders. Commencing in 1979 there shall be an annual meeting of the Shareholders to be held at such time and place and in such manner as the By-Laws shall provide. Except in the event of resignations or removal pursuant to Section 2.3 hereof, each Trustee shall hold office until the next annual meeting of Shareholders and until his successor is elected and qualified to serve as Trustee.
Section 2.3 - Resignation and Removal. Any Trustee may resign his trust
(without need for prior or subsequent accounting) by an instrument in writing
signed by him and delivered to the other Trustees and such resignation shall be
effective upon such delivery, or at a later date according to the terms of the
instrument. Any of the Trustees may be removed (provided the aggregate number of
Trustees after such removal shall not be less than the number required by
Section 2.1 hereof) with cause, by the action of two-thirds of the remaining
Trustees. Upon the resignation or removal of a Trustee, or his otherwise ceasing
to be a Trustee, he shall execute and deliver such documents as the remaining
Trustees shall require for the purpose of conveying to the Trust or the
remaining Trustees any Trust Property held in the name of the resigning or
removed Trustee. Upon the incapacity or death of any Trustee, his legal
representative shall execute and deliver on his behalf such documents as the
remaining Trustees shall require as provided in the preceding sentence.
Section 2.4 - Vacancies. The term of office of a Trustee shall terminate and a vacancy shall occur in the event of the death, resignation, removal, bankruptcy, adjudicated incompetence or other incapacity to perform the duties of the office of a Trustee. No such vacancy shall operate to annul the Declaration or to revoke any existing agency created pursuant to the terms of the Declaration. In the case of an existing vacancy, including a vacancy existing by reason of an increase in the number of Trustees, subject to the provisions of Section 16(a) of the 1940 Act, the remaining Trustees shall fill such vacancy by the appointment of such other person as they in their discretion shall see fit, made by a written instrument signed by a majority of the Trustees. Any such appointment shall not become effective, however, until the person named in the written instrument of appointment shall have accepted in writing such appointment and agreed in writing to be bound by the terms of the Declaration. An appointment of a Trustee may be made in anticipation of a vacancy to occur at a later date by reason of retirement, resignation or increase in the number of Trustees, provided that such appointment shall not become effective prior to such retirement, resignation or increase in the number of Trustees. Whenever a vacancy in the number of Trustees shall occur, until such vacancy is filled as provided in this Section 2.4, the Trustees in office, regardless of their number, shall have all the powers granted to the Trustees and shall discharge all the duties imposed upon the Trustees by the Declaration. A written instrument certifying the existence of such vacancy signed by a majority of the Trustees shall be conclusive evidence of the existence of such vacancy.
Section 2.5 - Reallocation of Power to Other Trustees. Any Trustee may, by power of attorney, delegate his power for a period not exceeding six (6) months at any one time to any other Trustee or Trustees; provided that in no case shall less than two (2) Trustees personally exercise the powers granted to the Trustees under the Declaration except as herein otherwise expressly provided.
ARTICLE III
POWERS OF TRUSTEES
Section 3.1 - General. The Trustees shall have exclusive and absolute control over the Trust Property and over the business of the Trust to the same extent as if the Trustees were the sole owners of the Trust Property and business in their own right, but with such powers of delegation as may be permitted by the Declaration. The Trustees shall have power to conduct the business of the Trust and carry on its operations in any and all of its branches and maintain offices both within and without The Commonwealth of Massachusetts, in any and all states of the United States of America, in the District of Columbia, and in any and all commonwealths, territories, dependencies, colonies, possessions, agencies or instrumentalities of the United States of America and of foreign governments, and to do all such other things and execute all such instruments as the Trustees deem necessary, proper or desirable in order to promote the interests of the Trust although such things are not herein specifically mentioned. Any determination as to what is in the interests of the Trust made by the Trustees in good faith shall be conclusive. In construing the provisions of the Declaration, the presumption shall be in favor of a grant of power to the Trustees.
The enumeration of any specific power herein shall not be construed as limiting the aforesaid power. Such powers of the Trustees may be exercised without order of or resort to any court.
Section 3.2 - Investments. The Trustees shall have the power to:
(a) conduct, operate and carry on the business of an investment company;
(b) subscribe for, invest in, reinvest in, purchase or otherwise acquire, own, hold, pledge, sell, assign, transfer, exchange, distribute, lend or otherwise deal in or dispose of securities of every nature and kind, including, without limitation, all types of bonds, debentures, stocks, negotiable or non-negotiable instruments, obligations, evidences of indebtedness, certificates of deposit or indebtedness, commercial paper, repurchase agreements, bankers' acceptances, and other securities of any kind, issued, created, guaranteed or sponsored by any and all Persons, including, without limitation, states, territories and possessions of the United States and the District of Columbia and any of the political subdivisions, agencies or instrumentalities thereof, and by the United States Government, any foreign government, political subdivisions thereof or their agencies or instrumentalities, or international instrumentalities, or by any bank or savings institution, or by any corporation organized under the laws of the United States or of any state, territory or possession thereof, or by any corporation organized under any foreign law, or in "when issued" contracts for any such securities, or retain Trust assets in cash and from time to time change the investments of the assets of the Trust; and to exercise any and all rights, powers and privileges of ownership or interest in respect of any and all such investments of every kind and description, including, without limitation, the right to consent and otherwise act with respect thereto, with power to designate one or more persons, firms, associations or corporations to exercise any of said rights, powers and privileges in respect of any of said instruments.
The Trustees shall not be limited to investing in obligations maturing before the possible termination of the Trust, nor shall the Trustees be limited by any law limiting the investments which may be made by fiduciaries.
Section 3.3 - Legal Title. Legal title to all the Trust Property shall be vested in the Trustees as joint tenants except that the Trustees shall have power to cause legal title to any Trust Property to be held by or in the name of one or more of the Trustees, or in the name of the Trust, or in the name of any other Person or nominee, on such terms as the Trustees may determine. The right, title and interest of the Trustees in the Trust Property shall vest automatically in each Person who may hereafter become a Trustee. Upon the resignation, removal or death of a Trustee he shall automatically cease to have any right, title or interest in any of the Trust Property, and the right, title and interest of such Trustee in the Trust Property shall vest automatically in the remaining Trustees. Such vesting and cessation of title shall be effective whether or not conveyancing documents have been executed and delivered.
Section 3.4 - Issuance and Repurchase of Securities. The Trustees shall have the power to issue, sell, repurchase, redeem, retire, cancel, acquire, hold, resell, reissue, dispose of, transfer, and otherwise deal in Shares and, subject to the provisions set forth in Articles VII, VIII and IX hereof, to apply to any such repurchase, redemption, retirement, cancellation or acquisition of Shares any funds or property of the Trust whether capital or surplus or otherwise, to the full extent now or hereafter permitted by the laws of The Commonwealth of Massachusetts governing business corporations.
Section 3.5 - Borrowing Money; Lending Trust Assets. The Trustees shall have power to borrow money or otherwise obtain credit and to secure the same by mortgaging, pledging or otherwise subjecting as security the assets of the Trust, to endorse, guarantee, or undertake the performance of any obligation, contract or engagement of any other Person and to lend Trust assets.
Section 3.6 - Delegation; Committees. The Trustees shall have power to delegate from time to time to such of their number or to officers, employees or agents of the Trust the doing of such things and the execution of such instruments either in the name of the Trust or the names of the Trustees or otherwise as the Trustees may deem expedient.
Section 3.7 - Collection and Payment. The Trustees shall have power to collect all property due to the Trust; to pay all claims, including taxes, against the Trust Property; to prosecute, defend, compromise or abandon any claims relating to the Trust Property; to foreclose any security interest securing any obligations, by virture of which any property is owed to the Trust; and to enter into releases, agreements and other instruments.
Section 3.8 - Expenses. The Trustees shall have the power to incur and pay any expenses which in the opinion of the Trustees are necessary or incidental to carry out any of the purposes of the Declaration, and to pay reasonable compensation from the funds of the Trust to themselves as Trustees. The Trustees shall fix the compensation of all officers, employees and Trustees.
Section 3.9 - Manner of Acting; By-Laws. Except as otherwise provided herein or in the By-Laws, any action to be taken by the Trustees may be taken by a majority of the Trustees present at a meeting of Trustees (a quorum being present), including any meeting held by means of a conference telephone circuit or similar communications equipment by means of which all persons participating in the meeting can hear each other, or by written consents of all the Trustees. The Trustees may adopt By-Laws not inconsistent with this Declaration to provide for the conduct of the business of the Trust and may amend or repeal such By-Laws to the extent such power is not reserved to the Shareholders.
Section 3.10 - Miscellaneous Powers. The Trustees shall have the power to:
(a) employ or contract with such Persons as the Trustees may deem desirable for the transaction of the business of the Trust;
(b) enter into joint ventures, partnerships and any other combina- tions or associations;
(c) remove Trustees or fill vacancies in or add to their number, elect and remove such officers and appoint and terminate such agents or employees as they consider appropriate, and appoint from their own number, and terminate, any one or more committees which may exercise some or all of the power and authority of the Trustees as the Trustees may determine;
(d) purchase, and pay for out of Trust Property, insurance policies insuring the Shareholders, Trustees, officers, employees, agents, investment advisers, distributors, selected dealers or independent contractors of the Trust against all claims arising by reason of holding any such position or by reason of any action taken or omitted by any such Person in such capacity, whether or not constituting negligence, or whether or not the Trust would have the power to indemnify such Person against such liability;
(e) establish pension, profit-sharing, share purchase, and other retirement, incentive and benefit plans for any Trustees, officers, employees and agents of the Trust;
(f) to the extent permitted by law, indemnify any person with whom the Trust has dealings, including the Investment Adviser, Distributor, Transfer Agent and selected dealers, to such extent as the Trustees shall determine;
(g) guarantee indebtedness or contractual obligations of others;
(h) determine and change the fiscal year of the Trust and the method by which its accounts shall be kept; and
(i) adopt a seal for the Trust but the absence of such seal shall not impair the validity of any instrument executed on behalf of the Trust.
Section 3.11 - Principal Transactions. Except in transactions permitted by the 1940 Act, or any order of exemption issued by the Commission, the Trustees shall not, on behalf of the Trust, buy any securities (other than Shares) from or sell any securities (other than Shares) to, or lend any assets of the Trust to, any Trustee or officer of the Trust or any firm of which any such Trustee or officer is a member acting as principal, or have any such dealings with the Investment Adviser, Distributor or Transfer Agent or with any Interested Person of such Person; but the Trust may employ any such Person, or firm or company in which such Person is an Interested Person, as broker, legal counsel, registrar, transfer agent, dividend disbursing agent or custodian upon customary terms.
Section 3.12 - Trustees and Officers as Shareholders. Except as hereinafter provided, no officer, Trustee or Member of the Advisory Board of the Trust, and no member, partner, officer, director or trustee of the Investment Adviser or of the Distributor, and no Investment Adviser or Distributor of the Trust, shall take long or short positions in the securities issued by the Trust. The foregoing provision shall not prevent:
(a) The Distributor from purchasing from the Trust Shares if such purchases are limited (except for reasonable allowances for clerical errors, delays and errors of transmission and cancellation of orders) to purchases for the purpose of filling orders for Shares received by the Distributor and provided that orders to purchase from the Trust are entered with the Trust or the Custodian promptly upon receipt by the Distributor of purchase orders for Shares, unless the Distributor is otherwise instructed by its customer;
(b) The Distributor from purchasing Shares as agent for the account of the Trust;
(c) The purchase from the Trust or from the Distributor of Shares by any officer, Trustee or member of the Advisory Board of the Trust or by any member, partner, officer, director or trustee of the Investment Adviser or of the Distributor at a price not lower than the net asset value of the Shares at the moment of such purchase, provided that any such sales are only to be made pursuant to a uniform offer described in the Trust's current prospectus; or
(d) The Investment Adviser, the Distributor, or any of their officers, partners, directors or trustees from purchasing Shares prior to the effective date of the Registration Statement relating to the Shares under the Securities Act of 1933, as amended.
ARTICLE IV
INVESTMENT ADVISER, DISTRIBUTOR AND TRANSFER AGENT
Section 4.1 - Investment Adviser. Subject to a Majority Shareholder Vote, the Trustees may in their discretion from time to time enter into an investment advisory or management contract whereby the other party to such contract shall undertake to furnish the Trust such management, investment advisory, statistical and research facilities and services, promotional activities, and such other facilities and services, if any, as the Trustees shall from time to time consider desirable and all upon such terms and conditions as the Trustees may in their discretion determine notwithstanding any provisions of the Declaration, the Trustees may delegate to the Investment Adviser authority (subject to such general or specific instructions as the Trustees may from time to time adopt) to effect purchases, sales, loans or exchanges of portfolio securities of the Trust on behalf of the Trustees or may authorize any officer, employee or Trustee to effect such purchases, sales, loans or exchanges pursuant to recommendations of the Investment Adviser (and all without further action by the Trustees). Any such purchases, sales, loans and exchanges shall be deemed to have been authorized by all of the Trustees.
Section 4.2 - Distributor. The Trustees may in their discretion from time to time enter into a contract, providing for the sale of Shares whereby the Trust may either agree to sell the Shares to the other party to the contract or appoint such other party its sales agent for such Shares. In either case, the contract shall be on such terms and conditions as the Trustees may in their discretion determine not inconsistent with the provisions of this Article IV or the By-Laws; and such contract may also provide for the repurchase or sale of Shares by such other party as principal or as agent of the Trust and may provide that such other party may enter into selected dealer agreements with registered securities dealers to further the purpose of the distribution or repurchase of the Shares.
Section 4.3 - Transfer Agent. The Trustees may in their discretion from time to time enter into a transfer agency and shareholder service contract whereby the other party to such contract shall undertake to furnish transfer agency and shareholder services to the Trust. The contract shall have such terms and conditions as the Trustees may in their discretion determine not inconsistent with the Declaration or the By-Laws. Such services may be provided by one or more Persons.
Section 4.4 - Parties to Contract. Any contract of the character described in Section 4.1, 4.2 or 4.3 of this Article IV or any Custodian contract, as described in the By-Laws, may be entered into with any Person, although one or more of the Trustees or officers of the Trust may be an officer, partner, director, trustee, shareholder, or member of such other party to the contract, and no such contract shall be invalidated or rendered voidable by reason of the existence of any such relationship; nor shall any Person holding such relationship be liable merely by reason of such relationship for any loss or expense to the Trust under or by reason of said contract or accountable for any profit realized directly or indirectly therefrom, provided that the contract when entered into was not inconsistent with the provisions of this Article IV or the By-Laws. The same Person may be the other party to contracts entered into pursuant to Sections 4.1, 4.2 and 4.3 above or Custodian contracts, and any individual may be financially interested or otherwise affiliated with Persons who are parties to any or all of the contracts mentioned in this Section 4.4.
ARTICLE V
LIMITATIONS OF LIABILITY OF SHAREHOLDERS, TRUSTEES AND OTHERS
Section 5.1 - No Personal Liability of Shareholders, Trustees, etc. No Shareholder shall be subject to any personal liability whatsoever to any Person in connection with Trust Property or the acts, obligations or affairs of the Trust. No Trustee, officer, employee or agent of the Trust shall be subject to any personal liability whatsoever to any Person, other than the Trust or its Shareholders, in connection with Trust Property or the affairs of the Trust, save only that arising from bad faith, willful misfeasance, gross negligence or reckless disregard for his duty to such Person; and all such Persons shall look solely to the Trust Property for satisfaction of claims of any nature arising in connection with the affairs of the Trust. If any Shareholder, Trustee, officer, employee, or agent, as such, of the Trust, is made a party to any suit or proceeding to enforce any such liability, he shall not, on account thereof, be held to any personal liability. The Trust shall indemnify and hold each Shareholder harmless from and against all claims and liabilities, to which such Shareholder may become subject by reason of his being or having been a Shareholder, and shall reimburse such Shareholder for all legal and other expenses reasonably incurred by him in connection with any such claim or liability. The rights accruing to a Shareholder under this Section 5.1 shall not exclude any other right to which such Shareholder may be lawfully entitled, nor shall anything herein contained restrict the right of the Trust to indemnify or reimburse a Shareholder in any appropriate situation even though not specifically provided herein.
Section 5.2 - Non-Liability of Trustees, etc. No Trustee, officer, employee or agent of the Trust shall be liable to the Trust, its Shareholders, or to any Shareholder, Trustee, officer, employee, or agent thereof for any action or failure to act (including without limitation the failure to compel in any way any former or acting Trustee to redress any breach of trust) except for his own bad faith, willful misfeasance, gross negligence or reckless disregard of his duties.
Section 5.3 - Mandatory Indemnification.
(a) Subject to the exceptions and limitations contained in paragraph
(b) below:
(i) every person who is or has been a Trustee or officer of the Trust shall be indemnified by the Trust 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;
(ii) the words "claim," "action," "suit," or "proceeding" shall apply to all claims, actions, suits or proceedings (civil, criminal or other, including appeals), actual or threatened, and the words "liability" and "expenses" shall include, without limitation, attorneys' fees, costs, judgments, amounts paid in settlement, fines, penalties and other liabilities.
(b) No indemnification shall be provided hereunder to a Trustee or officer:
(i) against any liability to the Trust or the Shareholders 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 interests of the Trust;
iii )in the event of a settlement or other disposition not involving a final adjudication as provided in paragraph (b)(i) or (b)(ii) 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 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 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.
(c) The rights of indemnification herein provided may be insured against by policies maintained by the Trust, shall be severable, shall not affect any other rights to which any Trustee or officer may now or hereafter be entitled, shall continue as to a Person who has ceased to be such Trustee or officer and shall inure to the benefit of the heirs, executors and administrators of such Person. Nothing contained herein shall affect any rights to indemnification to which personnel other than Trustees and officers may be entitled by contract or otherwise under law.
(d) Expenses of preparation and presentation of a defense to any claim,
action, suit or proceeding of the character described in paragraph (a) of this
Section 5.3 shall be advanced by the Trust 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 this Section 5.3, provided that either:
(i) such undertaking is secured by a surety bond or some other appropriate security or the Trust 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.
As used in this Section 5.3, a "Disinterested Trustee" is one (i) who is not an "Interested Person" of the Trust (including anyone who has been exempted from being an "Interested Person" by any rule, regulation or order of the Commission), and (ii) against whom none of such actions, suits or other proceedings or another action, suit or other proceeding on the same or similar grounds is then or had been pending.
Section 5.4 - No Bond Required of Trustees. No Trustee shall be obligated to give any bond or other security for the performance of any of his duties hereunder.
Section 5.5 - No Duty of Investigation; Notice in Trust Instruments, etc. No purchaser, lender, transfer agent or other Person dealing with the Trustees or any officer, employee or agent of the Trust shall be bound to make any inquiry concerning the validity of any transaction purporting to be made by the Trustees or by said officer, employee or agent or be liable for the application of money or property paid, loaned, or delivered to or on the order of the Trustees or of said officer, employee or agent. Every obligation, contract, instrument, certificate, Share, other security of the Trust or undertaking, and every other act or thing whatsoever executed in connection with the Trust shall be conclusively presumed to have been executed or done by the executors thereof only in their capacity as Trustees under the Declaration or in their capacity as officers, employees or agents of the Trust. Every written obligation, contract, instrument, certificate, Share, other security of the Trust or undertaking made or issued by the Trustees shall recite that the same is executed or made by them not individually, but as Trustees under the Declaration, and that the obligations of any such instrument are not binding upon any of the Trustees or Shareholders, individually, but bind only the trust estate, and may contain any further recital which they or he may deem appropriate, but the omission of such recital shall not operate to bind any of the Trustees individually. The Trustees shall at all times maintain insurance for the protection of the Trust Property, its Shareholders, Trustees, officers, employees and agents in such amount as the Trustees shall deem adequate to cover possible tort liability, and such other insurance as the Trustees in their sole judgment shall deem advisable.
Section 5.6 - Reliance on Experts, etc. Each Trustee and officer or employee of the Trust shall, in the performance of his duties, be fully and completely justified and protected with regard to any act or any failure to act resulting from reliance in good faith upon the books of account or other records of the Trust, upon an opinion of counsel, or upon reports made to the Trust by any of its officers or employees or by the Investment Adviser, the Distributor, Transfer Agent, selected dealers, accountants, appraisers or other experts or consultants selected with reasonable care by the Trustees, officers or employees of the Trust, regardless of whether such counsel or expert may also be a Trustee.
ARTICLE VI
SHARES OF BENEFICIAL INTEREST
Section 6.1 - Beneficial Interest. The interest of the beneficiaries hereunder shall be divided into transferable Shares of beneficial interest, without par value. The number of Shares of beneficial interest authorized hereunder is unlimited. All Shares issued hereunder including, without limitation, Shares issued in connection with a dividend in Shares or a split of Shares, shall be fully paid and non-assessable.
Section 6.2 - Rights of Shareholders. The ownership of the Trust property of every description and the right to conduct any business hereinbefore described are vested exclusively in the Trustees, and the Shareholders shall have no interest therein other than the beneficial interest conferred by their Shares, and they shall have no right to call for any partition or division of any property, profits, rights or interests of the Trust nor can they be called upon to assume any losses of the Trust or suffer an assessment of any kind by virtue of their ownership of Shares. The Shares shall be personal property giving only the rights in the Declaration specifically set forth. The Shares shall not entitle the holder to preference, preemptive, appraisal, conversion or exchange rights, except as the Trustees may determine with respect to any class of Shares.
Section 6.3 - Trust Only. It is the intention of the Trustees to create only the relationship of Trustee and beneficiary between the Trustees and each Shareholder from time to time. It is not the intention of the Trustees to create a general partnership, limited partnership, joint stock association, corporation, bailment or any form or legal relationship other than a trust. Nothing in the Declaration shall be construed to make the Shareholders, either by themselves or with the Trustees, partners or members of a joint stock association.
Section 6.4 - Issuance of Shares. The Trustees, in their discretion may, from time to time without vote of the Shareholders, issue Shares, in addition to the then issued and outstanding Shares and Shares held in the treasury, to such party or parties and for such amount and type of consideration, including cash or property, at such time or times, and on such terms as the Trustees may deem best, and may in such manner acquire other assets (including the acquisition of assets subject to, and in connection with the assumption of liabilities) and businesses. In connection with any issuance of Shares, the Trustees may issue fractional Shares. The Trustees may from time to time divide or combine the Shares of any series into a greater or lesser number without thereby changing the proportionate beneficial interests in the Trust. Contributions to the Trust may be accepted for, and Shares shall be redeemed as, whole Shares and/or 1/1,000ths of a Share or integral multiples thereof.
Section 6.5 - Register of Shares. A register shall be kept at the principal office of the Trust or at an office of the Transfer Agent which shall contain the names and addresses of the Shareholders and the number of Shares held by them respectively and a record of all transfers thereof. Such register shall be conclusive as to who are the holders of the Shares and who shall be entitled to receive dividends or distributions or otherwise to exercise or enjoy the rights of Shareholders. No Shareholder shall be entitled to receive payment of any dividend or distribution, nor to have notice given to him as herein or in the By-Laws provided, until he has given his address to the Transfer Agent or such other officer or agent of the Trustees as shall keep the said register for entry thereon. The Trustees, in their discretion, may authorize the issuance of Share certificates and promulgate appropriate rules and regulations as to their use.
Section 6.6 - Transfer of Shares. Shares shall be transferable on the records of the Trust only by the record holder thereof or by his agent thereunto duly authorized in writing, upon delivery to the Trustees or the Transfer Agent of a duly executed instrument of transfer, together with any certificate or certificates (if issued) for such Shares and such evidence of the genuineness of each such execution and authorization and of other matters as may reasonably be required. Upon such delivery the transfer shall be recorded on the register of the Trust. Until such record is made, the Shareholder of record shall be deemed to be the holder of such Shares for all purposes hereunder and neither the Trustees nor any Transfer Agent or registrar nor any officer, employee or agent of the Trust shall be affected by any notice of the proposed transfer.
Any person becoming entitled to any Shares in consequence of death, bankruptcy, or incompetence of any Shareholder, or otherwise by operation of law, shall be recorded on the register of Shares as the holder of such Shares upon production of the proper evidence thereof to the Trustees or the Transfer Agent; but until such record is made, the Shareholder of record shall be deemed to be the holder of such Shares for all purposes thereunder and neither the Trustees nor any Transfer Agent or registrar nor any officer of agent of the Trust shall be affected by any notice of such death, bankruptcy or incompetence, or other operation of law.
Section 6.7 - Notices. Any and all notices to which any Shareholder may be entitled and any and all communications shall be deemed duly served or given if mailed, postage prepaid, addressed to any Shareholder of record at his last known address as recorded on the register of the Trust.
Section 6.8 - Voting Powers. The Shareholders shall have power to vote
only (i) for the election of Trustees as provided in Section 2.2. hereof, (ii)
with respect to any investment advisory or management contract as provided in
Section 4.1., (iii) with respect to termination of the Trust as provided in
Section 9.2., (iv) with respect to any amendment of the Declaration to the
extent and as provided in Section 9.3., (v) with respect to any merger,
consolidation or sale of assets as provided in Sections 9.4., (vi) with respect
to incorporation of the Trust to the extent and as provided in Section 9.5.,
(vii) to the same extent as the stockholders of a Massachusetts business
corporation as to whether or not a court action, proceeding or claim should or
should not be brought or maintained derivatively or as a class action on behalf
of the Trust of the Shareholders, and (viii) with respect to such additional
matters relating to the Trust as may be required by the Declaration, the By-Laws
or any registration of the Trust with the Commission (or any successor agency)
or any state, or as the Trustees may consider necessary or desirable. Each whole
Share shall be entitled to one vote as to any matter on which it is entitled to
vote and each fractional Share shall be entitled to a proportionate fractional
vote, except that the Shares held in the treasury of the Trust shall not be
voted. There shall be no cumulative voting in the election of Trustees. Until
Shares are issued, the Trustees may exercise all rights of Shareholders and may
take any action required by law, the Declaration or the By-Laws to be taken by
Shareholders. The By-Laws may include further provisions for Shareholders' votes
and meetings and related matters.
Section 6.9 - Series Designation. The Trustees, in their discretion, may authorize the division of Shares into two or more series, and the different series shall be established and designated, and the variations in the relative rights and preferences as between the different series shall be fixed and determined by the Trustees; provided, that all Shares shall be identical except that there may be variations so fixed and determined between different series as to purchase price, right of redemption and the price, terms and manner of redemption, special and relative rights as to dividends and on liquidation, conversion rights, and conditions under which the several series shall have separate voting rights. Any series of Shares may be terminated by the Trustees by written notice to shareholders of the series.
The series of Shares established and designated pursuant to this
Section 6.9 and existing as of the date hereof are set forth in Annex A hereto.
Section 6.10 - Class Designation. The Trustees may, in their discretion, authorize the division of Shares of the Trust (or any series of the Trust) into one or more classes. All Shares of a class shall be identical with each other and with the Shares of each other class of the Trust or the same series of the Trust (as applicable), except for such variations between classes as may be approved by the Board of Trustees and permitted by the 1940 Act or pursuant to any exemptive order issued by the Securities and Exchange Commission. The classes of Shares authorized pursuant to this Section 6.10 and existing as of the date hereof are set forth in Annex B hereto.
ARTICLE VII
REDEMPTIONS
Section 7.1 - Redemptions. In case any Shareholder at any time desires
to dispose of his Shares, he may deposit his certificate or certificates
therefor, duly endorsed in blank or accompanied by an instrument of transfer
executed in blank, or if the Shares are not represented by any certificates, a
written request or other such form of request as the Trustees may from time to
time authorize, at the office of the Transfer Agent or at the office of any bank
or trust company, either in or outside of Massachusetts, which is a member of
the Federal Reserve System and which the said Transfer Agent has designated in
writing for that purpose, together with an irrevocable offer in writing in a
form acceptable to the Trustees to sell the Shares represented thereby to the
Trust at the net asset value thereof per Share, determined as provided in the
By-Laws, next after such deposit. Payment for said Shares shall be made to the
Shareholder within seven (7) days after the date on which the deposit is made,
unless (i) the date of payment is postponed pursuant to Section 7.2 hereof, or
(ii) the receipt, or verification of receipt, of the purchase price for the
Shares to be redeemed is delayed, in either of which event payment may be
delayed beyond seven (7) days.
Section 7.2 - Suspension of Right of Redemption. The Trust may declare
a suspension of the right of redemption or postpone the date of payment or
redemption for the whole or any part of any period (i) during which the New York
Stock Exchange is closed other than customary week-end and holiday closings,
(ii) during which trading on the New York Stock Exchange is restricted, (iii)
during which an emergency exists as a result of which disposal by the Trust of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Trust fairly to determine the value of its net assets, or
(iv) during any other period when the Commission may for the protection of
security holders of the Trust by order permit suspension of the right of
redemption or postponement of the date of payment or redemption; provided that
applicable rules and regulations of the Commission shall govern as to whether
the conditions prescribed in (ii), (iii) or (iv) exist. Such suspension shall
take effect at such time as the Trust shall specify but not later than the close
of business on the business day next following the declaration of suspension,
and thereafter there shall be no right of redemption or payment on redemption
until the Trust shall declare the suspension at an end, except that the
suspension shall terminate in any event on the first day on which said stock
exchange shall have reopened or the period specified in (ii) or (iii) shall have
expired (as to which, in the absence of an official ruling by the Commission,
the determination of the Trust shall be conclusive). In the case of a suspension
of the right of redemption, a Shareholder may either withdraw his request for
redemption or receive payment based on the net asset value existing after the
termination of the suspension.
Section 7.3 - Redemption of Shares; Disclosure of Holding. If the Trustees shall, at any time and in good faith, be of the opinion that direct or indirect ownership of Shares or other securities of the Trust has or may become concentrated in any Person to an extent which would disqualify the Trust as a regulated investment company under the Internal Revenue Code, then the Trustees shall have the power by lot or other means deemed equitable by them (i) to call for redemption by any such Person a number, or principal amount, of Shares or other securities of the Trust sufficient to maintain or bring the direct or indirect ownership of Shares or other securities of the Trust into conformity with the requirements for such qualification and (ii) to refuse to transfer or issue Shares or other securities of the Trust to any Person whose acquisition of the Shares or other securities of the Trust in question would result in such disqualification. The redemption shall be effected at the redemption price and in the manner provided in Section 7.1.
The holders of Shares or other securities of the Trust shall upon demand disclose to the Trustees in writing such information with respect to direct and indirect ownership of Shares or other securities of the Trust as the Trustees deem necessary to comply with the provisions of the Internal Revenue Code, or to comply with the requirements of any other authority.
Section 7.4 - Redemption in Kind. Payment for Shares deposited pursuant to Section 7.1 may, at the option of the Trustees, or such officer or officers as they may duly authorize for the purpose, in their complete discretion be made in cash, or in kind, or partially in cash and partially in kind. In case of payment in kind, the Trustees, or their delegate, shall have absolute discretion as to what security or securities shall be distributed in kind and the amount of the same, and the securities shall be valued for purposes of distribution at the figure at which they were appraised in computing the asset value of the Shares, provided that any Shareholder who cannot legally acquire securities so distributed in kind by reason of the prohibitions of the 1940 Act shall receive cash.
ARTICLE VIII
DETERMINATION OF NET ASSET VALUE, NET INCOME AND DISTRIBUTIONS
The Trustees, in their absolute discretion, may prescribe and shall set forth in the By-Laws such bases and times for determining the per Share net asset value of the Shares or net income, or the declaration and payment of dividends and distributions, as they may deem necessary or desirable.
ARTICLE IX
DURATION; TERMINATION OF TRUST; AMENDMENT; MERGERS, ETC.
Section 9.1 - Duration. The Trust shall continue without limitation of time but subject to the provisions of this Article IX.
Section 9.2 - Termination of Trust.
(a) The Trust may be terminated (i) by the affirmative vote of the holders of not less than two-thirds of the Shares outstanding and entitled to vote at any meeting of Shareholders, or (ii) by an instrument in writing, without a meeting, signed by a majority of the Trustees and consented to by the holders of not less than two-thirds of such Shares, or (iii) by the Trustees by written notice to the Shareholders. Upon the termination of the Trust:
(i) the Trust shall carry on no business except for the purpose of winding up its affairs;
(ii) the Trustees shall proceed to wind up the affairs of the Trust and all of the powers of the Trustees under this Declaration shall continue until the affairs of the Trust shall have been wound up, including the power to fulfill or discharge the contracts of the Trust, collect its assets, sell, convey, assign, exchange, transfer or otherwise dispose of all or any part of the remaining Trust Property to one or more persons at public or private sale for consideration which may consist in whole or in part of cash, securities or other property of any kind, discharge or pay its liabilities, and to do all other acts appropriate to liquidate its business; provided, that any sale, conveyance, assignment, exchange, transfer or other disposition of all or substantially all the Trust Property shall require Shareholder approval in accordance with Section 9.4 hereof; and
(iii) after paying or adequately providing for the payment of all liabilities, and upon receipt of such releases, indemnities and refunding agreements as they deem necessary for their protection, the Trustees may distribute the remaining Trust Property, in cash or in kind or partly in cash and partly in kind, among the Shareholders according to their respective rights.
(b) After termination of the Trust and distribution to the Shareholders as herein provided, a majority of the Trustees shall execute and lodge among the records of the Trust an instrument in writing setting forth the fact of such termination, and the Trustees shall thereupon be discharged from all further liabilities and duties hereunder, and the rights and interests of all Shareholders shall thereupon cease.
Section 9.3 - Amendment Procedure.
(a) This Declaration may be amended by a Majority Shareholder Vote or by any instrument in writing, without a meeting, signed by a majority of the Trustees and consented to by the holders of not less than a majority of the Shares outstanding and entitled to vote. The Trustees may also amend this Declaration without the vote or consent of Shareholders to change the name of the Trust, to supply any omission, to cure, correct or supplement any ambiguous, defective or inconsistent provision hereof, or if they deem it necessary to conform this Declaration to the requirements of applicable federal laws or regulations or the requirements of the regulated investment company provisions of the Internal Revenue Code, but the Trustees shall not be liable for failing so to do.
(b) No amendment may be made under this Section 9.3 which would change any rights with respect to any Shares by reducing the amount payable thereon upon liquidation of the Trust or by diminishing or eliminating any voting rights pertaining thereto, except with the vote or consent of the holders of two-thirds of the Shares outstanding and entitled to vote. Nothing contained in this Declaration shall permit the amendment of this Declaration to impair the exemption from personal liability of the Shareholders, Trustees, officers, employees and agents of the Trust or to permit assessments upon Shareholders.
(c) A certificate signed by a majority of the Trustees setting forth an amendment and reciting that it was duly adopted by the Shareholders or by the Trustees as aforesaid or a copy of the Declaration, as amended, and executed by a majority of the Trustees, shall be conclusive evidence of such amendment when lodged among the records of the Trust.
Notwithstanding any other provision hereof, until such time as a Registration Statement under the Securities Act of 1933, as amended, covering the first public offering of securities of the Trust shall have become effective, this Declaration may be terminated or amended in any respect by the affirmative vote of a majority of the Trustees or by an instrument signed by a majority of the Trustees.
Section 9.4 - Merger, Consolidation and Sale of Assets. The Trust may merge or consolidate with any other corporation, association, trust or other organization or may sell, lease or exchange all or substantially all of the Trust Property, including its good will, upon such terms and conditions and for such consideration when and as authorized at any meeting of Shareholders called for the purpose by the affirmative vote of the holders of not less than two-thirds of the Shares outstanding and entitled to vote, or by an instrument or instruments in writing without a meeting, consented to by the holders of not less than two-thirds of such Shares; provided, however, that if such merger, consolidation, sale, lease or exchange is recommended by the Trustees, the vote or written consent of the holders of a majority of Shares outstanding and entitled to vote shall be sufficient authorization; and any such merger, consolidation, sale, lease or exchange shall be deemed for all purposes to have been accomplished under and pursuant to the statutes of The Commonwealth of Massachusetts.
Section 9.5 - Incorporation. With the approval of the holders of a majority of the Shares outstanding and entitled to vote, the Trustees may cause to be organized or assist in organizing a corporation or corporations under the laws of any jurisdiction, or any other trust, partnership, association or other organization to take over all of the Trust Property or to carry on any business in which the Trust shall directly or indirectly have any interest, and to sell, convey and transfer the Trust Property to any such corporation, trust, association or organization in exchange for the Shares or securities thereof or otherwise, and to lend money to, subscribe for the Shares or securities of, and enter into any contracts with any such corporation, trust, partnership, association or organization or any corporation, partnership, trust, association or organization in which the Trust holds or is about to acquire Shares of any other interest. The Trustees may also cause a merger or consolidation between the Trust or any successor thereto and any such corporation, trust, partnership, association or other organization if and to the extent permitted by law, as provided under the law then in effect. Nothing contained herein shall be construed as requiring approval of Shareholders for the Trustees to organize or assist in organizing one or more corporations, trusts, partnerships, associations or other organizations and selling, conveying or transferring a portion of the Trust Property to such organization or entitles.
ARTICLE X
REPORTS TO SHAREHOLDERS
The Trustees shall at least semi-annually submit to the Shareholders a written financial report of the transactions of the Trust, including financial statements which shall at least annually be certified by independent public accountants.
ARTICLE XI
MISCELLANEOUS
Section 11.1 - Filing. This Declaration and any amendment hereto shall be filed in the office of the Secretary of The Commonwealth of Massachusetts and in such other places as may be required under the laws of Massachusetts and may also be filed or recorded in such other places as the Trustees deem appropriate. Each amendment so filed shall be accompanied by a certificate signed and acknowledged by a Trustee stating that such action was duly taken in a manner provided herein, and unless such amendment or such certificate sets forth some later time for the effectiveness of such amendment, such amendment shall be effective upon its filing. A restated Declaration, integrating into a single instrument all of the provisions of the Declaration which are then in effect and operative, may be executed from time to time by a majority of the Trustees and shall, upon filing with the Secretary of The Commonwealth of Massachusetts, be conclusive evidence of all amendments contained therein and may thereafter be referred to in lieu of the original Declaration and the various amendments thereto.
Section 11.2 - Governing Law. This Declaration is executed by the Trustees and delivered in The Commonwealth of Massachusetts and with reference to the laws thereof, and the rights of all parties and the validity and construction of every provision hereof shall be subject to and construed according to the laws of said State.
Section 11.3 - Counterparts. This Declaration may be simultaneously executed in several counterparts, each of which shall be deemed to be an original, and such counterparts, together, shall constitute one and the same instrument, which shall be sufficiently evidenced by any such original counterpart.
Section 11.4 - Reliance by Third Parties. Any certificate executed by an individual who, according to the records of the Trust appears to be a Trustee hereunder, certifying to: (a) the number or identity of Trustees or Shareholders, (b) the due authorization of the execution of any instrument or writing, (c) the form of any vote passed at a meeting of Trustees or Shareholders, (d) the fact that the number of Trustees or Shareholders present at any meeting or executing any written instrument satisfies the requirements of this Declaration, (e) the form of any By-Laws adopted by or the identity of any officers elected by the Trustees, or (f) the existence of any fact or facts which in any manner relate to the affairs of the Trust, shall be conclusive evidence as to the matters so certified in favor of any Person dealing with the Trustees and their successors.
Section 11.5 - Provisions in Conflict with Law or Regulations.
(a) The provisions of the Declaration are severable, and if the Trustees shall determine, with the advice of counsel, that any of such provisions is in conflict with the 1940 Act, the regulated investment company provisions of the Internal Revenue Code or with other applicable laws and regulations, the conflicting provision shall be deemed never to have constituted a part of the Declaration; provided, however, that such determination shall not affect any of the remaining provisions of the Declaration or render invalid or improper any action taken or omitted prior to such determination.
(b) If any provision of the Declaration shall be held invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall attach only to such provision in such jurisdiction and shall not in any manner affect such provision in any other jurisdiction or any other provision of the Declaration in any jurisdiction.
ANNEX A
Pursuant to Section 6.9 of the Declaration, the Trustees of the Trust have established and designated two series of Shares (as defined in the Declaration), such series to have the following special and relative rights:
1. The series are designated:
- MFS High Income Fund
- MFS Municipal High Income 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 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 the 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 established and existing series of the Trust 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 series.
ANNEX B
Pursuant to Section 6.10 of the Declaration of Trust, the Trustees have divided the Shares of MFS Municipal High Income Fund, a series of the Trust, to create two classes of Shares, within the meaning of Section 6.10, as follows:
1. The two classes of Shares are designated "Class A Shares" and "Class B Shares";
2. Class A Shares and Class B Shares shall be entitled to all the rights and preferences accorded to Shares under the Declaration;
3. The purchase price of Class A Shares and Class B Shares, the method of determination of the net asset value of Class A Shares and Class B Shares, the price, terms and manner of redemption of Class A Shares and Class B Shares, any conversion feature of the Class B Shares, and the relative dividend rights of holders of Class A Shares and Class B 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.
4. Class A Shares and Class B 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.
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.
Pursuant to Section 6.10 of the Declaration of the Trust, the Trustees have divided the Shares of the MFS High Income Fund, a series of the Trust, to create three classes of Shares, within the meaning of Section 6.10, as follows:
1. The three classes of Shares are designated "Class A Shares," "Class B Shares" and "Class C Shares";
2. Class A Shares, Class B Shares and Class C Shares shall be entitled to all the rights and preferences accorded to Shares under the Declaration of Trust;
3. The purchase price of Class A Shares, Class B Shares and Class C Shares, the method of determination of the net asset value of Class A Shares, Class B Shares and Class C Shares, the price, terms and manner of redemption of Class A Shares, Class B Shares and Class C Shares, any conversion feature of Class B Shares, and the relative dividend rights of holders of Class A Shares, Class B Shares and Class C Shares shall be established by the Trustees of the Trust in accordance with the Declaration of Trust 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;
4. Class A Shares, Class B Shares and Class C 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.
IN WITNESS WHEREOF, the undersigned have executed this instrument this 15th day of February, 1995.
A. KEITH BRODKIN CHARLES W. SCHMIDT - -------------------------- --------------------------- A. Keith Brodkin Charles W. Schmidt 76 Farm Road 63 Claypit Hill Road Sherborn, MA 01770 Wayland, MA 01778 RICHARD B. BAILEY ARNOLD D. SCOTT - -------------------------- --------------------------- Richard B. Bailey Arnold D. Scott 63 Atlantic Avenue 20 Rowes Wharf Boston, MA 02110 Boston, MA 02110 PETER G. HARWOOD JEFFREY L. SHAMES - -------------------------- --------------------------- Peter G. Harwood Jeffrey L. Shames 211 Lindsay Pond Road 60 Brookside Road Concord, MA 01742 Needham, MA 02192 J. ATWOOD IVES ELAINE R. SMITH - -------------------------- --------------------------- J. Atwood Ives Elaine R. Smith 1 Bennington Road 75 Scotch Pine Road Lexington, MA 02173 Weston, MA 02193 LAWRENCE T. PERERA DAVID B. STONE - -------------------------- --------------------------- Lawrence T. Perera David B. Stone 18 Marlborough Street 50 Delano Road Boston, MA 02116 Marion, MA 02736 |
EXHIBIT NO. 99.2
AMENDED AND RESTATED
BY-LAWS
OF
MFS SERIES TRUST III
DECEMBER 21, 1994
AMENDED AND RESTATED
BY-LAWS
OF
MFS SERIES TRUST III
ARTICLE I
DEFINITIONS
The terms "Commission", "Declaration", "Distributor", "Investment Adviser", "Majority Shareholder Vote", "1940 Act", "Shareholder", "Shares", "Transfer Agent", "Trust", "Trust Property" and "Trustees" have the respective meanings given them in the Declaration of Trust of MFS Series Trust III, dated December 15, 1977, as amended from time to time.
ARTICLE II
OFFICES
SECTION 1. PRINCIPAL OFFICE. Until changed by the Trustees, the principal office of the Trust in The Commonwealth of Massachusetts shall be in the City of Boston, County of Suffolk.
SECTION 2. OTHER OFFICES. The Trust may have offices in such other places without as well as within the Commonwealth as the Trustees may from time to time determine.
ARTICLE III
SHAREHOLDERS
SECTION 1. MEETINGS. Meetings of the Shareholders may be called at any time by a majority of the Trustees and shall be called by any Trustee upon written request of Shareholders holding in the aggregate not less than ten percent (10%) of the outstanding Shares of the Trust having voting rights, if shareholders of all series are required under the Declaration to vote in the aggregate and not by individual series at such meeting, or of any series or class if shareholders of such series or class are entitled under the Declaration to vote by individual series or class, such request specifying the purpose or purposes for which such meeting is to be called. Any such meeting shall be held within or without The Commonwealth of Massachusetts on such day and at such time as the Trustees shall designate.
SECTION 2. NOTICE OF MEETINGS. Notice of all meetings of Shareholders, stating the time, place and purposes of the meeting, shall be given by the Trustees by mail to each Shareholder entitled to vote at such meeting at his address as recorded on the register of the Trust, mailed at least (ten) 10 days and not more than (sixty) 60 days before the meeting. Only the business stated in the notice of the meeting shall be considered at such meeting. Any adjourned meeting may be held as adjourned without further notice. No notice need be given to any Shareholder who shall have failed to inform the Trust of his current address or if a written waiver of notice, executed before or after the meeting by the Shareholder or his attorney thereunto authorized, is filed with the records of the meeting.
SECTION 3. RECORD DATE FOR MEETINGS. For the purpose of determining the Shareholders who are entitled to notice of and to vote at any meeting, or to participate in any distribution, or for the purpose of any other action, the Trustees may from time to time close the transfer books for such period, not exceeding thirty (30) days, as the Trustees may determine; or without closing the transfer books the Trustees may fix a date not more than sixty (60) days prior to the date of any meeting of Shareholders or distribution or other action as a record date for the determination of the persons to be treated as Shareholders of record for such purpose.
SECTION 4. PROXIES. At any meeting of Shareholders, any holder of Shares entitled to vote thereat may vote by proxy, provided that no proxy shall be voted at any meeting unless it shall have been placed on file with the Clerk, or with such other officer or agent of the Trust as the Clerk may direct, for verification prior to the time at which such vote shall be taken. Pursuant to a vote of a majority of the Trustees, proxies may be solicited in the name of one or more Trustees or one or more of the officers of the Trust. When any Share is held jointly by several persons, any one of them may vote at any meeting in person or by proxy in respect of such Share, but if more than one of them shall be present at such meeting in person or by proxy, and such joint owners or their proxies so present disagree as to any vote to be cast, such vote shall not be received in respect of such Share. A proxy purporting to be executed by or on behalf of a Shareholder shall be deemed valid unless challenged at or prior to its exercise, and the burden of proving invalidity shall rest on the challenger. The placing of a Shareholder's name on a proxy pursuant to telephonic or electronically transmitted instructions obtained pursuant to procedures reasonably designed to verify that such instructions have been authorized by such Shareholder shall constitute execution of such proxy by or on behalf of such Shareholder. If the holder of any such Share is a minor or a person of unsound mind, and subject to guardianship or to the legal control of any other person as regards the charge or management of such Share, he may vote by his guardian or such other person appointed or having such control, and such vote may be given in person or by proxy. Any copy, facsimile telecommunication or other reliable reproduction of a proxy may be substituted for or used in lieu of the original proxy for any and all purposes for which the original proxy could be used, provided that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original proxy or the portion thereof to be returned by the Shareholder.
SECTION 5. QUORUM, ADJOURNMENT AND REQUIRED VOTE. A majority of outstanding Shares entitled to vote shall constitute a quorum at any meeting of Shareholders, except that where any provision of law, the Declaration or these By-laws permits or requires that holders of any series or class shall vote as a series or class, then a majority of the aggregate number of Shares of that series or class entitled to vote shall be necessary to constitute a quorum for the transaction of business by that series or class. In the absence of a quorum, a majority of outstanding Shares entitled to vote present in person or by proxy, or, where any provision of law, the Declaration or these By-laws permits or requires that holders of any series or class shall vote as a series or class, a majority of outstanding Shares of that series or class entitled to vote present in person or by proxy, may adjourn the meeting from time to time until a quorum shall be present. Only Shareholders of record shall be entitled to vote on any matter. Each full Share shall be entitled to one vote and fractional Shares shall be entitled to a vote of such fraction. Except as otherwise provided any provision of law, the Declaration or these By-laws, Shares representing a majority of the votes cast shall decide any matter (i.e., abstentions and broker non-votes shall not be counted) and a plurality shall elect a Trustee, provided that where any provision of law, the Declaration or these By-Laws permits or requires that holders of any series or class shall vote as a series or class, then a majority of the Shares of that series or class cast on the matter shall decide the matter (i.e., abstentions and broker non-votes shall not be counted) insofar as that series or class is concerned.
SECTION 6. INSPECTION OF RECORDS. The records of the Trust shall be open to inspection by Shareholders to the same extent as is permitted shareholders of a Massachusetts business corporation.
SECTION 7. ACTION WITHOUT MEETING. Any action which may be taken by Shareholders may be taken without a meeting if a majority of Shareholders entitled to vote on the matter (or such larger proportion thereof as shall be required by law, the Declaration or these By-Laws for approval of such matter) consent to the action in writing and the written consents are filed with the records of the meetings of Shareholders. Such consent shall be treated for all purposes as a vote taken at a meeting of Shareholders.
ARTICLE IV
TRUSTEES
SECTION 1. MEETINGS OF THE TRUSTEES. The Trustees may in their discretion provide for regular or stated meetings of the Trustees. Notice of regular or stated meetings need not be given. Meetings of the Trustees other than regular or stated meetings shall be held whenever called by the Chairman or by any one of the Trustees at the time being in office. Notice of the time and place of each meeting other than regular or stated meetings shall be given by the Secretary or an Assistant Secretary, or the Clerk or an Assistant Clerk or by the officer or Trustee calling the meeting and shall be mailed to each Trustee at least two days before the meeting, or shall be telegraphed, cabled, or wirelessed or sent by facsimile or other electronic means to each Trustee at his business address, or personally delivered to him at least one day before the meeting. Such notice may, however, be waived by any Trustee. Notice of a meeting need not be given to any Trustee if a written waiver of notice, executed by him before or after the meeting, is filed with the records of the meeting, or to any Trustee who attends the meeting without protesting prior thereto or at its commencement the lack of notice to him. A notice or waiver of notice need not specify the purpose of any meeting. Except as provided by law the Trustees may meet by means of a telephone conference circuit or similar communications equipment by means of which all persons participating in the meeting can hear each other, which telephone conference meeting shall be deemed to have been held at a place designated by the Trustees at the meeting. Participation in a telephone conference meeting shall constitute presence in person at such meeting. Any action required or permitted to be taken at any meeting of the Trustees may be taken by the Trustees without a meeting if all the Trustees consent to the action in writing and the written consents are filed with the records of the Trustees' meetings. Such consents shall be treated as a vote for all purposes.
SECTION 2. QUORUM AND MANNER OF ACTING. A majority of the Trustees shall be present at any regular or special meeting of the Trustees in order to constitute a quorum for the transaction of business at such meeting and (except as otherwise required by law, the Declaration or these By-Laws) the act of a majority of the Trustees present at any such meeting, at which a quorum is present, shall be the act of the Trustees. In the absence of a quorum, a majority of the Trustees present may adjourn the meeting from time to time until a quorum shall be present. Notice of an adjourned meeting need not be given.
ARTICLE V
COMMITTEES AND ADVISORY BOARD
SECTION 1. EXECUTIVE AND OTHER COMMITTEES. The Trustees by vote of a
majority of all the Trustees may elect from their own number an Executive
Committee to consist of not less than three (3) Trustees to hold office at the
pleasure of the Trustees which shall have the power to conduct the current and
ordinary business of the Trust while the Trustees are not in session, including
the purchase and sale of securities and the designation of securities to be
delivered upon redemption of Shares of the Trust, and such other powers of the
Trustees as the Trustees may, from time to time, delegate to the Executive
Committee except those powers which by law, the Declaration or these By-Laws
they are prohibited from delegating. The Trustees may also elect from their own
number other Committees from time to time, the number composing such Committees,
the powers conferred upon the same (subject to the same limitations as with
respect to the Executive Committee) and the term of membership on such
Committees to be determined by the Trustees. The Trustees may designate a
chairman of any such Committee.
In the absence of such designation a Committee may elect its own Chairman.
SECTION 2. MEETING, QUORUM AND MANNER OF ACTING. The Trustees may:
(i) provide for stated meetings of any Committee,
(ii) specify the manner of calling and notice required for special meetings of any Committee,
(iii) specify the number of members of a Committee required to constitute a quorum and the number of members of a Committee required to exercise specified powers delegated to such Committee,
(iv) authorize the making of decisions to exercise specified powers by written assent of the requisite number of members of a Committee without a meeting, and
(v) authorize the members of a Committee to meet by means of a telephone conference circuit.
Each Committee shall keep regular minutes of its meetings and records of decisions taken without a meeting and cause them to be recorded in a book designated for that purpose and kept in the office of the Trust.
SECTION 3. ADVISORY BOARD. The Trustees may appoint an Advisory Board to consist in the first instance of not less than three (3) members. Members of such Advisory Board shall not be Trustees or officers and need not be Shareholders. A member of such Advisory Board shall hold office for such period as the Trustees may by resolution provide. Any member of such board may resign therefrom by a written instrument signed by him which shall take effect upon delivery to the Trustees. The Advisory Board shall have no legal powers and shall not perform the functions of Trustees in any manner, such Advisory Board being intended merely to act in an advisory capacity. Such Advisory Board shall meet at such times and upon such notice as the Trustees may by resolution provide.
ARTICLE VI
OFFICERS
SECTION 1. GENERAL PROVISIONS. The officers of the Trust shall be a Chairman, a President, a Treasurer and a Clerk, who shall be elected by the Trustees. The Trustees may elect or appoint such other officers or agents as the business of the Trust may require, including one or more Vice Presidents, a Secretary and one or more Assistant Secretaries, one or more Assistant Treasurers, and one or more Assistant Clerks. The Trustees may delegate to any officer or Committee the power to appoint any subordinate officers or agents.
SECTION 2. TERM OF OFFICE AND QUALIFICATIONS. Except as otherwise provided by law, the Declaration or these By-Laws, the Chairman, the President, the Treasurer and the Clerk shall hold office until his resignation has been accepted by the Trustees or until his respective successor shall have been duly elected and qualified, and all other officers shall hold office at the pleasure of the Trustees. Any two or more offices may be held by the same person. Any officer may be, but none need be, a Trustee or Shareholder.
SECTION 3. REMOVAL. The Trustees, at any regular or special meeting of the Trustees, may remove any officer with or without cause by a vote of a majority of the Trustees. Any officer or agent appointed by any officer or Committee may be removed with or without cause by such appointing officer or Committee.
SECTION 4. POWERS AND DUTIES OF THE CHAIRMAN. The Chairman may call meetings of the Trustees and of any Committee thereof when he deems it necessary and shall preside at all meetings of the Shareholders. Subject to the control of the Trustees and any Committees of the Trustees, the Chairman shall at all times exercise a general supervision and direction over the affairs of the Trust. The Chairman shall have the power to employ attorneys and counsel for the Trust and to employ such subordinate officers, agents, clerks and employees as he may find necessary to transact the business of the Trust. The Chairman shall also have the power to grant, issue, execute or sign such powers of attorney, proxies or other documents as may be deemed advisable or necessary in furtherance of the interests of the Trust. The Chairman shall have such other powers and duties as, from time to time, may be conferred upon or assigned to him by the Trustees.
SECTION 5. POWERS AND DUTIES OF THE PRESIDENT. In the absence or disability of the Chairman, the President shall perform all the duties and may exercise any of the powers of the Chairman, subject to the control of the Trustees. The President shall perform such other duties as may be assigned to him from time to time by the Trustees or the Chairman.
SECTION 6. POWERS AND DUTIES OF VICE PRESIDENTS. In the absence or disability of the President, the Vice President or, if there be more than one Vice President, any Vice President designated by the Trustees shall perform all the duties and may exercise any of the powers of the President, subject to the control of the Trustees. Each Vice President shall perform such other duties as may be assigned to him from time to time by the Trustees or the President.
SECTION 7. POWERS AND DUTIES OF THE TREASURER. The Treasurer shall be the principal financial and accounting officer of the Trust. The Treasurer shall deliver all funds of the Trust which may come into his hands to such custodian as the Trustees may employ pursuant to Article X hereof. The Treasurer shall render a statement of condition of the finances of the Trust to the Trustees as often as they shall require the same and shall in general perform all the duties incident to the office of Treasurer and such other duties as from time to time may be assigned to him by the Trustees. The Treasurer shall give a bond for the faithful discharge of his duties, if required to do so by the Trustees, in such sum and with such surety or sureties as the Trustees shall require.
SECTION 8. POWERS AND DUTIES OF THE CLERK. The Clerk shall keep the minutes of all meetings of the Shareholders in proper books provided for that purpose; he shall have custody of the seal of the Trust; he shall have charge of the Share transfer books, lists and records unless the same are in the charge of the Transfer Agent. He or the Secretary shall attend to the giving and serving of all notices by the Trust in accordance with the provisions of these By-Laws and as required by law; and subject to these By-Laws, he shall in general perform all duties incident to the office of Clerk and such other duties as from time to time may be assigned to him by the Trustees.
SECTION 9. POWERS AND DUTIES OF THE SECRETARY. The Secretary, if any, shall keep the minutes of all meetings of the Trustees. He shall perform such other duties and have such other powers in addition to those specified in these By-Laws as the Trustees shall from time to time designate. If there be no Secretary or Assistant Secretary, the Clerk shall perform the duties of Secretary.
SECTION 10. POWERS AND DUTIES OF ASSISTANT TREASURERS. In the absence or disability of the Treasurer, any Assistant Treasurer designated by the Trustees shall perform all the duties, and may exercise any of the powers, of the Treasurer. Each Assistant Treasurer shall perform such other duties as from time to time may be assigned to him by the Trustees. Each Assistant Treasurer shall give a bond for the faithful discharge of his duties, if required to do so by the Trustees, in such sum and with such surety or sureties as the Trustees shall require.
SECTION 11. POWERS AND DUTIES OF ASSISTANT CLERKS. In the absence or disability of the Clerk, any Assistant Clerk designated by the Trustees shall perform all the duties, and may exercise any of the powers, of the Clerk. The Assistant Clerks shall perform such other duties as from time to time may be assigned to them by the Trustees.
SECTION 12. POWERS AND DUTIES OF ASSISTANT SECRETARIES. In the absence or disability of the Secretary, any Assistant Secretary designated by the Trustees shall perform all of the duties, and may exercise any of the powers, of the Secretary. The Assistant Secretaries shall perform such other duties as from time to time may be assigned to them by the Trustees.
SECTION 13. COMPENSATION OF OFFICERS AND TRUSTEES AND MEMBERS OF THE ADVISORY BOARD. Subject to any applicable law or provision of the Declaration, the compensation of the officers and Trustees and members of the Advisory Board shall be fixed from time to time by the Trustees or, in the case of officers, by any Committee or officer upon whom such power may be conferred by the Trustees. No officer shall be prevented from receiving such compensation as such officer by reason of the fact that he is also a Trustee.
ARTICLE VII
FISCAL YEAR
The fiscal year of the Trust shall begin on the first day of February in each year and shall end on the last day of January in that year, provided, however, that the Trustees may from time to time change the fiscal year.
ARTICLE VIII
SEAL
The Trustees shall adopt a seal which shall be in such form and shall have such inscription thereon as the Trustees may from time to time prescribe.
ARTICLE IX
WAIVERS OF NOTICE
Whenever any notice is required to be given by law, the Declaration or these By-Laws, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent thereto. A notice shall be deemed to have been telegraphed, cabled or wirelessed or sent by facsimile or other electronic means for the purposes of these By-Laws when it has been delivered to a representative of any telegraph, cable or wireless company with instruction that it be telegraphed, cabled or wirelessed or when a confirmation of such facsimile having been sent, or a confirmation that such electronic means has sent the notice being transmitted, is generated. Any notice shall be deemed to be given at the time when the same shall be mailed, telegraphed, cabled or wirelessed or when sent by facsimile or other electronic means.
ARTICLE X
CUSTODIAN
SECTION 1. APPOINTMENT AND DUTIES. The Trustees shall at all times employ a bank or trust company having a capital, surplus and undivided profits of at least five million dollars ($5,000,000) as custodian with authority as its agent, but subject to such restrictions, limitations and other requirements, if any, as may be contained in the Declaration, these By-Laws and the 1940 Act:
(1) to hold the securities owned by the Trust and deliver the same upon written order;
(2) to receive and receipt for any monies due to the Trust and deposit the same in its own banking department or elsewhere as the Trustees may direct;
(3) to disburse such funds upon orders or vouchers;
(4) if authorized by the Trustees, to keep the books and accounts of the Trust and furnish clerical and accounting services; and
(5) if authorized to do so by the Trustees, to compute the net income of the Trust;
all upon such basis of compensation as may be agreed upon between the Trustees and the custodian. If so directed by a Majority Shareholder Vote, the custodian shall deliver and pay over all property of the Trust held by it as specified in such vote.
The Trustees may also authorize the custodian to employ one or more sub-custodians from time to time to perform such of the acts and services of the custodian and upon such terms and conditions, as may be agreed upon between the custodian and such sub-custodian and approved by the Trustees, provided that in every case such sub-custodian shall be a bank or trust company organized under the laws of the United States or one of the states thereof and having capital, surplus and undivided profits of at least five million dollars ($5,000,000).
SECTION 2. CENTRAL CERTIFICATE SYSTEM. Subject to such rules, regulations and orders as the Commission may adopt, the Trustees may direct the custodian to deposit all or any part of the securities owned by the Trust in a system for the central handling of securities established by a national securities exchange or a national securities association registered with the Commission under the Securities Exchange Act of 1934, or such other person as may be permitted by the Commission, or otherwise in accordance with the 1940 Act, pursuant to which system all securities of any particular class or series of any issuer deposited within the system are treated as fungible and may be transferred or pledged by bookkeeping entry without physical delivery of such securities, provided that all such deposits shall be subject to withdrawal only upon the order of the Trust or its custodian.
SECTION 3. ACCEPTANCE OF RECEIPTS IN LIEU OF CERTIFICATES. Subject to such rules, regulations and orders as the Commission may adopt, the Trustees may direct the custodian to accept written receipts or other written evidences indicating purchases of securities held in book-entry form in the Federal Reserve System in accordance with regulations promulgated by the Board of Governors of the Federal Reserve System and the local Federal Reserve Banks in lieu of receipt of certificates representing such securities.
SECTION 4. PROVISIONS OF CUSTODIAN CONTRACT. The following provisions shall apply to the employment of a custodian pursuant to this Article X and to any contract entered into with the custodian so employed:
(a) The Trustees shall cause to be delivered to the custodian all securities owned by the Trust or to which it may become entitled, and shall order the same to be delivered by the custodian only upon completion of a sale, exchange, transfer, pledge, or other disposition thereof, and upon receipt by the custodian of the consideration therefor or a certificate of deposit or a receipt of an issuer or of its Transfer Agent, all as the Trustees may generally or from time to time require or approve, or to a successor custodian; and the Trustees shall cause all funds owned by the Trust or to which it may become entitled to be paid to the custodian, and shall order the same disbursed only for investment against delivery of the securities acquired, or in payment of expenses, including management compensation, and liabilities of the Trust, including distributions to Shareholders, or to a successor custodian; provided, however, that nothing herein shall prevent delivery of securities for examination to the broker selling the same in accord with the "street delivery" custom whereby such securities are delivered to such broker in exchange for a delivery receipt exchanged on the same day for an uncertified check of such broker to be presented on the same day for certification.
(b) In case of the resignation, removal or inability to serve of any such custodian, the Trust shall promptly appoint another bank or trust company meeting the requirements of this Article X as successor custodian. The agreement with the custodian shall provide that the retiring custodian shall, upon receipt of notice of such appointment, deliver the funds and property of the Trust in its possession to and only to such successor, and that pending appointment of a successor custodian, or a vote of the Shareholders to function without a custodian, the custodian shall not deliver funds and property of the Trust to the Trust, but may deliver them to a bank or trust company doing business in Boston, Massachusetts, of its own selection, having an aggregate capital, surplus and undivided profits (as shown in its last published report) of at least $5,000,000, as the property of the Trust to be held under terms similar to those on which they were held by the retiring custodian.
ARTICLE XI
SALE OF SHARES OF THE TRUST
The Trustees may from time to time issue and sell or cause to be issued and sold Shares for cash or other property, which shall in every case be paid or delivered to the Custodian as agent of the Trust before the delivery of any certificate for such shares. The Shares, including additional Shares which may have been repurchased by the Trust (herein sometimes referred to as "treasury shares"), may not be sold at a price less than the net asset value thereof (as defined in Article XII hereof) determined by or on behalf of the Trustees next after the sale is made or at some later time after such sale.
No Shares need be offered to existing Shareholders before being offered to others. No Shares shall be sold by the Trust (although Shares previously contracted to be sold may be issued upon payment therefor) during any period when the determination of net asset value is suspended by declaration of the Trustees pursuant to the provisions of Article XII hereof. In connection with the acquisition by merger or otherwise of all or substantially all the assets of an investment company (whether a regulated or private investment company or a personal holding company), the Trustees may issue or cause to be issued Shares and accept in payment therefor such assets valued at not more than market value thereof in lieu of cash, notwithstanding that the federal income tax basis to the Trust of any assets so acquired may be less than the market value, provided that such assets are of the character in which the Trustees are permitted to invest the funds of the Trust.
The Trustees, in their sole discretion, may cause the Trust to redeem all of the Shares of the Trust held by any Shareholder if the value of such Shares is less than a minimum amount established from time to time by the Trustees.
ARTICLE XII
NET ASSET VALUE OF SHARES
The term "net asset value" per Share of any class or series of Shares shall mean: (i) the value of all assets of that series or class; (ii) less total liabilities of such series or class; (iii) divided by the number of Shares of such series or class outstanding, in each case at the time of such determination, all as determine by or under the direction of the Trustees. Such value shall be determined on such days and at such time as the Trustees may determine. Such determination shall be made with respect to securities for which market quotations are readily available, at the market value of such securities; and with respect to other securities and assets, at the fair value as determined in good faith by or pursuant to the direction of the Trustees, provided, however, that the Trustees, without shareholder approval, may alter the method of appraising portfolio securities insofar as permitted under the 1940 Act, and the rules, regulations and interpretations thereof promulgated or issued by the Securities and Exchange Commission or insofar as permitted by any order of the Securities and Exchange commission. The Trustees may delegate any powers and duties under this Article XII with respect to appraisal of assets and liabilities. At any time the Trustees may cause the value per share last determined to be determined again in a similar manner and may fix the time when such predetermined value shall become effective.
ARTICLE XIII
DIVIDENDS AND DISTRIBUTIONS
SECTION 1. LIMITATIONS ON DISTRIBUTIONS. The total of distributions to Shareholders of a particular series or class paid in respect of any one fiscal year, subject to the exceptions noted below, shall, when and as declared by the Trustees, be approximately equal to the sum of:
(i) the net income, exclusive of the profits or losses realized upon the sale of securities or other property, of such series or class for such fiscal year, determined in accordance with generally accepted accounting principles (which, if the Trustees so determine, may be adjusted for net amounts included as such accrued net income in the price of Shares of such series or class issued or repurchased), but if the net income of such series or class exceeds the amount distributed by less than one cent per share outstanding at the record date for the final dividend, the excess shall be treated as distributable income of such series or class for the following fiscal year; and
(ii) in the discretion of the Trustees, an additional amount which shall not substantially exceed the excess of profits over losses on sales of securities or other property allocated or belonging to such series or class for such fiscal year.
The decision of the Trustees as to what, in accordance with generally accepted accounting principles, is income and what is principal shall be final, and except as specifically provided herein the decision of the Trustees as to what expenses and charges of the Trust shall be charged against principal and what against income shall be final, all subject to any applicable provisions of the 1940 Act and rules, regulations and orders of the Commission promulgated thereunder. For the purposes of the limitation imposed by this Section 1, Shares issued pursuant to Section 2 of this Article XIII shall be valued at the amount of cash which the Shareholders would have received if they had elected to receive cash in lieu of such Shares.
Inasmuch as the computation of net income and gains for federal income tax purposes may vary from the computation thereof on the books, the above provisions shall be interpreted to give to the Trustees the power in their discretion to distribute for any fiscal year as ordinary dividends and as capital gains distributions, respectively, additional amounts sufficient to enable the Trust to avoid or reduce liability for taxes. Any payment made to Shareholders pursuant to clause (ii) of this Section 1 shall be accompanied by a written statement showing the source or sources of such payment, and the basis of computation thereof.
SECTION 2. DISTRIBUTIONS PAYABLE IN CASH OR SHARES. The Trustees shall
have power, to the fullest extent permitted by the laws of The Commonwealth of
Massachusetts but subject to the limitation as to cash distributions imposed by
Section 1 of this Article XIII, at any time or from time to time to declare and
cause to be paid distributions payable at the election of any Shareholder of any
series or class (whether exercised before or after the declaration of the
distribution) either in cash or in Shares of such series, provided that the sum
of:
(i) the cash distribution actually paid to any Shareholder, and
(ii) the net asset value of the Shares which that Shareholder elects to receive, in effect at such time at or after the election as the Trustees may specify, shall not exceed the full amount of cash to which that Shareholder would be entitled if he elected to receive only cash.
In the case of a distribution payable in cash or Shares at the election of a Shareholder, the Trustees may prescribe whether a Shareholder, failing to express his election before a given time shall be deemed to have elected to take Shares rather than cash, or to take cash rather then Shares, or to take Shares with cash adjustment of fractions.
The Trustees, in their sole discretion, may cause the Trust to require that all distributions payable to a shareholder in amounts less than such amount or amounts determined from time to time by the Trustees be reinvested in additional shares of the Trust rather than paid in cash, unless a shareholder who, after notification that his distributions will be reinvested in additional shares in accordance with the preceding phrase, elects to receive such distributions in cash. Where a shareholder has elected to receive distributions in cash and the postal or other delivery service is unable to deliver checks to the shareholder's address of record, the Trustees, in their sole discretion, may cause the Trust to require that such Shareholder's distribution option will be converted to having all distributions reinvested in additional shares.
SECTION 3. STOCK DIVIDENDS. Anything in these By-Laws to the contrary notwithstanding, the Trustees may at any time declare and distribute pro rata among the Shareholders of any series or class a "stock dividend" out of either authorized but unissued Shares of such series or class or treasury Shares of such series or class or both.
ARTICLE XIV
DERIVATIVE CLAIMS
No Shareholder shall have the right to bring or maintain any court action, proceeding or claim on behalf of the Trust or any series or class thereof without first making demand on the Trustees requesting the Trustees to bring or maintain such action, proceeding or claim. Such demand shall be excused only when the plaintiff makes a specific showing that irreparable injury to the Trust or any series or class thereof would otherwise result. Such demand shall be mailed to the Clerk of the Trust at the Trust's principal office and shall set forth in reasonable detail the nature of the proposed court action, proceeding or claim and the essential facts relied upon by the Shareholder to support the allegations made in the demand. The Trustees shall consider such demand within 45 days of its receipt by the Trust. In their sole discretion, the Trustees may submit the matter to a vote of Shareholders of the Trust or any series or class thereof, as appropriate. Any decision by the Trustees to bring, maintain or settle (or not to bring, maintain or settle) such court action, proceeding or claim, or to submit the matter to a vote of Shareholders, shall be made by the Trustees in their business judgment and shall be binding upon the Shareholders. Any decision by the Trustees to bring or maintain a court action, proceeding or suit on behalf of the Trust or any series or class thereof shall be subject to the right of the Shareholders under Article VI, Section 6.8 of the Declaration to vote on whether or not such court action, proceeding or suit should or should not be brought or maintained.
ARTICLE XV
AMENDMENTS
These By-Laws, or any of them, may be altered, amended or repealed, or new By-Laws may be adopted
(a) by Majority Shareholder Vote, or
(b) by the Trustees,
provided, however, that no By-Law may be amended, adopted or repealed by the Trustees if such amendment, adoption or repeal requires, pursuant to law, the Declaration or these By-Laws, a vote of the Shareholders or if such amendment, adoption or repeal changes or affects the provisions of Sections 1 and 4 of Article X or the provisions of this Article XV.
EXHIBIT NO. 99.5(a)
INVESTMENT ADVISORY AGREEMENT
THIS AGREEMENT, made this 20th day of May, 1987, by and between MASSACHUSETTS FINANCIAL HIGH INCOME TRUST, a Massachusetts business trust (the "Fund") and MASSACHUSETTS FINANCIAL SERVICES COMPANY, a Delaware corporation (the "Adviser").
WITNESSETH:
WHEREAS, the Fund is engaged in business as an open-end investment company registered under the Investment Company Act of 1940;
WHEREAS, the Adviser is willing to provide business management services to the Fund on the terms and conditions hereinafter set forth;
WHEREAS, the Fund is composed of two Series, Series I and Series II, and terms for the provision of advisory services have been established for Series I pursuant to an agreement between the Fund and the Adviser, dated May 20, 1982;
WHEREAS, the Fund wishes to establish terms for the provision of advisory to Series II of the Fund (the "Series") services hereby;
NOW, THEREFORE, in consideration of the mutual covenants and agreements of the parties hereto as herein set forth, the parties covenant and agree as follows:
ARTICLE 1: DUTIES OF THE ADVISER. The Adviser shall provide the Series with such investment advice and supervision as the latter may from time to time consider necessary for the proper management of its funds. The Adviser shall act as Adviser to the Series and as such shall furnish continuously an investment program and shall determine from time to time what securities shall be purchased, sold or exchanged and what portion of the assets of the Series shall be held uninvested, subject always to the restrictions of the Declaration of Trust of the Fund, dated December 15, 1977, and By-Laws, each as amended from time to time (respectively, the "Declaration" and the "By-Laws"), and to the provisions of the Investment Company Act of 1940. The Adviser shall also make recommendations as to the manner in which voting rights, rights to consent to corporate action and any other rights pertaining to the Series' portfolio securities shall be exercised. Should the Trustees at any time, however, make any definite determination as to the investment policy and notify the Adviser thereof in writing, the Adviser shall be bound by such determination for the period, if any, specified in such notice or until similarly notified that such determination has been revoked. The Adviser shall take, on behalf of the Series, all actions which it deems necessary to implement the investment policies determined as provided above, and in particular to place all orders for the purchase or sale of portfolio securities for the Series' account with brokers or dealers selected by it, and to that end the Adviser is authorized as the agent of the Fund to give instructions to the Custodian of the Fund as to deliveries of securities and payments of cash for the account of the Series. In connection with the selection of such brokers or dealers and the placing of such orders, the Adviser is directed to seek for the Series the most favorable execution and price. After fulfilling this primary requirement of seeking for the Series the most favorable execution and price, the Adviser is hereby expressly authorized to consider, subject to any applicable laws, rules and regulations, statistical, research and other information or services furnished to the Adviser or the Series.
ARTICLE 2: ALLOCATION OF CHARGES AND EXPENSES. The Adviser shall furnish at its own expense all necessary administrative services, office space, equipment and clerical personnel, and investment advisory facilities and executive and supervisory personnel for managing the investments, effecting the portfolio transactions, and in general administering the affairs of the Series. The Adviser shall arrange, if desired by the Fund, for Directors, officers and employees of the Adviser to serve as Trustees, officers or agents of the Fund if duly elected or appointed to such positions and subject to their individual consent and to any limitations imposed by law. It is understood that the Fund will pay all of its own expenses including, without limitation, compensation of Trustees not affiliated with the Adviser, governmental fees, interest charges, taxes, membership dues in the Investment Company Institute allocable to the Fund, fees and expenses of independent auditors, of legal counsel and of any transfer agent, registrar and dividend disbursing agent of the Fund, expenses of repurchasing and redeeming shares, expenses of preparing, printing and mailing share certificates, prospectuses, shareholders' reports, notices, proxy statements and reports to governmental officers and commissions, brokerage and other expenses connected with the execution of portfolio security transactions, insurance premiums, fees and expenses of the custodian for all services to the Fund, including safekeeping of funds and securities, keeping of books and accounts and calculation of the net asset value of shares of the Fund, expenses of shareholders' meetings, and expenses relating to the issuance, registration and qualification of shares of the Fund.
ARTICLE 3: COMPENSATION OF THE ADVISER. For the services to be rendered and for the facilities to be furnished as provided in Articles 1 and 2 above, the Series shall pay to the Adviser a fee computed and paid monthly in an amount equal to the sum of .30% of the average daily net assets of the Series plus 4.09% of the adjusted gross income (i.e., income other than proceeds from the sale of securities) of the Series, in each case on an annual basis for the Series' then-current fiscal year, provided that such computation shall commence on the effective date of this Agreement and shall be based on the average daily net assets and adjusted gross income of the Fund on the after such date; and provided further that:
The Adviser will pay to the Series a sum equal to the amount by which the aggregate expenses of the Fund incurred during such fiscal year, but excluding interest, taxes and brokerage commissions, exceed the lesser of either 25% of gross income of the Series for the preceding year or the sum of (a) 1 1/2% of the average daily net assets of the Series for the preceding year up to and including $40,000,000 and (b) 1% of any excess of average daily net assets of the Series for the preceding year over $40,000,000.
The obligation of the Adviser to reimburse the Series for expenses incurred for any year may be terminated or revised at any time by the Adviser without the consent of the Fund by notice in writing from the Adviser to the Fund, provided, however, that termination or revision of the Adviser's obligation to reimburse for expenses is not to be effective with respect to the fiscal year within which such notice is given.
If the Adviser shall serve for less than the whole of any period specified in this Article 3, the compensation to the Adviser shall be prorated.
ARTICLE 4: COVENANTS OF THE ADVISER. The Adviser agrees that it will not deal with itself, or with the Trustees of the Fund or the Fund's principal underwriter as principals in making purchases or sales of securities or other property for the account of the Fund, except as permitted by the Investment Company Act of 1940 and the Rules, Regulations or orders thereunder, will not take a long or short position in the shares of the Series except as provided by the Declaration, and will comply with all other provisions of the Declaration and the By-Laws relative to the Adviser and its directors and officers.
ARTICLE 5: LIMITATION OF LIABILITY OF THE ADVISER. The Adviser shall not 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 Series, except for willful misfeasance, bad faith or gross negligence in the performance of its duties, or by reason of reckless disregard of its duties and obligations hereunder. As used in this Article 5, the term "Adviser" shall include directors, officers and employees of the Adviser as well as the corporation itself.
ARTICLE 6: ACTIVITIES OF THE ADVISER. The services of the Adviser to the Series are not deemed to be exclusive, the Adviser being free to render services to others. The Adviser may permit other fund clients to use the words "Massachusetts Financial" in their names. The Fund agrees that if the Adviser shall for any reason no longer serve as the Adviser to the Fund, the Fund will change its name so as to delete the words "Massachusetts Financial". It is understood that the Trustees, officers, and shareholders of the Fund are or may be or become interested in the Adviser, as directors, officers, employees, or otherwise and that directors, officers and employees of the Adviser are or may become similarly interested in the Fund, and that the Adviser may be or become interested in the Fund as a shareholder or otherwise.
ARTICLE 7: DURATION, TERMINATION AND AMENDMENTS OF THIS AGREEMENT. This Agreement shall become effective on the date of its execution and shall govern the relations between the parties hereto thereafter, and shall remain in force until August 1, 1988 on which date it will terminate unless its continuance after August 1, 1988 is specifically approved at least annually (i) by the vote of a majority of the Trustees of the Fund who are not interested persons of the Fund or of the Adviser at a meeting specifically called for the purpose of voting on such approval, and (ii) by the Board of Trustees of the Fund, or by vote of a majority of the outstanding voting securities of the Series. The aforesaid requirement that continuance of this Agreement be "specifically approved at least annually" shall be construed in a manner consistent with the Investment Company Act of 1940 and the Rules and Regulations thereunder.
This Agreement may be terminated at any time without the payment of any penalty by the Trustees or by vote of a majority of the outstanding voting securities of the Series, or by the Adviser, on not more than sixty days' nor less than thirty days' written notice to the other party. This Agreement shall automatically terminate in the event of its assignment.
This Agreement may be amended only if such agreement is approved by vote of a majority of the outstanding voting securities of the Series.
The terms "vote of a majority of the outstanding voting securities", "assignment", "affiliated person", and "interested person", when used in this Agreement, shall have the respective meanings specified in the Investment Company Act of 1940 and the Rules and Regulations thereunder, subject, however, to such exemptions as may be granted by the Securities and Exchange Commission under said Act.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered in their names and on their behalf by the undersigned officers thereunto duly authorized, and their respective seals to be hereto affixed, all as of the day and year first above written. The undersigned Trustee of the Fund has executed this Agreement not individually, but as Trustee under the Declaration and the obligations of this Agreement are not binding upon any of the Trustees or shareholders of the Fund, individually, but bind only the trust estate.
MASSACHUSETTS FINANCIAL HIGH
INCOME TRUST
MASSACHUSETTS FINANCIAL
SERVICES COMPANY
EXHIBIT NO. 99.6(b)
DISTRIBUTION AGREEMENT
DISTRIBUTION AGREEMENT, made this first day of January, 1995, by and between MFS SERIES TRUST III, a Massachusetts business trust (the "Trust"), on behalf of each series from time to time of the Trust (referred to individually as a "Fund" and collectively as the "Funds") and MFS FUND DISTRIBUTORS, INC., a Delaware corporation (the "Distributor");
NOW, THEREFORE, in consideration of the mutual promises and undertakings herein contained, the parties hereto agree as follows:
1. The Trust grants to the Distributor the right, as agent of the Trust, to sell Shares of Beneficial Interest, without par value, of the Funds (the "Shares") upon the terms herein below set forth during the term of this Agreement. While this Agreement is in force, the Distributor agrees to use its best efforts to find purchasers for Shares.
The Distributor shall have the right, as agent of the Trust, to order from the Trust the Shares needed, but not more than the Shares needed (except for clerical errors and errors of transmission) to fill unconditional orders for Shares placed with the Distributor by dealers, banks or other financial institutions or investors as set forth in the current Prospectus and Statement of Additional Information (collectively, the "Prospectus") relating to the Shares. The price which shall be paid to the Trust for the Shares so purchased shall be the net asset value used in determining the public offering price on which such orders were based. The Distributor shall notify the Custodian of the Trust, at the end of each business day, or as soon thereafter as the orders placed with it have been compiled, of the number of Shares and the prices thereof which have been ordered through the Distributor since the end of the previous day.
The right granted to the Distributor to place orders for Shares with the Trust shall be exclusive, except that said exclusive right shall not apply to Shares issued in the event that an investment company (whether a regulated or private investment company or a personal holding company) is merged or consolidated with the Trust (or a Fund) or in the event that the Trust (or a Fund) acquires by purchase or otherwise, all (or substantially all) the assets or the outstanding shares of any such company; nor shall it apply to Shares issued by the Trust (or a Fund) as a stock dividend or a stock split. The exclusive right to place orders for Shares granted to the Distributor may be waived by the Distributor by notice to the Trust in writing, either unconditionally or subject to such conditions and limitations as may be set forth in the notice to the Trust. The Trust hereby acknowledges that the Distributor may render distribution and other services to other parties, including other investment companies. In connection with its duties hereunder, the Distributor shall also arrange for computation of performance statistics with respect to the Trust and arrange for publication of current price information in newspapers and other publications.
2. The Shares may be sold through the Distributor to dealers, banks and other financial institutions having sales agreements with the Distributor, upon the following terms and conditions:
The public offering price, i.e., the price per Share at which the Distributor or dealers, banks or other financial institutions purchasing Shares through the Distributor may sell Shares to the public, shall be the public offering price as set forth in the current Prospectus relating to the Shares, including a sales charge (where applicable) not to exceed the amount permitted by Article III, Section 26 of the National Association of Securities Dealers, Inc.'s Rule of Fair Practice, as amended from time to time. The Distributor shall retain the sales charge (where applicable) less any applicable dealer or comparable discount. If the resulting public offering price does not come out to an even cent, the public offering price shall be adjusted to the nearer cent. In addition, the Trust agrees that the Distributor may impose certain contingent deferred sales charges (where applicable) in connection with the redemption of Shares, not to exceed 6% of the net asset value of Shares, and the Distributor shall retain (or receive from the Trust, as the case may be) all such contingent deferred sales charges.
The Distributor may place orders for Shares at the net asset value for such Shares (as established pursuant to paragraph l above) on behalf of such purchasers and under such circumstances as the Prospectus describes, provided that such sales comply with Rule 22d-1 under the Investment Company Act of 1940 or any exemptive order granted by the Securities and Exchange Commission. The Distributor may also place orders for Shares at net asset value on behalf of persons reinvesting the proceeds of the redemption or resale of Shares or shares of other investment companies for which the Distributor acts as Distributor or as otherwise provided in the current Prospectus.
The net asset value of Shares shall be determined by the Trust or by an agent of the Trust, as of the close of regular trading of the New York Stock Exchange on each business day on which said Exchange is open, in accordance with the method set forth in the governing instruments (as hereinafter defined) of the Trust. The Trust may also cause the net asset value to be determined in substantially the same manner or estimated in such manner and as of such other hour or hours as may from time to time be agreed upon in writing by the Trust and Distributor. The Trust shall have the right to suspend the sale of Shares if, because of some extraordinary condition, the New York Stock Exchange shall be closed, or if conditions obtaining during the hours when the Exchange is open render such action advisable, or for any other reasons deemed adequate by the Trust.
3. The Trust agrees that it will, from time to time, take all necessary action to register the offering and sale of Shares under the Securities Act of l933, as amended (the "Act"), and applicable state securities laws.
The Distributor shall be an independent contractor and neither the Distributor nor any of its directors, officers or employees as such, is or shall be an employee of the Trust. It is understood that Trustees, officers and shareholders of the Trust are or may become interested in the Distributor, as Directors, officers and employees, or otherwise and that Directors, officers and employees of the Distributor are or may become similarly interested in the Trust and that the Distributor may be or become interested in the Trust as a shareholder or otherwise. The Distributor is responsible for its own conduct and the employment, control and conduct of its agents and employees and for injury to such agents or employees or to others through its agents or employees. The Distributor assumes full responsibility for its agents and employees under applicable statutes and agrees to pay all employer taxes thereunder.
4. The Distributor covenants and agrees that, in selling Shares, it
will use its best efforts in all respects duly to conform with the requirements
of all state and federal laws and the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. (the "NASD") relating to the sale of
Shares, and will indemnify and hold harmless the Trust and each of its Trustees
and officers and each person, if any, who controls the Trust within the meaning
of Section 15 of the Act, against any loss, liability, damages, claim or expense
(including the reasonable cost of investigating or defending any alleged loss,
liability, damages, claim or expense and reasonable counsel fees incurred in
connection therewith), arising by reason of any person's acquiring any Shares,
which may be based upon the Act or any other statute or common law, on account
of any wrongful act of the Distributor or any of its employees (including any
failure to conform with any requirement of any state or federal law or the Rules
of Fair Practice of the NASD relating to the sale of Shares) or on the ground
that the registration statement or Prospectus as from time to time amended and
supplemented, includes an untrue statement of a material fact or omits to state
a material fact required to be stated therein or necessary in order to make the
statements therein not misleading, unless any such act, statement or omission
was made in reliance upon information furnished to the Distributor by or on
behalf of the Trust, provided, however, that in no case (i) is the indemnity of
the Distributor in favor of any person indemnified to be deemed to protect the
Trust or any such person against any liability to which the Trust or any such
person would otherwise be subject by reason of willful misfeasance, bad faith or
gross negligence in the performance of its or his duties or by reason of its or
his reckless disregard of its obligations and duties under this Agreement, or
(ii) is the Distributor to be liable under its indemnity agreement contained in
this paragraph with respect to any claim made against the Trust or any person
indemnified unless the Trust or such person, as the case may be, shall have
notified the Distributor in writing within a reasonable time after the summons
or other first legal process giving information of the nature of the claim shall
have been served upon the Trust or upon such person (or after the Trust or such
person shall have received notice of such service on any designated agent), but
failure to notify the Distributor of any such claim shall not relieve it from
any liability which it may have to the Trust or any person against whom such
action is brought otherwise than on account of its indemnity agreement contained
in this paragraph. The Distributor shall be entitled to participate, at its own
expense, in the defense, or, if it so elects, to assume the defense of any suit
brought to enforce any such liability, but, if the Distributor elects to assume
the defense, such defense shall be conducted by counsel chosen by it and
satisfactory to the Trust, or to its officers or Trustees, or to any controlling
person or persons, defendant or defendants in the suit. In the event that the
Distributor elects to assume the defense of any such suit and retain such
counsel, the Trust or such officers or Trustees or controlling person or
persons, defendant or defendants in the suit, shall bear the fees and expenses
of any additional counsel retained by them, but, in case the Distributor does
not elect to assume the defense of any such suit, it shall reimburse the Trust
and such officers and Trustees or controlling person or persons, defendant or
defendants in such suit, for the reasonable fees and expenses of any counsel
retained by them. The Distributor agrees promptly to notify the Trust of the
commencement of any litigation or proceedings against it in connection with the
issue and sale of any Shares. Neither the Distributor nor any other person is
authorized to give any information or to make any representation on behalf of
the Trust, other than those contained in the registration statement or
Prospectus filed with the Securities and Exchange Commission under the Act (as
said registration statement or Prospectus may be amended or supplemented from
time to time), covering the Shares or other than those contained in periodic
reports to shareholders of the Trust.
5. The Trust will pay, or cause to be paid -
(i) all costs and expenses of the Trust, including fees and disbursements of its counsel, in connection with the preparation and filing of any required registration statement or Prospectus under the Act covering Shares and all amendments and supplements thereto and any notices regarding the registration of shares, and preparing and mailing to shareholders Prospectuses, statements and confirmations and periodic reports (including the expense of setting up in type any such registration statement, Prospectus or periodic report);
(ii) the expenses (including auditing expenses) of qualification of the Shares for sale, and, if necessary or advisable in connection therewith, of qualifying the Trust as a dealer or broker, in such states as shall be selected by the Distributor and the fees payable to each such state with respect to shares sold and for continuing the qualification therein until the Distributor notifies the Trust that it does not wish such qualification continued;
(iii) the cost of preparing temporary or permanent certificates for Shares;
(iv) all fees and disbursements of the transfer agent of the Trust;
(v) the cost and expenses of delivering to the Distributor at its office in Boston, Massachusetts, all Shares sold through it as Distributor hereunder; and
(vi) all the federal and state issue and/or transfer taxes payable upon the issue by or (in the case of treasury Shares) transfer from the Trust of any and all Shares purchased through the Distributor hereunder.
The Distributor agrees that, after the Prospectus and periodic reports have been set up in type, it will bear the expense (other than the cost of mailing to shareholders of the Trust of printing and distributing any copies thereof which are to be used in connection with the offering of Shares to dealers, banks or other financial institutions or investors. The Distributor further agrees that it will bear the expenses of preparing, printing and distributing any other literature used by the Distributor or furnished by it for use by dealers, banks or other financial institutions in connection with the offering of the Shares for sale to the public and expenses of advertising in connection with such offering. The Distributor will also bear the expense of sending confirmations and statements to dealers, banks and other financial institutions having sales agreements with the Distributor. Nothing in this paragraph 5 shall be deemed to prohibit or conflict with any payment by the Trust or any Fund to the Distributor pursuant to any Distribution Plan adopted as in effect pursuant to Rule 12b-1 under the Investment Company Act of 1940.
6. The Trust hereby authorizes the Distributor to repurchase, upon the terms and conditions set forth in written instructions given by the Trust to the Distributor from time to time, as agent of the Trust and for its account, such Shares as may be offered for sale to the Trust from time to time; provided the Distributor shall have the right, as stated above in paragraph 2 of this Agreement, to retain (or to receive from the Trust, as the case may be) a deferred sales charge not to exceed 6% of the net asset value of the Shares so repurchased.
(a) The Distributor shall notify in writing the Custodian of the Trust, at the end of each business day, or as soon thereafter as the repurchases have been compiled, of the number of Shares repurchased for the account of the Trust since the last previous report, together with the prices at which such repurchases were made, and upon the request of any Officer or Trustee of the Trust shall furnish similar information with respect to all repurchases made up to the time of the request on any day.
(b) The Trust reserves the right to suspend or revoke the foregoing authorization at any time. Unless otherwise stated, any such suspension or revocation shall be effective forthwith upon receipt of notice thereof by an officer of the Distributor, by telegraph or by written notice from the Trust. In the event that the authorization of the Distributor is, by the terms of such notice, suspended for more than twenty-four hours or until further notice, the authorization given by this paragraph 6 shall not be revived except by action of a majority of the members of the Board of Trustees of the Trust.
(c) The Distributor shall have the right to terminate the operation of this paragraph 6 upon giving to the Trust thirty days' written notice thereof.
(d) The Trust agrees to authorize and direct the Custodian to pay, for the account of the Trust, the purchase price of any Shares so repurchased against delivery of the certificates, if any, in proper form for transfer to the Trust or for cancellation by the Trust.
(e) The Distributor shall receive no commission in respect of any repurchase of Shares under the foregoing authorization and appointment as agent, except in connection with contingent deferred sales charge as provided in the current Prospectus relating to the Shares.
(f) The Trust agrees to reimburse the Distributor, from time to time upon demand, for any reasonable expenses incurred in connection with the repurchase of Shares pursuant to this paragraph 6.
7. If, at any time during the existence of this Agreement, the Trust shall deem it necessary or advisable in the best interests of the Trust that any amendment of this Agreement be made in order to comply with the recommendations or requirements of the Securities and Exchange Commission or other governmental authority or to obtain any advantage under Massachusetts, any state or federal tax laws, it shall notify the Distributor of the form of amendment which it deems necessary or advisable and the reasons therefore. If the Distributor declines to assent to such amendment, the Trust may terminate this Agreement forthwith by written notice to the Distributor without payment of any penalty. If, at any time during the existence of this Agreement, upon request by the Distributor, the Trust fails (after a reasonable time) to make any changes in its governing instruments or in its methods of doing business which are necessary in order to comply with any requirements of federal or state laws or regulations, laws or regulations of the Securities and Exchange Commission or of a national securities association of which the Distributor is or may be a member, relating to the sale of Shares, the Distributor may terminate this Agreement forthwith by written notice to the Trust without payment of any penalty.
8. The Distributor agrees that it will not take any long or short positions in the Shares except as permitted by paragraphs l and 6 hereof. Whenever used in this Agreement, the term "governing instruments" shall mean the Declaration of Trust and the By-Laws of the Trust, as from time to time amended.
9. This Agreement shall become effective on January 1, 1995 and shall
continue in force until August 1, 1996 on which date it will terminate unless
its continuance after August 1, 1996, is specifically approved at least annually
(i) by the vote of a majority of the Board of Trustees of the Trust who are not
interested persons of the Trust or of the Distributor at a meeting specifically
called for the purpose of voting on such approval, and (ii) by the Board of
Trustees of the Trust or by vote of a majority of the outstanding voting
securities of that Fund. The aforesaid requirement that continuance of this
Agreement be "specifically approved at least annually" shall be construed in a
manner consistent with the Investment Company Act of l940 and the Rules and
Regulations thereunder.
This Agreement may be terminated as to any Fund at any time by either party without payment of any penalty on not more than sixty days' or less than thirty days' written notice to the other party.
10. This Agreement shall automatically terminate in the event of its assignment.
11. The terms "vote of a majority of the outstanding voting securities", "interested person" and "assignment" shall have the respective meanings specified in the Investment Company Act of l940 and the Rules and Regulations thereunder, subject, however, to such exemptions as may be granted by the Securities and Exchange Commission under said Act.
12. This Agreement shall be governed by the laws of The Commonwealth of Massachusetts.
13. A copy of the Declaration of Trust of the Trust is on file with the Secretary of State of The Commonwealth of Massachusetts. The Distributor acknowledges that the obligations of or arising out of this instrument are not binding upon any of the Trust's trustees, officers, employees, agents or shareholders individually, but are binding solely upon the assets and property of the Trust. If this instrument is executed by the Trust on behalf of one or more series of the Trust, the Distributor further acknowledges that the assets and liabilities of each series of the Trust are separate and distinct and that the obligations of or arising out of this instrument are binding solely upon the assets or property of the series on whose behalf the Trust has executed this instrument. If the Trust has executed this instrument on behalf of more than one series of the Trust, the Distributor also agrees that the obligations of each series hereunder shall be several and not joint, in accordance with its proportionate interest hereunder, and the Distributor agrees not to proceed against any series for the obligations of another series.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above.
MFS SERIES TRUST III
On behalf of: MFS High Income Fund
MFS Municipal High Income Fund
MFS FUND DISTRIBUTORS, INC.
President
Exhibit No. 99.11(a)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Post-Effective Amendment No. 20 to Registration Statement No. 2-60491 of MFS Series Trust III of our report dated March 3, 1995, appearing in the annual report to shareholders for the year ended January 31, 1995, of MFS High Income Fund, and to the references to us under the headings "Condensed Financial Information" in the Prospectus and "Independent Accountants and Financial Statements" in the Statement of Additional Information, both of which are part of such Registration Statement.
DELOITTE & TOUCHE
Deloitte & Touche
Boston, Massachusetts
May 24, 1995
Exhibit No. 99.11(b)
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference made to our firm under the captions "Condensed Financial Information" in the Prospectus and "Independent Auditors and Financial Statements" in the Statement of Additional Information and to the incorporation by reference in this Post-Effective Amendment No. 20 to Registration No. 2-60491 on Form N-1A of our report dated February 24, 1995, on the financial statements and financial highlights of MFS Municipal High Income Fund, included in the 1995 Annual Report to Shareholders.
ERNST & YOUNG LLP
Ernst & Young LLP
Boston, Massachusetts
May 24, 1995
Exhibit No. 99.11(c)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in Post-Effective Amendment No. 20 to the Registration Statement on Form N1-A (File No. 2-60491) of MFS Municipal High Income Fund of our report dated May 16, 1994 on our audit of the financial statements and financial highlights of the Fund, which report is included in the annual report to shareholders for the year ended January 31, 1994.
We also consent to the reference to our Firm under the heading "Independent Auditors and Financial Statements" in the Statement of Additional Information which is included in such Registration Statement.
COOPERS & LYBRAND LLP
Coopers & Lybrand LLP
Boston, Massachusetts
May 24, 1995
EXHIBIT NO. 99.15(a)
MFS SERIES TRUST III
MFS HIGH INCOME FUND
AMENDED AND RESTATED DISTRIBUTION PLAN
AMENDED AND RESTATED DISTRIBUTION PLAN with respect to the shares of beneficial interest to be designated "CLASS A" of the MFS HIGH INCOME FUND (the "Fund"), a series of MFS Series Trust III (the "Trust"), a business trust organized and existing under the laws of The Commonwealth of Massachusetts, dated the 19th day of December, 1990, amended and restated the 24th day of August, 1993 and amended this 21st day of December, 1994.
WITNESSETH:
WHEREAS, the Trust is engaged in business as an open-end management investment company and is registered under the Investment Company Act of 1940 (the "Act"); and
WHEREAS, a plan of distribution pursuant to Rule 12b-1 of the Act was previously adopted and approved by the Trustees of the Trust, including the Qualifying Trustees (as defined below), and by the shareholders of the Fund; and
WHEREAS, the Trust intends to continue to distribute the Shares of Beneficial Interest (without par value) of the Fund designated Class A Shares (the "Shares") in part in accordance with Rule 12b-1 under the Act ("Rule 12b-1"), and desires to adopt this amended and restated Distribution Plan (the "Plan") as a plan of distribution pursuant to such Rule; and
WHEREAS, the Trust has entered into a distribution agreement (the "Distribution Agreement") in a form approved by the Board of Trustees of the Trust (the "Board of Trustees") in the manner specified in Rule 12b-1, with MFS Fund Distributors, Inc., a Delaware corporation, as distributor (the "Distributor"), whereby the Distributor provides facilities and personnel and renders services to the Fund in connection with the offering and distribution of the Shares; and
WHEREAS, the Trust recognizes and agrees that the Distributor will enter into agreements ("Dealer Agreements") with various securities dealers and other financial intermediaries ("Dealers") pursuant to which the Dealers will act as dealers of the Shares in connection with the offering of Shares; and
WHEREAS, the Distribution Agreement provides that a sales charge may be paid by investors who purchase Shares and that the Distributor and Dealers will receive such sales charge as partial compensation for their services in connection with sale of Shares; and
WHEREAS, the Board of Trustees, in considering whether the Fund should adopt and implement this Plan, has evaluated such information as it deemed necessary to an informed determination as to whether this Plan should be adopted and implemented and has considered such pertinent factors as it deemed necessary to form the basis for a decision to use assets of the Fund for such purposes, and has determined that there is a reasonable likelihood that the adoption and implementation of this Plan will benefit the Fund and its Class A shareholders;
NOW, THEREFORE, the Board of Trustees hereby adopts this Plan for the Fund as a plan of distribution relating to the Shares in accordance with Rule 12b-1 under the Act, on the following terms and conditions:
1. As specified in the Distribution Agreement, the Distributor shall provide facilities, personnel and a program with respect to the offering and sale of Shares. Among other things, the Distributor shall be responsible for all expenses of printing (excluding typesetting) and distributing prospectuses to prospective shareholders and providing such other related services as are reasonably necessary in connection therewith.
2. The Distributor shall bear all distribution-related expenses to the extent specified in the Distribution Agreement in providing the Services described in Section 1, including without limitation, the compensation of personnel necessary to provide such services and all costs of travel, office expenses (including rent and overhead), equipment, printing, delivery and mailing costs.
3. As partial consideration for the services performed and expenses incurred in the performance of its obligations under the Distribution Agreement, the Fund shall pay the Distributor a distribution fee periodically at a rate of 0.10% per annum of the average daily net assets of the Fund attributable to the Shares. Such payments shall commence following shareholder approval of the Plan but only upon notification by the Distributor to the Fund of the commencement of the Plan (the "Commencement Date").
4. As partial consideration for the personal services and/or account maintenance services performed by each Dealer in the performance of its obligations under its Dealer Agreement, the Fund shall on or after the Commencement Date pay each Dealer a service fee periodically at a rate not to exceed 0.25% per annum of the portion of the average daily net assets of the Fund that is represented by Shares that are owned by investors for whom such Dealer is the holder or dealer of record. The Distributor may from time to time reduce the amount of the service fee paid to a Dealer for Shares sold prior to certain date.
5. In addition to fees payable pursuant to Sections 3 and 4 hereof, the expenses permitted to be paid by the Fund pursuant to this Plan on or after the Commencement Date shall include other distribution related expenses. These other distribution related expenses may include, but are not limited to, a dealer commission and a payment to wholesalers employed by the Distributor on net asset value purchases at or above a certain dollar level.
The aggregate amount of fees and expenses paid pursuant to Sections 3
and 4 hereof and this Section 5 shall not exceed 0.35% per annum of the average
daily net assets of the Fund attributable to the Shares. No fees shall be paid
pursuant to Section 4 hereof or this Section 5 to any insurance company which
has entered into an agreement with the Trust on behalf of the Fund and the
Distributor that permits such insurance company to purchase Shares from the Fund
at their net asset value in connection with annuity agreements issued in
connection with the insurance company's separate accounts. That portion of the
Fund's average daily net assets on which fees payable under Section 4 hereof and
this Section 5 are calculated may be subject to certain minimum amount
requirements as may be determined, and additional or different dealer or
wholesaler qualification standards that may be established, from time to time by
the Distributor. The Distributor shall be entitled to be paid any fees payable
under Section 4 hereof or this Section 5 with respect to accounts for which no
Dealer of record exists or qualification standards have not been met as partial
consideration for personal services and/or account maintenance services provided
by the Distributor to the Shares. The fees and expenses payable pursuant to
Section 4 and this Section 5 may from time to time be paid by the Fund to the
Distributor and the Distributor will then pay these expenses on behalf of the
Fund.
6. Nothing herein contained shall be deemed to require the Trust to take any action contrary to its Declaration of Trust or By-Laws or any applicable statutory or regulatory requirement to which it is subject or by which it is bound, or to relieve or deprive the Board of Trustees of the responsibility for and control of the conduct of the affairs of the Fund.
7. This Plan shall become effective upon (a) approval by a vote of at least a "majority of the outstanding voting securities" of the Shares, and (b) approval by a vote of the Board of Trustees and vote of a majority of the Trustees who are not "interested persons" of the Trust and who have no direct or indirect financial interest in the operation of the Plan or in any of the agreements related to the Plan (the "Qualified Trustees"), such votes to be cast in person at a meeting called for the purpose of voting on this Plan.
8. This Plan shall continue in effect indefinitely; provided, however, that such continuance is subject to annual approval by a vote of the Board of Trustees and a majority of the Qualified Trustees, such votes to be cast in person at a meeting called for the purpose of voting on continuance of this Plan. If such annual approval is not obtained, this Plan shall expire 12 months after the effective date of the last approval.
9. This Plan may be amended at any time by the Board of Trustees; provided that (a) any amendment to increase materially the amount to be spent for the services described herein shall be effective only upon approval by a vote of a "majority of the outstanding voting securities" of the Shares and (b) any material amendment of this Plan shall be effective only upon approval by a vote of the Board of Trustees and a majority of the Qualified Trustees, such votes to be cast in person at a meeting called for the purpose of voting on such amendment. This Plan may be terminated at any time by vote of a majority of the Qualified Trustees or by a vote of a "majority of the outstanding voting securities" of the Shares.
10. The Distributor shall provide the Board of Trustees, and the Board of Trustees shall review, at least quarterly, a written report of the amounts expended under the Plan and the purposes for which such expenditures were made.
11. While this Plan is in effect, the selection and nomination of Qualified Trustees shall be committed to the discretion of the Trustees who are not "interested persons" of the Trust.
12. For the purposes of this Plan, the terms "interested person" and "majority of the outstanding voting securities" are used as defined in the Act. In addition, for purposes of determining the fees payable to Dealers and wholesalers, the value of the Share's net assets shall be computed in the manner specified in the Fund's then current prospectus for computation of the net asset value of the Shares.
13. The Trust shall preserve copies of this Plan, and each agreement related hereto and each report referred to in Section 10 hereof (collectively the "Records") for a period of six years from the end of the fiscal year in which such Record was made and each such Record shall be kept in an easily accessible place for the first two years of said record keeping.
14. This Plan shall be construed in accordance with the laws of The Commonwealth of Massachusetts and the applicable provisions of the Act.
15. If any provision of this Plan shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of the Plan shall not be affected thereby.
EXHIBIT NO.99.15(b)
MFS SERIES TRUST III
MFS HIGH INCOME FUND
PLAN OF DISTRIBUTION
PLAN OF DISTRIBUTION with respect to the shares of beneficial interest to be designated "CLASS B" of MFS HIGH INCOME FUND (the "Fund"), a series of MFS Series Trust III (the "Trust") a Massachusetts business trust, dated September 1, 1993 and amended this 21st day of December, 1994.
WITNESSETH:
WHEREAS, the Trust is engaged in business as an open-end management investment company and is registered under the Investment Company Act of 1940, as amended (collectively with the rules and regulations promulgated thereunder, the "1940 Act"); and
WHEREAS, the Trust intends to distribute the shares of beneficial interest (without par value) of the Fund designated Class B Shares (the "Shares") in accordance with Rule 12b-1 under the 1940 Act ("Rule 12b-1"), and desires to adopt this Distribution Plan (the "Plan") as a plan of distribution pursuant to such Rule; and
WHEREAS, the Trust desires for MFS Fund Distributors, Inc., a Delaware corporation, to provide certain distribution services for the Fund (the "Distributor"); and
WHEREAS, the Trust has entered into a distribution agreement (the "Distribution Agreement") (in a form approved by the Board of Trustees of the Trust in a manner specified in such Rule 12b-1) with the Distributor, whereby the Distributor will provide facilities and personnel and render services to the Fund in connection with the offering and distribution of the Shares; and
WHEREAS, the Trust recognizes and agrees that (a) the Distributor may retain the services of firms or individuals to act as dealers (the "Dealers") of the Shares in connection with the offering of Shares, and (b) the Distributor may make payments for such services to the Dealers out of the fee paid to the Distributor hereunder, any deferred sales charges imposed by the Distributor in connection with the repurchase of Shares, its profits or any other source available to it; and
WHEREAS, the Trust recognizes and agrees that the Distributor may impose certain deferred sales charges in connection with the repurchase of Shares by the Fund, and the Distributor may retain (or receive from the Fund, as the case may be) all such deferred sales charges; and
WHEREAS, the Board of Trustees of the Trust, in considering whether the Fund should adopt and implement this Plan, has evaluated such information as it deemed necessary to an informed determination as to whether this Plan should be adopted and implemented and has considered such pertinent factors as it deemed necessary to form the basis for a decision to use assets of the Fund for such purposes, and has determined that there is a reasonable likelihood that the adoption and implementation of this Plan will benefit the Fund and its Class B shareholders;
NOW, THEREFORE, the Board of Trustees of the Trust hereby adopts this Plan for the Fund as a plan for distribution relating to the Shares in accordance with Rule 12b-1, on the following terms and conditions:
1. As specified in the Distribution Agreement, the Distributor shall provide facilities, personnel and a program with respect to the offering and sale of Shares. Among other things, the Distributor shall be responsible for commissions payable to Dealers, all expenses of printing (excluding typesetting) and distributing prospectuses to prospective shareholders and providing such other related services as are reasonably necessary in connection therewith.
2. The Distributor shall bear all distribution-related expenses to the extent specified in the Distribution Agreement in providing the services described in paragraph 1, including without limitation, the compensation of personnel necessary to provide such services and all costs of travel, office expenses (including rent and overhead), equipment, printing, delivery and mailing costs.
3. It is understood that the Distributor may impose certain deferred sales charges in connection with the repurchase of Shares by the Fund and the Distributor may retain (or receive from the Fund, as the case may be) all such deferred sales charges. As additional consideration for all services performed and expenses incurred in the performance of its obligations under the Distribution Agreement, the Fund shall pay the Distributor a distribution fee periodically at a rate of 0.75% per annum of the Fund's average daily net assets attributable to the Shares.
4. As partial consideration for the personal services and/or account maintenance services performed by each Dealer in the performance of its obligations under its dealer agreement with the Distributor, the Fund shall pay each Dealer a service fee periodically at a rate not to exceed 0.25% per annum of the portion of the average daily net assets of the Fund that is represented by Shares that are owned by investors for whom such Dealer is the holder or dealer of record. That portion of the Fund's average daily net assets on which the fees payable under this paragraph 4 hereof are calculated may be subject to certain minimum amount requirements as may be determined, and additional or different dealer qualification standards that may be established from time to time, by the Distributor. The Distributor shall be entitled to be paid any fees payable under this paragraph 4 hereof with respect to Shares for which no Dealer of record exists or qualification standards have not been met as partial consideration for personal services and/or account maintenance services provided by the Distributor to the Shares. The service fee payable pursuant to this paragraph 4 may from time to time be paid by the Fund to the Distributor and the Distributor will then pay these fees on behalf of the Fund.
5. The Fund understands that agreements between the Distributor and the Dealers may provide for payment of commissions to Dealers in connection with the sales of Shares and may provide for a portion (which may be all or substantially all) of the fees payable by the Fund to the Distributor under the Distribution Agreement to be paid by the Distributor to the Dealers in consideration of the Dealer's services as a dealer of the Shares. Except as described in paragraph 4, nothing in this Plan shall be construed as requiring the Fund to make any payment to any Dealer or to have any obligations to any Dealer in connection with services as a dealer of the Shares. The Distributor shall agree and undertake that any agreement entered into between the Distributor and any Dealer shall provide that, except as provided in paragraph 4, such Dealer shall look solely to the Distributor for compensation for its services thereunder and that in no event shall such Dealer seek any payment from the Fund.
6. The Fund shall pay all fees and expenses of any independent auditor, legal counsel, investment adviser, administrator, transfer agent, custodian, shareholder servicing agent, registrar or dividend disbursing agent of the Fund; expenses of distributing and redeeming Shares and servicing shareholder accounts; expenses of preparing, printing and mailing prospectuses, shareholder reports, notices, proxy statements and reports to governmental officers and commissions and to shareholders of the Fund, except that the Distributor shall be responsible for the distribution-related expenses as provided in paragraphs 1 and 2 hereof.
7. Nothing herein contained shall be deemed to require the Trust to take any action contrary to its Declaration of Trust or By-Laws or any applicable statutory or regulatory requirement to which it is subject or by which it is bound, or to relieve or deprive the Board of Trustees of the responsibility for and control of the conduct of the affairs of the Fund.
8. This Plan shall become effective upon (a) approval by a vote of at least a "majority of the outstanding voting securities" of the Shares, and (b) approval by a vote of the Board of Trustees and a vote of a majority of the Trustees who are not "interested persons" of the Trust and who have no direct or indirect financial interest in the operation of the Plan or in any agreement related to the Plan (the "Qualified Trustees"), such votes to be cast in person at a meeting called for the purpose of voting on this Plan.
9. This Plan shall continue in effect indefinitely; provided that such continuance is "specifically approved at least annually" by a vote of both a majority of the Trustees of the Trust and a majority of the Qualified Trustees. If such annual approval is not obtained, this Plan shall expire 12 months after the effective date of the last approval.
10. This Plan may be amended at any time by the Board of Trustees; provided that this Plan may not be amended to increase materially the amount of permitted expenses hereunder without the approval of holders of a "majority of the outstanding voting securities" of the Shares and may not be materially amended in any case without a vote of a majority of both the Trustees and the Qualified Trustees. This Plan may be terminated at any time by a vote of a majority of the Qualified Trustees or by a vote of the holders of a "majority of the outstanding voting securities" of the Shares.
11. The Fund and the Distributor shall provide the Board of Trustees, and the Board of Trustees shall review, at least quarterly, a written report of the amounts expended under this Plan and the purposes for which such expenditures were made.
12. While this Plan is in effect, the selection and nomination of Qualified Trustees shall be committed to the discretion of the Trustees who are not "interested persons" of the Trust.
13. For the purposes of this Plan, the terms "interested persons", "majority of the outstanding voting securities" and "specifically approved at least annually" are used as defined in the 1940 Act. In addition, for purposes of determining the fees payable to the Distributor hereunder, the value of the Fund's net assets shall be computed in the manner specified in the Fund's then-current prospectus and statement of additional information for computation of the net asset value of the Shares of the Fund.
14. The Trust shall preserve copies of this Plan, and each agreement related hereto and each report referred to in paragraph 11 hereof (collectively, the "Records") for a period of six years from the end of the fiscal year in which such Record was made and each such record shall be kept in an easily accessible place for the first two years of said record-keeping.
15. This Plan shall be construed in accordance with the laws of The Commonwealth of Massachusetts and the applicable provisions of the 1940 Act.
16. If any provision of this Plan shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of the Plan shall not be affected thereby.
EXHIBIT NO. 99.15(c)
MFS SERIES TRUST III
MFS HIGH INCOME FUND
PLAN OF DISTRIBUTION
PLAN OF DISTRIBUTION with respect to the shares of beneficial interest to be designated "CLASS C" of MFS HIGH INCOME FUND (the "Fund"), a series of MFS Series Trust III (the "Trust") a Massachusetts business trust, dated December 28, 1993 and amended this 21st day of December, 1994.
WITNESSETH:
WHEREAS, the Trust is engaged in business as an open-end management investment company and is registered under the Investment Company Act of 1940, as amended (collectively with the rules and regulations promulgated thereunder, the "1940 Act"); and
WHEREAS, the Trust intends to distribute the shares of beneficial interest (without par value) of the Fund designated Class C Shares (the "Shares") in accordance with Rule 12b-1 under the 1940 Act ("Rule 12b-1"), and desires to adopt this Distribution Plan (the "Plan") as a plan of distribution pursuant to such Rule; and
WHEREAS, the Trust desires for MFS Fund Distributors, Inc., a Delaware corporation, to provide certain distribution services for the Fund (the "Distributor"); and
WHEREAS, the Trust has entered into a distribution agreement (the "Distribution Agreement") (in a form approved by the Board of Trustees of the Trust in a manner specified in Rule 12b-1) with the Distributor, whereby the Distributor will provide facilities and personnel and render services to the Fund in connection with the offering and distribution of the Shares; and
WHEREAS, the Trust recognizes and agrees that (a) the Distributor may retain the services of firms or individuals to act as dealers (the "Dealers") of the Shares in connection with the offering of Shares, and (b) the Distributor may make payments for such services to the Dealers out of the fee paid to the Distributor hereunder, any deferred sales charges imposed by the Distributor in connection with the repurchase of Shares, its profits or any other source available to it; and
WHEREAS, the Trust recognizes and agrees that the Distributor may (but is not required to) impose certain deferred sales charges in connection with the repurchase of Shares by the Fund, and the Distributor may retain (or receive from the Fund, as the case may be) all such deferred sales charges; and
WHEREAS, the Board of Trustees of the Trust, in considering whether the Fund should adopt and implement this Plan, has evaluated such information as it deemed necessary to an informed determination as to whether this Plan should be adopted and implemented and has considered such pertinent factors as it deemed necessary to form the basis for a decision to use assets of the Fund for such purposes, and has determined that there is a reasonable likelihood that the adoption and implementation of this Plan will benefit the Fund and its Class C shareholders;
NOW, THEREFORE, the Board of Trustees of the Trust hereby adopts this Plan for the Fund as a plan for distribution relating to the Shares in accordance with Rule 12b-1, on the following terms and conditions:
1. As specified in the Distribution Agreement, the Distributor shall provide facilities, personnel and a program with respect to the offering and sale of Shares. Among other things, the Distributor shall be responsible for any commissions payable to Dealers (including any ongoing maintenance commissions), all expenses of printing (excluding typesetting) and distributing prospectuses to prospective shareholders and providing such other related services as are reasonably necessary in connection therewith.
2. The Distributor shall bear all distribution-related expenses to the extent specified in the Distribution Agreement in providing the services described in paragraph 1, including without limitation, the compensation of personnel necessary to provide such services and all costs of travel, office expenses (including rent and overhead), equipment, printing, delivery and mailing costs.
3. It is understood that the Distributor may (but is not required to) impose certain deferred sales charges in connection with the repurchase of Shares by the Fund and the Distributor may retain (or receive from the Fund, as the case may be) all such deferred sales charges. As additional consideration for all services performed and expenses incurred in the performance of its obligations under the Distribution Agreement, the Fund shall pay the Distributor a distribution fee periodically at a rate not to exceed 0.75% per annum of the Fund's average daily net assets attributable to the Shares.
4. As partial consideration for the personal services and/or account maintenance services performed by each Dealer in the performance of its obligations under its dealer agreement with the Distributor, the Fund shall pay each Dealer a service fee periodically at a rate not to exceed 0.25% per annum of the portion of the average daily net assets of the Fund that is represented by Shares that are owned by investors for whom such Dealer is the holder or dealer of record. That portion of the Fund's average daily net assets on which the fees payable under this paragraph 4 hereof are calculated may be subject to certain minimum amount requirements as may be determined, and additional or different dealer qualification standards that may be established, from time to time by the Distributor. The Distributor shall be entitled to be paid any fees payable under this paragraph 4 hereof with respect to Shares for which no Dealer of record exists or qualification standards have not been met as partial consideration for personal services and/or account maintenance services provided by the Distributor to the Shares. The service fee payable pursuant to this paragraph 4 may from time to time be paid by the Fund to the Distributor and the Distributor will then pay these fees to Dealers on behalf of the Fund or retain them in accordance with this paragraph.
5. The Fund understands that agreements between the Distributor and the Dealers may provide for payment of commissions to Dealers in connection with the sales of Shares and may provide for a portion (which may be all or substantially all) of the fees payable by the Fund to the Distributor under the Distribution Agreement to be paid by the Distributor to the Dealers in consideration of the Dealer's services as a dealer of the Shares. Except as described in paragraph 4, nothing in this Plan shall be construed as requiring the Fund to make any payment to any Dealer or to have any obligations to any Dealer in connection with services as a dealer of the Shares. The Distributor shall agree and undertake that any agreement entered into between the Distributor and any Dealer shall provide that, except as provided in paragraph 4, such Dealer shall look solely to the Distributor for compensation for its services thereunder and that in no event shall such Dealer seek any payment from the Fund.
6. The Fund shall pay all fees and expenses of any independent auditor, legal counsel, investment adviser, administrator, transfer agent, custodian, shareholder servicing agent, registrar or dividend disbursing agent of the Fund; expenses of distributing and redeeming Shares and servicing shareholder accounts; expenses of preparing, printing and mailing prospectuses, shareholder reports, notices, proxy statements and reports to governmental officers and commissions and to shareholders of the Fund, except that the Distributor shall be responsible for the distribution-related expenses as provided in paragraphs 1 and 2 hereof.
7. Nothing herein contained shall be deemed to require the Trust to take any action contrary to its Declaration of Trust or By-Laws or any applicable statutory or regulatory requirement to which it is subject or by which it is bound, or to relieve or deprive the Board of Trustees of the responsibility for and control of the conduct of the affairs of the Fund.
8. This Plan shall become effective upon (a) approval by a vote of at least a "majority of the outstanding voting securities" of Class C, and (b) approval by a vote of the Board of Trustees and a vote of a majority of the Trustees who are not "interested persons" of the Trust and who have no direct or indirect financial interest in the operation of the Plan or in any agreement related to the Plan (the "Qualified Trustees"), such votes to be cast in person at a meeting called for the purpose of voting on this Plan.
9. This Plan shall continue in effect indefinitely; provided that such continuance is "specifically approved at least annually" by a vote of both a majority of the Trustees of the Trust and a majority of the Qualified Trustees. If such annual approval is not obtained, this Plan shall expire 12 months after the effective date of the last approval.
10. This Plan may be amended at any time by the Board of Trustees; provided that this Plan may not be amended to increase materially the amount of permitted expenses hereunder without the approval of holders of a "majority of the outstanding voting securities" of Class C and may not be materially amended in any case without a vote of a majority of both the Trustees and the Qualified Trustees. This Plan may be terminated at any time by a vote of a majority of the Qualified Trustees or by a vote of the holders of a "majority of the outstanding voting securities" of Class C.
11. The Fund and the Distributor shall provide the Board of Trustees, and the Board of Trustees shall review, at least quarterly, a written report of the amounts expended under this Plan and the purposes for which such expenditures were made.
12. While this Plan is in effect, the selection and nomination of Qualified Trustees shall be committed to the discretion of the Trustees who are not "interested persons" of the Trust.
13. For the purposes of this Plan, the terms "interested persons", "majority of the outstanding voting securities" and "specifically approved at least annually" are used as defined in the 1940 Act. In addition, for purposes of determining the fees payable to the Distributor hereunder, the value of the Fund's net assets shall be computed in the manner specified in the Fund's then-current prospectus and statement of additional information for computation of the net asset value of the Shares of the Fund.
14. The Trust shall preserve copies of this Plan, and each agreement related hereto and each report referred to in paragraph 11 hereof (collectively, the "Records") for a period of six years from the end of the fiscal year in which such Record was made and each such record shall be kept in an easily accessible place for the first two years of said record-keeping.
15. This Plan shall be construed in accordance with the laws of The Commonwealth of Massachusetts and the applicable provisions of the 1940 Act.
16. If any provision of this Plan shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of the Plan shall not be affected thereby.
EXHIBIT 99.15(d)
MFS SERIES TRUST III
MFS MUNICIPAL HIGH INCOME FUND
PLAN OF DISTRIBUTION
PLAN OF DISTRIBUTION with respect to the shares of beneficial interest to be designated "CLASS B" of MFS MUNICIPAL HIGH INCOME FUND (the "Fund"), a series of MFS Series Trust III (the "Trust") a Massachusetts business trust, dated September 1, 1993 and amended this 21st day of December, 1994.
WITNESSETH:
WHEREAS, the Trust is engaged in business as an open-end management investment company and is registered under the Investment Company Act of 1940, as amended (collectively with the rules and regulations promulgated thereunder, the "1940 Act"); and
WHEREAS, the Trust intends to distribute the shares of beneficial interest (without par value) of the Fund designated Class B Shares (the "Shares") in accordance with Rule 12b-1 under the 1940 Act ("Rule 12b-1"), and desires to adopt this Distribution Plan (the "Plan") as a plan of distribution pursuant to such Rule; and
WHEREAS, the Trust desires for MFS Fund Distributors, Inc., a Delaware corporation, to provide certain distribution services for the Fund (the "Distributor"); and
WHEREAS, the Trust has entered into a distribution agreement (the "Distribution Agreement") (in a form approved by the Board of Trustees of the Trust in a manner specified in such Rule 12b-1) with the Distributor, whereby the Distributor will provide facilities and personnel and render services to the Fund in connection with the offering and distribution of the Shares; and
WHEREAS, the Trust recognizes and agrees that (a) the Distributor may retain the services of firms or individuals to act as dealers (the "Dealers") of the Shares in connection with the offering of Shares, and (b) the Distributor may make payments for such services to the Dealers out of the fee paid to the Distributor hereunder, any deferred sales charges imposed by the Distributor in connection with the repurchase of Shares, its profits or any other source available to it; and
WHEREAS, the Trust recognizes and agrees that the Distributor may impose certain deferred sales charges in connection with the repurchase of Shares by the Fund, and the Distributor may retain (or receive from the Fund, as the case may be) all such deferred sales charges; and
WHEREAS, the Board of Trustees of the Trust, in considering whether the Fund should adopt and implement this Plan, has evaluated such information as it deemed necessary to an informed determination as to whether this Plan should be adopted and implemented and has considered such pertinent factors as it deemed necessary to form the basis for a decision to use assets of the Fund for such purposes, and has determined that there is a reasonable likelihood that the adoption and implementation of this Plan will benefit the Fund and its Class B shareholders;
NOW, THEREFORE, the Board of Trustees of the Trust hereby adopts this Plan for the Fund as a plan for distribution relating to the Shares in accordance with Rule 12b-1, on the following terms and conditions:
1. As specified in the Distribution Agreement, the Distributor shall provide facilities, personnel and a program with respect to the offering and sale of Shares. Among other things, the Distributor shall be responsible for commissions payable to Dealers, all expenses of printing (excluding typesetting) and distributing prospectuses to prospective shareholders and providing such other related services as are reasonably necessary in connection therewith.
2. The Distributor shall bear all distribution-related expenses to the extent specified in the Distribution Agreement in providing the services described in paragraph 1, including without limitation, the compensation of personnel necessary to provide such services and all costs of travel, office expenses (including rent and overhead), equipment, printing, delivery and mailing costs.
3. It is understood that the Distributor may impose certain deferred sales charges in connection with the repurchase of Shares by the Fund and the Distributor may retain (or receive from the Fund, as the case may be) all such deferred sales charges. As additional consideration for all services performed and expenses incurred in the performance of its obligations under the Distribution Agreement, the Fund shall pay the Distributor a distribution fee periodically at a rate of 0.75% per annum of the Fund's average daily net assets attributable to the Shares.
4. As partial consideration for the personal services and/or account maintenance services performed by each Dealer in the performance of its obligations under its dealer agreement with the Distributor, the Fund shall pay each Dealer a service fee periodically at a rate not to exceed 0.25% per annum of the portion of the average daily net assets of the Fund that is represented by Shares that are owned by investors for whom such Dealer is the holder or dealer of record. That portion of the Fund's average daily net assets on which the fees payable under this paragraph 4 hereof are calculated may be subject to certain minimum amount requirements as may be determined, and additional or different dealer qualification standards that may be established from time to time, by the Distributor. The Distributor shall be entitled to be paid any fees payable under this paragraph 4 hereof with respect to Shares for which no Dealer of record exists or qualification standards have not been met as partial consideration for personal services and/or account maintenance services provided by the Distributor to the Shares. The service fee payable pursuant to this paragraph 4 may from time to time be paid by the Fund to the Distributor and the Distributor will then pay these fees on behalf of the Fund.
5. The Fund understands that agreements between the Distributor and the Dealers may provide for payment of commissions to Dealers in connection with the sales of Shares and may provide for a portion (which may be all or substantially all) of the fees payable by the Fund to the Distributor under the Distribution Agreement to be paid by the Distributor to the Dealers in consideration of the Dealer's services as a dealer of the Shares. Except as described in paragraph 4, nothing in this Plan shall be construed as requiring the Fund to make any payment to any Dealer or to have any obligations to any Dealer in connection with services as a dealer of the Shares. The Distributor shall agree and undertake that any agreement entered into between the Distributor and any Dealer shall provide that, except as provided in paragraph 4, such Dealer shall look solely to the Distributor for compensation for its services thereunder and that in no event shall such Dealer seek any payment from the Fund.
6. The Fund shall pay all fees and expenses of any independent auditor, legal counsel, investment adviser, administrator, transfer agent, custodian, shareholder servicing agent, registrar or dividend disbursing agent of the Fund; expenses of distributing and redeeming Shares and servicing shareholder accounts; expenses of preparing, printing and mailing prospectuses, shareholder reports, notices, proxy statements and reports to governmental officers and commissions and to shareholders of the Fund, except that the Distributor shall be responsible for the distribution-related expenses as provided in paragraphs 1 and 2 hereof.
7. Nothing herein contained shall be deemed to require the Trust to take any action contrary to its Declaration of Trust or By-Laws or any applicable statutory or regulatory requirement to which it is subject or by which it is bound, or to relieve or deprive the Board of Trustees of the responsibility for and control of the conduct of the affairs of the Fund.
8. This Plan shall become effective upon (a) approval by a vote of at least a "majority of the outstanding voting securities" of the Shares, and (b) approval by a vote of the Board of Trustees and a vote of a majority of the Trustees who are not "interested persons" of the Trust and who have no direct or indirect financial interest in the operation of the Plan or in any agreement related to the Plan (the "Qualified Trustees"), such votes to be cast in person at a meeting called for the purpose of voting on this Plan.
9. This Plan shall continue in effect indefinitely; provided that such continuance is "specifically approved at least annually" by a vote of both a majority of the Trustees of the Trust and a majority of the Qualified Trustees. If such annual approval is not obtained, this Plan shall expire 12 months after the effective date of the last approval.
10. This Plan may be amended at any time by the Board of Trustees; provided that this Plan may not be amended to increase materially the amount of permitted expenses hereunder without the approval of holders of a "majority of the outstanding voting securities" of the Shares and may not be materially amended in any case without a vote of a majority of both the Trustees and the Qualified Trustees. This Plan may be terminated at any time by a vote of a majority of the Qualified Trustees or by a vote of the holders of a "majority of the outstanding voting securities" of the Shares.
11. The Fund and the Distributor shall provide the Board of Trustees, and the Board of Trustees shall review, at least quarterly, a written report of the amounts expended under this Plan and the purposes for which such expenditures were made.
12. While this Plan is in effect, the selection and nomination of Qualified Trustees shall be committed to the discretion of the Trustees who are not "interested persons" of the Trust.
13. For the purposes of this Plan, the terms "interested persons", "majority of the outstanding voting securities" and "specifically approved at least annually" are used as defined in the 1940 Act. In addition, for purposes of determining the fees payable to the Distributor hereunder, the value of the Fund's net assets shall be computed in the manner specified in the Fund's then-current prospectus and statement of additional information for computation of the net asset value of the Shares of the Fund.
14. The Trust shall preserve copies of this Plan, and each agreement related hereto and each report referred to in paragraph 11 hereof (collectively, the "Records") for a period of six years from the end of the fiscal year in which such Record was made and each such record shall be kept in an easily accessible place for the first two years of said record-keeping.
15. This Plan shall be construed in accordance with the laws of The Commonwealth of Massachusetts and the applicable provisions of the 1940 Act.
16. If any provision of this Plan shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of the Plan shall not be affected thereby.
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
| ARTICLE 6 |
| THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF MFS HIGH INCOME FUND AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. |
| SERIES: |
| NUMBER: |
| NAME: MFS HIGH INCOME FUND CLASS A |
| PERIOD TYPE | 12 MOS |
| FISCAL YEAR END | JAN 31 1995 |
| PERIOD END | JAN 31 1995 |
| INVESTMENTS AT COST | 892,675,204 |
| INVESTMENTS AT VALUE | 804,264,908 |
| RECEIVABLES | 24,180,254 |
| ASSETS OTHER | 14,034 |
| OTHER ITEMS ASSETS | 39,155 |
| TOTAL ASSETS | 828,498,351 |
| PAYABLE FOR SECURITIES | 11,574,597 |
| SENIOR LONG TERM DEBT | 0 |
| OTHER ITEMS LIABILITIES | 4,071,282 |
| TOTAL LIABILITIES | 15,645,879 |
| SENIOR EQUITY | 0 |
| PAID IN CAPITAL COMMON | 1,150,975,470 |
| SHARES COMMON STOCK | 108,084,812 |
| SHARES COMMON PRIOR | 117,225,880 |
| ACCUMULATED NII CURRENT | (62,774) |
| OVERDISTRIBUTION NII | 0 |
| ACCUMULATED NET GAINS | (249,658,152) |
| OVERDISTRIBUTION GAINS | 0 |
| ACCUM APPREC OR DEPREC | (88,402,072) |
| NET ASSETS | 812,852,472 |
| DIVIDEND INCOME | 170,746 |
| INTEREST INCOME | 79,788,140 |
| OTHER INCOME | 0 |
| EXPENSES NET | 10,768,448 |
| NET INVESTMENT INCOME | 69,190,438 |
| REALIZED GAINS CURRENT | (24,359,807) |
| APPREC INCREASE CURRENT | (82,756,770) |
| NET CHANGE FROM OPS | (37,926,139) |
| EQUALIZATION | 0 |
| DISTRIBUTIONS OF INCOME | (46,197,364) |
| DISTRIBUTIONS OF GAINS | 0 |
| DISTRIBUTIONS OTHER | 0 |
| NUMBER OF SHARES SOLD | 41,588,518 |
| NUMBER OF SHARES REDEEMED | (55,887,292) |
| SHARES REINVESTED | 5,157,706 |
| NET CHANGE IN ASSETS | (203,419,266) |
| ACCUMULATED NII PRIOR | (1,027,715) |
| ACCUMULATED GAINS PRIOR | (210,514,331) |
| OVERDISTRIB NII PRIOR | 0 |
| OVERDIST NET GAINS PRIOR | 0 |
| GROSS ADVISORY FEES | 3,756,072 |
| INTEREST EXPENSE | 0 |
| GROSS EXPENSE | 11,300,062 |
| AVERAGE NET ASSETS | 862,762,970 |
| PER SHARE NAV BEGIN | 5.50 |
| PER SHARE NII | 0.44 |
| PER SHARE GAIN APPREC | (0.66) |
| PER SHARE DIVIDEND | (0.43) |
| PER SHARE DISTRIBUTIONS | (0.01) |
| RETURNS OF CAPITAL | 0.00 |
| PER SHARE NAV END | 4.84 |
| EXPENSE RATIO | 0.99 |
| AVG DEBT OUTSTANDING | 0 |
| AVG DEBT PER SHARE | 0 |
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
| ARTICLE 6 |
| THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF MFS HIGH INCOME FUND AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. |
| SERIES: |
| NUMBER: |
| NAME: MFS HIGH INCOME FUND CLASS B |
| PERIOD TYPE | 12 MOS |
| FISCAL YEAR END | JAN 31 1995 |
| PERIOD END | JAN 31 1995 |
| INVESTMENTS AT COST | 892,675,204 |
| INVESTMENTS AT VALUE | 804,264,908 |
| RECEIVABLES | 24,180,254 |
| ASSETS OTHER | 14,034 |
| OTHER ITEMS ASSETS | 39,155 |
| TOTAL ASSETS | 828,498,351 |
| PAYABLE FOR SECURITIES | 11,574,597 |
| SENIOR LONG TERM DEBT | 0 |
| OTHER ITEMS LIABILITIES | 4,071,282 |
| TOTAL LIABILITIES | 15,645,879 |
| SENIOR EQUITY | 0 |
| PAID IN CAPITAL COMMON | 1,150,975,470 |
| SHARES COMMON STOCK | 58,992,349 |
| SHARES COMMON PRIOR | 67,405,086 |
| ACCUMULATED NII CURRENT | (62,774) |
| OVERDISTRIBUTION NII | 0 |
| ACCUMULATED NET GAINS | (249,658,152) |
| OVERDISTRIBUTION GAINS | 0 |
| ACCUM APPREC OR DEPREC | (88,402,072) |
| NET ASSETS | 812,852,472 |
| DIVIDEND INCOME | 170,746 |
| INTEREST INCOME | 79,788,140 |
| OTHER INCOME | 0 |
| EXPENSES NET | 10,768,448 |
| NET INVESTMENT INCOME | 69,190,438 |
| REALIZED GAINS CURRENT | (24,359,807) |
| APPREC INCREASE CURRENT | (82,756,770) |
| NET CHANGE FROM OPS | (37,926,139) |
| EQUALIZATION | 0 |
| DISTRIBUTIONS OF INCOME | (23,170,851) |
| DISTRIBUTIONS OF GAINS | 0 |
| DISTRIBUTIONS OTHER | 0 |
| NUMBER OF SHARES SOLD | 35,621,772 |
| NUMBER OF SHARES REDEEMED | (46,104,410) |
| SHARES REINVESTED | 2,069,901 |
| NET CHANGE IN ASSETS | (203,419,266) |
| ACCUMULATED NII PRIOR | (1,027,715) |
| ACCUMULATED GAINS PRIOR | (210,514,331) |
| OVERDISTRIB NII PRIOR | 0 |
| OVERDIST NET GAINS PRIOR | 0 |
| GROSS ADVISORY FEES | 3,756,072 |
| INTEREST EXPENSE | 0 |
| GROSS EXPENSE | 11,300,062 |
| AVERAGE NET ASSETS | 862,762,970 |
| PER SHARE NAV BEGIN | 5.50 |
| PER SHARE NII | 0.39 |
| PER SHARE GAIN APPREC | (0.65) |
| PER SHARE DIVIDEND | (0.39) |
| PER SHARE DISTRIBUTIONS | (0.01) |
| RETURNS OF CAPITAL | 0.00 |
| PER SHARE NAV END | 4.84 |
| EXPENSE RATIO | 1.85 |
| AVG DEBT OUTSTANDING | 0 |
| AVG DEBT PER SHARE | 0 |
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
| ARTICLE 6 |
| THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF MFS HIGH INCOME FUND AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. |
| SERIES: |
| NUMBER: |
| NAME: MFS HIGH INCOME FUND CLASS C |
| PERIOD TYPE | 12 MOS |
| FISCAL YEAR END | JAN 31 1995 |
| PERIOD END | JAN 31 1995 |
| INVESTMENTS AT COST | 892,675,204 |
| INVESTMENTS AT VALUE | 804,264,908 |
| RECEIVABLES | 24,180,254 |
| ASSETS OTHER | 14,034 |
| OTHER ITEMS ASSETS | 39,155 |
| TOTAL ASSETS | 828,498,351 |
| PAYABLE FOR SECURITIES | 11,574,597 |
| SENIOR LONG TERM DEBT | 0 |
| OTHER ITEMS LIABILITIES | 4,071,282 |
| TOTAL LIABILITIES | 15,645,879 |
| SENIOR EQUITY | 0 |
| PAID IN CAPITAL COMMON | 1,150,975,470 |
| SHARES COMMON STOCK | 706,226 |
| SHARES COMMON PRIOR | 187,887 |
| ACCUMULATED NII CURRENT | (62,774) |
| OVERDISTRIBUTION NII | 0 |
| ACCUMULATED NET GAINS | (249,658,152) |
| OVERDISTRIBUTION GAINS | 0 |
| ACCUM APPREC OR DEPREC | (88,402,072) |
| NET ASSETS | 812,852,472 |
| DIVIDEND INCOME | 170,746 |
| INTEREST INCOME | 79,788,140 |
| OTHER INCOME | 0 |
| EXPENSES NET | 10,768,448 |
| NET INVESTMENT INCOME | 69,190,438 |
| REALIZED GAINS CURRENT | (24,359,807) |
| APPREC INCREASE CURRENT | (82,756,770) |
| NET CHANGE FROM OPS | (37,926,139) |
| EQUALIZATION | 0 |
| DISTRIBUTIONS OF INCOME | (193,662) |
| DISTRIBUTIONS OF GAINS | 0 |
| DISTRIBUTIONS OTHER | 0 |
| NUMBER OF SHARES SOLD | 1,348,486 |
| NUMBER OF SHARES REDEEMED | (856,606) |
| SHARES REINVESTED | 26,459 |
| NET CHANGE IN ASSETS | (203,419,266) |
| ACCUMULATED NII PRIOR | (1,027,715) |
| ACCUMULATED GAINS PRIOR | (210,514,331) |
| OVERDISTRIB NII PRIOR | 0 |
| OVERDIST NET GAINS PRIOR | 0 |
| GROSS ADVISORY FEES | 3,756,072 |
| INTEREST EXPENSE | 0 |
| GROSS EXPENSE | 11,300,062 |
| AVERAGE NET ASSETS | 862,762,970 |
| PER SHARE NAV BEGIN | 5.50 |
| PER SHARE NII | 0.41 |
| PER SHARE GAIN APPREC | (0.66) |
| PER SHARE DIVIDEND | (0.39) |
| PER SHARE DISTRIBUTIONS | (0.01) |
| RETURNS OF CAPITAL | 0.00 |
| PER SHARE NAV END | 4.85 |
| EXPENSE RATIO | 1.79 |
| AVG DEBT OUTSTANDING | 0 |
| AVG DEBT PER SHARE | 0 |
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
| ARTICLE 6 |
| THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF MASSACHUSETTS FINANCIAL SERVICES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. |
| SERIES: |
| NUMBER: 2 |
| NAME: MFS MUNICIPAL HIGH INCOME FUND CLASS A |
| PERIOD TYPE | 12 MOS |
| FISCAL YEAR END | JAN 31 1995 |
| PERIOD END | JAN 31 1995 |
| INVESTMENTS AT COST | 1,005,158,171 |
| INVESTMENTS AT VALUE | 984,592,244 |
| RECEIVABLES | 24,356,103 |
| ASSETS OTHER | 10,608 |
| OTHER ITEMS ASSETS | 38,525 |
| TOTAL ASSETS | 1,008,997,480 |
| PAYABLE FOR SECURITIES | 31,240,000 |
| SENIOR LONG TERM DEBT | 0 |
| OTHER ITEMS LIABILITIES | 2,039,633 |
| TOTAL LIABILITIES | 33,279,633 |
| SENIOR EQUITY | 0 |
| PAID IN CAPITAL COMMON | 1,074,349,203 |
| SHARES COMMON STOCK | 107,020,050 |
| SHARES COMMON PRIOR | 86,342,748 |
| ACCUMULATED NII CURRENT | 1,098,869 |
| OVERDISTRIBUTION NII | 0 |
| ACCUMULATED NET GAINS | (79,164,298) |
| OVERDISTRIBUTION GAINS | 0 |
| ACCUM APPREC OR DEPREC | (20,565,927) |
| NET ASSETS | 975,717,847 |
| DIVIDEND INCOME | 0 |
| INTEREST INCOME | 76,354,946 |
| OTHER INCOME | 0 |
| EXPENSES NET | 9,913,116 |
| NET INVESTMENT INCOME | 66,441,830 |
| REALIZED GAINS CURRENT | (34,044,867) |
| APPREC INCREASE CURRENT | (41,635,823) |
| NET CHANGE FROM OPS | (9,238,860) |
| EQUALIZATION | 0 |
| DISTRIBUTIONS OF INCOME | (66,774,251) |
| DISTRIBUTIONS OF GAINS | 0 |
| DISTRIBUTIONS OTHER | 0 |
| NUMBER OF SHARES SOLD | 32,283,057 |
| NUMBER OF SHARES REDEEMED | (14,365,883) |
| SHARES REINVESTED | 2,760,128 |
| NET CHANGE IN ASSETS | 169,759,297 |
| ACCUMULATED NII PRIOR | 1,095,222 |
| ACCUMULATED GAINS PRIOR | (42,807,444) |
| OVERDISTRIB NII PRIOR | 0 |
| OVERDIST NET GAINS PRIOR | 0 |
| GROSS ADVISORY FEES | 6,385,098 |
| INTEREST EXPENSE | 0 |
| GROSS EXPENSE | 9,913,116 |
| AVERAGE NET ASSETS | 885,034,511 |
| PER SHARE NAV BEGIN | 9.38 |
| PER SHARE NII | 0.64 |
| PER SHARE GAIN APPREC | (0.75) |
| PER SHARE DIVIDEND | 0 |
| PER SHARE DISTRIBUTIONS | (0.67) |
| RETURNS OF CAPITAL | 0 |
| PER SHARE NAV END | 8.60 |
| EXPENSE RATIO | 1.04% |
| AVG DEBT OUTSTANDING | 0 |
| AVG DEBT PER SHARE | 0 |
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
| ARTICLE 6 |
| THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF MASSACHUSETTS FINANCIAL SERVICES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. |
| SERIES: |
| NUMBER: |
| NAME: MFS MUNICIPAL HIGH INCOME FUND CLASS B |
| PERIOD TYPE | 12 MOS |
| FISCAL YEAR END | JAN 31 1995 |
| PERIOD END | JAN 31 1995 |
| INVESTMENTS AT COST | 1,005,158,171 |
| INVESTMENTS AT VALUE | 984,592,244 |
| RECEIVABLES | 24,356,103 |
| ASSETS OTHER | 10,608 |
| OTHER ITEMS ASSETS | 38,525 |
| TOTAL ASSETS | 1,008,997,480 |
| PAYABLE FOR SECURITIES | 31,240,000 |
| SENIOR LONG TERM DEBT | 0 |
| OTHER ITEMS LIABILITIES | 2,039,633 |
| TOTAL LIABILITIES | 33,279,633 |
| SENIOR EQUITY | 0 |
| PAID IN CAPITAL COMMON | 1,074,349,203 |
| SHARES COMMON STOCK | 6,476,558 |
| SHARES COMMON PRIOR | 125 |
| ACCUMULATED NII CURRENT | 1,098,869 |
| OVERDISTRIBUTION NII | 0 |
| ACCUMULATED NET GAINS | (79,164,298) |
| OVERDISTRIBUTION GAINS | 0 |
| ACCUM APPREC OR DEPREC | (20,565,927) |
| NET ASSETS | 975,717,847 |
| DIVIDEND INCOME | 0 |
| INTEREST INCOME | 76,354,946 |
| OTHER INCOME | 0 |
| EXPENSES NET | 9,913,116 |
| NET INVESTMENT INCOME | 66,441,830 |
| REALIZED GAINS CURRENT | (34,044,867) |
| APPREC INCREASE CURRENT | (41,635,823) |
| NET CHANGE FROM OPS | (9,238,860) |
| EQUALIZATION | 0 |
| DISTRIBUTIONS OF INCOME | (1,978,622) |
| DISTRIBUTIONS OF GAINS | 0 |
| DISTRIBUTIONS OTHER | 0 |
| NUMBER OF SHARES SOLD | 6,732,579 |
| NUMBER OF SHARES REDEEMED | (356,549) |
| SHARES REINVESTED | 100,403 |
| NET CHANGE IN ASSETS | 169,759,297 |
| ACCUMULATED NII PRIOR | 1,095,222 |
| ACCUMULATED GAINS PRIOR | (42,807,477) |
| OVERDISTRIB NII PRIOR | 0 |
| OVERDIST NET GAINS PRIOR | 0 |
| GROSS ADVISORY FEES | 6,385,098 |
| INTEREST EXPENSE | 0 |
| GROSS EXPENSE | 9,913,116 |
| AVERAGE NET ASSETS | 33,436,705 |
| PER SHARE NAV BEGIN | 9.38 |
| PER SHARE NII | 0.57 |
| PER SHARE GAIN APPREC | (0.78) |
| PER SHARE DIVIDEND | 0 |
| PER SHARE DISTRIBUTIONS | (0.57) |
| RETURNS OF CAPITAL | 0 |
| PER SHARE NAV END | 8.60 |
| EXPENSE RATIO | 2.10% |
| AVG DEBT OUTSTANDING | 0 |
| AVG DEBT PER SHARE | 0 |